**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, 2007** |
|                                                 |       |                                                                                                             |
| **or**                                               |
|                                                 |       |                                                                                                             |
| o                                                    | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**          |
|                                                 | ** ** | ** **                                                                                                       |
|                                                 | ** ** | **For the  transition period from               to** |

 

**Commission file number: 001-33291**

 

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**OptimerPharmaceuticals, Inc.**

(ExactName 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 toSection 12(b) of the 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 toSection 12(g) of the Act:**None**

 

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Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

Yes   o No  x.

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

Yes o No   x.

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    Yes  x    No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of theregistrant’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

 

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Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer  o |   | Accelerated  filer  o                |   | Non-accelerated  filer  x |   | Smaller  reporting company  o |
|---------------------------------------|--------|------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------------|
|                                  |   | (Do not check if a  smaller reporting company) |   |                                |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o  No  x.

 

Theaggregate market value of the registrant’s common stock held by non-affiliatesas of June 30, 2007  (withoutadmitting that any person whose shares are not included in such calculation isan affiliate), computed by reference to the price at which the common stock waslast sold as of such date on the Nasdaq Global Market, was $154,146,460

 

The number of outstandingshares of the registrant’s common stock, par value $0.001 per share, as of March 10,2008 was 27,919,980.

 

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the DefinitiveProxy Statement for our 2008 Annual Meeting of Stockholders are incorporated byreference in Part III of this report.

 

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**OPTIMER PHARMACEUTICALS**

 

**FORM 10-K—ANNUAL REPORT**

**For the Fiscal Year Ended December 31, 2007**

 

**Table of Contents**

 
| **PART I**   | ** **                                                                                                          | ** ** |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                |       |
| Item 1            | Business                                                                                                            | 4          |
|              |                                                                                                                |       |
| Item 1A      | Risk Factors                                                                                                        | 24         |
|              |                                                                                                                |       |
| Item 1B           | Unresolved Staff  Comments                                                                                          | 46         |
|              |                                                                                                                |       |
| Item 2            | Properties                                                                                                          | 46         |
|              |                                                                                                                |       |
| Item 3            | Legal Proceedings                                                                                                   | 46         |
|              |                                                                                                                |       |
| Item 4            | Submission of  Matters to a Vote of Security Holders                                                                | 46         |
|              |                                                                                                                |       |
| **PART II**  | ** **                                                                                                          | ** ** |
|              |                                                                                                                |       |
| Item 5            | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 46         |
|              |                                                                                                                |       |
| Item 6            | Selected  Consolidated Financial Data                                                                               | 47         |
|              |                                                                                                                |       |
| Item 7            | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          | 48         |
|              |                                                                                                                |       |
| Item 7A           | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 56         |
|              |                                                                                                                |       |
| Item 8            | Financial  Statements and Supplementary Data                                                                        | 57         |
|              |                                                                                                                |       |
| Item 9            | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                               | 79         |
|              |                                                                                                                |       |
| Item 9A           | Controls and  Procedures                                                                                            | 79         |
|              |                                                                                                                |       |
| Item 9B           | Other Information                                                                                                   | 80         |
|              |                                                                                                                |       |
| **PART III** | ** **                                                                                                          | ** ** |
|              |                                                                                                                |       |
| Item 10           | Directors,  Executive Officers and Corporate Governance                                                             | 80         |
|              |                                                                                                                |       |
| Item 11           | Executive  Compensation                                                                                             | 80         |
|              |                                                                                                                |       |
| Item 12           | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 80         |
|              |                                                                                                                |       |
| Item 13           | Certain  Relationships and Related Transactions, and Director Independence                                          | 80         |
|              |                                                                                                                |       |
| Item 14           | Principal  Accountant Fees and Services                                                                             | 80         |
|              |                                                                                                                |       |
| **PART IV**  | ** **                                                                                                          | ** ** |
|              |                                                                                                                |       |
| Item 15           | Exhibits and  Financial Statement Schedules                                                                         | 81         |
|              |                                                                                                                |       |
| **Signatures**    |                                                                                                                | 83         |

 

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**PART I**

 

**Cautionary Note Regarding Forward-LookingStatements**

 

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

 

**Item 1.Business**

 

**Overview**

 

We are a biopharmaceuticalcompany focused on discovering, developing and commercializing innovativeanti-infective products. Our initial development efforts address products thattreat gastrointestinal infections, or GI infections,****and related diseases where current therapies havelimitations, including diminished efficacy, serious adverse side effects,drug-to-drug interactions, difficult patient compliance and bacterialresistance.

 

We currently have twolate-stage anti-infective product candidates, OPT-80 and Prulifloxacin. OPT-80,our lead product candidate, is an antibiotic currently in two Phase 3registration trials for the treatment of *Clostridiumdifficile*-infections, or CDI, also known as *Clostridium difficile*-associated disease,or CDAD, the most common nosocomial diarrhea. Prulifloxacin is an antibioticcurrently in two Phase 3 trials for the treatment of infectious diarrhea intravelers, a community-acquired infection which can be caused by a broad rangeof bacteria. We are developing additional product candidates using ourproprietary technology, including our OPopS drug discovery platform.

 

We were incorporated in November 1998.Since inception, we have focused on developing our product candidates,including OPT-80 and Prulifloxacin.

 

**AntibioticMarket Background**

 

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

 

Bacteria can be classifiedas either gram-positive or gram-negative.****The difference in classification islargely based on a difference in bacteria cell wall structure in thatgram-positive bacteria have exposed thick peptidoglycan, a polymer consistingof sugars and amino acids, cell walls which retain a crystal violet dye duringthe gram stain process, while gram-negative bacteria do not. Gram-positivebacteria will appear blue or violet under a microscope, whereas gram-negativebacteria will appear red or pink. Antibiotics that treat bacterial infectionscan be classified as either broad-spectrum or narrow-spectrum. Most antibioticsin use today are generally considered broad-spectrum, meaning they target awide variety of bacteria. In contrast, narrow-spectrum antibiotics target aselect group of bacteria such as gram-positive or gram-negative

 

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bacteria. Current researchis increasingly focused on antibiotics that target specific bacteria, which maybe beneficial for the treatment of certain infections.

 

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

 

The anti-infective market isone of the largest therapeutic categories worldwide. According to IMS Health,the combined market for prescription antibacterial drugs in 2006 for the UnitedStates, Japan, Korea, Germany, France, Italy, the United Kingdom and Spainexceeded $28.0 billion. The market for anti-infective products is generallydivided into two categories, nosocomial infections and community-acquiredinfections, which represent approximately 30% and 70% of the anti-infectivesmarket, respectively. According to the U.S. Centers for Disease Control andPrevention, or CDC, approximately two million nosocomial infections occurannually in the United States and these infections can increase average lengthof hospital stays by seven to nine days. Approximately four million nosocomialinfections occur annually in Europe, three million in North America, twomillion in South America and two million in East Asia (excluding China).Nosocomial infections are costly to address, with an estimated annual aggregatehealthcare cost in the United States and the United Kingdom of approximately$4.5 billion and $1.9 billion, respectively. In addition, in the United States,nosocomial infections cause approximately 80,000 deaths annually, making themone of the five leading causes of death in the United States. We believe thatbacterial infections, especially infections caused by difficult-to-treat, drugresistant bacteria, cause or contribute to a majority of these deaths.

 

**Our MarketOpportunity**

 

Many marketed antibioticsused to treat infections have well documented shortcomings. For example,current antibiotics often fail to reach sufficient concentrations at the siteof infection to adequately eliminate harmful bacteria. Certain of theseantibiotics have also been associated with serious adverse side effects,including renal toxicities, heart rhythm abnormalities, phototoxicity, rashesand central nervous effects, such as seizures. These side effects limit the useof antibiotics for certain patients. In addition, certain antibiotics haveinteraction issues with prescribed drugs, such as cholesterol lowering agents. Safetyproblems can arise when increased doses of these antibiotics are needed totreat resistant bacteria. If bacteria develop resistance to currently availableantibiotics, the underlying infection can become difficult or impossible totreat, and may even lead to death. Patients also often fail to comply withtreatment regimens due to many factors including the inability to tolerate anantibiotic due to its side effects, inconvenient method of dosing andundesirable frequency and length of dosing. Because of these shortcomingsassociated with marketed antibiotics, we believe an opportunity exists to improveupon existing treatments.

 

**Our ProductCandidates**

 

We believe that our productcandidates may offer advantages over existing antibiotics in terms of efficacy,safety, potential for minimal bacterial resistance and more convenient dosing. Wealso believe that the markets for these product candidates present us withsignificant commercial opportunities. Our product candidates are in variousstages of clinical development and none have been approved by the U.S. Food andDrug Administration, or FDA,****forsale by us. Our ability to obtain FDA approval of any of our product candidatesrequires us to successfully complete the clinical development of each suchproduct candidate, including further clinical trials. Clinical trials involve alengthy and expensive process with an uncertain outcome, and efficacy andsafety data of earlier studies and trials may not be predictive of future trialresults.

 

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Our current productcandidate portfolio consists of the following:

 
| **Product Candidate**          | ** **   | **Target Indications**               | ** **   | **Development Status** | ** **   | **Commercial Rights** | ** **   |
|-------------------------------------|--------------|-------------------------------------------|--------------|-----------------------------|--------------|----------------------------|--------------|
| ***Anti-Infectives***               | *** *** | *** ***                              | *** *** | *** ***                | *** *** | *** ***               | *** *** |
| OPT-80 (1)                          |         | CDI  treatment                            |         | Phase 3                |         | Optimer  worldwide         |         |
|                                |         | CDI oral  suspension                      |         | Pre-clinical                |         |                       |         |
|                                |         | CDI  prevention                           |         | Proof-of-concept  Trial (2) |         |                       |         |
|                                |         | Prevention of VRE  bloodstream infections |         | Proof-of-concept  Trial (2) |         |                       |         |
|                                |         | MRS infections (2nd  generation)          |         | Pre-clinical                |         |                       |         |
| Prulifloxacin (OPT-99) (3)          |         | Infectious  diarrhea                      |         | Phase 3                |         | Optimer U.S.               |         |
| OPT-1068/CEM-101                    |         | Respiratory  tract infections             |         | Pre-clinical                |         | Cempra  worldwide (4)      |         |
|                                |         |                                      |         |                        |         |                       |         |
| ***Other Therapeutic Areas***       | *** *** | *** ***                              | *** *** | *** ***                | *** *** | *** ***               | *** *** |
| OPT-822/OPT-821 Combination Therapy |         | Breast  cancer                            |         | Planning  Phase 2      |         | Optimer  worldwide         |         |
| OPT-88                              |         | Osteoarthritis                            |         | Pre-clinical                |         | Optimer  worldwide         |         |

 

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(1)                               We filed an investigational new drugapplication, or IND, with the FDA for OPT-80 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 filed an IND with the FDA forPrulifloxacin (OPT-99) in December 2005.

(4)                               We have the right to receive royalties fromCempra Pharmaceuticals, Inc. on any sales of OPT-1068/CEM-101.

 

***Anti-Infective Product Candidates***

 

*OPT-80*

 

*Overview*. We are initially developing OPT-80 for thetreatment of infections caused by *Clostridiumdifficile*, or *C. difficile*bacteria. OPT-80 is a differentiated antibiotic for the treatment of CDI, themost common nosocomial diarrhea. Specifically, OPT-80 has a narrow spectrum ofactivity against certain gram-positive bacteria. Pre-clinical data indicatesthat OPT-80 is bactericidal and acts by inhibiting RNA polymerase, a bacterialenzyme. This data also shows that OPT-80 inhibits the growth of otherpotentially harmful bacteria such as Staphylococci, common bacteria that resideon the skin and in the GI tract, and Enterococci, common bacteria that residein the GI tract.

 

OPT-80 is currently in twoPhase 3 registration trials for the treatment of CDI. In April 2005,we entered into a collaboration agreement with Par Pharmaceutical, Inc.,or Par, pursuant to which we and Par exclusively collaborated in the clinicaldevelopment and commercialization of OPT-80. In February 2007, we electedto terminate the collaboration agreement with Par, exercised our right under aprospective buy-back agreement to repurchase Par’s rights to develop andcommercialize OPT-80 in North America and Israel and paid Par a one-time $20.0million termination fee. As a result, we now hold worldwide rights to OPT-80. TheFDA has granted Fast Track status for OPT-80 in the treatment of CDI. FastTrack designation indicates that OPT-80 has the potential to treatlife-threatening diseases with unmet medical needs. The FDA also chose OPT-80to be the only investigational new drug in the FDA’s Continuous MarketingApplications, or CMA, Pilot 2 Program in the Division of Anti-Infectiveand Ophthalmology Products. The CMA designation offers several potentialbenefits, including a program of continuous FDA feedback designed to streamlinethe development process. Participation in these programs will not eliminate anyphase of clinical development.

 

Currently, metronidazole andoral vancomycin are the two standard therapeutics used to treat CDI. Both haveshortcomings including limited efficacy, high recurrence rates, adverse sideeffects and poor compliance. Of these two therapeutics, only oral vancomycin isFDA-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

 

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and illness related to *C. difficile* generally occur duringor after therapy with broad-spectrum antibiotics. Broad-spectrum antibioticscan cause CDI by disrupting normally occurring gastrointestinal bacteria, orgut flora, thereby allowing *C. difficile*to proliferate. Recent studies have suggested that the use of proton pumpinhibitors, or PPIs, a widely used group of heartburn drugs, may also be linkedto *C. difficile* infections. CDIaccounts for approximately 20% of antibiotic-associated diarrhea incidences aswell as many cases of antibiotic-associated colitis, or inflammation of thecolon. C*. difficile* can betransmitted by direct or indirect contact with infected patients via sporesthat can live for months on dry surfaces. According to the U.S. Centers forDisease Control and Prevention, or CDC, CDI is becoming more prevalent outsidethe hospital.

 

We estimate that CDIaffected over 500,000 patients in the United States in 2005. In the UnitedKingdom in 2005, the reported number of CDI patients over 65 years of age wasapproximately 50,000, and we believe that CDI incidence is growing in patientsworldwide. We believe that the incidence of CDI may be higher than what iscurrently being reported because many hospitals are not required to and do notreport incidents of CDI. Additionally, recent reports indicate that the incidenceof community-acquired CDI cases may be increasing. For example, a studyconducted in one major U.S. city and cited at the 2006 Interscience Conferenceon Antimicrobial Agents and Chemotherapy, or ICAAC, 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.

 

According to a study citedin the New England Journal of Medicine, the increased rates of CDI and severityof the disease may be caused by a combination of factors, including theexcessive use of antibiotics and the emergence of a new hypervirulent strain of*C. difficile* known as NorthAmerica Phenotype 1/027, or NAP1/027. A study published in the medical journalLancet in September 2005 demonstrated that NAP1/027 produces 16 to 23times more toxins *in vitro* thanother strains. NAP1/027 has been reported in over 38 states in the UnitedStates and is characterized by increased virulence, morbidity and mortality aswell as potential antimicrobial resistance. According to the data presented atthe 2006 ICAAC, NAP1/027 incidence in the United Kingdom increased an estimated200% in the two years after mandatory surveillance of the disease was initiatedin hospitals in 2004.

 

Generally, CDI results inlonger hospital stays and increases average patient cost which is often notreimbursed to the hospital. In more complicated cases of CDI, hospitalizationmay be prolonged by up to two weeks. It has been estimated that**each case of CDI in the United States maycost more than $7,000 with total annual expenses to the nation’s hospitalsestimated at as much as $1.3 billion. According to the data presented at the2006 ICAAC, CDI results in an estimated increase in average patient cost ofover $6,000 per patient in the United Kingdom and the total projected annualcost for treating the disease in Europe is approximately $3.8 billion.

 

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

 

*CurrentTreatments and Limitations*. Metronidazole is generally used for patients in the United States andEurope experiencing their first episode or first recurrent episode of CDI. Metronidazoleis a generic drug that is used off-label to treat CDI due to its low cost andhistorical efficacy. The typical treatment regimen for metronidazole is 250 mgevery six hours, for a minimum of ten days. Metronidazole can be associatedwith numerous adverse side effects such as seizures, toxic reactions toalcohol, leukopenia, or reduction of white blood cells, neuropathy, a diseaseaffecting one or more nerves, unpleasant taste or dry mouth.

 

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

 

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Both metronidazole and oralvancomycin have shortcomings as treatments for CDI including:

 

·                  Limited Efficacy. A recent controlled studyconducted in North America showed that approximately 19% of CDI patientstreated with oral vancomycin and 28% of CDI patients treated with metronidazoledo not respond to therapy, and these patients are at risk of developing moresevere CDI.

 

·                  High Recurrence Rate. Approximately 20% ofCDI patients who initially respond to oral vancomycin and 30% of CDI patientswho initially respond to metronidazole experience a clinical recurrencefollowing the cessation of antibiotic administration.

 

·                  Bacterial Resistance. Widespread use of oralvancomycin is discouraged for the treatment of CDI in some hospitals due to concernsover the development of cross-resistance, including vancomycin-resistantEnterococci, or VRE, and vancomycin-resistant Staphylococcus, which can alsocause other serious nosocomial infections. Furthermore, *C. difficile* resistance tometronidazole has been reported in at least one recent study.

 

·                  Adverse Side Effects. Metronidazole, which issystemically absorbed and must be administered in high doses to treat CDI, mayresult in serious adverse side effects and complications, including seizures,toxic reactions to alcohol, leukopenia, neuropathy, unpleasant taste or drymouth.

 

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

 

·                  Inconvenient Dosing and Difficult Compliance.The current treatment regimen for both oral vancomycin and metronidazole isinconvenient as both must be administered every six hours for a minimum ofseven days, which may result in lower levels of patient compliance.

 

*PotentialOPT-80 Advantages*. OPT-80is a differentiated macrocycle antibiotic consisting of an 18-member ringstructure. OPT-80 has significant differentiating features, including a narrowantimicrobial spectrum, fast-acting bactericidal activity against *C. difficile*, minimal systemicexposure and an enduring clinical effect. Based on our clinical andpre-clinical studies of OPT-80 for the treatment of CDI, we believe OPT-80 mayoffer the following advantages:

 

·                  Demonstrated activity against *C. difficile*, including hypervirulentstrains such as NAP1/027, with low rates of treatment failures and recurrences;

 

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

 

·                  Minimal systemic exposure resulting in afavorable safety profile;

 

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

 

·                  Convenient, twice daily dosing regimen.

 

*ClinicalDevelopment*

 

*Phase 3Pivotal Trials*. Basedon our Phase 2a clinical trial results, in May 2006, we initiated aNorth American double blind, randomized, parallel group Phase 2b/3 studyto compare the safety and efficacy of OPT-80 dosed at 200 mg twice daily (400mg/day), versus oral vancomycin dosed at its recommended dosing regimen of 125mg every six hours (500 mg/day) for ten days, in CDI patients. In the initialPhase 2b portion of the trial, we enrolled a total of 100 CDI patients at32 sites. Following an interim blinded safety analysis by an independent datasafety monitoring board, we transitioned into a Phase 3 clinical trial in March 2007.We expanded the number of sites to approximately 100 with a target total enrollmentof approximately 530 evaluable CDI patients. The primary endpoint for thePhase 3 trial is clinical cure of CDI, as determined

 

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by the treating physicianfor each patient two days after the end of treatment. A secondary endpoint isrecurrence, as determined four weeks following treatment. We initiated a secondPhase 3 pivotal trial of the same design in the second quarter of 2007. Weanticipate enrollment in the first trial will be completed in the next fewmonths and we anticipate completing enrollment and reporting data on the secondtrial in 2009. If both trials are successful, we intend to file a New DrugApplication, or NDA, as soon as practical thereafter.

 

*Phase 2aStudy*. In July 2005,we completed an open-label, dose-ranging, randomized safety and clinicalevaluation study of OPT-80 in patients with CDI at five sites. OPT-80 wasadministered to 48 patients. Three patients withdrew from the trial for reasonsunrelated to the administration of OPT-80, resulting in 45 patients eligiblefor evaluation. Forty-one of these patients completed a ten-day therapy regimenconsisting of twice daily doses of 50 mg (100 mg/day), 100 mg (200 mg/day) or200 mg (400 mg/day). A primary endpoint of the trial was clinical cure of CDI,as determined by the treating physician for each patient on the tenth day ofadministration. Additional endpoints investigated were time-to-resolution ofdiarrhea, recurrence rate through six weeks post-treatment and total relief ofCDI symptoms, defined as complete relief of diarrhea, fever and abdominal pain,and normalized white blood cell counts by the end of the ten-day therapy.

 

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

 

A summary of the results ofthe Phase 2a clinical trial for OPT-80 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. OPT-80 was not detectable in the blood in halfof the patients and only three subjects had levels exceeding 0.02 mg/mL. Stoolconcentrations of OPT-80 averaged over 1,400 mg/g of stool at the 400 mg/daydose level at day ten. As *C. difficile*is present mainly in the gut, high stool concentrations suggest that OPT-80 ispresent where needed to treat CDI and low concentrations in the blood indicateOPT-80 is minimally absorbed in the system, thus reducing the risk of sideeffects. There were no adverse events determined by the physicians to berelated to OPT-80. At one site in this Phase 2a trial, we performed amicrobiologic analysis of the stool of 29 patients. This analysis showed thatOPT-80 did not cause any unusual disruptions of normal gut flora for patientsin any of the three dose groups.

 

*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 ofOPT-80 in healthy volunteers. Each Phase 1a patient received two singleoral administrations of either a 100 mg dose followed by a 300 mg dose, or a200 mg dose followed by a 450 mg dose of OPT-80. Each Phase 1b patientreceived daily oral administrations of 150, 300, or 450 mg doses of OPT-80 forten consecutive days. In both trials, there were eight subjects for each doselevel, six of whom were randomly selected to receive OPT-80 and two of whomreceived placebo. We collected blood, urine and stool samples forpharmacokinetic 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, OPT-80 was well toleratedby all subjects and no drug-related adverse events were observed.

 

OPT-80 also exhibited afavorable pharmacokinetic profile for CDI treatment. After oral administrationat either single dose or multiple doses, all blood samples had low, usuallylower than 0.02 mg/mL, or undetectable levels of OPT-80 which indicates verylow systemic absorption. In contrast, OPT-80 was found to be present in high concentrationsin the

 

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stool. For example, at dayten for the 450 mg per day multiple-dose group, the mean OPT-80 stoolconcentration exceeded 10,000 times the MIC90, or minimumconcentration of a drug needed to inhibit growth of 90% of microorganisms, of *C. difficile*.

 

*OralSuspension Formulation Development.*We are developing an oral suspension formulation which complements theexisting tablet form of OPT-80. This formulation is intended for use withintensive care unit and elderly patients. We plan to file an IND for potentiallabel expansion.

 

*Commercialization*

 

In April 2005, weentered into a collaboration agreement with Par pursuant to which we and Parexclusively collaborated to develop and commercialize OPT-80. We had granted toPar an exclusive royalty-bearing license, with the right to sublicense,promote, market, distribute and sell OPT-80 in a territory composed of theUnited States, Canada and Puerto Rico, with an option to extend the territoryto include Israel. We retained all other rights to OPT-80 in the rest of theworld. In January 2007, we entered into a prospective buy-back agreementwith Par which provided us with an option to terminate the collaboration andrepurchase the rights to develop and commercialize OPT-80 in North America andIsrael.

 

In February 2007, weelected to terminate the collaboration agreement pursuant to the prospectivebuy-back agreement with Par and we have repurchased the rights to develop andcommercialize OPT-80 in North America and Israel. We now hold worldwide rightsto OPT-80. Under the terms of the prospective buy-back agreement, we paid Par aone-time $20.0 million termination fee and purchased $1.9 million of OPT-80clinical supply material and active pharmaceutical ingredient from Par. We arealso obligated to pay****Par aone-time $5.0 million milestone payment, a 5% royalty on net sales by us or ouraffiliates of OPT-80 in North America and Israel, and a 1.5% royalty on netsales by us or our affiliates of OPT-80 in the rest of the world. In addition,in the event we license our right to market OPT-80 in the rest of the world, wewill be required to pay Par a 6.25% royalty on net revenues we receive relatedto OPT-80. 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.

 

*OPT-80 —Other Indications*

 

Based on our pre-clinicaland clinical studies for CDI treatment, we believe OPT-80 may be effectiveagainst a broad range of indications with significant unmet medical needs. Ourstrategy is to develop OPT-80 for its lead indication, CDI treatment, whilealso advancing its development for additional indications.

 

*CDIPrevention.* Webelieve OPT-80 may be effective not only for treating CDI but also forpreventing CDI. Patients at high risk of developing CDI, such as elderlypatients in long-term care facilities or hospital patients on broad-spectrumantibiotics or PPIs, may benefit from prophylactic protection from the disease.Up to 20% of long-term care patients are colonized with *C. difficile*. There is currently notherapeutic drug approved for the prevention of CDI. Incidence of CDI outbreakshas been increasing in the hospital and community settings, and we believeOPT-80 may provide safe, potent and narrow-spectrum bactericidal activityagainst *C. difficile*,thereby protecting high-risk patients while limiting disruption to normal gutflora. We continue to evaluate the design of a proof-of-concept clinical trialof OPT-80 to prevent CDI disease in high-risk populations.

 

*Preventionof Nosocomial VRE Bloodstream Infections*. Pre-clinical data indicate that OPT-80 isactive *in vitro* againstantibiotic-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 indicateOPT-80 may be useful in the prevention of VRE bloodstream infections byminimizing the colonization of these bacteria in the GI tract before they enterinto the bloodstream. We are planning to conduct a proof-of-concept clinicaltrial for this additional indication.

 

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*Methicillin-ResistantStaphylococci, or MRS, Infections*. We believe second generation OPT-80 compounds may be useful for thetreatment of Staphylococcal infections. Methicillin is a broad-spectrumantibiotic that was previously used to treat infections caused by susceptiblegram-positive bacteria, such as *Staphylococcusaureus*, or *S. aureus*,and *Staphylococcus epidermidis*,or *S. epidermidis*, thatwould otherwise be resistant to most penicillins.

 

*Prulifloxacin(OPT-99)*

 

*Overview*. We are developing Prulifloxacin for thetreatment of infectious diarrhea, including travelers’ diarrhea, acommunity-acquired infection which can be caused by a broad range of bacteria. Weintend to seek a label for Prulifloxacin for the treatment of infectiousdiarrhea in travelers and initially plan to focus commercialization efforts onthe treatment of travelers’ diarrhea. Prulifloxacin is a prodrug in thefluoroquinolone class of antibiotics, a widely-used class of broad-spectrumantibiotics. A prodrug is an inactive form of a compound that is converted inthe body to an active drug either by spontaneous chemical reaction or throughthe enzymatic process. Following oral administration, Prulifloxacin is convertedto ulifloxacin, which is rapidly bactericidal by killing susceptible bacterialpathogens through inhibition of DNA replication. Ulifloxacin has demonstratedpotent broad-spectrum activity against gram-positive and gram-negativebacteria. We are currently conducting two Phase 3 clinical trials ofPrulifloxacin for the treatment of travelers’ diarrhea. We believe thatPrulifloxacin will be a differentiated therapeutic option for travelers’diarrhea due to its broad and potent activity against gastrointestinalpathogens, favorable safety profile, clinical efficacy and convenient dosingregimen.

 

In June 2004, weacquired from Nippon Shinyaku Co., Ltd., the exclusive rights to develop andcommercialize Prulifloxacin for all indications in the United States. Prulifloxacinhas been marketed by other companies in Japan since 2002 to treat a wide rangeof bacterial infections, including infectious diarrhea, and in Italy since 2004to treat urinary tract infections, or UTIs, and respiratory tract infections,or RTIs. Other parties have established that Prulifloxacin is well-tolerated,as demonstrated by its use in the treatment of more than two 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.

 

*InfectiousDiarrhea*. Infectiousdiarrhea is associated with an infection caused by bacteria, viruses orparasites. 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. TheCDC estimates that there are approximately 50,000 cases of travelers’ diarrheaeach 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 30% to 50% oftravelers to high-risk regions (including most of Asia, the Middle East,Africa, Central America and South America) will develop travelers’ diarrheaduring a one- to two-week visit. The risk of infection increases with theduration of travel, and infection is possible throughout the world. A study ofAmericans visiting developing countries found that 46% acquired diarrhea.

 

*CurrentTreatments and Limitations*. Authorities such as the Infectious Disease Society of America and theCDC recommend treatment for travelers’ diarrhea with an antibiotic that has anappropriate spectrum of activity against typical pathogens related to travelers’diarrhea. These antibiotics include fluoroquinolones such as ciprofloxacin,macrolides such as azithromycin, sulfonamides such astrimethoprim-sulfamethoxazole, or TMP/SMX, tetracyclines such as doxycycline,and rifamycins such as rifaximin. Fluoroquinolones remain the first-linetreatment for infectious diarrhea because of their bactericidal nature, broadspectrum of activity and generally well-tolerated profile.

 

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Many of the treatments fortravelers’ diarrhea have significant limitations. Limitations of ciprofloxacin,rifaximin and TMP/SMX, three of the most commonly prescribed treatments forinfectious diarrhea, include one or more of the following:

 

·                  Limited Spectrum of Activity andAntimicrobial Resistance. Rifaximin is approved only for the treatment oftravelers’ diarrhea caused by noninvasive strains of *E. coli*. Rifaximin is not recommended for the treatmentof diarrhea caused by other pathogens commonly associated with travelers’diarrhea such as Shigella, Salmonella, Aeromonas, Campylobacter, Plesiomonas,and Yersinia. In addition, our studies with a panel of 582 infectiousdiarrhea-associated bacteria have shown that 25% of *E. coli* and 67% of Shigella strains associated withtravelers’ diarrhea are resistant to 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 isapproved as therapy for infectious diarrhea with a dosing regimen of twicedaily administrations for five to seven days. Rifaximin is approved as atherapy for diarrhea caused by noninvasive *E. coli*and is typically given three times daily for three days. These treatmentregimens may be inconvenient for traveling patients.

 

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

 

·                  Efficacy. Prulifloxacin has been establishedto be an effective therapy for infectious diarrhea in clinical studies by thirdparties in Japan. Ulifloxacin, the active metabolite of Prulifloxacin, quicklyreached effective concentration levels following a single administration of thedrug in patients with profuse diarrhea. Approximately two-thirds of the oraldose of Prulifloxacin remains in the stool after being converted to ulifloxacinwhile approximately one-third is absorbed and accumulated in tissues and inphagocytes, the white blood cells which engulf bacterial pathogens. Ulifloxacinremains active in these tissues and available in the body to eliminate invasiveand intracellular pathogens such as Shigella and Salmonella and invasive formsof *E. coli*.

 

·                  Spectrum of Activity. Ulifloxacin has morepotent antibacterial activity relative to other antibacterial agents againstinfectious diarrhea pathogens. In a pre-clinical study we commissioned,ulifloxacin was the most active of nine antibacterial agents tested against apanel of 582 international infectious diarrhea-associated bacteria. The potencyof six of these agents against common bacterial pathogens that cause diarrheais shown below, normalized to the potency 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 of an antibiotic normalized torifaximin is expressed as the quotient obtained by dividing the MIC90concentration of rifaximin by the MIC90 concentration of thatantibiotic.

 

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·                  Side Effects. Prulifloxacin has anestablished and favorable safety profile with minimal potential to produceadverse side effects associated with other treatments for travelers’ diarrhea,such as QT interval prolongation, phototoxicity, or central nervous systemeffects.

 

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

 

*On-GoingClinical Development and Next Steps*. We are currently conducting two Phase 3 clinical trials for theregistration of Prulifloxacin in the United States for the treatment ofbacterial infectious diarrhea.

 

·      *Phase 3Trials*. The first trial, being conducted in the United States,Mexico and Peru, was initiated in July 2006 and is a randomized,double-blind placebo-controlled clinical trial in which two-thirds of thepatients will receive Prulifloxacin in 600 mg doses and one-third of thepatients will receive a placebo. We initiated the second trial in December 2006in India, and subsequently added additional sites in other countries. Thissecond trial is also a randomized, double-blind placebo-controlled clinicaltrial in which half of the patients will receive Prulifloxacin in 600 mg dosesand half of the patients will receive placebo. The primary endpoint of bothtrials is time to last unformed stool. Secondary endpoints includemicrobiological eradication of the disease pathogen and relief of other diseasesymptoms. We have completed enrollment in the first trial and expect data inthe next few months. We currently anticipate completing enrollment andreporting data in the second trial during the second half of 2008, and assumingpositive results, filing an NDA as soon as practical thereafter.

 

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

 

*AdditionalIndication for Urinary Tract Infection*. After the anticipated launch of Prulifloxacin for the treatment ofinfectious diarrhea, we may seek additional approval of Prulifloxacin for thetreatment of complicated UTIs, which are commonly caused by bacteria such as *E. coli*, Staphylococcus saprophyticusand Pseudomonas aeruginosa. According to the Kidney and Urology Foundation ofAmerica, an estimated ten million physician office visits in 2002 were due toUTIs, the second leading cause of infection following RTIs. UTIs account for upto 40% of nosocomial infections and, when present, can increase the averagehospital patient cost by approximately $675 per patient. According to IMSHealth, global sales of UTI prescription antibiotics exceeded $1.1 billion in2003, with the United States accounting for approximately 62% of this market. Webelieve Prulifloxacin’s advantages as a therapy for infectious diarrhea can beleveraged in the approval for treatment of complicated UTIs. Prulifloxacin iscurrently approved as therapy for complicated and uncomplicated UTIs in Italyand Japan. Prulifloxacin was compared to ciprofloxacin as therapy forcomplicated lower UTIs in a 257-patient, double-blind, comparator-controlledclinical trial that was conducted in Europe by third parties. In patients thatwere administered Prulifloxacin once daily for 10 days, clinical resolution ofthe infection was achieved in approximately 95% of patients and the pathogenwas eradicated in approximately 90% of patients. In contrast, in patients that wereadministered ciprofloxacin twice daily for 10 days, clinical resolution wasachieved in approximately 93% of patients and the pathogen was eradicated inapproximately 78% of patients. A similar open-label study producedmicrobiological eradication and clinical cure in approximately 93% andapproximately 96%, respectively, of 113 Prulifloxacin-treated patients.

 

**Our OPopSDrug Discovery Platform**

 

*Background*. Carbohydrates are the most abundant classof biological molecules in nature and are fundamental to many physiologicalprocesses, which can be inhibited or augmented by carbohydrate-based drugs. Webelieve these processes represent potential drug targets for infectiousdiseases, cancer and immune-related disorders. Carbohydrates, however, can bedifficult to synthesize because of their complex molecular structure. Historically,the synthesis of complex carbohydrate molecules took weeks to months tocomplete, and thus carbohydrate synthesis for use in therapeutics has oftenbeen characterized as prohibitively difficult and time-consuming. Numerousdrugs currently on the market have carbohydrate components, which are oftenimplicated in bacterial resistance, and numerous diseases involve interactionswith carbohydrate molecules. Carbohydrate synthesis involves the manipulationof existing drugs to improve their spectrum of activity or significantly reducetheir side effects. Such drugs include aminoglycosides, glycopeptides,macrolides and antivirals.

 

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

 

·                  *GlycoOptimization*. This process enables the modification of acarbohydrate group on an existing drug to improve its properties.

 

·                  *De Novo Glycosylation*. This process enables the addition of newcarbohydrate groups on an existing drug to create new, patentable compounds.

 

We acquired worldwide rightsto this technology from The Scripps Research Institute, or TSRI, in July 1999.We have built approximately 500 carbohydrate building blocks, and through ourproprietary OptiMer software program, we are able to rapidly and reliablyproduce a wide variety of carbohydrate-based molecules. With OPopS, we are ableto reduce the time required for the synthesis of these molecules from weeks ormonths to hours. We believe OPopS enables us to develop patentable drugs, optimizingdrug performance, improving activity, overcoming bacterial resistance issuesand/or improving side effect profiles. Several of our pre-clinical drugcandidates have been developed with OPopS and we intend to use this technologyto identify additional novel carbohydrate-based product candidates withsignificant commercial potential.

 

**OtherPipeline Product Candidates**

 

Using our OPopS technology,we are developing a pipeline of promising new drug candidates for the treatmentof various indications including infectious disease, osteoarthritis and breastcancer. Our strategy is to license these drug candidates opportunistically tothird-party partners in order to maximize the potential for their developmentand commercialization. The most advanced pipeline product candidates are asfollows:

 

*OPT-88: ATherapy for Osteoarthritis*

 

*Overview*. We intend to develop our carbohydrate-basedproduct candidate OPT-88 as a disease-modifying intra-articular, or within thecavity of a joint, 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. There are nocurrently marketed treatments for the underlying disease. 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-clinicalstudies of OPT-88 indicate reduced erosion of knee cartilage and a reduction ofpain for up to nine days after a single injection. With its disease-modifyingactivity and tolerability profile, OPT-88 represents a potentially newintra-articular therapy, and we believe it is a significant product opportunityfor the osteoarthritis market.

 

*Pre-ClinicalStudies and Future Plans*.*In vitro* studies of OPT-88 inhuman cell cultures have shown that it significantly stimulates restoration ofjoint cartilage. Animal studies demonstrated a reduced pathology and reductionin the erosion of knee cartilage. We held a pre-Investigational New Drugapplication, or pre-IND, meeting with the FDA in the first quarter of 2008 andplan to file an IND application for OPT-88 in the second half of 2008 toinitiate a Phase 1 study for assessing the safety of repetitive intra-articularinjections in patients with knee osteoarthritis using an escalating dosescheme. If the Phase 1 study is successful, we plan to conduct a subsequentproof-of-concept Phase 2 efficacy study.****After our Phase 2 study, we would likely seek a partner tofully develop and commercialize OPT-88.

 

*OPT-822/OPT-821:A Cancer Immunotherapy*

 

*Overview*. We are currently developing ourcarbohydrate-based product candidate OPT-822 combined with OPT-822’s adjuvanttherapy OPT-821, a carbohydrate-based immunostimulant therapy, for thetreatment of metastatic breast cancer. According to the American CancerSociety, breast cancer was the second most common form of cancer among women inthe United States, with more than 200,000 new cases and 40,000 deaths estimatedin 2005. The survival rate for patients with metastatic breast cancer remainslimited, with a median survival of two to three years and a five-year survivalrate of less than 20% for those patients diagnosed with late-stage cancer thathas metastasized to other parts of the body. In

 

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July 2002, we acquired exclusive rights fromSloan-Kettering Institute for Cancer Research, or SKI, to develop andcommercialize OPT-822 worldwide. Carbohydrate antigens are known to stimulate the immune response againstcancer cells in the body.  We haveapplied OPopS technology to manufacture effectively complex carbohydrate cancerantigens, including Globo-H, a prominent antigen in breast cancer cells, andsialyl Lewis a, an antigen in breast and small lung cancer cells.  OPT-822 is a novel cancer immunotherapy andis composed of Globo H linked to a protein carrier.

 

*Clinical Studies and Future Plans*. SKI completed Phase 1 safety studies of OPT-822 in prostate cancerpatients and breast cancer patients in 1999 and 2001, respectively.  In these studies, OPT-822 appeared to be welltolerated and to stimulate response to tumor antigens.  Eighteen of 27 metastatic breast cancerpatients treated with OPT-822 in the studies survived after five years.  We also plan to evaluate the clinicalefficacy of OPT-822 combined with OPT-822’s adjuvant therapy OPT-821.  We currently plan to identify a strategicpartner, apply for government grants for subsequent clinical trials, and theninitiate a Phase 2/3****clinicaltrial in Asia.

 

*OPT-1068/CEM-101: Macrolide andKetolide Antibiotics*

 

Macrolide antibiotics have been marketed for thetreatment of upper and lower respiratory tract infections.  Macrolides such as erythromycin andazithromycin, and ketolides, such as telithromycin, are related classes ofantibiotics which have strong gram-positive activity and inhibit bacterialgrowth.  However, an increasing number ofpathogens are now resistant to currently available macrolides andketolide.  Two of our leading productcandidates developed with our discovery technology, includingglycooptimization, OPT-1068/CEM-101, are effective against these resistantbacterial strains.  These productcandidates have been shown to possess potent activity against multi-drugresistant Streptococcus pneumoniae and Streptococcus pyogenes, common RTIpathogens.  OPT-1068, the most advancedlead candidate, is orally active with potent efficacy in animal models afteronce-a-day administration.  Cempra haslicensed from us a library of approximately 500 macrolides related to these twoproduct candidates.  Cempra has informedus that it is initially planning to develop OPT-1068 for RTIs in adults andchildren, including sinusitis, an infection of the sinus, pharyngitis, aninfection of the pharynx, and community-acquired mild and moderate pneumonia.

 

**Our Strategy**

 

Our principal objective is to become a leadingbiopharmaceutical company focused on the discovery, development andcommercialization of innovative anti-infective compounds, with an initial focuson 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, OPT-80for the treatment of CDI, and Prulifloxacin for the treatment of infectiousdiarrhea in travelers.  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 OPT-80 and Prulifloxacin.  OPT-80 potentially offers significantadvantages over existing therapeutics for CDI, a serious and growinghospital-acquired illness.  Prulifloxacinalso potentially offers significant advantages over existing therapeutics forinfectious diarrhea and has an extensive record of safety and efficacy, havingbeen used in over two million patients in Europe and Japan.  If our trials for OPT-80 for the treatment ofCDI are successful, we plan to file an NDA for OPT-80 as soon as practicalthereafter.  If our trials forPrulifloxacin for the treatment of travelers’ diarrhea are successful, we planto file an NDA for Prulifloxacin as soon as practical thereafter.

 

·                  *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 OPT-80 and Prulifloxacin in key

 

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defined markets.  In order to achieve these goals, we intend todevelop our own marketing organization and sales force, as well as evaluatepartnering alternatives to commercialize our product candidates.

 

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

 

**Marketing and Sales**

 

We currently have no marketing, sales or distributioncapabilities.  However, we plan todevelop these capabilities internally or through collaborations with thirdparties.  In February 2007, weelected to terminate our collaboration agreement with Par and exercised ourright to repurchase Par’s rights to develop and commercialize OPT-80 in theNorth America and Israel.  We now holdworldwide rights to OPT-80. We plan to build our own marketing and sales forcefor OPT-80 in North America and Prulifloxacin in the United States.  We plan to seek collaborations with one ormore third parties for the commercialization of OPT-80 outside of NorthAmerica.  We plan to target our marketingand sales of OPT-80 to hospital-based and long-term care physicians, includinggastroenterologists, infectious disease specialists and internists.  If OPT-80 and Prulifloxacin are approved bythe FDA, we intend to develop a marketing and sales force in the United Statesto commercialize both OPT-80 and Prulifloxacin in this market.  We plan to target our marketing and sales ofPrulifloxacin to high-prescribing physicians of antibiotics for travelers’diarrhea, including those at travel clinics.

 

We continue to evaluate the marketing and salescapabilities that will be necessary to launch and commercialize OPT-80 andPrulifloxacin.  We are currently buildinga marketing department and establishing a medical affairs group to introduceour product candidates to key opinion leaders in CDI and healthcareprofessionals focusing on infectious diseases and gastroenterology.

 

**Collaborations, Commercial andLicense Agreements and Grants**

 

*Par Pharmaceutical, Inc.* In January 2007, we entered into a prospective buy-back agreementwith Par which provided us with an option to terminate a collaborationagreement entered in April 2005. The collaboration agreement provided that Par would develop andcommercialize OPT-80 and granted Par an exclusive royalty bearing license, withthe right to sublicense, promote, market, distribute and sell OPT-80 in aterritory composed of the United States, Canada and Puerto Rico, with an optionto extend the territory to include Israel. We retained all other rights to OPT-80 in the rest of the world (i.e.outside North America).

 

In February 2007, we elected to terminate thecollaboration agreement pursuant to the prospective buy-back agreement with Parand we have repurchased the rights to develop and commercialize OPT-80 in NorthAmerica and Israel.  We now holdworldwide rights to OPT-80.  Under theterms of the prospective buy-back agreement, we paid Par a one-time $20.0million termination fee and $1.9 million for OPT-80 clinical supply materialand active pharmaceutical ingredient in 2007. We are also obligated to pay Par a one-time $5.0 million milestonepayment, a 5% royalty on net sales by us or our affiliates of OPT-80 in NorthAmerica and Israel, and a 1.5% royalty on net sales by us or our affiliates ofOPT-80 in the rest of the world.  Theone-time $5.0 million milestone payment shall be paid after the earliest tooccur of (i) the successful completion by us of our pivotal Phase 3trial for OPT-80, (ii) our grant to a third party of the rights to OPT-80or (iii) the submission to the FDA of an NDA for OPT-80.  In the event we license our right to marketOPT-80 in the rest of the world, we will be required to pay Par a 6.25% royaltyon net revenues we receive related to OPT-80. 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.* *The agreement also includes amutual release between the parties and our indemnification of Par for actionsrelated to OPT-80, the agreements assigned to us by Par and certain othermatters.

 

*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, for OPT-80.Under this agreement, Biocon is obligated to supply to us our requirements ofthe OPT-80 API for certain markets. The

 

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supply agreement will terminate upon the tenthanniversary of the commercial launch of OPT-80 unless earlier terminated bymutual agreement or material default of either party.

 

*Nippon Shinyaku*. In June 2004, we entered into a license agreement with Nippon Shinyaku.  Under the terms of the agreement, we acquiredthe non-exclusive right to import and purchase Prulifloxacin, and the exclusiveright (with the right to sublicense) within the United States to develop, make,use, offer to sell, sell and license products suitable for consumption byhumans containing Prulifloxacin. Additionally, we acquired rights within the United States to a keypatent which covers the compound and its use in the treatment of bacterialinfections in humans and animals.  Thekey patent will expire in February 2009; however, upon receiving finalmarketing approval of Prulifloxacin, we plan to apply to extend the term ofthis key patent for up to an additional five years, under the Drug PriceCompetition and Patent Term Restoration Act, informally known as theHatch-Waxman Act.  Under the agreement,we also acquired rights to a pending U.S. patent application filed by NipponShinyaku in October 2005 which relates to production of a form ofPrulifloxacin.  If issued, the U.S.pending patent application for Prulifloxacin would expire in 2023.

 

Under the terms of the agreement, we paid NipponShinyaku a $1.0 million upfront licensing fee and will be required to payNippon Shinyaku a milestone payment in the amount of $1.0 million upon the filing,if any, of the NDA for Prulifloxacin in the United States.  We also agreed to exclusively purchasePrulifloxacin from Nippon Shinyaku and to purchase a certain amount ofPrulifloxacin annually that is to be mutually agreed upon by us and Nippon Shinyaku,commencing in the year of the first commercial sale of Prulifloxacin in theUnited States.  If Nippon Shinyaku isunable to supply us with the required amount of Prulifloxacin, then NipponShinyaku will grant us a non-exclusive, worldwide license to make or have madePrulifloxacin, in which event we will owe Nippon Shinyaku a royalty based onthe amount of net sales of Prulifloxacin generated by us and oursublicensees.  Additionally, we will oweNippon Shinyaku certain royalties based on the amount of net sales ofPrulifloxacin less the amount of Prulifloxacin we buy from Nippon Shinyaku.

 

Either party may terminate the agreement 60 days aftergiving notice of a material breach which remains uncured 60 days after writtennotice.  If not terminated earlier, theagreement will terminate upon the longer of ten years from the date of thefirst commercial sale of Prulifloxacin in the United States or until the dateon which the last valid patent claim relating to Prulifloxacin expires in theUnited States.

 

*Sloan-Kettering Institute for CancerResearch*.  In July 2002, we entered into a licenseagreement with Sloan-Kettering Institute for Cancer Research, or SKI, toacquire, together with certain non-exclusive licenses, exclusive, worldwidelicensing and sublicensing rights to certain patented and patent-pendingcarbohydrate-based cancer immunotherapies. As partial consideration for the licensing rights, we paid to SKI aone-time fee consisting of both cash and 55,383 shares of our commonstock.  Under the agreement, which wasamended in June 2005, we owe SKI milestone payments in the followingamounts for each licensed product: (i) $500,000 upon the commencement ofPhase 3 clinical studies, (ii) $750,000 upon the filing of the firstNDA, (iii) $1.5 million upon marketing approval in the United States and (iv) $1.0million upon marketing approval in each and any of Japan and certain Europeancountries, but only to the extent that we, and not a sublicensee, achieve suchmilestones.  We also owe SKI royalties basedon net sales generated from the licensed products and income we source from oursublicensing activities, which royalty payments are credited against a minimumannual royalty payment we owe to SKI during the term of the agreement.

 

The term of the agreement continues until the later ofJuly 31, 2017, or the expiration of the last to expire of the patentslicensed under this agreement, unless the agreement is earlier terminated.  The agreement can be terminated by SKI for avariety of reasons, including (i) upon 60 days’ notice in the event wefail to meet a development milestone specified in the agreement or (ii) upon30 days’ notice, in the event we fail to pay any licensing fees, royalties orpatent expenses due under the agreement within 30 days of the due date andthereafter fail to pay such deficit in-full within the 30-day notice period.

 

*Cempra Pharmaceuticals, Inc.* In March 2006, we entered into a collaborative research anddevelopment and license agreement with Cempra, a biotechnology company focusedon anti-infectives.  We are collaboratingwith Cempra to discover, develop and commercialize drugs based on macrolide andketolide compounds.  We granted to Cempraan exclusive worldwide license, except in Association of Southeast AsianNations, or ASEAN, countries as of the effective date of the agreement, withthe right to sublicense, our patent and know-how related to our macrolide andketolide antibacterial program, several other pre-clinical compounds and ourrelated proprietary technology.  Cemprais responsible for many of the

 

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costs associated with the development andcommercialization of product candidates arising under agreement, includingmanufacturing, marketing and sales costs. As partial consideration for granting Cempra the licenses, we obtainedcommon stock of Cempra.  We will receivemilestone payments as product candidates are developed and/or co-developed byCempra.  The milestone payments will betriggered upon the completion of certain clinical development milestones and incertain instances, regulatory approval of products.  The aggregate amount of such milestonepayments we may receive is based in part on the number of products developedunder the agreement and can exceed $24.5 million.  We will also receive royalty payments basedon a percentage of net sales of licensed products.  In consideration of the foregoing, Cemprawill receive milestone payments of $1.0 million from us for each of the firsttwo products we develop which receive regulatory approval in ASEAN countries aswell as royalty payments on the net sales of such products.

 

The research term of this agreement will be completedon March 31, 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 30 days’prior written notice provided that all licenses granted by the terminatingparty to the non-terminating party shall survive upon the express election ofthe non-terminating party.

 

*The Scripps Research Institute*. In July 1999, we acquiredexclusive, worldwide rights to OPopS technology from The Scripps ResearchInstitute, or TSRI.  This agreementincludes the license to us of patents, patent applications and copyrightsrelated to OPopS technology.  We alsoacquired, pursuant to three separate license agreements with TSRI, exclusive,worldwide rights to over 20 TSRI patents and patent applications related toother potential drug compounds and technologies, including HIV/FIV proteaseinhibitors, aminoglycoside antibiotics, polysialytransferase, selectininhibitors, nucleic acid binders, carbohydrate mimetics and osteoarthritis.

 

Under the four agreements with TSRI, we paid TSRIlicense fees consisting of an aggregate of 239,996 shares of our common stockwith a deemed aggregate fair market value of $46,400, as determined on thedates of each such payment. Additionally, under each agreement, we owe TSRI royalties based on netsales by us, our affiliates and sublicensees of the covered products androyalties based on revenue we generate from sublicenses granted pursuant to theagreements.  For the first licensedproduct under each of the four agreements, we also will owe TSRI payments uponachievement of certain milestones.  Inthree of the four TSRI agreements, the milestones are the successful completionof a Phase 2 trial or its foreign equivalent, the filing of an NDA or itsforeign equivalent and government marketing and distribution approval.  In the remaining TSRI agreement, themilestones are the initiation of a Phase 3 trial or its foreign equivalent,the filing of an NDA or its foreign equivalent and government marketing anddistribution approval.  The aggregatepotential amount of milestone payments we may be required to pay TSRI under allfour TSRI agreements is approximately $14.0 million.

 

Each TSRI agreement terminates in part as follows: (i) withrespect to each product which utilizes patent rights licensed under theagreement, on a country-by-country basis concurrently with the expiration ofthe last to expire of the applicable patent rights, (ii) with respect toeach product which utilizes technology licensed under the agreement but whichdoes not utilize patent rights also licensed thereunder, 15 years after thedate of the first commercial sale of the product in each country and (iii) withrespect to software licensed under the 1999 OPopS agreement, 75 years after thedate the applicable copyright is filed in the United States.

 

*Inc. Research, Inc.* In November 2005, we entered into a master services agreement withInc Research, Inc., formerly known as Advanced Biologics, as amended in January 2006.  Under the terms of the agreement, IncResearch will, from time to time, at our request and pursuant to separate workorders, perform research and/or administrative services in connection withcertain of our clinical trials, including trial management, data collection,statistical programming or analysis, quality assurance auditing, scientific andmedical communications, regulatory affairs consulting, regulatory submissionsand strategic consulting.  Pursuant tothe master services agreement, we have issued work orders totaling $34.0million for services.  Unless extended bythe mutual agreement of the parties, the master services agreement willterminate on November 16, 2012.  Wemay terminate the master services agreement at any time and for any reason,upon 30 days’ prior notice to Inc Research.

 

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*NIH Small Business InnovationResearch Awards*.  In June 2005, we received a NationalInstitutes of Health Small Business Innovation Research Program Phase IIAward in the amount of $612,000 from the National Institute of Allergy andInfectious Diseases, or NIAID.  The awardis to facilitate discovery of a new macrolide class of antibiotics through glycosylation,our proprietary chemistry technology, and evaluation of the lead compound inpre-clinical settings.  The grant alsocontains a recommendation for future support in the amount of $575,000, whichfunds will be awarded subject to availability and the satisfactory progress ofthe project, as determined by the NIAID. The award originally provided funding support from July 1, 2005through June 30, 2007 and was extended to May 31, 2008.

 

In September 2007, we received an award fromNIAID in the amount of $1 million.  Theaward will be used to conduct supplementary studies to the ongoing OPT-80trials to confirm narrow spectrum activity and potency of OPT-80 againsthypervirulent epidemic strains, to support additional toxicology andmacrobiological studies to demonstrate the safety and efficacy of the OPT-80compound and its major metabolite in CDI patients and to support a surveillancestudy of *C. difficile* isolatesacross North America to compare activity of OPT-80 with existing CDItreatments. The $1 million grant is renewable each year until August 2010to a maximum of $3 million over a three year funding period.

 

**Manufacturing**

 

We rely on third parties to manufacture our productcandidates and currently have no plans to develop our own manufacturingfacility.  We require in ourmanufacturing and processing agreements that all third-party contractmanufacturers and processors produce APIs, and finished products in accordancewith cGMP and all other applicable laws and regulations.  We maintain confidentiality agreements withpotential and existing manufacturers in order to protect our proprietary rightsrelated to our drug candidates.

 

Par assigned to us its contract with Biocon tomanufacture clinical trial supplies of the API for OPT-80 in February 2007in connection with our repurchase of rights to OPT-80 for North America andIsrael pursuant to the prospective buy-back agreement with Par.  The manufacturing facilities of Biocon havebeen approved by the FDA for other companies’ drug products, however, Biocon’sfacilities have not yet been approved by the FDA for the manufacture of ourOPT-80 drug supplies.  We intend tocontract with other third-party contract manufacturers for the commercialsupply of OPT-80.

 

In June 2004, as part of our license agreementfor exclusive rights to develop and commercialize Prulifloxacin in the UnitedStates, we entered into a supply agreement with Nippon Shinyaku for themanufacture and supply of the API for Prulifloxacin.  In turn, Nippon Shinyaku contracts with JuzenChemical Co. for the manufacture of the API for Prulifloxacin.  The tablets used in our Phase 3 clinicaltrials for Prulifloxacin are manufactured by Angelini ACRAF, or Angelini.  We are also in discussion with Angelini andother contract manufacturers for the manufacturing, packaging and labeling ofPrulifloxacin for commercial sale in the United States.  The manufacturing facilities of Juzen havebeen approved by the FDA for other companies’ drug products; however, Juzen’sfacilities have not yet been approved for the manufacture of our Prulifloxacindrug supplies.  Angelini’s facilitieshave not been approved by the FDA for the manufacture of any drug.

 

We have used both in-house capabilities and outsidethird-party cGMP manufacturers for the preparation of compounds forpre-clinical development and for the manufacture of limited quantities offinished products for clinical development. We have developed a proprietary synthetic process in our laboratoriesfor Globo-H, the carbohydrate portion of the OPT-822 cancer immunotherapy.  Third parties with cGMP facilities havemanufactured OPT-822 for clinical trials. We also plan to use third-party cGMP manufacturers for the production ofthe adjuvant, OPT-821, as well as for the production of our carbohydrate-basedproduct candidate OPT-88, a disease-modifying intra-articular therapy forosteroarthritis.

 

**Intellectual Property**

 

The proprietary nature of, and protection for, ourproducts, product candidates, processes and know-how are important to ourbusiness.  We seek patent protection inthe United States and internationally for our product candidates and othertechnology where available and when appropriate.  Our policy is to patent or in-license thetechnology, inventions and improvements that we consider important to thedevelopment 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

 

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any of our pending patent applications or with respectto any patent applications filed by us in the future, nor can we be sure thatany of our existing patents or any patents that may be granted to us in thefuture will be commercially useful in protecting our technology.  For this and more comprehensive risks relatedto our intellectual property, please see “Risk Factors — Risks Related to OurIntellectual Property.”

 

We have established and continue to build proprietarypositions for our pipeline product candidates and technology in the UnitedStates and abroad.  We have built aportfolio of more than 90 patents and patent applications that we either own orhave licensed around our key products and technologies.  As of March 10, 2008, this portfolioincluded 14 issued U.S. patents and 13 pending U.S. patent applications.  Foreign counterparts to these included 11issued patents and 53 pending patent applications.

 

For our lead product candidate OPT-80, we have onepending patent cooperation treaty, or PCT, patent application and seven U.S.pending patent applications, and 22 pending foreign counterparts in Australia,Canada, China, Europe, Japan, South Korea, India, Taiwan, Mexico andBrazil.  If issued, these OPT-80 relatedpatent applications may cover the composition of matter, the specificcrystalline polymorph forms, specific methods for manufacturing, methods ofusing and pharmaceutical formulations containing the various components.  If issued, these patent applications wouldexpire between 2023 and 2027.  For ourother product candidate Prulifloxacin, we have licensed one issued U.S. patentand one pending U.S. patent application from Nippon Shinyaku.  The U.S. patent, which expires in 2009,covers the compound Prulifloxacin.  Ifissued, the U.S. pending patent application for Prulifloxacin would expire in2023 and may cover processes for producing a drug-form of Prulifloxacin.  The remainder of our patents and patentapplications, and licensed patents and patent applications, relate to our otherproducts and technology, and expire between 2015 and 2023.

 

**Government Regulation and ProductApproval**

 

*FDA Approval Process*

 

Regulation by governmental authorities in the UnitedStates and other countries is a significant factor in the development,manufacture and marketing of pharmaceuticals and antibiotics.  All of our products will require regulatoryapproval by governmental agencies prior to commercialization.  In particular, pharmaceutical drugs aresubject to rigorous pre-clinical testing and clinical trials and otherpremarketing approval requirements by the FDA and regulatory authorities inother countries.  In the United States,various federal, and, in some cases, state statutes and regulations, alsogovern or impact the manufacturing, safety, labeling, storage, record-keepingand marketing of pharmaceutical products. The lengthy process of seeking required approvals and the continuingneed for compliance with applicable statutes and regulations require theexpenditure of substantial resources. Regulatory approval, if and when obtained for any of our productcandidates, may be limited in scope, which may significantly limit theindicated uses for which our product candidates may be marketed.  Furthermore, approved drugs and manufacturersare subject to ongoing review and discovery of previously unknown problems thatmay result in restrictions on their manufacture, sale or use or in theirwithdrawal from the market.

 

Before testing any compounds with potentialtherapeutic value in human subjects in the United States, we must satisfystringent government requirements for pre-clinical studies.  Pre-clinical testing includes both *in vitro* and *in vivo* laboratory evaluation and characterization of thesafety 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 be filedwith the FDA.  The IND will becomeeffective automatically 30 days after receipt by the FDA, unless the FDA raisesconcern or questions about the conduct of the trials as outlined in the INDprior to that time.  In this case, theIND sponsor and the FDA must resolve any outstanding concerns before clinicaltrials can proceed.

 

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Clinical trials are typically conducted in threesequential phases, Phases 1, 2 and 3, with Phase 4 trials potentiallyconducted after initial marketing approval. These phases may be compressed, may overlap or may be omitted in somecircumstances.

 

·                  *Phase 1*. After an IND becomes effective, Phase 1 human clinical trials maybegin.  These trials evaluate a drug’ssafety profile and the range of safe dosages that can be administered tohealthy volunteers and/or patients, including the maximum tolerated dose thatcan be given to a trial subject with the target disease or condition.  Phase 1 trials also determine how a drugis absorbed, distributed, metabolized and excreted by the body and the durationof its action.  In some cases, we maydecide to run what is referred to as a “Phase 1a” evaluation in which weadminister single doses of a new drug candidate in a small group of people toevaluate its pharmacokinetic properties, safety, dose range and sideeffects.  We may also decide to run whatis referred to as a “Phase 1b” evaluation, which is a secondsafety-focused Phase 1 trial in which we administer a new drug candidateat its targeted dosing regimen in a small group of people to evaluate itspharmacokinetic 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 clinicaltrials, the drug is usually tested in one or more controlled, randomized trialscomparing the investigational new drug to an approved form of therapy orplacebo in an expanded and well-defined patient population and at multipleclinical sites.  The goal of these trialsis to obtain definitive statistical evidence of safety and effectiveness of theinvestigational new drug regimen as compared to a placebo or an approvedstandard therapy in defined patient populations with a given disease and stageof 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.  These clinicaltrials are often referred to as Phase 3/4 post approval clinicaltrials.  Failure to promptly conductmandatory Phase 4 clinical trials could result in withdrawal of approvalfor products approved under accelerated approval regulations.

 

After completion of Phase 1, 2 and 3 clinicaltrials, if there is substantial evidence that the drug is safe and effective,an NDA is prepared and submitted for the FDA to review.  The NDA must contain all of the essentialinformation on the drug gathered to that date, including data from pre-clinicaland clinical trials, and the content and format of an NDA must conform to allFDA 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 the applicationshould be approved.  The FDA is not boundby 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 an approvable letter, the latter of which usually contains anumber of conditions that must be satisfied in order to secure finalapproval.  If the FDA’s evaluation of theNDA submission or manufacturing facility is not favorable, the FDA may refuseto approve the NDA or issue a not approvable letter.

 

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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 cGMPs regulationswhich impose procedural and documentation requirements upon us and any thirdparty manufacturers we utilize.

 

The FDA closely regulates the marketing and promotionof drugs.  A company can make only thoseclaims relating to safety and efficacy that are approved by the FDA.  Failure to comply with these requirements canresult in adverse publicity, warning letters, corrective advertising andpotential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that are notdescribed in the product’s labeling and that differ from those tested by us andapproved by the FDA.  Such off-label usesare common across medical specialties. Physicians may believe that such off-label uses are the best treatmentfor many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice oftreatments.  The FDA does, however,restrict manufacturer’s communications on the subject of off-label use.

 

The FDA’s policies may change and additionalgovernment regulations may be enacted that could prevent or delay regulatoryapproval of our product candidates or approval of new indications after theinitial 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 subject to a wide variety of foreignregulations governing the development, manufacture and marketing of ourproducts.  Whether or not FDA approvalhas been obtained, approval of a product by the comparable regulatoryauthorities of foreign countries must still be obtained prior to manufacturingor marketing the product in those countries. The approval process varies from country to country and the time neededto secure approval may be longer or shorter than that required for FDAapproval.  We cannot assure you thatclinical trials conducted in one country will be accepted by other countries orthat approval in one country will result in approval in any other country.

 

*Fast Track Products Designation*

 

The FDA has granted Fast Track status for OPT-80 inthe treatment of CDI.  The FDA’s FastTrack program is intended to facilitate the development and expedite the reviewof drugs that are intended for the treatment of a serious or life-threateningcondition for which there is no effective treatment and demonstrate thepotential to address unmet medical needs for their condition.  Under the Fast Track program, the sponsor ofa new drug may request the FDA to designate the drug for a specific indicationas a Fast Track product at any time during the clinical development of theproduct.  The FDA must determine if theproduct qualifies for Fast Track designation within 60 days of receipt of thesponsor’s request.

 

If Fast Track designation is obtained, 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 Fees Act, which governsthe time period goals the FDA has committed to reviewing an application, doesnot begin until the complete application is submitted.  The Fast Track designation may be withdrawnby the FDA if the FDA believes that the designation is no longer supported bydata emerging in the clinical trial process. Participation in the Fast Track program does not eliminate any phase ofclinical studies.  Additionally, in somecases, a Fast Track designated product may also qualify for priority review, orreview within a six-month time frame from the time an NDA is accepted forfiling.  A Fast Track designated productwould ordinarily meet the FDA’s criteria for priority review.  We cannot guarantee any of our products withpriority review designation, or if a priority designation is received, thatreview or approval will be faster than conventional FDA procedures.

 

*Continuous Marketing Application*

 

OPT-80 was also chosen to be the only investigationalnew drug in the FDA’s CMA, Pilot 2 Program in the Division ofAnti-infectives and Ophthalmology Products. The CMA designation offers several potential benefits, including aprogram of continuous FDA feedback designed to streamline the developmentprocess.  In 2002, the FDA outlined thebasic elements of two CMA pipeline programs: CMA Pilot 1 and CMAPilot 2.  Both programs apply onlyto certain new drug or biological products that have been designated as FastTrack products.  CMA Pilot 1provides for the review of a limited

 

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number of pre-submitted portions of an applicant’smarketing application based on the terms and conditions agreed upon by theapplicant and the FDA.  Under the CMAPilot 2 program in which we are a participant, the FDA and Fast Track drugapplicants enter into an agreement to engage in frequent scientific feedbackand interactions during the IND phase of product development.  According to FDA guidelines, the CMAPilot 2 program will evaluate the cost of such enhanced interactionbetween the FDA and applicants and whether it improves the efficiency andeffectiveness of development programs, and will be limited to no more than oneFast Track product for each of 20 participating FDA review divisions.  According to the FDA guidelines, CMAPilot 2 applications are evaluated based on the FDA’s overall assessmentof (a) the potential value of enhanced interaction, emphasizing thepotential public health benefit resulting from development of the product, (b) thelikelihood that concentrated scientific dialogue will facilitate theavailability of a promising novel therapy, and (c) the applicant’sdemonstration of commitment to product development as evidenced by a thoroughconsideration of the rationale for participation in CMA Pilot 2.  Participation in the CMA Pilot 2 programdoes not in any way indicate product candidate efficacy or increase thelikelihood of regulatory approval of the product candidate.

 

*Hatch-Waxman Act*

 

The key licensed patent under our agreement withNippon Shinyaku covers Prulifloxacin for treating bacterial infections inhumans and animals.  This patent willexpire in February 2009.  We plan toapply to extend the term of this key patent under the Drug Price Competitionand Patent Term Restoration Act, informally known as the Hatch-Waxman Act,which allows patent term extension of a maximum of five years, if certainconditions are met.

 

**Competition**

 

The pharmaceutical industry is highlycompetitive.  We face significantcompetition from pharmaceutical companies and biotechnology companies that areresearching and selling products designed to treat infectious disease.  Many of these companies have significantlygreater financial, manufacturing, marketing and product development resourcesthan us.  Additionally, many of thesecompanies have substantially greater experience developing, manufacturing andcommercializing drugs which may allow them to bring their products to marketquicker than we can.  Severalpharmaceutical and biotechnology companies have already established themselvesin the markets for the treatment of CDI and/or infectious diarrhea and manyadditional companies are currently developing products for the treatment of CDIand/or infectious diarrhea, which we expect will compete with OPT-80 andPrulifloxacin.  Potentially significantcompetitors to OPT-80 and Prulifloxacin, both currently marketed and inclinical development, include the following:

 
| **Product**                        | ** ** | **Stage of Development** | ** ** | **Company**                         |
|------------------------------------|------------|------------------------------------|------------|-------------------------------------|
| **OPT-80 Competitors**             | ** ** | ** **                         | ** ** | ** **                          |
| FlagylTM/metronidazole         |       | Marketed                           |       | Pfizer, Sanofi-Aventis and generics |
| VancocinTM/oral vancomycin     |       | Marketed                           |       | Viropharma and generics             |
| TolevamerTM                    |       | Phase 3                            |       | Genzyme                             |
| XifaxanTM/rifaximin            |       | Phase 3                       |       | Salix and generics                  |
| AliniaTM/nitazoxanide          |       | Phase 3                       |       | Romark                              |
| ramoplanin                         |       | Phase 2 completed             |       | Oscient                             |
| CD Vaccine                         |       | Phase 1                       |       | Acambis                             |
| **Prulifloxacin Competitors**      | ** ** | ** **                         | ** ** | ** **                          |
| CiproTM/ciprofloxacin          |       | Marketed                           |       | Bayer and generics                  |
| ZithromaxTM/azithromycin       |       | Marketed                           |       | Pfizer                              |
| XifaxanTM/rifaximin            |       | Marketed                           |       | Salix and generics                  |
| BactrimTM/SeptraTM/TMP/SMX |       | Marketed                           |       | Roche and generics                  |
| VibramycinTM/doxycycline       |       | Marketed                           |       | Pfizer and generics                 |
| DukoralTM                      |       | Marketed                           |       | Novartis                            |
| LevaquinTM/levofloxacin        |       | Marketed                           |       | Johnson & Johnson          |
| ACE527/ETEC Vaccine                |       | Phase 2 completed             |       | Iomai                               |

 

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**Research and Development**

 

Our research and development efforts are primarilyfocused on developing OPT-80 and Prulifloxacin and our other productcandidates.  Our research and developmentexpense was approximately $41.6 million, $10.5 million and $7.0 million inyears 2007, 2006 and 2005, respectively. Research and development expenses in 2007 include the one-time terminationpayment of  $20 million related to theprospective buy-back agreement with Par, and the $1.9 million OPT-80 clinicalsupply material and active pharmaceutical ingredient which we purchased fromPar.

 

**Employees**

 

As of March 10, 2008, we employed 47 persons, 18of whom hold Ph.D., M.D. or DVM degrees. Nine employees were engaged in discovery research, thirteen in clinicalresearch and regulatory affairs, four in commercial and corporate developmentand 21 in support administration, including finance, information systems,facilities and human resources.  None ofour employees is subject to a collective bargaining agreement.  We consider our relations with our employeesto be good.

 

**Item 1a. Risk Factors**

 

**Risks Related to Our Business**

 

**We are a company with limited sourcesof revenue, and we are largely dependent on the success of our lead productcandidate OPT-80 and, to a lesser degree, our other lead product candidatePrulifloxacin.**

 

We are a biopharmaceutical company with no productsapproved for commercial sale and, to date, we have not generated any revenuesfrom product sales.  Our ability togenerate future revenues depends heavily on our success in:

 

·                  developing and securing U.S. and/or foreign regulatoryapprovals for OPT-80 and Prulifloxacin and, to a lesser extent, other productcandidates;

 

·                  commercializing any product candidates for which wereceive approval from the FDA; and

 

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

 

Our product candidates will require extensiveadditional clinical study and evaluation, regulatory approval in multiplejurisdictions, substantial investment and significant marketing efforts beforewe generate any revenues from product sales.  We are not permitted to market or promote ourproduct candidates before we receive regulatory approval from the FDA orcomparable foreign regulatory authorities. We have not submitted an NDA, or received marketing approval for eitherOPT-80 or Prulifloxacin, and we cannot be certain that either of these productcandidates will be successful in clinical trials or receive regulatoryapproval.  If we do not receiveregulatory approval for and successfully commercialize OPT-80 andPrulifloxacin, we will not generate any revenues from product sales for severalyears, if at all, and we may not be able to continue our operations.

 

We believe our initial success will be more dependenton OPT-80 than Prulifloxacin, because we believe that our market for thetreatment of CDI is larger than our market for the treatment of infectiousdiarrhea.  Even if we successfully obtainregulatory approval to market OPT-80 or Prulifloxacin, our revenues for eitherdrug candidate will be dependent upon the size of the markets in theterritories for which we have commercial rights.  If the markets for the treatment of CDI orinfectious diarrhea are not as significant as we estimate, our business andprospects will be harmed.

 

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

 

We have experienced significant operating losses sinceour inception in 1998.  As of December 31,2007, we had an accumulated deficit of approximately $97.7 million.  We have generated no revenues from productsales to date.  We have funded ouroperations to date from the sale of approximately $154.8 million of oursecurities and through research funding

 

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pursuant to collaborations with partners or governmentgrants.  We expect to continue to incursubstantial additional operating losses for the next several years as weadvance our clinical trials and research and development initiatives and buildour marketing and sales capabilities. Because of the numerous risks and uncertainties associated withdeveloping and commercializing antibiotics, we are unable to predict the extentof any future losses.  We may neversuccessfully commercialize our product candidates and thus may never have anysignificant future revenues or achieve and sustain profitability.

 

**If we fail to obtain additionalfinancing, we may be unable to commercialize OPT-80 and Prulifloxacin ordevelop and commercialize our other product candidates, or continue our otherresearch and development programs.**

 

We will require additional capital to commercializeour current lead product candidates OPT-80 and Prulifloxacin.  We cannot be certain that additional fundingwill be available on acceptable terms, or at all.  To the extent that we raise additional fundsby issuing equity securities, our stockholders may experience significantdilution.  Any debt financing, ifavailable, may require us to pledge our assets as collateral or involverestrictive covenants, such as limitations on our ability to incur additionalindebtedness, limitations on our ability to acquire or license intellectualproperty rights and other operating restrictions that could negatively impactour ability to conduct our business.  Ifwe are unable to raise additional capital when required or on acceptable terms,we may have to significantly delay, scale back or discontinue the developmentor commercialization of one or more of our product candidates or one or more ofour other research and development initiatives. We also could be required to:

 

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

 

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

 

Any of the above events could significantly harm ourbusiness and prospects and could cause our stock price to decline.

 

We do not currently have sufficient resources tocommercialize OPT-80 on our own. If we are unable to raise additional capitalor we are unable to find a collaboration partner or are unable to effectivelycollaborate with one or more partners for the commercialization of OPT-80 orPrulifloxacin, we will not generate significant revenues from sales of OPT-80and our business will be materially harmed.

 

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

 

We currently plan to build our own marketing and salesforce for OPT-80 in North America and Prulifloxacin in the United States, andwe may also seek one or more partners for the commercialization of OPT-80 outsideof North America.  We cannot be certainthat we would be successful in attracting any such partners.  If we were not able to find appropriatepartners for the continued development and commercialization of OPT-80, wewould either have to delay these initiatives which would harm our business andprospects, or raise significant additional funds to develop clinical andcommercialization capabilities internally.

 

We are subject to a number of additional risksassociated with our dependence on collaborations with third parties.** **Conflictsmay arise between us and collaborators, such as conflicts concerning theinterpretation of clinical data, the achievement of milestones, theinterpretation of financial provisions or the ownership of intellectualproperty developed during the collaboration. If any such conflicts arise, a collaborator could act in its ownself-interest, which may be adverse to our best interests.  Any such disagreement between us and acollaborator could result in one or more of the following, each of which coulddelay or prevent the development or commercialization of OPT-80, and in turnprevent us from generating sufficient revenues to achieve or maintainprofitability:

 

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

 

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

 

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

 

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

 

In addition, a collaborator may shift its research,development, manufacturing and commercialization resources to other productopportunities including those that might be competitive with OPT-80.

 

If we cannot commercialize OPT-80, we will have torely solely on Prulifloxacin and earlier stage product candidates for anyfuture revenues, and our ability to achieve and sustain profitability will bematerially and adversely harmed.

 

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

 

We need FDA approval prior to marketing our productcandidates in the United States.  If wefail to obtain FDA approval to market our product candidates, we will be unableto sell our product candidates in the United States, which will significantlyimpair our ability to generate any revenues.

 

This regulatory review and approval process, whichincludes evaluation of pre-clinical studies and clinical trials of our productcandidates as well as the evaluation of our manufacturing processes and ourthird-party contract manufacturers’ facilities, is lengthy, expensive anduncertain.  To receive approval for aproduct candidate, we must, among other things, demonstrate with substantialevidence from well-controlled clinical trials that the product candidate isboth safe and effective for each indication for which approval is sought.  Satisfaction of the approval requirementstypically takes several years and the time needed to satisfy them may varysubstantially, based on the type, complexity and novelty of the pharmaceuticalproduct.  We cannot predict if or when wemight receive regulatory approvals for any of our product candidates currentlyunder development.  Moreover, anyapprovals that we obtain may not cover all of the clinical indications forwhich we are seeking approval, or could contain significant limitations in theform of narrow indications, warnings, precautions or contra-indications withrespect to conditions of use.  In such anevent, our ability to generate revenues from such products would be greatlyreduced and our business would be harmed.

 

The FDA has substantial discretion in the approvalprocess and may either refuse to consider our application for substantivereview or may form the opinion after review of our data that our application isinsufficient 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. Depending on the extent of these or any other studies, approval of anyapplications that we submit may be delayed by several years, or may require usto expend more resources than we have available.  It is also possible that additional studies,if performed and completed, may not be successful or considered sufficient bythe FDA for approval or even to make our applications approvable.  If any of these outcomes occur, we may beforced to abandon one or more of our future applications for approval, whichmight significantly harm our business and prospects.

 

It is possible that none of our existing product candidatesor any product candidates we may seek to develop in the future will ever obtainthe appropriate regulatory approvals necessary for us or our collaborators tocommence product sales.  Moreover, recentevents, including complications arising from FDA-approved drugs such as Vioxxand Ketek, have raised questions about the safety of marketed drugs and mayresult in increased cautiousness by the FDA and comparable foreign regulatoryauthorities in reviewing new drugs based on safety, efficacy or otherregulatory approvals.  This increasedscrutiny by regulatory authorities may result in significant delays inobtaining regulatory approvals, as well as more stringent product labeling andpost-marketing testing requirements.

 

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Although the FDA has granted Fast Track status toOPT-80 and selected it for participation in a CMA Pilot 2 Program, wecannot be certain that we will receive any benefits from these designations orthat the designations will expedite regulatory review or approval ofOPT-80.  Participation in these programswill not eliminate any phase of clinical development.  Moreover, our participation in the CMA Pilot 2Program will involve frequent scientific discussions and other interactionswith the staff of the FDA during the investigational new drug phase of ourdevelopment of OPT-80.  These frequentdiscussions could subject OPT-80 to a greater level of scrutiny than it mightotherwise have received or require us to make more frequent submissions andendure other burdens that would have been avoided if we had not participated inthe program.  Therefore, despite anypotential benefits of OPT-80’s Fast Track and CMA Pilot 2 Programdesignations, significant uncertainty remains regarding the clinicaldevelopment and regulatory approval process for OPT-80.

 

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

 

Clinical testing is expensive and can take many yearsto complete, and its outcome is uncertain. Failure can occur at any time during the clinical trial process.  The results of pre-clinical studies and earlyclinical trials of our product candidates may not be predictive of the resultsof later-stage clinical trials.  Productcandidates in later stages of clinical trials may fail to show the desiredsafety and efficacy traits despite having progressed through pre-clinicalstudies and initial clinical testing.  Inaddition, the type and amount of clinical data necessary to gain regulatoryapproval for our product candidates may change.

 

Even after we complete our planned clinical trials,our product candidates could fail to receive regulatory approval for manyreasons, including the following:

 

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

 

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

 

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

 

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

 

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

 

·                  the data collected from clinical trialsof our product candidates may not be sufficient to support the submission of anew drug application or other submission or to obtain regulatory approval inthe United States or elsewhere; and

 

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

 

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

 

We may experience delays in clinical trials of ourproduct candidates.  OPT-80 is currentlyin two Phase 3 clinical trials for the treatment of CDI.  We anticipate enrollment in the first trialwill be completed in the next few months and we anticipate completingenrollment and reporting data in the second trial in 2009. If both trials aresuccessful, we intend to file an NDA

 

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as soon as practicable thereafter. In addition, we areplanning to conduct clinical and proof-of-concept clinical trials for otherindications of OPT-80.  Prulifloxacin isin two Phase 3 trials for infectious diarrhea in travelers.  We intend to conduct a Phase 4 trial ofPrulifloxacin subsequent to NDA submission to compare Prulifloxacin tociprofloxacin.  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 affect patientenrollment, including the size and nature of the patient population, theproximity 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.  Several of our principal investigators havestated that the enrollment rate in the clinical trials for OPT-80 has been lessthan projected.  Our original projectionswere based on enrollment rates for our Phase 2a trial of OPT-80.  If we continue to experience lower thanexpected enrollment in the trials, the trials may not be completed as currentlyscheduled and we may incur delays in obtaining regulatory approval as well asadditional significant expenses.  Furthermore,with respect to the clinical trials conducted by third parties, we will have nocontrol over their timing or success.

 

We could encounter delays if prescribing physiciansencounter unresolved ethical issues associated with enrolling patients inclinical trials of our product candidates in lieu of prescribing existingantibiotics that have established safety and efficacy profiles or withadministering placebo to patients in our placebo-controlled trials.  Further, a clinical trial may be suspended orterminated by us, our collaborators, the FDA or other regulatory authoritiesdue to a number of factors, including failure to conduct the clinical trial inaccordance with regulatory requirements or our clinical protocols, inspectionof the clinical trial operations or trial site by the FDA or other regulatoryauthorities resulting in the imposition of a clinical hold, unforeseen safetyissues or adverse side effects, failure to demonstrate a benefit from using adrug, changes in governmental regulations or administrative actions or lack ofadequate funding to continue the clinical trial.  In addition, our Prulifloxacin productcandidate treats bacterial infections which tend to peak during high travelseasons.  As a result, during certaintimes of the year, it is more difficult to enroll patients in our trials forPrulifloxacin.  If we experience delaysin the completion of, or termination of, any clinical trial of our productcandidates, the commercial prospects of our product candidates will be harmed,and our ability to generate product revenues from any of these productcandidates will be delayed.  In addition,any delays in completing our clinical trials will increase our costs, slow downour product development and approval process and jeopardize our ability tocommence product sales and generate revenues. Any of these occurrences may significantly harm our business, financialcondition and prospects.

 

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

 

Our clinical trials may be suspended at any time for anumber of reasons.  We may voluntarilysuspend or terminate our clinical trials if at any time we believe that theypresent an unacceptable risk to participants. In addition, regulatory agencies may order the temporary or permanentdiscontinuation of our clinical trials at any time if they believe that theclinical trials are not being conducted in accordance with applicableregulatory requirements or that they present an unacceptable safety risk toparticipants.  In previous clinicaltrials of OPT-80, certain patients experienced non-drug related adverseevents.  Patients treated withPrulifloxacin have experienced drug-related side effects including abdominalpain, diarrhea, nausea, renal toxicities, cardiac arrhythmias,photosensitivity, rash, excessive flushing of the skin and central nervoussystem effects, such as seizures.  TheFDA recommended that we conduct a study to determine the effect, if any, of Prulifloxacinon the prolongation of the QT interval, a condition that is associated withpotentially life-threatening cardiac arrhythmias.  Our future clinical trials will involvetesting in larger patient populations, which could reveal a high prevalence ofthese or other side effects.  In suchevent, our trials would be interrupted, delayed or halted and the FDA orcomparable foreign regulatory authorities could order us to cease furtherdevelopment of or deny approval of our product candidates for any or alltargeted indications.  Even if we believeour product candidates are safe, our data is subject to review by the FDA,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.

 

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

 

We have entered into agreements with third-party CROs,such as INC Research to provide monitors for and to manage data for ouron-going clinical programs.

 

We and the CROs conducting clinical trials for ourproduct candidates are required to comply with current good clinical practices,or GCPs, regulations and guidelines enforced by the FDA for all of our productsin clinical development.  The FDAenforces GCPs through periodic inspections of trial sponsors, principalinvestigators and trial sites.  If we orthe CROs conducting clinical trials of our product candidates fail to complywith applicable GCPs, the clinical data generated in the clinical trials may bedeemed unreliable and the FDA may require additional clinical trials beforeapproving any marketing applications.  Wecannot assure you that, upon inspection, the FDA will determine that anyclinical trials of our product candidates comply with GCPs.  In addition, our clinical trials must beconducted with product produced under cGMP regulations, and will require alarge number of test subjects.  Ourfailure to comply with these regulations may require us to repeat clinical trials,which would be costly and delay the regulatory approval process andcommercialization of our product candidates.

 

Typically, the CROs conducting clinical trials of ourproduct candidates have the right to terminate their agreements with us or ourcollaborators upon notice in the event of an uncured material breach.  In addition, some CROs have an ability toterminate their respective agreements with us if we fail to perform ourobligations, if it can be reasonably demonstrated that the safety of thesubjects participating in our clinical trials warrants such termination, if wemake a general assignment for the benefit of our creditors or if we areliquidated.  INC Research has beenheavily involved in the clinical development and regulatory approval processfor our lead product candidates and possesses significant experience with theregulatory process.  We substantiallyrely on INC Research to conduct the clinical trials for OPT-80 andPrulifloxacin.  INC Research has alsosubcontracted with other third-party CROs for various aspects of the clinicaltrials.  If any relationships with INCResearch or these other third-party CROs terminate, we or our collaborators maynot be able to enter into arrangements with alternative CROs or we may enterinto arrangements with alternative CROs that do not have the expertise orrelationships that INC Research has with government agencies. For example, athird party service provider recently terminated their clinical trial agreementregarding the enrollment of patients in our Prulifloxacin trial inGuatemala.  As a result, we are currentlyunable to recruit new patients in Guatemala and are evaluating additional sitesto supplement existing ones in India and Mexico.

 

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

 

**If we fail to gain and maintainapproval from regulatory authorities in international markets for OPT-80 andany future product candidates for which we have rights in internationalmarkets, our market opportunities will be limited.**

 

Sales of our product candidates outside of the UnitedStates will be subject to foreign regulatory requirements governing clinicaltrials and marketing approval.  Even ifthe FDA grants marketing approval for a product candidate, comparableregulatory authorities of foreign countries must also approve the manufacturingand marketing of the product candidate in those countries.  This is important for the commercializationof OPT-80 for which we currently have exclusive worldwide marketingrights.  Obtaining foreign regulatoryapprovals could result in significant delays, difficulties and costs for us andrequire additional pre-clinical studies or clinical trials which would becostly and time consuming.  Regulatoryrequirements can vary widely from country to country and could delay theintroduction of our products in those countries.  Clinical trials conducted in one country maynot be accepted by regulatory authorities in other countries, and regulatory

 

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approval in one country does not mean that regulatoryapproval will be obtained in any other country. In addition, our failure to obtain regulatory approval in any countrymay delay or have negative effects on the process for regulatory approval inothers.  Other than Prulifloxacin, whichis sold by other parties in Japan, Italy and certain other European countries,none of our product candidates is approved for sale in any international marketfor which we have rights, and we do not have experience in obtaining regulatoryapproval in international markets.  If wefail to comply with regulatory requirements in our international markets or toobtain and maintain required approvals, our target market will be reduced andour ability to generate revenues will be diminished, which would significantlyharm our business, results of operations and prospects.

 

**We currently have no marketing andsales organization and have no experience in marketing drug products.  If we are unable to establish marketing andsales capabilities or enter into agreements with third parties to market andsell our product candidates, we may not be able to generate product revenues.**

 

We currently do not have a sales organization for themarketing, sales and distribution of pharmaceutical products.  In order to commercialize any products, wemust build our marketing, sales, distribution, managerial and othernon-technical capabilities or make arrangements with third parties to performthese services.  We plan to build our ownmarketing and sales force to commercialize OPT-80 in North America and willseek third-party partners outside North America.  We own exclusive rights to commercializePrulifloxacin in the United States, and we contemplate establishing our ownsales force or seeking third-party partners to sell Prulifloxacin in the UnitedStates.  The establishment anddevelopment of our own sales force to market any products we may develop willbe expensive and time consuming and could delay any product launch, and wecannot be certain that we will be able to successfully develop thiscapability.  We will also have to competewith other pharmaceutical and biotechnology companies to recruit, hire, trainand retain marketing and sales personnel. To the extent we rely on third parties to commercialize our products, ifany, we may receive less revenues than if we commercialized these productsourselves.  In addition, we may havelittle or no control over the sales efforts of any third parties involved incommercializing our products.  In theevent we are unable to develop our own marketing and sales force or collaboratewith a third-party marketing and sales organization, we would not be able tocommercialize our product candidates which would negatively impact our abilityto generate product revenues.

 

**We may not be able to enter intoacceptable agreements to market and commercialize OPT-80 outside of NorthAmerica or if, needed, adequately build our own marketing and salescapabilities.**

 

If appropriate regulatory approvals are obtained, weintend to commercialize OPT-80 outside of North America through collaborationarrangements with third parties.  We maybe unable to enter into collaboration arrangements in internationalmarkets.  In addition, there can be noguarantee that if we enter into these collaboration arrangements with otherparties that they will be successful or result in more revenues than we couldobtain by marketing OPT-80 on our own. If we are unable to enter intocollaboration arrangements for our products or develop an effectiveinternational sales force, our ability to generate product revenues would belimited, which would adversely affect our business, financial condition,results of operations and prospects. If we are unable to enter into suchcollaboration arrangements, we may need to develop our own marketing and salesforce to market OPT-80 in a number of countries in Europe and Latin America tohospital-based and long-term care physicians. These efforts may not be successful as we have no relationships amongsuch hospital-based and long-term care physicians.  There is no guarantee that we will be able todevelop an effective international sales force to successfully commercializeour products in these international markets.

 

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

 

If approved, our lead product candidates will competeagainst both branded antibiotic therapies, such as Vancocin Pulvules withrespect to OPT-80 and Xifaxan®/rifazamin with respect to Prulifloxacin, andgeneric antibiotics such as metronidazole and vancomycin with respect to OPT-80and ciprofloxacin with respect to Prulifloxacin.  In addition, we anticipate that OPT-80 willcompete with other antibiotic and anti-infective product candidates currentlyin development for the treatment of CDI, such as Xifaxan®/rifaxamin, AliniaTM/nitazoxanideand TolevamerTM.  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 collaborative arrangementswith large, established companies.

 

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We anticipate that, if approved, OPT-80 andPrulifloxacin will face increasing competition in the form of generic versionsof branded products of competitors that will lose their patentexclusivity.  For example, OPT-80, ifapproved, will immediately face steep competition from an inexpensive genericform of metronidazole.  OPT-80 currentlyfaces generic oral vancomycin competition in Europe and may face competitionfrom generic oral vancomycin in the United States in 2008.  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 OPT-80 as a first-line therapy for thetreatment of CDI.  If we are unable todemonstrate 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 OPT-80, Prulifloxacin 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 currently depend, and will in thefuture continue to depend, on third parties to manufacture our productcandidates, including OPT-80 and Prulifloxacin. If these manufacturers fail to provide us and our collaborators withadequate supplies of clinical trial materials and commercial product or fail tocomply with the requirements of regulatory authorities, we may be unable todevelop or commercialize our products.**

 

We outsource all manufacturing of clinical trialsupplies of our product candidates to third parties.  We seek to establish long-term supplyarrangements with third-party contract manufacturers.  We intend to continue outsourcing themanufacture of our product candidates to third parties for any future clinicaltrials and large-scale commercialization of any product candidates that receiveregulatory approval and become commercial drugs.

 

Our ability to develop and commercialize OPT-80 andPrulifloxacin and any other product candidates depends in part on our abilityto arrange for collaborators or other third parties to manufacture our productsat a competitive cost, in accordance with strictly enforced regulatoryrequirements and in sufficient quantities for clinical testing and eventualcommercialization.  We have not yetmanufactured commercial batches of OPT-80, Prulifloxacin or any of our otherproduct candidates.  Collaborators orthird-party manufacturers that we select to manufacture our product candidatesfor clinical testing or on a commercial scale may encounter difficulties withthe small- and large-scale formulation and manufacturing processes required forsuch manufacture.  Such difficultiescould result in delays in clinical trials, regulatory submissions, orcommercialization of our product candidates. The inability of us or our collaborators to enter into and maintainagreements with third-party manufacturers on acceptable terms would causeshortages of clinical trial supplies of our product candidates, therebydelaying or preventing regulatory approval and/or commercialization of theaffected product candidate, and adversely affecting our ability to generaterevenues.  Further, development oflarge-scale manufacturing processes will require additional validation studies,which the FDA must review and approve. Even if we are able to establish additional or replacementmanufacturers, identifying these sources and entering into definitive supplyagreements and obtaining regulatory approvals may take a substantial amount oftime and cost and such supply arrangements may not be available on acceptableeconomic terms.

 

In addition, we, our collaborators and otherthird-party manufacturers of our products must comply with current strictlyenforced cGMP requirements enforced by the FDA through its facilitiesinspection program.  These requirementsinclude quality control, quality assurance and the maintenance of records anddocumentation.  We rely on Biocon tomanufacture OPT-80 API and rely on Patheon, Inc. to manufacture the drugproduct supplies.  As such, Biocon andPatheon will be subject to ongoing periodic unannounced inspections by the FDAand other agencies for compliance with current cGMP, and similar foreign standards.We also rely on Nippon Shinyaku, which contracts with Juzen and Angelini, tomanufacture Prulifloxacin drug supplies. The manufacturing facilities of Biocon, Juzen and Patheon have beeninspected and approved by the FDA for other companies’ drug products; however,neither Biocon’s nor Juzen’s nor Patheon’s facilities have yet been approvedfor the manufacture of our drug supplies. Angelini’s facilities have not been inspected or approved by the FDA.  We or other third-party manufacturers of ourproducts may be unable to comply with cGMP requirements and with other FDA,state, local and foreign regulatory requirements.  We and our collaborators have little controlover third-party

 

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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.

 

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

 

Even if our product candidates are approved by theappropriate regulatory authorities for marketing and sale, physicians may notprescribe our product candidates, which would prevent us from generatingrevenues or becoming profitable.  Marketacceptance of OPT-80, Prulifloxacin and any of our future product candidates byphysicians, patients and healthcare payors will depend on a number of factors,many of which are beyond our control, including:

 

·                  the clinical indications for which theproduct candidate is approved;

 

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

 

·                  perceived advantages over alternativetreatments;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  relative convenience and ease ofadministration; and

 

·                  prevalence and severity of adverse sideeffects.

 

Because OPT-80 is a differentiated antibiotic for thetreatment of CDI, it may encounter additional hurdles to market acceptance byphysicians, who may be skeptical about its clinical benefits or healthcarepayors who may resist reimbursing a premium-priced therapeutic particularly inlight of the availability of generic alternatives.

 

We plan to target our marketing of Prulifloxacinprimarily to high-prescribing physicians of antibiotics for travelers’diarrhea, including those at travel clinics. Because of the number of these physicians in the United States, we willbe required to expend significant time and resources to obtain broad marketacceptance of Prulifloxacin among these physicians.  We do not have experience in marketing tothis population of physicians and do not currently have the resources to beable to conduct such marketing efforts on our own.  As such, we may not be successful in any ofthese marketing efforts which

 

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would limit the commercial success ofPrulifloxacin.  In addition, becausePrulifloxacin has already been marketed by other companies to treat a widerange of bacterial infections, including infectious diarrhea, urinary tractinfections, or UTIs and RTIs, patients may be able to obtain Prulifloxacin fromthese other companies, and not from us, if Prulifloxacin is approved in themarket where the patient is located.  Wehave rights to Prulifloxacin only in the United States.  These patients may obtain Prulifloxacin inthese other markets from other companies even if these patients are from theUnited States.

 

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

 

A key element of our strategy is to commercialize aportfolio of new anti-infective products in addition to OPT-80 andPrulifloxacin.  As a significant part ofour growth strategy, we intend to develop and commercialize additional productsand product candidates through our discovery research program using ourproprietary technology, including OPopS. The success of this strategy depends upon our ability to identify,select and acquire pharmaceutical product candidates and products that fit intoour development plans on terms that are acceptable to us.

 

Any product candidate we identify may 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 commerciallyavailable alternatives.

 

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

 

If we are unable to develop suitable potential productcandidates through internal research programs or by obtaining rights to noveltherapeutics from third parties, our business and prospects will suffer.

 

Our focus on drug discovery and development using ourtechnology platform, including our patented proprietary OPopS drug discoveryplatform, is novel and unique.  As aresult, we cannot be certain that our product candidates will producecommercially viable drugs that safely and effectively treat infectious diseasesor other diseases.  To date, ourtechnology platform has yielded only a small number of anti-infective productcandidates.  In addition, we do not havesignificant clinical data with respect to any of these potential productcandidates.  Even if we are successful incompleting 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 willalso be able to develop and receive regulatory approval for other drugcandidates for the treatment of other forms of that disease or otherdiseases.  If we fail to develop andcommercialize viable drugs using our platform and specialized focus, we willnot be successful in developing a pipeline of potential product candidates tofollow OPT-80 and Prulifloxacin, and our business prospects would significantlybe harmed.

 

**Our future growth depends on our abilityto identify and acquire or in-license products. If we do not successfully identify and acquire or in-license relatedproduct candidates or integrate them into our operations, we may have limitedgrowth opportunities.**

 

We in-licensed the U.S. rights to Prulifloxacin fromNippon Shinyaku who, along with Meiji-Seika Kaisha Ltd., conducted the initialdevelopment of this product candidate. An important part of our business strategy is to continue to develop apipeline of product candidates by acquiring or in-licensing products,businesses or technologies that we believe are a strategic fit for ourbusiness.  Future in-licenses oracquisitions, however, may entail numerous operational and financial risks,including:

 

·                  exposure to unknown liabilities;

 

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

 

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

 

·                  higher than expected acquisition and integrationcosts;

 

·                  increased amortization expenses;

 

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

 

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

 

·                  inability to retain key employees of any acquiredbusinesses.

 

We have limited resources to identify and execute theacquisition or in-licensing of third-party products, businesses andtechnologies and integrate them into our current infrastructure.  In particular, we may compete with largerpharmaceutical companies and other competitors in our efforts to establish newcollaborations and in-licensing opportunities. These competitors likely will have access to greater financial resourcesthan us and may have greater expertise 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.

 

**If we do not find collaborators forour future product candidates, we may be required to reduce or delay our rateof product development and commercialization and/or increase our expenditures.**

 

Our strategy to develop and commercialize our productcandidates in pre-clinical studies or early clinical trials includes enteringinto relationships with pharmaceutical or biotechnology companies to advanceour programs.  We may not be able tonegotiate collaborations with these partners on acceptable terms.  If we are unable to establish collaborativearrangements, we may be required to reduce or delay further development of someof our programs and/or increase our expenditures and undertake the developmentactivities at our own expense.

 

If we are able to identify and reach agreement withcollaborators for our product candidates, those relationships will also besubject to a number of risks, including:

 

·                  collaborators may not pursue further development andcommercialization of product candidates resulting from our collaboration or mayelect not to renew research and development programs;

 

·                  collaborators may delay clinical trials, underfund aclinical trial program, stop a clinical trial or abandon a product candidate,repeat or conduct additional clinical trials or require the development of anew formulation of a product candidate for clinical testing;

 

·                  a collaborator with marketing and distribution rightsto one or more of our products may not commit sufficient resources to themarketing and distribution of our products, limiting our potential revenuesfrom the commercialization of these products; and

 

·                  disputes may arise delaying or terminating theresearch, development or commercialization of our product candidates, or resultin significant litigation or arbitration.

 

Even if we successfully establish collaborations orcommercial agreements, these relationships may never result in the successfuldevelopment or commercialization of any product candidates or the generation ofsales or royalty revenues.

 

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

 

Our license agreement with Nippon Shinyaku provides uswith an exclusive license to develop and commercialize Prulifloxacin for anyindication in the United States, with a right to sublicense to thirdparties.  In the event Nippon Shinyaku isnot able to supply us with Prulifloxacin, the license agreement provides uswith a non-exclusive, worldwide right and license to manufacture or havePrulifloxacin manufactured for us. Either we or Nippon Shinyaku may terminate the license agreementimmediately upon the bankruptcy or dissolution of the other party or upon a breachof any material provision of the agreement if the breach is not cured within 60days following written notice.  Inaddition, we are entitled to terminate the agreement in the event that the FDAcompels us to cease sales of Prulifloxacin in the United States.  If our license agreement with Nippon Shinyakuterminates, we will lose our rights to develop, manufacture and commercializePrulifloxacin and our potential revenues would be limited.  Similarly, if our agreement with TSRI for thelicense of our OPopS technology is terminated, we will not be able to furtherdevelop future product candidates using our OPopS technology.

 

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

 

We face an inherent risk of product liability lawsuitsrelated to the testing of our product candidates, and will face an even greaterrisk if product candidates are introduced commercially.  An individual may bring a liability claimagainst us if one of our product candidates causes, or merely appears to havecaused, an injury.  If we cannotsuccessfully defend ourselves against the product liability claim, we may incursubstantial liabilities.  Regardless ofmerit or eventual outcome, liability claims may result in:

 

·                  decreased demand for our product candidates;

 

·                  injury to our reputation;

 

·                  termination of clinical trial sites or entire clinicaltrial programs;

 

·                  withdrawal of clinical trial participants;

 

·                  significant litigation costs;

 

·                  substantial monetary awards to or costly settlementwith patients;

 

·                  product recalls;

 

·                  loss of revenues; and

 

·                  the inability to commercialize our product candidates.

 

We may become dependent upon consumer perceptions ofus and the safety and quality of our product candidates.  We could be adversely affected if we or ourproduct candidates are subject to negative publicity.  We could also be adversely affected if any ofour potential products or any similar products distributed by other companiesprove to be, or are asserted to be, harmful to consumers.  Also, because of our dependence upon consumerperceptions, any adverse publicity associated with illness or other adverseeffects resulting from consumers’ use or misuse of our potential products orany similar products distributed by other companies could have a materialadverse impact on our results of operations.

 

We have global clinical trial liability insurance thatcovers our clinical trials up to a $10.0 million annual aggregate limit.  Our current or future insurance coverage mayprove insufficient to cover any liability claims brought against us.  We intend to expand our insurance coverage toinclude the sale of commercial products if marketing approval is obtained forour product candidates, 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.

 

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

 

Even if we receive regulatory approval to sell ourproduct candidates, the FDA and foreign regulatory authorities will likelyimpose significant restrictions on the indicated uses or marketing of suchproducts, or impose ongoing requirements for potentially costly post-approvalstudies.  In addition, following anyregulatory approval of our product candidates, we and our collaborators will besubject to continuing 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 themarketplace may suffer and we may become the target of lawsuits, includingclass action suits.  Moreover, if we orour collaborators 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 retainsenior management and key scientific personnel, we may be unable tosuccessfully develop our product candidates, conduct our clinical trials andcommercialize our product candidates.**

 

Our success depends in part on our continued abilityto attract, retain and motivate highly qualified management, clinical andscientific personnel and on our ability to develop and maintain importantrelationships with leading academic institutions, clinicians and scientists.  We are highly dependent upon our seniormanagement and scientific staff, particularly Michael N. Chang, Ph.D., ourPresident and Chief Executive Officer, Tessie M. Che, Ph.D., our SeniorVice President and Chief Operating Officer, Youe-Kong Shue, Ph.D., our VicePresident, Clinical Development, Sherwood L. Gorbach, MD, our Vice President ofMedical Affairs and Chief Medical Officer, and Kevin P. Poulos, our ChiefCommercial Officer.  The loss of servicesof any of Dr. Chang, Dr. Che, Dr. Shue or Mr. Poulos or oneor more of our other members of senior management could delay or prevent thesuccessful completion of our planned clinical trials or the commercializationof our product candidates.  Replacing keyemployees may be difficult and costly and may take an extended period of timebecause of the limited number of individuals in our industry with the breadthof skills and experience required to develop and commercialize productssuccessfully.  We do not maintain “keyperson” insurance policies on the lives of these individuals or the lives ofany of our other employees.  We employthese individuals on an at-will basis and their employment can be terminated byus or them at any time, for any reason and with or without notice.

 

We will need to hire additional personnel as we expandour clinical development and commercial activities.  We may not be able to attract or retainqualified management and scientific personnel on acceptable terms in the futuredue to the intense competition for qualified personnel among biotechnology,pharmaceutical and other businesses, particularly in the San Diego, Californiaarea.  If we are not able to attract andretain the necessary personnel to accomplish our business objectives, we mayexperience constraints that will impede significantly the achievement of ourresearch and development objectives, our ability to raise additional capitaland our ability to implement our business strategy.  In particular, if we lose any members of oursenior management team, we may not be able to find suitable replacements, andour business and prospects may be harmed as a result.

 

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**We willneed to increase the size of our organization, and we may experiencedifficulties in managing growth.**

 

We are a small company with47 employees as of March 10, 2008. To continue our clinical trials and commercialize our productcandidates, we will need to expand our employee base for managerial,operational, marketing, sales, financial and other resources.  Future growth will impose significant addedresponsibilities on members of management, including the need to identify,recruit, maintain and integrate additional employees and may take time awayfrom running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performance and our ability to commercialize ourproduct candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively.  To that end, we must be able to:

 

·                  manage our development efforts effectively;

 

·                  manage our current clinical trials for OPT-80and Prulifloxacin effectively;

 

·                  integrate additional management,administrative and manufacturing personnel;

 

·                  build a marketing and sales organization; and

 

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

 

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

 

**Third-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.**

 

Market acceptance and salesof our product candidates will depend on reimbursement policies and may beaffected by future healthcare reform measures. Government third-party payors, such as the Medicare and Medicaid programs,and private payors, including health maintenance organizations, decide whichdrugs they will pay for and establish reimbursement levels for thesedrugs.  Because third-party payorsincreasingly are challenging prices charged and the cost-effectiveness ofmedical products, significant uncertainty exists as to the ability of ourproduct candidates to receive adequate coverage and reimbursement.  We cannot be sure that third-party payorswill place our product candidates on approved formularies or that reimbursementwill be available in whole or in part for any of our product candidates.  For example, the Deficit Reduction Act of2005 requires an adjustment in Medicare payments for reimbursement ofcertain-hospital acquired conditions. The Centers for Medicare and Medicaid Services, or CMS, is likely toexpand its list of non-payment for preventable hospital acquiredinfections.  Both CDI and MRSA infectionshave been discussed but CMS has determined that further analysis is requiredbefore considering these conditions for non-reimbursement.  Also, we cannot be sure that insufficientreimbursement amounts will not reduce the demand for, or the price of, ourproducts, if approved.

 

Many healthcare providers,such as hospitals, receive a fixed reimbursement amount per procedure or othertreatment therapy, and these amounts are not necessarily based on the actualcosts incurred.  As a result, thesehealthcare providers may choose only the least expensive therapies regardlessof efficacy.  We cannot guarantee thatour product candidates will be the least expensive alternative and thusproviders may decide not to use them or buy them for treatment.

 

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

 

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**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.**

 

We may face competition forour products from lower priced products from foreign countries that have placedprice controls on pharmaceutical products. The Medicare Modernization Act of 2003, or MMA, contains provisions thatmay change U.S. importation laws and expand consumers’ ability to import lowerpriced versions of our and competing products from Canada, where there aregovernment price controls.  These changesto U.S. importation laws will not take effect unless and until the Secretary ofHealth and Human Services certifies that the changes will lead to substantialsavings for consumers and will not create a public health safety issue.  The Secretary of Health and Human Serviceshas not yet announced any plans to make the required certification.  Even if the changes do not take effect, andother changes are not enacted, imports from Canada and elsewhere may continueto increase due to market and political forces, and the limited enforcementresources of the FDA, the U.S. Customs Service, and other governmentagencies.  For example, Pub. L. No. 109-295,which was signed into law on October 4, 2006 and provides appropriationsfor the Department of Homeland Security for fiscal year 2007, expresslyprohibits the U.S. Customs Service from using funds to prevent individuals fromimporting from Canada less than a 90-day supply of a prescription drug forpersonal use, when the drug otherwise complies with the Federal Food, Drug andCosmetic Act.  Further, several statesand local governments have implemented importation schemes for their citizens,and, in the absence of federal action to curtail such activities, we expectother states and local governments to launch importation efforts.  The importation of foreign products thatcompete with our own product candidates could negatively impact our businessand prospects.

 

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

 

In both the United Statesand certain foreign jurisdictions, there have been, and we anticipate therewill continue to be, a number of legislative and regulatory changes to thehealthcare system that could impact our ability to sell our products profitably.  In particular, the MMA added an outpatientprescription drug benefit to Medicare, the publicly-funded health insuranceprogram in the United States generally for the elderly and disabled, whichbecame effective on January 1, 2006. Drug benefits under this new benefit are administered through privateplans that negotiate price concessions from pharmaceutical manufacturers.  We cannot be certain that OPT-80 andPrulifloxacin or other current or future drug candidates will successfully beplaced on the list of drugs covered by particular health plan formularies, norcan we predict the negotiated price for our drug candidates, which will bedetermined by market factors.

 

The MMA also changed theformula for determining payment for certain drugs, which include drugs providedin physician offices and other outpatient settings.  Further, with respect to the Medicaidprogram, the Deficit Reduction Act of 2005 made changes to certain formulasused to calculate pharmacy reimbursement under Medicaid, the health insuranceprogram in the United States generally for individuals and families with lowincomes and resources, which became effective on January 1, 2007.  These changes could lead to reduced paymentsto pharmacies.  Many states have alsocreated preferred drug lists and include drugs on those lists only when themanufacturers agree to pay a supplemental rebate.  If OPT-80 and Prulifloxacin or other currentor future 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.

 

As a result of legislativeproposals and the trend towards managed healthcare in the United States,third-party payors are increasingly attempting to contain healthcare costs bylimiting both coverage and the level of reimbursement of new drugs.  They may also refuse to provide any coverageof uses of approved products for medical indications other than those for whichthe FDA has granted market approvals.  Asa result, significant uncertainty exists as to whether and how much third-partypayors will reimburse for newly-approved drugs, which in turn will put pressureon the pricing of drugs.  Further, we donot have experience in ensuring approval by applicable third-party payorsoutside of the United States for reimbursement of our products.  The availability of numerous genericantibiotics at lower prices than branded antibiotics can also be expected tosubstantially reduce the likelihood of reimbursement for OPT-80 andPrulifloxacin.  We also anticipatepricing pressures in connection with the sale of our products due to the trendtoward managed healthcare, the increasing influence of health maintenanceorganizations and additional 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.**

 

We are subject to variousfederal and state laws pertaining to healthcare fraud and abuse, includinganti-kickback laws and physician self-referral laws.  Violations of these laws are punishable bycriminal and civil sanctions, including, in some instances, exclusion fromparticipation in federal and state healthcare programs, including Medicare andMedicaid, and the curtailment or restructuring of operations.  We believe that our operations are inmaterial compliance with such laws. However, because of the far-reaching nature of these laws, there can beno assurance that we would not be required to alter one or more of ourpractices to be in compliance with these laws. In addition, there can be no assurance that the occurrence of one ormore violations of these laws or regulations would not result in a materialadverse effect on our financial condition and results of operations.

 

**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.**

 

Our third-partymanufacturers’ activities and, to a lesser extent, our own activities involvethe controlled storage, use and disposal of hazardous materials, including thecomponents of our product candidates and other hazardous compounds.  We and our manufacturers are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of these hazardous materials.  Although we believe that the safetyprocedures for handling and disposing of these materials comply with thestandards prescribed by these laws and regulations, we cannot eliminate the riskof 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.**

 

Despite the implementationof security measures, our internal computer systems are vulnerable to damagefrom computer viruses, unauthorized access, natural disasters, terrorism, warand telecommunication and electrical failures. Any system failure, accident or security breach that causesinterruptions in our operations could result in a material disruption of our drugdevelopment programs.  For example, theloss of clinical trial information from completed or ongoing clinical trialsfor OPT-80 or Prulifloxacin, which is maintained by our third-party CRO, couldresult in delays in our regulatory approval efforts and significantly increaseour costs to recover or reproduce the data. To the extent that any disruption or security breach results in a lossor damage to our data or applications, or inappropriate disclosure of confidentialor proprietary information, we may incur liability and the further developmentof our product candidates may be delayed.

 

**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.**

 

Our commercial success willdepend in part on obtaining and maintaining patent protection and trade secretprotection of the use, formulation and structure of our product candidates, andthe methods used to manufacture them, as well as successfully defending thesepatents against third-party challenges, including those from generic drugmanufacturers.  Our ability to protectour product candidates from unauthorized making, using, selling, offering tosell or importing by third parties is dependent upon the extent to which wehave rights under valid and enforceable patents or trade secrets that coverthese activities.

 

The patent positions ofpharmaceutical and biotechnology companies can be highly uncertain and involvecomplex legal and factual questions for which important legal principles remainunresolved.  No consistent policyregarding the breadth of claims allowed in biotechnology patents has emerged todate in the United States.  Thebiotechnology patent situation outside the United States is even moreuncertain.  Changes in either the patentlaws or in interpretations of patent 

 

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laws in the United Statesand other countries may diminish the value of our intellectual property.  Accordingly, we cannot predict the breadth ofclaims that may be allowed or enforced in our licensed patents, our patents orin third-party patents.

 

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

 

·                  others may be able to make compounds that aresimilar to our product candidates but that are not covered by the claims of ourpending patent applications or licensed patents, or for which we are notlicensed under our license agreements;

 

·                  others may be able to make competingpharmaceutical formulations containing our product candidates or components ofour product formulations that are either not covered by the claims of ourlicensed patents, not licensed to us under our license agreements or aresubject to patents that expire;

 

·                  we or our licensors might not have been thefirst to make the inventions covered by our pending patent applications or thepending patent applications and issued patents of our licensors;

 

·                  we or our licensors might not have been thefirst to file patent applications for these inventions;

 

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

 

·                  it is possible that our pending patentapplications or our licensed patent applications will not result in issuedpatents;

 

·                  our pending patent applications or thepending patent applications and issued patents of our licensors may not provideus with any competitive advantages, may be designed around by our competitors,including generic drug companies, or may be held invalid or unenforceable as aresult of legal challenges by third parties;

 

·                  we may not develop additional proprietarytechnologies that are patentable; or

 

·                  the patents of others may have an adverseeffect on our business.

 

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

 

While we have filed 7 patentapplications for OPT-80, we do not yet have any issued patents for OPT-80.

 

These patent applicationsrelated to OPT-80 encompass various topics relating to:

 

·                  composition of matter for OPT-80;

 

·                  composition of matter for OPT-80 relatedsubstances and use for CDI;

 

·                  polymorphic crystalline forms;

 

·                  manufacturing processes;

 

·                  treatment of diseases;

 

·                  formulation; and

 

·                  OPT-80 related compounds (second generation).

 

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If we are unable to obtain acomposition of matter patent, our competitors, including generic drugcompanies, may be able to design other similar formulations of the activeingredient of OPT-80.  Furthermore, evenif these process and formulation patent applications become issued patents, ourcompetitors, including generic drug companies, may be able to design around ourmanufacturing processes or formulation for OPT-80.  As a result, our competitors may be able todevelop competing products.

 

In addition, assuming ourclinical trials are successful and completed in a timely manner, we currentlyplan to file a NDA for Prulifloxacin for the treatment of infectious diarrheain travelers in 2009.  However, thepatent covering Prulifloxacin is scheduled to expire in February 2009, anddue to this short remaining patent life we may be forced to abandon plans topursue development and approval of Prulifloxacin for any indications, includinginfectious diarrhea. Although we also currently plan to apply for an extensionof this patent term until 2014, we cannot assure you that the United StatesPatent and Trademark Office, or PTO, will grant the extension for the fulladditional five years, or at all.  In eitherevent, our business and prospects would be significantly harmed.

 

We depend, in part, on ourlicensors and collaborators to protect a portion of our proprietaryrights.  In such cases, our licensors andcollaborators may be primarily or wholly responsible for the maintenance ofpatents and prosecution of patent applications relating to important areas ofour business.  For example, NipponShinyaku, SKI, TSRI and Cempra are responsible for the maintenance of patentsand prosecution of patent applications relating to Prulifloxacin,OPT-822/OPT-821 combination therapy, our OPopS technology, and OPT-1068 alsoknown as CEM-101, respectively.  We mayalso be dependent on Par to provide technical support for patent applicationsrelating to OPT-80.  If any of theseparties fail to adequately protect these product candidates with issuedpatents, our business and prospects would be significantly harmed.

 

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

 

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

 

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

 

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

 

If we choose to go to courtto stop someone else from using our inventions, that individual or company hasthe right to ask the court to rule that the underlying patents are invalidand/or should not be enforced against that third party.  These lawsuits are expensive and wouldconsume time and other resources even if we were successful in stopping theinfringement 

 

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of these patents.  There is also the risk that, even if thevalidity of these patents is upheld, the court will refuse to stop the otherparty on the ground that such other party’s activities do not infringe ourrights to these patents.

 

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

 

Although we have conductedsearches of third-party patents with respect to OPT-80 and Prulifloxacin, thesesearches may not have identified all third-party patents relevant to thoseproducts and we have not conducted an extensive search of patents issued tothird parties with respect to our other product candidates.  Consequently, no assurance can be given thatthird-party patents containing claims covering our products, technology or methodsdo not exist, have not been filed, or could not be filed or issued.  Because of the number of patents issued andpatent applications filed in our technical areas or fields, we believe there isa risk that third parties may allege they have patent rights encompassing ourproducts, technology or methods.  Inaddition, we have not conducted an extensive search of third-party trademarks,so no assurance can be given that such third-party trademarks do not exist,have not been filed, could not be filed or issued, or could not exist undercommon trademark law.  While we havefiled a trademark application for the names “Optimer” and “OptimerPharmaceuticals,” we are aware that the name “Optimer” has been registered as atrademark with the PTO by more than one third party, including one in thebiotechnology space.  As such, we believethere is a significant risk that third parties may allege they have trademarkrights encompassing the names for which we have applied for protection.

 

Because some patentapplications in the United States may be maintained in secrecy until thepatents are issued, because patent applications in the United States and manyforeign jurisdictions are typically not published until eighteen months afterfiling, and because publications in the scientific literature often lag behindactual discoveries, we cannot be certain that others have not filed patentapplications for technology covered by our licensors’ issued patents or ourpending applications or our licensors’ pending applications, or that we or ourlicensors were the first to invent the technology.  Our competitors may have filed, and may inthe future file, patent applications covering technology similar to ours.  Any such patent application may have priorityover our or our licensors’ patent applications and could further require us toobtain rights to issued patents covering such technologies.  If another party has filed a U.S. patentapplication on inventions similar to ours, we may have to participate in aninterference proceeding declared by the PTO, to determine priority of inventionin the United States.  The costs of theseproceedings could be substantial, and it is possible that such efforts would beunsuccessful, resulting in a loss of our U.S. patent position with respect tosuch inventions.

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  actions taken by the FDA or other regulatoryagencies with respect to our product candidates, clinical trials, manufacturingprocess or marketing and sales activities;

 

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

 

·                  the success of our development efforts andclinical trials, particularly with respect to OPT-80 and Prulifloxacin;

 

·                  announcements by our collaborators withrespect to clinical trial results and communications from the FDA or comparableforeign regulatory agencies;

 

·                  the success of our efforts to acquire orin-license additional products or product candidates;

 

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

 

·                  actual or anticipated variations in ourquarterly operating results;

 

·                  announcements of technological innovations byus, our collaborators or our competitors;

 

·                  new products or services introduced orannounced by us or our commercialization partners, or our competitors and thetiming of these introductions or announcements;

 

·                  third-party coverage or reimbursementpolicies;

 

·                  actual or anticipated changes in earnings estimatesor recommendations by securities analysts;

 

·                  conditions or trends in the biotechnology andbiopharmaceutical industries;

 

·                  announcements by us or our competitors ofsignificant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

·                  general economic and market conditions andother factors that may be unrelated to our operating performance or theoperating performance of our competitors;

 

·                  changes in the market valuations of similarcompanies;

 

·                  sales of common stock or other securities byus or our stockholders in the future;

 

·                  additions or departures of key scientific ormanagement personnel;

 

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

 

·                  trading volume of our common stock.

 

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

 

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

 

Persons who were ourstockholders prior to our initial public offering continue to hold asubstantial number of shares of our common stock. Many of these stockholdersare now able to sell their shares in the public market. Significant portions ofthese shares is 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.

 

We have also registered allcommon stock that we may issue under our employee benefits plans. As a result,these shares can be freely sold in the public market upon issuance, subject to anyapplicable restrictions under the securities laws. In addition, our directorsand executive officers may in the future establish programmed selling plansunder Rule 10b5-1 of the Securities Exchange Act for the purpose ofeffecting sales of our common stock. If any of these events cause a largenumber of our shares to be sold in the public market, the sales could reducethe trading price of our common stock and impede our ability to raise futurecapital.

 

**Negativeconditions in the global credit markets may impair the liquidity of a portionof our investment portfolio.**

 

Our investment securitiesconsist of high-grade auction rate securities, money market funds, corporatedebt securities and government agency securities. As of December 31, 2007,our short-term investments included $14.2 million of high-grade (AAArated) auction rate securities issued primarily by municipalities and closedend funds. The recent negative conditions in the global credit markets haveprevented some investors from liquidating their holdings, including theirholdings of auction rate securities. As of March 21, 2008, we hold onlytwo auction rate securities, representing approximately $1.5 million.  There was insufficient demand at auction forthese two auction rate preferreds. As a result, these affected securities arecurrently not liquid, and we could be required to hold them until they areredeemed by the issuer or to maturity. 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 a futureauction on these investments is successful, the securities are redeemed by theissuer or they mature. At this time, management has not obtained sufficientevidence to conclude that these investments are impaired or that they will notbe settled in the short term, although the market for these investments ispresently uncertain. If the credit ratings of the security issuers deteriorateand any decline in market value is determined to be other-than-temporary, wewould be required to adjust the carrying value of the investment through animpairment charge.

 

**We will continueto incur significant costs as a result of operating as a public company, andour management will be required to devote substantial time to new complianceinitiatives.**

 

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

 

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The Sarbanes-Oxley Actrequires, among other things, that we maintain effective internal controls forfinancial reporting and disclosure controls and procedures.  In fiscal 2008, we will be required toperform system and process evaluation and testing of our internal controls overfinancial reporting to allow management and our independent registered publicaccounting firm to report on the effectiveness of our internal controls overfinancial reporting, as required by Section 404 of the Sarbanes-OxleyAct.  Our testing, or the subsequenttesting by our independent registered public accounting firm, may revealdeficiencies in our internal controls over financial reporting that are deemedto be material weaknesses.  Ourcompliance with Section 404 will require that we incur substantialaccounting expense and expend significant management efforts.  We currently do not have an internal auditgroup, and we may need to hire additional accounting and financial staff withappropriate public company experience and technical accounting knowledge.  We currently have five****employees dedicated full-time toaccounting and finance matters.  In thefuture we will hire full-time employees in the accounting and financedepartment, as necessary, to ensure we have effective internal controls overfinancial reporting and disclosure controls and procedures.  We also hire consultants from time to time toaddress these matters.  If we are unableto hire adequate accounting and finance personnel, we may not be able to meetour public company reporting and governance obligations, including those setforth under the Sarbanes-Oxley Act. Moreover, if we are not able to comply with the requirements of Section 404in a timely manner, or if we or our independent registered public accountingfirm identifies deficiencies in our internal controls over financial reportingthat are deemed to be material weaknesses, the market price of our stock coulddecline and we could be subject to sanctions or investigations by Nasdaq, theSEC or other regulatory authorities, which would require additional financialand management resources.

 

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

 

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

 

·                  a board of directors divided into threeclasses serving staggered three-year terms, such that not all members of theboard will be elected at one time;

 

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

 

·                  limiting the removal of directors by thestockholders;

 

·                  prohibiting stockholder action by writtenconsent, thereby requiring all stockholder actions to be taken at a meeting ofour stockholders;

 

·                  a requirement of approval of not less than 662/3%of all outstanding shares of our capital stock entitled to vote to amend anybylaws by stockholder action, or to amend specific provisions of ourcertificate of incorporation;

 

·                  eliminating the ability of stockholders tocall a special meeting of stockholders; and

 

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

 

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

 

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**Item 1B.Unresolved Staff Comments**

 

None.

 

**Item 2.Properties**

 

Our facilities currentlyconsist of approximately 18,000 square feet of space, approximately 65% ofwhich is laboratory space and approximately 35% of which is office space,located at our corporate headquarters in San Diego, California.  The current facilities are leased through November 2011,with an option to lease additional space and two options to extend the term foran additional five years each through November 2021.  We believe these facilities are adequate tomeet our current needs and that additional space will be available oncommercially reasonable terms as needed.

 

**Item 3.Legal Proceedings**

 

We are not currently a partyto any legal proceeding.

 

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

 

Nomatters were submitted to a vote of security holders during the fourth quarterof fiscal year ended December 31, 2007.

 

**PART II**

 

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

 

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

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

 

As of March 10, 2008,there were approximately 125 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.

 

**PerformanceMeasurement Comparison (1)**

 

The following graph showsthe total stockholder return of an investment of $100 in cash on February 9,2007 in (i) the Company’s common stock, (ii) the Nasdaq CompositeIndex (the “Nasdaq”) and (iii) the Nasdaq Biotechnology Index.  All values assume reinvestment of the fullamount of all dividends.

 

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Comparison of CumulativeTotal Return on Investment since our Initial Public Offering on February 9,2007:

 

**COMPARISON OF 11 MONTH CUMULATIVE TOTAL RETURN***

Among Optimer Pharmaceuticals Inc, The NASDAQ Composite Index

And The NASDAQ Biotechnology Index

 

 

 

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*****$100 invested on 2/9/07 in stock or 1/31/07 in index-including reinvestment ofdividends. Fiscal year ending December 31.

 

(1) This section is not“soliciting material”, is not deemed “filed” with the SEC, is not subject tothe liabilities of Section 18 of the Securities Exchange Act of 1934, asamended, or the Exchange Act, and is not to be incorporated by reference in anyfiling of the Company under the Securities Act of 1933, as amended, or theExchange Act whether made before or after the date hereof and irrespective ofany general incorporation language in any such filing.

 

**Repurchasesof Equity Securities**

 

We did not repurchase anyshares of our common stock during the fourth quarter of fiscal year ended December 31,2007.

 

**Item6.  Selected Consolidated Financial Data**

 

Youshould read the following selected consolidated financial and operatinginformation together with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our consolidated financial statementsand notes thereto included elsewhere in this report. Historical results for anyprior period are not necessarily indicative of the results to be expected forany future period.

 
| ** **                                                                 | ** ** | **Years Ended December 31,**                           | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**                                          |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Collaboration and grant revenues                                           |       | $                                                                     | 767        |   | $ | 933 |   | $ | 2,147 |   | $ | 1,111 |   | $ | 542 |   |
| Operating expenses:                                                        |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Research and development                                                   |       | 41,569                                                                |       | 10,481 |   | 7,047 |   | 8,571 |   | 7,910 |   |
| Marketing                                                                  |       | 2,048                                                                 |       | — |   | — |   | — |   | — |   |
| General and administrative                                                 |       | 5,351                                                                 |       | 3,523 |   | 2,782 |   | 2,697 |   | 2,856 |   |
| Total operating expenses                                                   |       | 48,968                                                                |       | 14,004 |   | 9,829 |   | 11,268 |   | 10,766 |   |
| Loss from operations                                                       |       | (48,201                                                               | )          | (13,071 | ) | (7,682 | ) | (10,157 | ) | (10,224 | ) |
| Interest income (expense) and other, net                                   |       | 2,062                                                                 |       | 1,169 |   | 237 |   | 247 |   | 441 |   |
| Net loss                                                                   |       | (46,139                                                               | )          | (11,902 | ) | (7,445 | ) | (9,910 | ) | (9,783 | ) |
| Accretion to redemption amount of  redeemable convertible preferred stock  |       | —                                                                |       | (329 | ) | (223 | ) | (12 | ) | (13 | ) |
| Net loss attributable to common  stockholders                              |       | $                                                                     | (46,139    | ) | $ | (12,231 | ) | $ | (7,668 | ) | $ | (9,922 | ) | $ | (9,796 | ) |
| Basic and diluted net loss per share  attributable to common stockholders: |       | $                                                                     | (2.12      | ) | $ | (4.81 | ) | $ | (3.22 | ) | $ | (4.76 | ) | $ | (5.01 | ) |
| Weighted average shares outstanding:                                       |       | 21,715                                                                |       | 2,543 |   | 2,383 |   | 2,084 |   | 1,954 |   |

 
| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | **(in thousands)**               | ** ** |
| **Balance Sheet Data:**                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and short-term  investments |       | $                                     | 58,806     |   | $ | 21,341 |   | $ | 29,880 |   | $ | 1,953 |   | $ | 11,134 |   |
| Working capital                                    |       | 52,173                                |       | 17,990 |   | 28,490 |   | 1,231 |   | 10,349 |   |
| Total assets                                       |       | 60,786                                |       | 24,114 |   | 32,335 |   | 4,903 |   | 14,837 |   |
| Redeemable convertible preferred stock             |       | —                                |       | 65,460 |   | 65,078 |   | 32,175 |   | 32,163 |   |
| Accumulated deficit                                |       | (97,698                               | )          | (51,558 | ) | (39,656 | ) | (32,212 | ) | (22,302 | ) |
| Total stockholders’ equity (deficit)          |       | 52,903                                |       | (46,702 | ) | (35,143 | ) | (28,463 | ) | (18,760 | ) |
|                                                    |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operation**

 

*The following discussion andanalysis should be read in conjunction with our “Selected ConsolidatedFinancial Data” and consolidated financial statements and accompanying notesappearing elsewhere in this report.  Thisdiscussion and other parts of this report may contain forward-lookingstatements based upon current expectations that involve risks anduncertainties.  Our actual results andthe timing of selected events could differ materially from those anticipated inthese forward-looking statements as a result of several factors, includingthose set forth under “Risk Factors” and elsewhere in this report.*

 

Overview

 

We are a biopharmaceutical company focused on discovering,developing and commercializing innovative anti-infective products.  Our initial development efforts addressproducts that treat gastrointestinal infections and related diseases wherecurrent therapies have limitations, including limited efficacy, serious adverseside effects, drug-to-drug interactions, difficult patient compliance andbacterial resistance.

 

We currently have two late-stage anti-infectiveproduct candidates, OPT-80 and Prulifloxacin. OPT-80, our lead product candidate, is an antibiotic currently in twoPhase 3 registration trials for the treatment of * Clostridiumdifficile*-infections, or CDI, also known as *Clostridium difficile*-associated disease,or CDAD, the most common nosocomial, or hospital acquired, diarrhea.  In April 2005, we entered into acollaboration agreement with Par Pharmaceutical, Inc., or Par, pursuant towhich we and Par, exclusively collaborated in the clinical development andcommercialization of OPT-80.  In February 2007,we elected to terminate the collaboration agreement with Par, exercised ourright under a prospective buy-back agreement to repurchase Par’s rights todevelop and commercialize OPT-80 in North America and Israel and paid Par aone-time $20.0 million termination fee. As a result, we now hold worldwiderights to OPT-80.  The Food and DrugAdministration, or FDA, has granted Fast Track status for OPT-80 in thetreatment of CDI.  Fast Track designationindicates that OPT-80 has the potential to treat life-threatening diseases withunmet medical needs.  The FDA also choseOPT-80 to be the only investigational new drug in the Continuous MarketingApplications, or CMA, Pilot 2 Program in the Division of Anti-Infectiveand Ophthalmology Products.  The CMAdesignation offers several potential benefits, including a program ofcontinuous FDA feedback designed to streamline the development process.  Participation in these programs will noteliminate any phase of clinical development. Prulifloxacin is an antibiotic currently in two Phase 3 trials forthe treatment of travelers’ diarrhea, a form of infectious diarrhea caused bybacteria.  We will seek a label forPrulifloxacin for the treatment of infectious diarrhea in travelers andinitially plan to focus commercialization efforts on the treatment of travelers’diarrhea.  Prulifloxacin is a prodrug inthe fluoroquinolone class of antibiotics, a widely-used class of broad-spectrumantibiotics. We are developing additional product candidates using ourproprietary technology, including our OPopS drug discovery platform.

 

We were incorporated in November 1998.  Since inception, we have focused ondeveloping our product candidates, including OPT-80 and Prulifloxacin.  We have never been profitable and haveincurred significant net losses since our inception.  As of December 31, 2007, we had anaccumulated deficit of $97.7 million. These losses have resulted principally from costs incurred in connectionwith research and development activities, including the costs of clinical trialactivities associated with our current lead product candidates, license feesand general and administrative expenses. We expect to continue to incur operating losses for the next severalyears as we pursue the clinical development and commercialization of ourproduct candidates, as well as acquire or in-license additional products orproduct candidates, technologies or businesses that are complementary to ourown.

 

**Financial Operations Overview**

 

*Collaboration and Grant Revenues*

 

We have not generated any revenues from sales ofcommercial products.  Since inception, wehave generated revenues primarily as a result of various collaborations withpharmaceutical and biotechnology companies and grants from government agencies.  We may also periodically recognize asrevenues non-refundable payments for achieving certain milestones, during theterm of our collaboration agreements.

 

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*Research and Development Expense*

 

Research and development expense consists of expensesincurred in connection with identifying and developing our drug candidates anddeveloping and advancing our drug discovery technology.  Our research and development expenses consistprimarily of salaries and related employee benefits, costs associated withclinical trials managed by our CROs and costs associated with non-clinicalresearch activities and regulatory approvals. Our most significant costs are for clinical trials, including paymentsto vendors such as CROs, investigators, manufacturers of clinical supplies andrelated consultants.  Our historicalresearch and development expenses have resulted predominantly from our clinicaltrials of OPT-80 and Prulifloxacin, the development of our carbohydratetechnology platform, including OPopS, in-licensing fees and general researchactivities.  We charge all research anddevelopment expenses to operations as they are incurred because the underlyingtechnology associated with these expenditures relates to our research anddevelopment efforts and has no alternative future uses.  From inception through December 31,2007, we incurred total research and development expenses of approximately$84.3 million.

 

We use our internal research and development resourcesacross several projects, and much of this use which is not allocable to a specificproject.  Accordingly, we do not accountfor all of our internal research and development costs on a project basis.  In addition to our internal resources, we useexternal service providers and vendors to conduct our clinical trials, tomanufacture our product candidates to be used in clinical trials and to providevarious other research and development related products and services.  These external costs are allocable tospecific projects.

 

External costs are expensed as incurred.  We incurred $34.4 million, $4.8 million and$46.1 million of research and development expenses directly related to thedevelopment of OPT-80 for the years ended December 31, 2007 and 2006, andcumulatively through December 31, 2007, respectively.  We incurred $4.0 million, $2.5 million, and$8.7 million of research and development expenses directly related to thedevelopment of Prulifloxacin for the years ended December 31, 2007 and2006, and cumulatively through December 31, 2007, respectively.  All other research and development expenseswere for other clinical programs.

 

We expect our research and development expenses toincrease substantially as we expand our clinical trial activities with respectto OPT-80 and Prulifloxacin, advance our other product candidates through thedevelopment process and invest in additional product opportunities and researchprograms.  Clinical trials andpre-clinical studies are time-consuming and expensive.  Our expenditures on current and futurepre-clinical and clinical development programs are subject to manyuncertainties.  We test our productcandidates in several pre-clinical studies, and we then conduct clinical trialsfor those product candidates that we determine to be the most promising.  As we obtain results from clinical trials, wemay elect to discontinue or delay trials for some product candidates in orderto focus our resources on more promising product candidates.  Completion of clinical trials may takeseveral years and the length of time generally varies substantially accordingto the type, size of trial and intended use of a product candidate.  The cost of clinical trials may varysignificantly over the life of a project as a result of a variety of factors,including:

 

·                  the number of patients who participate in the trials;

 

·                  the number of sites included in the trials;

 

·                  the length of time required to enroll trialparticipants;

 

·                  the duration of patient treatment and follow-up;

 

·                  the costs of producing supplies of the productcandidates needed for clinical trials and regulatory submissions; and

 

·                  the costs, requirements and timing of, and the abilityto secure, regulatory approvals.

 

As a result of the uncertainties discussed above, weare unable to determine with any significant degree of certainty the durationand completion costs of our research and development projects or when and towhat extent we will generate

 

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revenues from the commercialization and sale of any ofour product candidates.  However, whilewe do not have specific estimates for the costs of all of our projects, wecurrently estimate that we will incur external costs of approximately $13.7million to complete the Phase 3****clinicaltrials for OPT-80 to treat CDI and approximately $3.6 million to complete the Phase 3clinical trials for Prulifloxacin to treat infectious diarrhea in travelers.

 

*General and Administrative Expense*

 

General and administrative expense consists primarilyof compensation, including stock-based compensation, and other expenses relatedto an allocated portion of facility cost, legal fees and other professionalservices expenses, our corporate administrative employees and insurancecosts.  We anticipate that we willmaintain our existing 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 ofinterest earned on our cash, cash equivalents and short-term investments andother-than-temporary declines in the market value of available-for-salesecurities and cash and non-cash interest charges related to bridge financings.

 

*Net Operating Losses and Tax CreditCarryforwards*

 

As of December 31, 2007, we had federal, stateand foreign net operating loss carryforwards of approximately$87.6 million, $86.3 million and $2.0 million, respectively.  If not utilized, the net operating losscarryforwards will begin expiring in 2020 for federal purposes and 2012 forstate purposes.  The foreign lossesoriginate from our subsidiary in Taiwan. The losses from our subsidiary in Taiwan expire five years after origination.  As of December 31, 2007, we had bothfederal and state research and development tax credit carryforwards ofapproximately $1.8 million and $1.3 million, respectively.  The federal tax credits will begin expiringin 2020 unless previously utilized and the state tax credits carryforwardindefinitely.  As of December 31,2007, we had a state manufacturer’s investment tax credit carryforward ofapproximately $103,000 which will begin to expire in 2011, unless previouslyutilized.  Under Section 382 of theInternal Revenue Code of 1986, as amended, substantial changes in our ownershipmay limit the amount of net operating loss and tax credit carryforwards thatcould be utilized annually in the future to offset taxable income.  Any such annual limitation may significantlyreduce the utilization of the net operating losses and tax credits before theyexpire.  We are in the process ofcompleting a Section 382 study at this time. In each period since our inception, we have recorded a valuationallowance for the full amount of our deferred tax asset, as the realization ofthe deferred tax asset has not met the “more likely than not” thresholdrequired under SFAS 109, Accounting For Income Taxes.  As a result, we have not recorded any federalor state income tax benefit in our statement of operations.

 

**Critical Accounting Policies andEstimates**

 

Our Management’s Discussion and Analysis of ourFinancial Condition and Results of Operations is based on our consolidatedfinancial statements, which have been prepared in conformity with generallyaccepted accounting principles in the United States.  The preparation of these consolidatedfinancial statements requires us to make estimates and assumptions that affectthe 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*

 

Our collaboration agreements contain multipleelements, including non-refundable upfront fees, payments for reimbursement ofthird-party research costs, payments for ongoing research, payments associatedwith achieving specific development milestones and royalties based on specifiedpercentages of net product sales, if any. We apply the revenue recognition criteria outlined in Staff AccountingBulletin, or SAB, No. 104, *RevenueRecognition* and Emerging Issues Task Force, or EITF,Issue 00-21, *Revenue Arrangements withMultiple Deliverables*, or EITF 00-21.  In applying these revenue

 

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recognition criteria, we consider a variety of factorsin determining the appropriate method of revenue recognition under thesearrangements, such as whether the elements are separable, whether there aredeterminable fair values and whether there is a unique earnings processassociated with each element of a contract.

 

Cash received in advance of services being performedis recorded as deferred revenue and recognized as revenue as services areperformed over the applicable term of the agreement.

 

When a payment is specifically tied to a separateearnings process, revenues are recognized when the specific performanceobligation associated with the payment is completed.  Performance obligations typically consist ofsignificant and substantive milestones. Revenues from milestone payments may be considered separable fromfunding for research services because of the uncertainty surrounding theachievement of milestones for products in early stages of development.  Accordingly, these milestone payments areallowed to be recognized as revenue if and when the performance milestone isachieved if they represent a substantive earnings process as described inEITF 00-21.

 

In connection with certain research collaborationagreements, revenues are recognized from non-refundable upfront fees, which wedo not believe are specifically tied to a separate earnings process, ratablyover the term of the agreement or the period over which we have significantinvolvement or perform services.  Researchfees are recognized as revenue as the related research activities areperformed.

 

Revenues derived from reimbursement of directout-of-pocket expenses for research costs associated with grants are recordedin compliance with EITF Issue 99-19, *ReportingRevenue Gross as a Principal Versus Net as an Agent*, and EITFIssue 01-14, *Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred*.  According to thecriteria established by these EITF Issues, 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.  Thecosts associated with these reimbursements are reflected as a component ofresearch and development expense in the consolidated statements of operations.

 

None of the payments that we have received fromcollaborators to date, whether recognized as revenue or deferred, arerefundable even if the related program is 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 apply the criteria outlined in EITFIssue 07-3, or EITF 07-3,  *Accounting for Non-Refundable Advance Payments forGoods or Services to be Used in Future Research and Development Activities .*Inaccordance with EITF 07-3, these types of payments are deferred andcapitalized. The capitalized amounts are expensed when the related goods aredelivered or the services are performed.

 

*Accrued Clinical Trial Costs*

 

A substantial portion of our on-going research anddevelopment activities are performed under agreements we enter into with externalservice providers, including CROs, who conduct many of our research anddevelopment activities.  We accrue thecosts incurred under these contracts based on factors such as estimates of workperformed, milestones achieved, patient enrollment and costs historicallyincurred for similar contracts.  Asactual costs become known, we adjust our accruals.  To date, our accruals have been withinmanagement’s estimates, and no material adjustments to research and developmentexpenses have been recognized.  We expectto significantly expand the level of research and development activity to beperformed by external service providers and our estimated accruals will be morematerial to our future operations. Subsequent changes in estimates may result in a material change in ouraccruals, which could also materially affect our results of operations.

 

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*Stock-Based Compensation*

 

Effective January 1, 2006, we adopted Statementof Financial Accounting Standards, or SFAS, No. 123(R), *Share-Based Payment*, which revises SFAS No. 123,*Accounting for Stock-Based Compensation*and supersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS No. 123(R) requires thatshare-based payment transactions with employees be recognized in the financialstatements based on their fair value and recognized as compensation expenseover the vesting period.  We used themodified prospective method when we adopted SFAS No. 123(R) andaccordingly we did not restate the results of operations for the prior periods.Compensation expense of $1.2 million and $0.7 million was recognized in theyears ended December 31, 2007 and 2006, respectively, for all awardsgranted on or after December 31, 2005 as well as for the unvested portionof awards granted before December 31, 2005.

 

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 SAB No. 107,“*Simplified Method for Estimating theExpected Term*.” Expected dividends are estimated based on ourdividend history as well as our current projections. The risk-free interestrate for periods approximating the expected terms of the options is based onthe U.S. Treasury yield curve in effect at the time of grant. Theseassumptions are updated on an annual basis or sooner if there is a significant change in circumstances that couldaffect these assumptions.

 

Equity instruments issuedto non-employees are recorded at their fair value as determined in accordancewith SFAS No.123(R) and EITF Issue 96-18, *Accounting for Equity Instruments That are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling Goods andServices*, and are periodically revalued as the equity instrumentsvest and are recognized as expense over the related service period.

 

**Results of Operations**

 

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

 

*Collaboration and Grant Revenues*. Collaboration and grant revenues for the years ended December 31,2007 and 2006 were $767,000 and $933,000, respectively.  The decrease of $166,000, or 18%, wasprimarily due to a decrease in revenue from a NIH grant and the conclusion of adevelopment and license agreement, partially offset by an increase of $370,000related to a collaboration with a natural healthcare company.

 

*Research and Development Expense*. Research and development for the years ended December 31, 2007 and2006 was $41.6 million and $10.5 million, respectively.  The increase of $31.1 million, or 297% wasdue primarily to the $20.0 million payment to Par to reacquire the rights toOPT-80 in North America and Israel, the advancement of our OPT-80 andPrulifloxacin clinical trials, including the initiation of the second pivotalPhase 3 trial for OPT-80, and the purchase of $1.9 million of OPT-80 clinicalsupply material and active pharmaceutical ingredient for the OPT-80 clinicalstudy.

 

*Marketing. *We incurred $2.0 million of marketing expense in theyear ended December 31, 2007 and no such expense in the year ended December 31,2006.  The expenses in the year ended December 31,2007 were related to salaries and pre-launch activities which include medicaleducation, scientific conferences, and public relations services.

 

*General and Administrative Expense*. General and administrative expense for the year ended December 31,2007 and 2006 was $5.3 million and $3.5 million, respectively.  The increase of $1.8 million, or 52%, was dueto increased expenses to support a public company infrastructure which includedhigher legal expenses, insurance and compensation expenses, including a$679,000 of stock compensation expense, an increase of $265,000 over the prioryear.

 

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*Interest Income and Other, net*. Net interest income and other for the year ended December 31, 2007and 2006 were $2.1 million and $1.2 million, respectively.  The increase was primarily due to higher cashand short-term investment balances as a result of our initial public offeringcompleted in February 2007 and our private placement offering which closedin October 2007.

 

***Comparison of YearsEnded December 31, 2006 and 2005***

 

*Collaboration and Grant Revenues*. Collaboration and grant revenues for the years ended December 31,2006 and 2005 were $933,000 and $2.1 million, respectively.  The decrease of $1.2 million, or 57%, wasprimarily due to a decrease in revenue from NIH grants, which generated$494,000 in the current year versus $1.1 million in the prior year.  In addition, we terminated the manufacturingsupply agreement with Sloan-Kettering Institute for Cancer Research as well asour development and license agreement with a pharmaceutical company.  These two agreements generated an additional$265,000 and $225,000 of revenue, respectively, in the prior year.

 

*Research and Development Expense*. Research and development expense for the years ended December 31,2006 and 2005 were $10.5 million and $7.0 million, respectively. The increaseof $3.5 million, or 50%, was primarily due to costs incurred on our OPT-80Phase 2b/3 and Prulifloxacin Phase 3 clinical trials which we initiated inMay 2006 and July 2006, respectively.

 

*General and Administrative Expense*. General and administrative expense for the years ended December 31,2006 and 2005 were $3.5 million and $2.8 million, respectively.  The increase of $741,000, or 27% wasprimarily due to stock compensation expense of $415,000 recorded in accordancewith FAS 123(R) and the forgiveness of a note receivable to an officer of$263,000.

 

*Interest Income and Other, Net*. Net interest income and other for the years ended December 31, 2006and 2005 were $1.2 million and $237,000, respectively, an increase of $932,000from the prior year.  The increase wasprimarily due to higher cash and short-term investment balances resulting in anincrease in interest income of $663,000, as well as a decrease in interestexpense of $239,000 related to the fair value of warrants and the related beneficialconversion feature, in connection with our bridge financing that was expensedin 2005.

 

**Liquidity and Capital Resources**

 

*Sources of Liquidity*

 

Since inception, our operations have been financedprimarily through the sale of equity securities.  Through March 10, 2008, we receivedgross proceeds of approximately $154.8 million from the sale of shares of ourpreferred and common stock as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

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Until required for operations, we invest a substantialportion of our available funds in money market funds, corporate debtsecurities, United States government instruments and other readily marketabledebt instruments, all of which are investment-grade quality.  We have established guidelines relating todiversification and maturities of our investments to preserve principal andmaintain liquidity.

 

*Cash Flows*

 

As of December 31, 2007, cash, cash equivalentsand short-term investments totaled approximately $58.8 million as compared to$21.3 million as of December 31, 2006, an increase of approximately $37.5million.  In 2007, we raised $43.6million in net proceeds from our initial public offering and $33.6 million innet proceeds from a private placement. We also paid Par $20.0 million of the net proceeds to reacquire rightsto OPT-80 in North America and Israel.

 

We cannot be certain if, when or to what extent wewill receive cash inflows from the commercialization of our productcandidates.  We expect our developmentexpenses to be substantial and to increase over the next few years as weadvance the development of our product candidates.

 

In April 2005, we entered into a collaborationagreement with Par pursuant to which we and Par exclusively collaborated todevelop and commercialize OPT-80.  We hadgranted to Par an exclusive royalty-bearing license, with the right tosublicense, promote, market, distribute and sell OPT-80 in a territory composedof the United States, Canada and Puerto Rico, with an option to extend theterritory to include Israel.  We retainedall other rights to OPT-80 in the rest of the world.  In January 2007, we entered into aprospective buy-back agreement with Par which provided us with an option toterminate the collaboration and repurchase the rights to develop andcommercialize OPT-80 in North America and Israel.

 

In February 2007, we elected to terminate thecollaboration agreement pursuant to the prospective buy-back agreement with Parand repurchased the rights to develop and commercialize OPT-80 in North Americaand Israel. We now hold worldwide rights to OPT-80.  Under the terms of the prospective buy-backagreement, we paid Par a one-time $20.0 million termination fee and purchased$1.9 million of OPT-80 clinical supply material and active pharmaceuticalingredient.  We are also obligated to payPar a one-time $5.0 million milestone payment, a 5% royalty on net sales by usor our affiliates of OPT-80 in North America and Israel, and a 1.5% royalty onnet sales by us or our affiliates of OPT-80 in the rest of the world.  In addition, in the event we license ourright to market OPT-80 in the rest of the world, we will be required to pay Para 6.25% royalty on net revenues we receive related to OPT-80.  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**.**

 

In June 2004, we entered into a license agreementwith Nippon Shinyaku to which we acquired the non-exclusive right to import andpurchase Prulifloxacin , and the exclusive right (with the right tosublicense), within the United States, to develop, make, use, offer to sell,sell and license products suitable for consumption by humans containingPrulifloxacin.  Additionally, we acquiredrights within the United States to a key patent which covers the compound andthe treatment of bacterial infections in humans and animals.  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 the NDA for the Prulifloxacin in the UnitedStates.

 

*Funding Requirements*

 

Our future capital uses and requirements depend onnumerous factors including, but not 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;

 

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·                  the costs of establishing sales or distributioncapabilities;

 

·                  the commercial success of our products; and

 

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

 

We believe that our existing cash and cash equivalentswill be sufficient to meet our capital requirements for at least the next 12months.

 

Until we can generate significant cash from ouroperations, we expect to continue to fund our operations with existing cashresources that were primarily generated from of offerings of our equitysecurities and collaborations and government grants.  In addition, we may finance future cash needsthrough the sale of additional equity securities, strategic collaborationagreements and debt financing.  However,we may not be successful in entering into additional collaboration agreements,in receiving milestone or royalty payments under new or existing collaborationagreements, in obtaining new government grants or in obtaining equity or debtfinancing.  In addition, we cannot besure 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.  Having insufficient funds may require us todelay, scale-back or eliminate some or all of our development programs,relinquish some or even all of our rights to product candidates at an earlierstage of development or renegotiate less favorable terms than we wouldotherwise choose.  Failure to obtainadequate financing also may adversely affect our ability to operate as a goingconcern.  If we raise funds by issuingequity securities, substantial dilution to existing stockholders would likelyresult.  If we raise funds by incurringadditional debt financing, the terms of the debt may involve significant cashpayment obligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

 

**Off-Balance Sheet Arrangements**

 

We have not engaged in any off-balance sheet activities.

 

**Contractual Obligations**

 

The following table describes our long-termcontractual obligations and commitments as of December 31, 2007:

 
| ** **                 | ** ** | **Payments Due by Period** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|
| ** **                 | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-2 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| ** **                 | ** ** | **(in thousands)**                   | ** ** |
| Operating lease obligation |       | $                                         | 2,887      |   | $ | 784 |   | $ | 1,477 |   | $ | 626 |   | $ | — |   |
|                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We have contracted with a contract researchorganization, or CRO, for clinical research services for the OPT-80Phase 3 clinical trials and Prulifloxacin Phase 3 clinicaltrials.  We have issued purchase orderstotaling $34.0 million for these services, $20.4 million of which were issuedin 2006 and an additional $9.8 million of which were issued in 2007.  As of December 31, 2007, we have paid $12.5million related to these purchase orders. We can terminate the service agreement at any time upon 60 days’ writtennotice to the CRO.  We have not includedany amounts related to the CRO contract in the table above.

 

The contractual obligations table does not include (a) apotential future milestone payment in the amount of $1.0 million to NipponShinyaku due upon filing our first NDA in the United States for Prulifloxacin, (b) potentialfuture milestone payments to Cempra in the amount of $1.0 million due upon theregulatory approval of each of the first two products we develop under ourlicensing agreement with Cempra in any country which is a member of theAssociation of Southeast Asian Nations, or ASEAN, (c) potential futuremilestone payments to SKI for each product licensed under the SKI agreement asfollows: (i) $500,000 upon the commencement of Phase 3 clinicalstudies, (ii) $750,000 upon the filing of the first NDA, (iii) $1.5million upon marketing approval in the United States and (iv) $1.0 millionupon marketing approval in each and any of Japan and certain Europeancountries, (d) potential future milestone payments of up to $14.0 millionto TSRI due upon achievement of certain clinical milestones, the filing of NDAsor their foreign equivalents and government marketing and distributionapproval, or (e) a future $5.0 million milestone payment to Par upon theearliest occurrence of (i) the successful completion by us of our pivotalPhase 3 trial for OPT-80, (ii) our grant to a third party of therights to OPT-80

 

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or (iii) the submission to the FDA of a NDA forOPT-80.  We may also be required to payroyalties on any net sales of Prulifloxacin, OPT-80 and other licensed productcandidates.  The milestone and royaltypayments under our license agreements are not included in the table abovebecause we cannot, at this time, determine when or if the related milestoneswill be achieved or the events triggering the commencement of paymentobligations will occur.

 

**Recently Issued Accounting Pronouncements**

 

In September 2006, the Financial AccountingStandards Board, or FASB, issued FASB Statement No. 157, “*Fair Value Measurements*”, orSFAS 157, which defines fair value, establishes a framework for measuringfair value under generally accepted accounting principles, and expandsdisclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require orpermit fair value measurements.  The newguidance is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and for interim periods within thosefiscal years.  We are currentlyevaluating the impact of SFAS 157, but do not believe the adoption of thisstandard will have a material impact on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159,“*The Fair Value Option for Financial Assetsand Liabilities”*, or SFAS 159*.*SFAS 159 permits entities to choose to measure many financial instruments andcertain other items at fair value. SFAS 159 will be effective for our fiscalyear beginning after November 15, 2007. Early adoption is permitted. Weare currently evaluating the impact of SFAS 159, but do not believe theadoption of this standard will have a material impact on our financialposition, cash flows, and results of operations.

 

In July 2007, the FASB released Emerging IssuesTask Force Issue 07-3*, “Accounting forNonrefundable Advance Payments for Goods or Services to be used in FutureResearch and Development Activities”*, or EITF 07-3.  In accordance with EITF 07-3, nonrefundableadvance payments for goods or services to be received in the future for use inresearch and development activities should be deferred and capitalized. Thecapitalized amounts should be expensed as the related goods are delivered orthe services are performed. EITF 07-3 is effective for new contracts enteredinto during fiscal years beginning after December 15, 2007, includinginterim periods within those fiscal years. Our current accounting treatment is consistentwith EITF 07-3 and as such this EITF is not expected to have an impact on itsfinancial position, cash flows, and results of operations.

 

In December 2007, the FASB issued Statement ofFinancial Accounting Standards, or SFAS No. 160, *“Noncontrolling Interests in Consolidated FinancialStatements — An Amendment of ARB No. 51”*, orSFAS 160.  SFAS 160 requiresthe recognition of a noncontrolling interest, sometimes called minorityinterest, as equity in the consolidated financial statements and separate fromthe parent’s equity. The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income on the faceof the income statement. SFAS 160 clarifies that changes in a parent’sownership interest in a subsidiary that do not result in deconsolidation areequity transactions if the parent retains its controlling financial interest.In addition, this statement requires that a parent recognize a gain or loss innet income when a subsidiary is deconsolidated. Such gain or loss will bemeasured using the fair value of the noncontrolling equity investment on thedeconsolidation date. SFAS 160 also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterest. SFAS 160 is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008.Earlier adoption is prohibited. We have not determined the impact, if any, thatadopting this standard may have on our financial position, cash flows, andresults of operations.

 

**Item 7A. Quantitative and QualitativeDisclosures about Market Risk**

 

Our cash and cash equivalents and short-terminvestments as of December 31, 2007 consisted primarily of money marketfunds and government agency securities. Our primary exposure to market risk is interest income sensitivity,which is affected by changes in the general level of U.S. interest rates,particularly because the majority of our investments are in short-termmarketable securities.  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 31,2007 would have resulted in approximately a $207,000 change in net loss.Accordingly, we would not expect our operating results or cash flows to beaffected to any significant degree by the effect of a sudden change in marketinterest rates on 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.

 

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**Item 8. Financial Statements andSupplementary Data**

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report  of Independent Registered Public Accounting Firm                                                    |   | 58 |
|-------------------------------------------------------------------------------------------------------------|--------|----|
| Consolidated  Balance Sheets                                                                                |   | 59 |
| Consolidated  Statements of Operations                                                                      |   | 60 |
| Consolidated  Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity  (Deficit) |   | 61 |
| Consolidated  Statements of Cash Flows                                                                      |   | 62 |
| Notes to  Consolidated Financial Statements                                                                 |   | 63 |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Stockholders of

Optimer Pharmaceuticals, Inc.

 

We have audited the accompanying consolidated balancesheets of Optimer Pharmaceuticals, Inc. as of December 31, 2007 and2006 and the related consolidated statements of operations, redeemableconvertible preferred stock and stockholders’ equity (deficit), and cash flowsfor each of the three years in the period ended December 31, 2007.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour 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, 2007 and 2006,and the consolidated results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2007, in conformity withU.S. generally accepted accounting principles.

 

As discussed in Note 1 to the consolidated financialstatements, Optimer Pharmaceuticals, Inc. changed its method of accountingfor Share-Based Payments in accordance with Statement of Financial AccountingStandards No. 123 (revised 2004) on January 1, 2006.

 

 
|                  | /s/ ERNST & YOUNG LLP |
|-----------------------|--------------------------------|
|                  |                           |
| San Diego, California |                           |
| March 25, 2008        |                           |

 

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**OptimerPharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                          | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                          | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                                                                     |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                           |       | $                     | 3,191,814  |   | $ | 6,122,438 |   |
| Short-term investments                                                                                                                                                                                                                                                                                                                              |       | 55,613,785            |       | 15,218,860 |   |
| Research grant and contract receivables                                                                                                                                                                                                                                                                                                             |       | 95,184                |       | 163,502 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                           |       | 872,810               |       | 1,549,062 |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                |       | 59,773,593            |       | 23,053,862 |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                         |       | 705,374               |       | 744,564 |   |
| Other assets                                                                                                                                                                                                                                                                                                                                        |       | 306,573               |       | 315,490 |   |
| Total assets                                                                                                                                                                                                                                                                                                                                        |       | $                     | 60,785,540 |   | $ | 24,113,916 |   |
| **LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED  STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                                                    |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                    |       | $                     | 2,602,152  |   | $ | 1,753,394 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                    |       | 4,998,025             |       | 3,310,199 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                           |       | 7,600,177             |       | 5,063,593 |   |
| Deferred rent                                                                                                                                                                                                                                                                                                                                       |       | 281,894               |       | 292,384 |   |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                                       |       | —                |       | — |   |
| Redeemable convertible preferred stock, $0.001 par value:                                                                                                                                                                                                                                                                                           |       |                  |       |   |   |
| Series B redeemable convertible, no shares and 6,461,439 shares  authorized at December 31, 2007 and 2006, respectively; no shares and  4,132,736 shares issued and outstanding at December 31, 2007 and 2006,  respectively                                                                                                         |       | —                |       | 32,198,929 |   |
| Series C redeemable convertible, no shares and 1,615,359 shares  authorized at December 31, 2007 and 2006, respectively; no shares and  1,538,437 shares outstanding at December 31, 2007and 2006, respectively                                                                                                                      |       | —                |       | 11,494,052 |   |
| Series D redeemable convertible, no shares and 3,923,016 shares  authorized at December 31, 2007 and 2006, respectively; no shares and  2,861,277 shares issued and outstanding at December 31, 2007 and 2006,  respectively                                                                                                         |       | —                |       | 21,766,662 |   |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                                                                                                |       |                  |       |   |   |
| Preferred stock, par value $0.001, 10,000,000 shares and no shares  authorized at December 31, 2007 and 2006, respectively                                                                                                                                                                                                                     |       | —                |       | — |   |
| Series A convertible preferred stock, par value $0.001, no  shares and 2,307,656 shares authorized at December 31, 2007 and 2006,  respectively; no shares and 1,523,051 shares issued and outstanding at  December 31, 2007 and 2006, respectively; liquidation preference of $0  and $3,300,000 at December 31, 2007 and 2006 |       | —                |       | 1,523 |   |
| Common stock, $0.001 par value, 75,000,000 shares and 25,384,225  shares authorized at December 31, 2007 and 2006, respectively;  27,903,705 shares and 2,704,476 shares issued and outstanding at  December 31, 2007 and 2006, respectively; 46,153 shares held in treasury                                                              |       | 27,904                |       | 2,704 |   |
| Treasury stock, at cost; 46,153 shares                                                                                                                                                                                                                                                                                                              |       | (100,000              | )          | (100,000 | ) |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                          |       | 150,681,519           |       | 4,997,421 |   |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                |       | (8,396                | )          | (44,971 | ) |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                 |       | (97,697,558           | )          | (51,558,381 | ) |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                           |       | 52,903,469            |       | (46,701,704 | ) |
| Total liabilities, redeemable convertible preferred stock and  stockholders’ equity (deficit)                                                                                                                                                                                                                                                  |       | $                     | 60,785,540 |   | $ | 24,113,916 |   |

 

See accompanying notes.

 

59

----

 

**OptimerPharmaceuticals, Inc.**

**ConsolidatedStatements of Operations**

 
| ** **                                                                                       | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                       | ** ** | **2007**                                    | ** **  | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                       | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                                        |       |                                        |        |   |   |   |   |
| Research grants                                                                                  |       | $                                           | 333,610     |   | $ | 676,764 |   | $ | 1,355,134 |   |
| Collaborative research agreements                                                                |       | 433,555                                     |        | 256,326 |   | 791,548 |   |
| Total revenues                                                                                   |       | 767,165                                     |        | 933,090 |   | 2,146,682 |   |
| Operating expenses:                                                                              |       |                                        |        |   |   |   |   |
| Research and development                                                                         |       | 41,569,067                                  |        | 10,480,924 |   | 7,046,625 |   |
| Marketing                                                                                        |       | 2,048,002                                   |        | — |   | — |   |
| General and administrative                                                                       |       | 5,350,800                                   |        | 3,523,221 |   | 2,781,966 |   |
| Total operating expenses                                                                         |       | 48,967,869                                  |        | 14,004,145 |   | 9,828,591 |   |
| Loss from operations                                                                             |       | (48,200,704                                 | )           | (13,071,055 | ) | (7,681,909 | ) |
| Interest income and other, net                                                                   |       | 2,061,527                                   |        | 1,169,160 |   | 237,088 |   |
| Net loss                                                                                         |       | (46,139,177                                 | )           | (11,901,895 | ) | (7,444,821 | ) |
| Accretion to redemption amount of redeemable convertible preferred stock                         |       | —                                      |        | (329,207 | ) | (223,439 | ) |
| Net loss allocable to common stockholders                                                        |       | $                                           | (46,139,177 | ) | $ | (12,231,102 | ) | $ | (7,668,260 | ) |
|                                                                                             |       |                                        |        |   |   |   |   |
| Basic and diluted net loss per share attributable to common  stockholders                        |       | $                                           | (2.12       | ) | $ | (4.81 | ) | $ | (3.22 | ) |
| Shares used to compute basic and diluted net loss per share  attributable to common stockholders |       | 21,715,332                                  |        | 2,542,893 |   | 2,383,435 |   |

 

See accompanying notes.

 

60

----

 

**Optimer Pharmaceuticals, Inc.**

**Consolidated Statements ofRedeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)**
|                                                                                                                |       |                               |       |                                     |       |                               |       |                                           |       |              |       |                |       |        |       |                 |       |                                 |       |            |       |       |       |       |       |             |       |                |       |                   |       |        |       | ** **  |       |        |   |   |    |   |   |        |   |   |        |   |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------------|------------|------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|---------------------|------------|-------------|------------|----------------------|------------|--------------------------------------|------------|-----------------|------------|------------|------------|------------|------------|------------------|------------|---------------------|------------|------------------------|------------|-------------|------------|-------------|------------|-------------|--------|--------|---------|--------|--------|-------------|--------|--------|-------------|--------|
| ** **                                                                                                          | ** ** | **Redeemable  Convertible**        | ** ** | **Stockholders’  Equity (Deficit)** | ** ** |
| ** **                                                                                                          | ** ** | **Series B  Preferred Stock** | ** ** | **Series C  Preferred Stock**       | ** ** | **Series D  Preferred Stock** | ** ** | **Series A  Convertible Preferred Stock** | ** ** | **Common  Stock** | ** ** | **Treasury  Stock** | ** ** | **Capital** | ** ** | **Additional  paid** | ** ** | **Accumulated  other comprehensive** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                                                          | ** ** | **Shares**                         | ** ** | **Amount**                               | ** ** | **Shares**                         | ** ** | **Amount**                                     | ** ** | **Shares**        | ** ** | **Amount**          | ** ** | **Shares**  | ** ** | **Amount**           | ** ** | **Shares**                           | ** ** | **Amount**      | ** ** | **Shares** | ** ** | **Amount** | ** ** | **subscription** | ** ** | **in capital** | ** ** | **income (loss)** | ** ** | **deficit** | ** ** | **Total**   | ** ** |
| Balance at  December 31, 2004                                                                                  |       | 4,132,736                          |       | $                                        | 32,175,119 |                               | —     |                                           | $          | —            |       | —              |       | $           | —     |                 | 1,569,204  |                                 | $          | 1,569           |       | 2,345,794  |       | $          | 2,346      |             | —     |                | $          | —                 |       | $           | 46,000     | ** **  | $          | 3,703,054   |   | $      | (4,254  | )      | $      | (32,211,665 | )      | $      | (28,462,950 | )      |
| Issuance of  common stock upon exercise of options                                                                  |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | 13,058                               |       | 13              |       | —     |       | —     |       | —           |       | 7,414               |       | —                 |       | —      |       | 7,427       |       |
| Issuance of  subscribed common stock                                                                                |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | 55,384                               |       | 55              |       | —     |       | —     |       | (46,000          | )          | 45,945              |       | —                 |       | —      |       | —      |       |
| Issuance of  Series C convertible preferred stock                                                              |       |                               |       |                                     |       |                               |       |                                           |       |              |       |                |       |        |       |                 |       |                                 |       |            |       |       |       |       |       |             |       |                |       |                   |       |        |       |        |       |
| net of issuance  costs of $758,921                                                                                  |       | —                             |       | —                                   |       | 1,538,437                          |       | 11,241,078                                     |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | —                 |       | —      |       | —      |       |
| Issuance of  Series D convertible preferred stock and common stock warrants net of  issuance costs of $827,589 |       | —                             |       | —                                   |       | —                             |       | —                                         |       | 2,854,611         |       | 21,438,801          |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | 742,211             |       | —                 |       | —      |       | 742,211     |       |
| Issuance of warrants  to acquire Series D convertible preferred stock                                          |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | 119,637             |       | —                 |       | —      |       | 119,637     |       |
| Beneficial  conversion related to Series D warrants                                                            |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | 119,637             |       | —                 |       | —      |       | 119,637     |       |
| Accretion of  redemption amount for Series B, C and D convertible preferred stock                              |       | —                             |       | 11,905                                   |       | —                             |       | 101,189                                        |       | —            |       | 110,345             |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | (223,439            | )          | —                 |       | —      |       | (223,439    | )          |
| Compensation  expense related to grants of consultant stock options                                                 |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | 43,997              |       | —                 |       | —      |       | 43,997      |       |
| Comprehensive  loss:                                                                                                |       |                               |       |                                     |       |                               |       |                                           |       |              |       |                |       |        |       |                 |       |                                 |       |            |       |       |       |       |       |             |       |                |       |                   |       |        |       |        |       |
| Unrealized loss  on short-term investment                                                                           |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | (38,527                | )          | —      |       | (38,527     | )          |
| Foreigh currency  translation adjustment                                                                            |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | (6,443                 | )          | —      |       | (6,443      | )          |
| Net loss                                                                                                            |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | —                 |       | (7,444,821  | )          | (7,444,821  | )          |
| Comprehensive  loss                                                                                                 |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | —                 |       | —      |       | (7,489,791  | )          |
| Balance at  December 31, 2005                                                                                  |       | 4,132,736                          |       | 32,187,024                               |       | 1,538,437                          |       | 11,342,267                                     |       | 2,854,611         |       | 21,549,146          |       | 1,569,204   |       | 1,569                |       | 2,414,236                            |       | 2,414           |       | —     |       | —     |       | —           |       | 4,558,456           |       | (49,224                | )          | (39,656,486 | )          | (35,143,271 | )          |
| Issuance of  common stock upon exercise of options                                                                  |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | 290,240                              |       | 290             |       | —     |       | —     |       | —           |       | 156,096             |       | —                 |       | —      |       | 156,386     |       |
| Accretion of redemption  amount for Series B, C and D convertible preferred stock                              |       | —                             |       | 11,905                                   |       | —                             |       | 151,785                                        |       | —            |       | 165,518             |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | (329,208            | )          | —                 |       | —      |       | (329,208    | )          |
| Exercise of  Series D warrants                                                                                 |       | —                             |       | —                                   |       | —                             |       | —                                         |       | 6,666             |       | 51,998              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | —                 |       | —      |       | —      |       |
| Compensation  expense related to grants of consultant stock options                                                 |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | 158,850             |       | —                 |       | —      |       | 158,850     |       |
| Employee stock  based compensation under FAS123(R)                                                                  |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | 553,181             |       | —                 |       | —      |       | 553,181     |       |
| Repurchase of  common stock                                                                                         |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | (46,153    | )          | (100,000   | )          | —           |       | —              |       | —                 |       | —      |       | (100,000    | )          |
| Retirement of  Series A convertible preferred stock                                                            |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | (46,153     | )          | (46                  | )          | —                               |       | —          |       | —     |       | —     |       | —           |       | (99,954             | )          | —                 |       | —      |       | (100,000    | )          |
| Comprehensive  loss:                                                                                                |       |                               |       |                                     |       |                               |       |                                           |       |              |       |                |       |        |       |                 |       |                                 |       |            |       |       |       |       |       |             |       |                |       |                   |       |        |       |        |       |
| Unrealized loss  on short-term investment                                                                           |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | (5,872                 | )          | —      |       | (5,872      | )          |
| Foreigh currency  translation adjustment                                                                            |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | 10,125                 |       | —      |       | 10,125      |       |
| Net loss                                                                                                            |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | —                 |       | (11,901,895 | )          | (11,901,895 | )          |
| Comprehensive  loss                                                                                                 |       | —                             |       | —                                   |       | —                             |       | —                                         |       | —            |       | —              |       | —      |       | —               |       | —                               |       | —          |       | —     |       | —     |       | —           |       | —              |       | —                 |       | —      |       | (11,897,642 | )          |
| Balance at  December 31, 2006                                                                                  |       | 4,132,736                          |       |                                     | 32,198,929 |                               | 1,538,437  |                                           |       | 11,494,052        |       | 2,861,277           |       |        | 21,766,662 |                 | 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                                                                      |       | (4,132,736                         | )          | (32,198,929                              | )          | (1,538,437                         | )          | (11,494,052                                    | )          | (2,861,277        | )          | (21,766,662         | )          | (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     | )          |
| Foreigh 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  |   |

 

 

61

----

 

**Optimer Pharmaceuticals, Inc.**

**Consolidated Statements of Cash Flows**

 
| ** **                                                                    | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                    | ** ** | **2007**                                    | ** **  | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Operating activities**                                                      |       |                                        |        |   |   |   |   |
| Net loss                                                                      |       | $                                           | (46,139,177 | ) | $ | (11,901,895 | ) | $ | (7,444,821 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:  |       |                                        |        |   |   |   |   |
| Depreciation and amortization                                                 |       | 285,515                                     |        | 496,211 |   | 885,733 |   |
| Stock based compensation                                                      |       | 1,244,022                                   |        | 712,031 |   | 43,997 |   |
| Stock awards                                                                  |       | 148,226                                     | ** **  | **—** | ** ** | **—** | ** ** |
| Non-cash interest expense related to  warrants and beneficial conversion      | ** ** | **—**                                  | ** **  | **—** |   | 239,274 |   |
| Non-cash compensation related to  forgiveness of note receivable from officer | ** ** | **—**                                  |        | 262,500 |   | 37,500 |   |
| Gain (loss) on disposal of assets                                             | ** ** | **—**                                  |        | (45,339 | ) | 24,906 |   |
| Deferred revenue                                                              |       | —                                      |        | — |   | (14,706 | ) |
| Deferred rent                                                                 |       | (10,490                                     | )           | 12,970 |   | 35,637 |   |
| Changes in operating assets and  liabilities:                                 |       |                                        |        |   |   |   |   |
| Prepaid expenses and other current assets                                     |       | 676,252                                     |        | (1,449,189 | ) | 6,612 |   |
| Research grant and contract receivables                                       |       | 68,318                                      |        | 466,626 |   | (525,775 | ) |
| Other assets                                                                  |       | 8,917                                       |        | (2,894 | ) | 111,943 |   |
| Accounts payable and accrued expenses                                         |       | 2,536,584                                   |        | 2,943,357 |   | 1,197,221 |   |
| Net cash used in operating activities                                         |       | (41,181,833                                 | )           | (8,505,622 | ) | (5,402,479 | ) |
|                                                                          |       |                                        |        |   |   |   |   |
| **Investing activities**                                                      |       |                                        |        |   |   |   |   |
| Purchases of short-term investments                                           |       | (86,993,067                                 | )           | (10,478,237 | ) | (9,975,025 | ) |
| Sales or maturity of short-term investments                                   |       | 46,610,000                                  |        | 5,190,000 |   | — |   |
| Purchase of property and equipment                                            |       | (246,326                                    | )           | (46,173 | ) | (44,743 | ) |
| Net cash used in investing activities                                         |       | (40,629,393                                 | )           | (5,334,410 | ) | (10,019,768 | ) |
|                                                                          |       |                                        |        |   |   |   |   |
| **Financing activities**                                                      |       |                                        |        |   |   |   |   |
| Proceeds from sale of preferred stock, net  of issuance costs                 |       | —                                      |        | — |   | 33,422,090 |   |
| Proceeds from sale of common stock                                            |       | 77,485,617                                  |        | 156,386 |   | 7,427 |   |
| Proceeds from exercise of Series D  warrants                             |       | 1,370,267                                   |        | 51,998 |   | — |   |
| Repurchase of common stock                                                    |       | —                                      |        | (100,000 | ) | — |   |
| Repurchase of Series A preferred stock                                   |       | —                                      |        | (100,000 | ) | — |   |
| Repayments of proceeds from capital leases                                    |       | —                                      |        | — |   | (9,369 | ) |
| Net cash provided by financing activities                                     |       | 78,855,884                                  |        | 8,384 |   | 33,420,148 |   |
| Effect of exchange rate changes on cash and  cash equivalents                 |       | 24,718                                      |        | 10,127 |   | (6,443 | ) |
| Net increase (decrease) in cash and cash  equivalents                         |       | (2,930,624                                  | )           | (13,821,521 | ) | 17,991,458 |   |
| Cash and cash equivalents at beginning of  year                               |       | 6,122,438                                   |        | 19,943,959 |   | 1,952,501 |   |
| Cash and cash equivalents at end of year                                      |       | $                                           | 3,191,814   |   | $ | 6,122,438 |   | $ | 19,943,959 |   |
|                                                                          |       |                                        |        |   |   |   |   |
| **Supplemental disclosure of cash flow  information:**                        |       |                                        |        |   |   |   |   |
| Interest paid                                                                 |       | $                                           | —      |   | $ | — |   | $ | 7,501 |   |
| Conversion of redeemable convertible  preferred stock to common stock         |       | 65,461,166                                  |        | — |   | — |   |

 

Seeaccompanying notes.

 

62

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****            ****Organization and Summary of Significant AccountingPolicies**

 

Optimer Pharmaceuticals, Inc.(“Optimer” or the “Company”) was incorporated in Delaware on November 18,1998 and has three subsidiaries.  OptimerBiotechnology, Inc. is a wholly owned subsidiary of the Company and isincorporated in Taiwan while Optimer Singapore PTE LTD (“Optimer Singapore”)and Optimer Asia PTE LTD are incorporated in Singapore and are wholly ownedsubsidiaries of Optimer Biotechnology, Inc.  During the year ended December 31, 2006,the Company had ceased operations of Optimer Asia PTE LTD and OptimerSingapore, respectively, neither of which had a material impact on theconsolidated financial statements.

 

Optimer is abiopharmaceutical company focused on discovering, developing andcommercializing anti-infective products. The Company currently has two anti-infective product candidates, OPT-80for the treatment of *Clostridium difficile*-infections,and Prulifloxacin, for the treatment of infectious diarrhea in travelers.

 

*StockSplit*

 

In December 2006 and January 2007,the Company’s board of directors and stockholders authorized a 1-for-2.1667reverse stock split for all outstanding preferred and common shares.  All share information has been retroactivelyrestated to reflect the reverse stock split.

 

*Principlesof Consolidation*

 

The consolidated financialstatements include all the accounts of the Company and its three wholly ownedsubsidiaries in Asia.  All intercompanybalances and transactions have been eliminated in consolidation.

 

*Use ofEstimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

*Cash, CashEquivalents and Short-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 within other comprehensive loss in the consolidated statementof redeemable convertible preferred stock and stockholders’ equity (deficit).  Realized gains and losses, and declines invalue judged to be other than temporary, are included in investment income orinterest expense.  The cost of securitiessold is computed using the specific identification method.

 

*Concentrationof Credit Risk*

 

Financial instruments thatpotentially subject the Company to a significant concentration of credit riskconsist primarily of cash and cash equivalents and short-term investments.  The Company maintains deposits in federallyinsured financial institutions in excess of federally insured limits.  However, management believes the Company isnot exposed to significant credit risk due to the financial position of thedepository institutions in which those deposits are held.  Additionally, the Company has establishedguidelines regarding diversification of its investments and their maturities,which are designed to maintain safety and liquidity.

 

*Propertyand 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.

 

63

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*DeferredRent*

 

Rent expense is recorded ona 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.

 

*RedeemableConvertible Preferred Stock*

 

In connection with theclosing of the Company’s initial public offering in February 2007, allshares of redeemable convertible preferred stock were converted to commonstock.  Prior to the initial publicoffering, the carrying value of redeemable convertible preferred stock wasincreased by periodic accretions so that the carrying amount would equal the redemptionvalue at the redemption date.  Theseaccretions were effected through charges against additional paid in capital.

 

*ForeignCurrency Translation*

 

The financial statements offoreign subsidiaries having the U.S. dollar as the functional currency, withcertain transactions denominated in a local currency, are remeasured into U.S.dollars at their historical rates.  Theremeasurement of local currency amounts into U.S. dollars creates translationadjustments that are included in net loss. Transaction and translation gains or losses were not material to thefinancial statements for any periods presented.

 

*Fair Valueof Financial Instruments*

 

The carrying amount of cashand 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 fiscalperiod.

 

*Impairmentof Long-Lived Assets*

 

In accordance with Statementof Financial Accounting Standards (“SFAS”) No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as property andequipment, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized by theamount by which the carrying amount of the asset exceeds the fair value of theasset.  Assets to be disposed of would beseparately presented in the balance sheet and reported at the lower of thecarrying amount or the fair value less costs to sell, and are no longerdepreciated.  The assets and liabilitiesof a disposed group classified as held for sale would be presented separately inthe appropriate asset and liability sections of the balance sheet.  Although the Company has accumulated lossessince inception, the Company believes the future cash flows to be received fromthe long-lived assets will exceed the assets’ carrying value and, accordingly,the Company has not recognized any impairment losses through December 31,2007.

 

*IncomeTaxes*

 

Income taxes are accountedfor under the asset and liability method. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. The Company provides a valuation allowance against net deferred taxassets unless, based upon the available evidence, it is more likely than notthat the deferred tax assets will be realized.

 

64

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

*RevenueRecognition*

 

The Company’s collaborationagreements contain multiple elements, including non-refundable upfront fees,payments for reimbursement of third-party research costs, payments for ongoingresearch, payments associated with achieving specific development milestonesand royalties based on specified percentages of net product sales, if any.  The Company applies the revenue recognitioncriteria outlined in Staff Accounting Bulletin (“SAB”) No. 104, *Revenue Recognition* and Emerging IssuesTask Force (“EITF”) Issue 00-21, *RevenueArrangements with Multiple Deliverables* (“EITF 00-21”).  In applying these revenue recognitioncriteria, the Company considers a variety of factors in determining theappropriate method of revenue recognition under these arrangements, such aswhether the elements are separable, whether there are determinable fair valuesand whether there is a unique earnings process associated with each element ofa contract.

 

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

 

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

 

In connection with certainresearch collaboration agreements, revenues are recognized from non-refundableupfront fees, which the Company does not believe are specifically tied to aseparate earnings process, ratably over the term of the agreement.  Research fees are recognized as revenue asthe related research activities are performed.

 

Revenues derived fromreimbursement of direct out-of-pocket expenses for research costs associatedwith grants are recorded in compliance with EITF Issue 99-19, *Reporting Revenue Gross as a Principal Versus Net asan Agent*, and EITF Issue 01-14, *Income Statement Characterization of Reimbursements Received for“Out-of-Pocket” Expenses Incurred*. According to the criteria established by these EITF Issues, intransactions where the Company acts as a principal, with discretion to choosesuppliers, bear credit risk and perform part of the services required in thetransaction, the Company records revenue for the gross amount of thereimbursement.  The costs associated withthese reimbursements are reflected as a component of research and developmentexpense in the consolidated statements of operations.

 

None of the payments thatthe Company has received from collaborators to date, whether recognized asrevenue or deferred, are refundable even if the related program is notsuccessful.

 

*Researchand Development Expenses*

 

The Company accounts forresearch and development costs in accordance with SFAS No. 2, *Accounting for Research and Development Costs*(“SFAS 2”).  SFAS 2 specifiesthat research and development costs should be charged to expense untiltechnological feasibility has been established for the product.  Once technological feasibility isestablished, all product costs should be 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, or approval of the new drugapplication (“NDA”) for such product. The Company’s research and development expenses consist primarily oflicense fees, salaries and related employee benefits, costs associated withclinical trials managed by the Company’s contract research organizations, orCROs, and costs associated with non-clinical activities and regulatoryapprovals.  The Company uses externalservice providers and vendors to conduct clinical trials, to manufacturesupplies of product candidates to be used in clinical trials and to providevarious other research and development-related products and services.

 

Whennonrefundable payments for goods or services to be received in the future foruse in research and development activities are made, the Company applies thecriteria outlined in EITF issue No. 07-3 (“ EITF 07-3”),  *Accountingfor Non-Refundable Advance Payments for Goods or Services to be Used in FutureResearch and Development*

 

65

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)**

 

*Activities..*In accordance withEITF 07-3, these types of payments are deferred and capitalized. Thecapitalized amounts are expensed when the related goods are delivered or theservices are performed.

 

*Stock-BasedCompensation*

 

Effective January 1,2006, the Company adopted Statement of Financial Accounting Standards,(“SFAS”), No. 123(R), *Share-BasedPayment*, which revises SFAS No. 123, *Accounting for Stock-Based Compensation* and supersedesAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS No. 123(R) requires thatshare-based payment transactions with employees be recognized in the financialstatements based on their fair value and recognized as compensation expenseover the vesting period.  The Companyused the modified prospective-transition-method when it adopted SFAS 123(R),and accordingly, the Company did not restate its results of operations for theprior periods. Compensation expense of $1.2 million and $0.7 million wasrecognized in the years ended December 31, 2007 and 2006, respectively,for all awards granted on or after December 31, 2005 as well as for theunvested portion of awards granted before December 31, 2005.

 

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.

 

Estimatingthe fair 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 SAB No. 107, “*SimplifiedMethod for Estimating the Expected Term*”. Expected dividends areestimated based on the Company’s dividend history as well as the Company’scurrent projections. The risk-free interest rate for periods approximating theexpected terms of the options is based on the U.S. Treasury yield curve ineffect at the time of grant. These assumptions are updated on an annual basisor sooner if there is a significant change in circumstances that could affectthese assumptions.

 

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

 

*ComprehensiveIncome (Loss)*

 

The Company has applied SFASNo. 130, *Reporting Comprehensive Income*,which requires that all components of comprehensive income (loss), includingnet income (loss), be reported in the financial statements in the period inwhich they are recognized.  Comprehensiveincome (loss) is defined as the change in equity during a period fromtransactions and other 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).

 

*Net LossPer Share Attributable to Common 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 attributableto common stockholders by the weighted average number of common stockequivalents outstanding for the period determined using the treasury-stockmethod.  For purposes of thiscalculation, convertible preferred stock, 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.

 

66

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)**

 
| ** **                                                                                                  | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                                  | ** ** | **2007**                                    | ** **  | **2006** | ** ** | **2005** | ** ** |
| **Historical**                                                                                              |       |                                        |        |   |   |   |   |
| Numerator:                                                                                                  |       |                                        |        |   |   |   |   |
| Net loss attributable to common  stockholders                                                               |       | $                                           | (46,139,177 | ) | $ | (12,231,102 | ) | $ | (7,668,260 | ) |
| Denominator:                                                                                                |       |                                        |        |   |   |   |   |
| Weighted average common shares outstanding                                                                  |       | 21,715,332                                  |        | 2,542,893 |   | 2,383,435 |   |
| Net loss attributable to common  stockholders per share — basic and diluted                            |       | $                                           | (2.12       | ) | $ | (4.81 | ) | $ | (3.22 | ) |
| **Historical outstanding anti-dilutive  securities not included in diluted net loss per share calculation** |       |                                        |        |   |   |   |   |
| Preferred stock (as converted)                                                                              |       | —                                      |        | 12,223,548 |   | 12,261,701 |   |
| Preferred stock warrants (as converted)                                                                     |       | —                                      |        | 22,705 |   | 30,705 |   |
| Common stock options                                                                                        |       | 1,615,317                                   |        | 1,496,945 |   | 1,455,022 |   |
| Common stock warrants                                                                                       |       | 13,845                                      |        | 1,144,604 |   | 1,155,681 |   |
|                                                                                                        |       | 1,629,162                                   |        | 14,887,802 |   | 14,903,109 |   |

 

*RecentAccounting Pronouncements*

 

In September 2006, theFinancial Accounting Standards Board, or FASB, issued FASB Statement No. 157,“*Fair Value Measurements*”(“SFAS 157”), which defines fair value, establishes a framework formeasuring fair value under generally accepted accounting principles, andexpands disclosures about fair value measurements.  SFAS 157 applies to other accountingpronouncements that require or permit fair value measurements.  The new guidance is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andfor interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS 157, butdoes not believe the adoption of this standard will have a material impact onits consolidated financial statements.

 

In February 2007, theFASB issued SFAS No. 159, “*The FairValue Option for Financial Assets and Liabilities”* (“SFAS 159”)*.*SFAS 159 permits entities to choose to measure many financial instruments andcertain other items at fair value. SFAS 159 will be effective for the Company’sfiscal year beginning after November 15, 2007. Early adoption ispermitted. The Company is currently evaluating the impact of SFAS 159, butdoes not believe the adoption of this standard will have a material impact onits financial position, cash flows, and results of operations.

 

In July 2007, the FASBreleased EITF Issue 07-3*, “Accounting forNonrefundable Advance Payments for Goods or Services to be used in FutureResearch and Development Activities”*(“ EITF 07-3”).  In accordance with EITF 07-3, nonrefundableadvance payments for goods or services to be received in the future for use inresearch and development activities should be deferred and capitalized. Thecapitalized amounts should be expensed as the related goods are delivered orthe services are performed. EITF 07-3 is effective for new contracts enteredinto during fiscal years beginning after December 15, 2007, includinginterim periods within those fiscal years. The Company’s current accountingtreatment is consistent with EITF 07-3 and as such this EITF is not expected tohave an impact on its financial position, cash flows, and results ofoperations.

 

In December 2007, theFASB issued Statement of Financial Accounting Standards, or SFAS No. 160,*“Noncontrolling Interests in ConsolidatedFinancial Statements — An Amendment of ARB No. 51”*(“SFAS 160”).  SFAS 160requires the recognition of a noncontrolling interest, sometimes calledminority interest, as equity in the consolidated financial statements andseparate from the parent’s equity. The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income on the faceof the income statement. SFAS 160 clarifies that changes in a parent’sownership interest in a subsidiary that do not result in deconsolidation areequity transactions if the parent retains its controlling financial interest.In addition, this statement requires that a parent recognize a gain or loss innet income when a subsidiary is deconsolidated. Such gain or loss will bemeasured using the fair value of the noncontrolling equity investment on thedeconsolidation date. SFAS 160 also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterest. SFAS 160 is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008.Earlier adoption is prohibited. The Company has not determined the impact, ifany, in adopting this standard may have on its financial position, cash flows,and results of operations.

 

67

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**2.****            ****Short-Term Investments**

 

Investment securities areclassified as available-for-sale and include high grade auction ratesecurities, or ARS. The ARS have either a stated or a perpetual maturity thatis structured with short-term holding periods. At the end of each holdingperiod, a new auction is held to determine the rate or dividend for the nextholding period. The Company can sell or continue to hold securities at par ateach auction. In order to sell ARS, the auction needs to be successful wherebydemand in the marketplace exceeds the supply. The length of each holding periodis determined at the original issuance of the ARS. Typically, ARS holdingperiods range from 7 to 63 days, but occasionally the Company invests inARS with longer reset dates. As of December 31, 2007, the Company held$14.2 million of ARS with stated maturity dates ranging from 2022 to 2037 andreset dates primarily less than 30 days.

 

The following is a summaryof the Company’s investment securities, all of which are classified as available-for-sale.Determination of estimated fair value is based upon quoted market prices.

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

 
| ** **             | ** ** | **December 31, 2006** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **Gross  Amortized Cost**  | ** ** | **Gross  Unrealized Gains** | ** ** | **Gross  Unrealized Losses** | ** ** | **Market Value** | ** ** |
| Government obligations |       | $                               | 15,263,259 |   | $ | — |   | $ | (44,399 | ) | $ | 15,218,860 |   |
|                        |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Investments in netunrealized loss positions as of December 31, 2007 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** | ** ** |
| Commercial paper          |       | 3                               |       | $                                                                         | 4,475,505  |                                                                         | $          | (650                                 | )          | $ | — |   | $ | — |   | $ | 4,475,505 |   | $ | (650 | ) |
| Certificate of deposit    |       | 3                               |       | 3,399,598                                                                 |       | (2,234                                                                       | )          | —                               |       | — |   | 3,399,598 |   | (2,234 | ) |
| Corporate debt securities |       | 11                              |       | 10,617,187                                                                |       | (43,527                                                                      | )          | —                               |       | — |   | 10,617,187 |   | (43,527 | ) |
| Foreign debt securities   |       | 3                               |       | 2,305,696                                                                 |       | (3,479                                                                       | )          | —                               |       | — |   | 2,305,696 |   | (3,479 | ) |
| Other Securities          |       | 1                               |       | 1,492,380                                                                 |       | (5,871                                                                       | )          | —                               |       | — |   | 1,492,380 |   | (5,871 | ) |
|                      |       | 21                              |       | $                                                                         | 22,290,366 |                                                                         | $          | (55,761                              | )          | $ | — |   | $ | — |   | $ | 22,290,366 |   | $ | (55,761 | ) |
|                           |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortized cost andestimated fair value of securities available-for-sale at December 31, 2007,by contractual maturity, are as follows:

 
| ** **                           | ** ** | **Amortized Cost** | ** ** | **Estimated Fair Value** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| Due in one year or less              |       | $                       | 36,953,863 |                               | $          | 36,931,288 |   |
| Due after one year through two years |       | 18,692,466              |       | 18,682,497                         |       |
|                                 |       | $                       | 55,646,329 |                               | $          | 55,613,785 |   |

 

The Company believes thatthe decline in value is temporary and primarily related to the change in marketinterest rates since purchase.  TheCompany anticipates full recovery of amortized cost with respect to thesesecurities at maturity or sooner in the event of a change in the marketinterest rate environment.

 

68

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**3.****                                     ****Property and Equipment**

 

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

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Equipment                                       |       | $                     | 3,016,275  |   | $ | 3,033,589 |   |
| Furniture and fixtures                          |       | 279,923               |       | 292,688 |   |
| Leasehold improvements                          |       | 1,368,179             |       | 1,268,987 |   |
| Computer equipment and software                 |       | 224,802               |       | 197,793 |   |
|                                            |       | 4,889,179             |       | 4,793,057 |   |
| Less accumulated depreciation and  amortization |       | (4,183,805            | )          | (4,048,493 | ) |
|                                            |       | $                     | 705,374    |   | $ | 744,564 |   |

 

Depreciation of property andequipment is computed using the straight-line method over the estimated usefullives of the assets, which typically is five years.  Leasehold improvements and assets acquiredunder capital leases are amortized over their estimated useful life or therelated lease term, whichever is shorter. The depreciation of equipment under capital leases is included indepreciation expense.  As of December 31,2007 and 2006, the Company did not have any capital leases.

 

**4.****             ****Note Receivable from Officer**

 

Note receivable from officerof $262,500 as of December 31, 2005, represents an uncollateralized loanto an officer for housing and relocation assistance with an original balance of$300,000.  With the renewal of the officer’s employment agreement in June 2005,the board of directors agreed to forgive the loan ratably over four yearssubject to the officer being an employee of the Company.  In November 2006,the loan and the related interest were forgiven.

 

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

 

Accrued expenses consistedof the following:

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Accrued preclinical and clinical expenses |       | $                     | 3,726,891  |   | $ | 2,566,433 |   |
| Accrued research services                 |       | 172,754               |       | 132,367 |   |
| Accrued legal fees                        |       | 64,007                |       | 232,280 |   |
| Accrued salaries, wages and benefits      |       | 980,448               |       | 206,469 |   |
| Other accrued liabilities                 |       | 53,925                |       | 172,650 |   |
|                                      |       | $                     | 4,998,025  |   | $ | 3,310,199 |   |

 

**6.     Revenue and Other Collaborative Agreements**

 

*Revenuesfrom Research Grants*

 

Since 2003, the Company hasreceived Small Business Innovative Research (“SBIR”) grants from U.S.government agencies totaling $3,333,213, including three SBIR grants receivedin 2005 totaling $1,454,827 and two SBIR grants received in 2006 and 2007totaling $1,578,386.  The 2007 grant isrenewable each year until August 2010 to a maximum of $3 million over athree year funding period.  The purposeof the grants was to support research on certain antibiotic and osteoarthritisdrug candidates being developed by the Company and to conduct supplementarystudies to the ongoing OPT-80 clinical trials. For the years ended December 31, 2007, 2006 and 2005, the Companyrecognized revenues related to these grants of $338,735, $493,960 and$1,097,024, respectively.  Through 2007,the Company recognized revenues of $2,188,932 related to these grants.** **Asof December 31, 2007, $1,095,647 of revenue is remaining to be recognizedunder the grants.

 

In 2003, Optimer received agrant in the amount of $721,150 from the Philip Morris External ResearchProgram (“Philip Morris”) to support development of a carbohydrate-based cancerimmunotherapy.  The research grant wasfor a

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

three-year research periodand was subject to renewal annually by Philip Morris.  Optimer retained all rights to the data andnovel glycosylation methods developed pursuant to research funded by the grant.  For the years ended December 31, 2007,2006 and 2005, the Company recognized revenue of $0, $182,804 and $239,416respectively, under the grant.

 

*Revenuesfrom Collaborative Research Agreements*

 

For the years ended December 31,2007, 2006 and 2005, the Company recognized revenues of $433,555, $256,326 and$791,548, respectively, under collaborative research agreements with largepharmaceutical companies and research institutions.

 

In May 2003, Optimerentered into a manufacturing supply agreement with the Sloan-KetteringInstitute for Cancer Research (“SKI”) to manufacture certain conjugates for SKIin support of SKI’s on-going U.S. Phase 2 clinical trials for a productcandidate to treat breast cancer. According to the terms of the agreement, Optimer was eligible to receiveup to $1,000,000 over the term of the agreement, if the Company met themanufacturing performance obligations contained in the agreement.  Through 2004, the Company received anon-refundable advance payment of $250,000 under the agreement, all of whichhas been recognized ratably over the agreement term, as research contractrevenue, including $14,705 and $172,795 in 2005 and 2004, respectively.  In 2004, the Company informed SKI that itintended to terminate the agreement after completion of the first $250,000milestone payment under the contract.  In2005, the Company achieved the first milestone and accordingly recognized$250,000 of research contract revenue and terminated the agreement.

 

In June 2005, Optimerentered into a binding letter agreement establishing a development and licenseagreement with a pharmaceutical company to develop one or more pharmaceuticalproducts using Optimer’s proprietary carbohydrate synthesis technology.  Optimer was reimbursed at an agreed upon ratefor research services performed under the contract.  The pharmaceutical company was responsible,at its own expense, for carrying out pre-clinical tests, animal tests, humanclinical trials, marketing and commercializing any product candidates pursuedunder the terms of the agreement.  Theagreement included milestone and royalty payments to Optimer assuming thesuccessful development and commercialization of a product candidate.  In November 2006, the collaboration wasterminated. Through December 31, 2006, Optimer recognized $678,168 of researchrevenue under the terms of the agreement.

 

*OtherCollaborative Agreements*

 

In April 2005, theCompany entered into a collaboration agreement with Par****to develop and commercialize OPT-80.  The Company granted to Par an exclusiveroyalty bearing license, with the right to sublicense, promote, market,distribute and sell OPT-80 in a territory composed of the United States, Canadaand Puerto Rico, with an option to extend the territory to include Israel.  The Company retained all other rights toOPT-80 in the rest of the world.  At thetime of execution of this collaboration agreement, Par also purchased $12.0million of the Company’s Series C Preferred Stock.

 

In January 2007, theCompany entered into a prospective buy-back agreement with Par which providedus with an option to terminate the collaboration and repurchase the rights todevelop and commercialize OPT-80 in North America and Israel.

 

In February 2007, theCompany elected to terminate the collaboration agreement with Par, exercisedits rights under the prospective buy-back agreement to repurchase Par’s rightto develop and commercialize OPT-80 in North America and Israel. The Companynow holds worldwide rights to OPT-80.  Inconnection with the exercise of the rights under the prospective buy-backagreement, the Company paid Par a one-time $20.0 million termination fee and$1.9 million for OPT-80 clinical supply material and active pharmaceuticalingredient in 2007.  The Company is alsoobligated to pay Par a one-time $5.0 million milestone payment, a potential$3.0 million prepayment to Biocon, subject to future set-offs following theassignment, if any, by Par to the Company of its supply agreement with Biocon,a 5% royalty on net sales by the Company, its affiliates or its licensees ofOPT-80 in North America and Israel, and a 1.5% royalty on net sales by theCompany or its affiliates of OPT-80 in the rest of the world.  The one-time $5.0 million milestone paymentshall be paid after the earliest to occur of (i) the successful completionby the Company of its pivotal Phase 3 trial for OPT-80, (ii) theCompany’s grant to a third party of the rights to OPT-80 or (iii) thesubmission to the FDA of an NDA for OPT-80. In addition, in the event the Company licenses its right to marketOPT-80 in the rest of the world, the Company will be required to pay Par a6.25%

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)**

 

royalty on net revenues received by it related to OPT-80.  The Company is 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 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 ASEAN countries, with the right to sublicense, theCompany’s patent and know-how related to the Company’s macrolide and ketolideantibacterial program.  As partialconsideration for granting Cempra the licenses, the Company obtained commonstock of Cempra and the Company assigned no value to such shares.  The Company will receive milestone paymentsas product candidates are developed and/or co-developed by Cempra, in additionto milestone payments based on certain sublicense revenue.  The aggregate potential amount of suchmilestone payments is not capped and, based in part on the number of productsdeveloped under the agreement, may exceed $24.5 million.  The Company will also receive royaltypayments based on a percentage of net sales of licensed products.  The Company will receive milestone paymentsas product candidates are developed and/or co-developed by Cempra and will betriggered upon the completion of certain clinical development milestones and incertain instances, regulatory approval of products.  The Company will also receive royaltypayments based on a percentage of net sales of licensed products.  In consideration of the foregoing, Cemprawill receive milestone payments from the Company in the amount of $1.0 millionfor each of the first two products the Company develops which receiveregulatory approval in ASEAN countries, as well as royalty payments on the netsales of such products.  The researchterm of this agreement continues until the earlier of the Company’s completionof all research activities set forth in the work plan under the agreement, or March 2008.  Subject to certain exceptions, on acountry-by-country basis, the general terms of this agreement continue untilthe later of: (i) the expiration of the last to expire patent rights of acovered product in the applicable country or (ii) ten years from the firstcommercial sale of a covered product in the applicable country.  Either party may terminate the agreement inthe event of a material breach by the other party, subject to prior notice andthe opportunity to cure.  Either partymay also terminate the agreement for any reason upon 30 days’ prior writtennotice provided that all licenses granted by the terminating party to thenon-terminating party shall survive upon the express election of thenon-terminating party.

 

In June 2004, theCompany entered into a license agreement with Nippon Shinyaku, Co., Ltd.(“Nippon Shinyaku”).  Under the terms ofthe agreement, the Company acquired the non-exclusive right to import andpurchase Prulifloxacin, and the exclusive right (with the right to sublicense),within the United States, to develop, make, use, offer to sell, sell andlicense products suitable for consumption by humans containing Prulifloxacin.  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 in the United States. Under the agreement, the Company pays Nippon Shinyaku for certainmaterials.  If Nippon Shinyaku is unableto supply the Company with the contracted amount of Prulifloxacin, then NipponShinyaku will grant to the Company a non-exclusive, worldwide license to makeor have made Prulifloxacin, in which event the Company will owe Nippon Shinyakua royalty based on the amount of net sales of Prulifloxacin generated by theCompany and the Company’s subsidiaries. Additionally, the Company will owe Nippon Shinyaku certain royaltiesbased on the amount of net sales of Prulifloxacin less the amount ofPrulifloxacin we buy from Nippon Shinyaku. Either party may terminate the agreement 60 days after giving notice ofa material breach which remains uncured 60 days after written notice.  If not terminated earlier, the agreement willterminate upon the later of ten years from the date of the first commercialsale of Prulifloxacin in the United States or until the date on which the lastvalid patent claim relating to Prulifloxacin expires in the United States.

 

In July 2002, theCompany entered into a license agreement with SKI, to acquire, together withcertain nonexclusive licenses, exclusive, worldwide licensing and sublicensingrights to certain patented and patent-pending carbohydrate-based cancerimmunotherapies.  As partialconsideration for the licensing rights, the Company paid to SKI a one-time feeconsisting of both cash and 55,383 shares of its common stock.  Under the agreement, which was amended in June 2005,the Company owes SKI 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 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 the Company, and not a sublicensee,achieves such milestones.  The Companyalso owes SKI royalties based on net sales generated from the licensed productsand income the Company sources from its sublicensing activities, which royaltypayments are credited against a minimum annual royalty payment the Company owesto SKI during the term of the agreement. The term of the agreement continues until the later of July 31,2017, or the expiration of the last to expire of the patents licensed underthis agreement, unless the agreement is earlier terminated.  The agreement can be terminated by

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

SKI for a variety of reasons, including (i) upon 60 days’ noticein the event the Company fails to meet a development milestone specified in theagreement or (ii) upon 30 days’ notice, in the event the Company fails topay any licensing fees, royalties or patent expenses due under the agreementwithin 30 days of the due date and thereafter fail to pay such deficit in-fullwithin the 30-day notice period.

 

In July 1999, theCompany acquired exclusive, worldwide rights to 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, the Company paid TSRI license fees consistingof an aggregate of 239,996 shares of its common stock with a deemed aggregatefair market value of $46,400, as determined on the dates of each suchpayment.  Additionally, under eachagreement, the Company owes TSRI royalties based on net sales by the Company,its affiliates and sublicensees of the covered products and royalties based onrevenue the Company generates from sublicenses granted pursuant to theagreements.  For the first licensedproduct under each of the four agreements, the Company will also owe TSRIpayments upon achievement of certain milestones.  In three of the four TSRI agreements, themilestones are the initiation of a Phase 2 trial or its foreignequivalent, the filing of an NDA or its foreign equivalent and governmentmarketing and distribution approval.  Inthe remaining TSRI agreement, the milestones are the successful completion of aPhase 3 trial or its foreign equivalent, the filing of an NDA or itsforeign equivalent and government marketing and distribution approval.  The aggregate potential amount of milestonepayments the Company may be required to pay TSRI under all four TSRI agreementsis approximately $14.0 million.  EachTSRI agreement terminates in part as follows: (i) with respect to eachproduct which utilizes patent rights licensed under the agreement, on acountry-by-country basis concurrently with the expiration of the last to expireof the applicable patent rights, (ii) with respect to each product whichutilizes technology licensed under the agreement but which does not utilizepatent rights also licensed thereunder, 15 years after the date of the firstcommercial sale of the product in each country and (iii) with respect tosoftware licensed under the 1999 OPopS agreement, 75 years after the date theapplicable copyright is filed in the United States.

 

**7.     Commitments**

 

*Leases*

 

The Company leases officeand research facilities under operating lease agreements that extend through November 2011.  The Company has recorded deferred rent of$281,894 and $292,384 as of December 31, 2007 and 2006, respectively, inconjunction with one of the lease agreements.

 

At December 31, 2007,annual minimum rental payments due under the Company’s operating leases are asfollows:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2008                                         |       | $          | 783,950    |   |
| 2009                                         |       | 793,849    |       |
| 2010                                         |       | 683,255    |       |
| 2011                                         |       | 626,317    |       |
| Total minimum lease payments                 |       | $          | 2,887,371  |   |

 

Rent expense was $768,854,$837,551 and $817,813, for the years ended December 31, 2007, 2006, and2005, respectively.

 

*ContractResearch Organization Purchase Orders*

 

The Company has contractedwith a contract research organization (“CRO”), whereby the CRO will provideclinical research services to the Company for the OPT-80 Phase 3 clinicaltrials and Prulifloxacin Phase 3 clinical trials.  At December 31, 2007, the Company hadissued purchase orders totaling $33,954,753 for these services, $20,388,054 and$9,757,661 of which were issued in 2006 and 2007, respectively.  As of December 31, 2007, the Company had paid$12,533,810 related to these purchase orders. The Company can terminate the service agreement at any time upon 60days’ prior written notice to the CRO.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**8.     Redeemable Convertible Preferred Stock andStockholders’ Equity (Deficit)**

 

*PrivatePlacement*

 

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.

 

*InitialPublic Offering*

 

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

 

*TreasuryStock*

 

In September 2006, theCompany reacquired 46,153 shares of previously issued common stock at $2.17 pershare from a former executive officer. The shares were recorded as treasury stock at their cost.  The 46,153 shares of common stock remain in treasuryas of December 31, 2007.

 

*Warrants*

 

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

 

*EquityCompensation Plans*

 

*StockOptions*

 

In November 1998, theCompany adopted the 1998 Stock Plan (the “1998 Plan”).  Upon the completion of the Company’s initialpublic offering in February 2007, the 1998 Plan was terminated and noadditional grants will be issued from this plan.  In December 2006, the Company’s board ofdirectors approved the 2006 Equity Incentive Plan (the “2006 Plan”).  The 2006 Plan provides for the grant ofincentive stock options, within the meaning of Section 422 of the InternalRevenue Code of 1986, as amended, to the Company’s employees and any parent andsubsidiary corporations’ employees, and for the grant of nonstatutory stockoptions, restricted stock, restricted stock units, stock appreciation rights,performance units and performance shares to the Company’s employees, directorsand consultants and any parent and subsidiary corporations’ employees andconsultants. The Company initially reserved a total of 2,000,000 shares of itscommon stock for issuance pursuant to the 2006 Plan.  In addition, the 2006 Plan provides for annualincreases in the number of shares available for issuance thereunder on thefirst day of each fiscal year, beginning with the Company’s 2008 fiscal year,equal to the lesser of (i) 5% of the outstanding shares of the Company’scommon stock on the last day of the immediately preceding fiscal year; (ii) 750,000shares; or (iii) such other amount as the board of directors maydetermine. Pursuant to this provision, 750,000 additional shares of theCompany’s common stock were reserved for issuance under the 2006 Plan on January 1,2008.  Under the 2006 Plan, the exerciseprice of options granted must at least be equal to the fair market value of theCompany’s common stock on the date of grant. The term of an incentive stock option may not exceed ten years from thedate of grant (five years for a 10% stockholder).  Options generally vest over a period of fouryears.  The 2006 Plan is administered bythe compensation committee of the Company’s board of directors.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

Following is a summary ofstock option activity:

 
| ** **                           | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|--------------------------------------|------------|-------------|------------|---------------------------------------------|------------|
| Balance as of December 31, 2004 |       | 1,148,631   |       | $                                           | 0.69       |   |
| Granted                              |       | 411,244     |       | $                                           | 1.08       |   |
| Exercised                            |       | (13,057     | )          | $                                           | 0.56       |   |
| Canceled                             |       | (91,796     | )          | $                                           | 0.98       |   |
| Balance as of December 31, 2005 |       | 1,455,022   |       | $                                           | 0.78       |   |
| Granted                              |       | 367,517     |       | $                                           | 2.08       |   |
| Exercised                            |       | (279,163    | )          | $                                           | 0.52       |   |
| Canceled                             |       | (46,431     | )          | $                                           | 0.71       |   |
| Balance as of December 31, 2006 |       | 1,496,945   |       | $                                           | 1.17       |   |
| Granted                              |       | 310,353     |       | $                                           | 8.84       |   |
| Exercised                            |       | (182,385    | )          | $                                           | 0.96       |   |
| Canceled                             |       | (9,596      | )          | $                                           | 3.70       |   |
| Balance as of December 31, 2007 |       | 1,615,317   |       | $                                           | 2.65       |   |

 

The aggregate intrinsicvalue of options exercised during the year ended December 31, 2007 wasapproximately $1,070,930.  The aggregateintrinsic value of options outstanding and options exercisable as of December 31,2007 was approximately $7,673,553 and $5,759,375, respectively.

 

The following tablesummarizes information concerning outstanding and exercisable stock options asof December 31, 2007:

 
| ** **          | ** ** | **December 31, 2007**                                       | ** ** |
|---------------------|------------|-----------------------------------------------------------------------|------------|
| ** **          | ** ** | **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               |       | 58,460                                                                |       | 3.0 |   | $ | 0.22 |   | 58,460 |   | $ | 0.22 |   |
| $0.65               |       | 378,254                                                               |       | 4.0 |   | $ | 0.65 |   | 378,254 |   | $ | 0.65 |   |
| $1.08               |       | 543,397                                                               |       | 7.2 |   | $ | 1.08 |   | 395,389 |   | $ | 1.08 |   |
| $2.17               |       | 343,456                                                               |       | 8.6 |   | $ | 2.17 |   | 128,598 |   | $ | 2.17 |   |
| $7.10-$10.00        |       | 291,750                                                               |       | 9.4 |   | $ | 9.21 |   | — |   | $ | — |   |
| $0.22-$10.00        |       | 1,615,317                                                             |       | 7.0 |   | $ | 2.65 |   | 960,701 |   | $ | 1.01 |   |

 

As of December 31,2007, 1,615,317 options were outstanding at exercise prices ranging from $0.22to $10.00 per share.  The weighted averageremaining contractual life of options outstanding at December 31, 2007 was7.0 years with a weighted average exercise price of $2.65 per share.  Of the options outstanding, options topurchase up to 960,701 shares were vested as of December 31, 2007, with aweighted average remaining contractual life of 5.8 years and a weighted averageexercise price of $1.01 per share, while options to purchase up to 654,616shares were unvested.

 

*Share-BasedCompensation*

 

Effective January 1,2006, the Company adopted the provisions of SFAS No. 123(R) using themodified prospective-transition-method and therefore, prior period results willnot be restated.  SFAS No. 123(R) supersedesAccounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB Opinion 25”), and related interpretations, and revises guidance in SFAS No. 123,*Accounting for Stock-Based Compensation*(“SFAS 123”).  Under this transitionmethod, the compensation costs related to all equity instruments granted priorto, but not yet vested as of, the adoption date of SFAS 123(R) arerecognized based on the grant-date fair value which is estimated in accordancewith the original provisions of SFAS 123. Compensation costs related to all equity instruments granted after January 1,2006 are recognized at the grant-date fair value of the awards in accordancewith the provisions of SFAS 123(R). Additionally, under the provisions of SFAS 123(R), the Company isrequired to include an estimate of the value of the awards that will beforfeited in calculating compensation costs, which is recognized over therequisite service period of the awards on a straight-line basis.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

During the year ended December 31,2007, the Company recorded $1,244,022, or $0.06 per share, of stock-basedcompensation expense related to all stock options grants, stock awards andemployee stock purchases as a result of the adoption of SFAS 123(R).  Of this amount, the Company allocated$307,481, $257,218 and $679,323 to research and development, marketing andgeneral and administrative expenses, respectively, based on the department towhich the associated employee reported. No related tax benefits of the stock-based compensation expense havebeen recognized since the inception of the Company.

 

The Black-Scholesoption-pricing model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fully transferable.  In addition, the Black-Scholes option-pricingmodel requires the input of subjective assumptions, including the expectedstock price volatility.  The followingtable shows the assumptions used to compute stock-based compensation expensefor the stock options granted during the year ended December 31, 2007using the Black-Scholes option pricing model:

 
| **Employee Stock Options** | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------|------------|-------------|------------|------------|------------|----------|------------|
| Risk-free interest rate              |       | 3.88%-4.80  | %          | 4.75%-4.80 | %          | 4.00     | %          |
| Dividend yield                       |       | 0.00        | %          | 0.00       | %          | 0.00     | %          |
| Expected life of options (years)     |       | 5.27-6.08   |       | 6.08       |       | 5.00     |       |
| Volatility                           |       | 60.47-65.82 | %          | 65.82      | %          | 70.00    | %          |

 

The risk-free interest rateassumption was based on the United States Treasury’s rates for U.S. Treasuryzero-coupon bonds with maturities similar to those of the expected term of theaward being valued.  The assumed dividendyield was based on the Company’s expectation of not paying dividends in theforeseeable future.  The weighted averageexpected life of options was calculated using the simplified method as prescribedSAB No. 107, *Share-Based Payment*(“SAB 107”).  This decision wasbased on the lack of relevant historical data due to the Company’s limitedhistory.  In addition, due to theCompany’s limited historical data, the estimated volatility also reflects theapplication of SAB 107, incorporating the historical volatility ofcomparable companies whose share prices are publicly available.

 

Based on these assumptions,the weighted average grant-date fair values of stock options granted during the****year ended December 31, 2007 was$8.84****per share.

 

As of December 31,2007, the total unrecognized compensation expense related to stock options wasapproximately $7,257,372 and the related weighted-average period over which itis expected to be recognized is approximately 6.83 years.

 

Prior to January 1,2006, the Company applied the intrinsic-value-based method of accountingprescribed by APB Opinion 25, and related interpretations including FinancialAccounting Standards Board (“FASB”) Interpretation No. 44, *Accounting for Certain Transactions involving StockCompensation — an interpretation of APB Opinion No. 25*, toaccount for its equity-based awards to employees and directors.  Under this method, if the exercise price ofthe award equaled or exceeded the fair value of the underlying stock on themeasurement date, no compensation expense was recognized.  The measurement date was the date on whichthe final number of shares and exercise price were known and was generally thegrant date for awards to employees and directors.

 

Equity instruments issued tonon-employees are recorded at their fair value as determined in accordance withSFAS 123(R) and EITF Issue No. 96-18, *Accounting for Equity Instruments That are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling Goods and Services*,(“EITF 96-18”) and are periodically revalued as the equity instrumentsvest and are recognized as expense over the related service period.  Through December 31, 2007, the Companyissued options in conjunction with various consulting agreements to purchase290,764 shares of common stock, at exercise prices ranging from $0.22 to $1.08per share.  The options generally vestover a period of up to four years. Expense related to options granted to consultants, as determined underSFAS 123 and EITF 96-18, was $34,720, $176,974 and $43,997, for theyears ended December 31, 2007, 2006, and 2005, respectively.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

*Stock Awards*

 

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

 

*EmployeeStock Purchase Plan*

 

In connection with theCompany’s initial public offering in February 2007, it established theemployee stock purchase plan.  TheCompany’s board of directors adopted the employee stock purchase plan 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.

 

The initial offering date ofthe purchase plan was February 15, 2007 and the first purchase occurred onNovember 15, 2007.  As of  December 31, 2007, there were 22,683shares of common stock issued and 177,317 shares remained available forissuance under the purchase plan.

 

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

 
| **Employee Stock Options** | ** ** | **2007**    | ** ** |
|--------------------------------------|------------|-------------|------------|
| Risk-free interest rate              |       | 3.58%-4.64  | %          |
| Dividend yield                       |       | 0.00        | %          |
| Expected life (years)                |       | —      |       |
| Volatility                           |       | 45.33-50.66 | %          |

 

As of December 31,2007, the Company recorded stock-based compensation expense of approximately$63,681 related to the purchase plan.

 

**9.     Income Taxes**

 

On July 13, 2006, the FASBissued Financial Interpretation (“FIN”) No. 48, Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109. FIN No. 48clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS No. 109, Accounting forIncome Taxes, and prescribes a recognition threshold and measurement attributesfor financial statement disclosure of tax positions taken or expected to betaken on a tax return. Under FIN No. 48, the impact of an uncertain income taxposition on the income tax return must be recognized at the largest amount thatis more-likely-than-not to be sustained upon audit by the relevant taxingauthority. An uncertain income tax position will not be recognized if it hasless than a 50% likelihood of being sustained. Additionally, FIN No. 48 providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN No. 48 is effective forfiscal years beginning after December 15, 2006. 

 

The Company adopted theprovisions of FIN No. 48 on January 1, 2007. There were no unrecognized taxbenefits as of the date of adoption and there are no unrecognized tax benefitsincluded in the balance sheet at December 31, 2007 that would, if recognized,affect the effective tax rate. 

 

The Company’s practice is torecognize interest and/or penalties related to income tax matters in income taxexpense. The Company had $0 accrued for interest and penalties on the Company’sbalance sheets at December 31, 2007 and 2006 and has recognized $0 in interestand/or penalties in the statement of operations for the year ended December 31,2007. 

 

76

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

The Company issubject to taxation in the United States, California and various foreignjurisdictions. The Company’s tax years for 1999 and forward are subject to examination by the Federal and Californiatax authorities due to the carryforward of unutilized net operating losses andresearch and development credits. 

 

The Company iscurrently undergoing a Section 382/383 analysis regarding the limitationof net operating loss and research and development credit carryforwards. Untilthis analysis has been completed the Company has removed the deferred taxassets for net operating losses of $34,796,000 and research anddevelopment credits of $2,759,000 generated through 2007 from its deferred taxasset schedule and has recorded a corresponding decrease to its valuationallowance. When this analysis is finalized, the Company plans to update itsunrecognized tax benefits under FIN No. 48. The Company expects theSection 382/383 analysis to be completed within the next 12 months.Due to the existence of the valuation allowance, future changes in theCompany’s unrecognized tax benefits will not impact the Company’s effective taxrate. 

 

AtDecember 31, 2007, the Company had Federal, California and foreign incometax net operating loss carryforwards of approximately $87,611,000,86,350,000 and 1,1976,000, respectively. The Federal and California tax losscarryforwards will begin expiring in 2020 and 2012 resprectively, unlesspreviously utilized. The foreign losses originate from the Compnay’s Taiwansubsidiary and expire five years after origination.  In addition, the Company has Federal andCalifornia research tax credit carryforwards of $1,842,000 and $1,287,000 million,respectively. The Federal research and development credit carryforwards willbegin to expire in 2020 unless previously utilized. The California research anddevelopment credit carryforwards will carry forward indefinitely untilutilized. The Company also has California state manufacturer’s investment taxcredit carryforwards of $103,000 which will begin to expire in 2011 unlesspreviously utitlized.

 

Significant components of the Company’s deferred tax assets as ofDecember 31, 2007 and 2006 are listed below. A valuation allowance of $680,000and $19,986,000 at December 31, 2007 and 2006, respectively, has beenrecognized to offset the net deferred tax assets as realization of such assetsis uncertain. Amounts are shown as of December 31, of the respectiveyears: 

 
| ** **                                   | ** ** | **2007** | ** ** | **2006**    | ** ** |
|----------------------------------------------|------------|----------|------------|-------------|------------|
| Deferred tax  assets:                        |       |     |       |        |       |
| Net  operating loss carryforwards            |       | $        | —     |        | $          | 17,170,000 |   |
| Tax credits                                  |       | —   |       | 2,217,000   |       |
| Other, net                                   |       | 680,000  |       | 599,000     |       |
| Total  deferred tax assets                   |       | 680,000  |       | 19,986,000  |       |
| Valuation  allowance for deferred tax assets |       | (680,000 | )          | (19,986,000 | )          |
|                                         |       | $        | —     |        | $          | — |   |

 

As of December 31,2007, the Company had federal, state and foreign net operating losscarryforwards of approximately $87,611,000, $86,350,000 and $1,976,000,respectively.  The federal and state taxloss carryforwards will begin expiring in 2020 and 2012, respectively, unlesspreviously utilized.  The foreign lossesoriginate from the Company’s subsidiary in Taiwan.  The losses from the Company’s subsidiary inTaiwan expire five years after origination. The Company also had federal research tax credit carryforwards ofapproximately $1,842,000, which will begin to expire in 2020, unless previouslyutilized.  As of December 31, 2007,the Company had California state research tax credit carryforwards ofapproximately $1,287,000, which do not expire and California statemanufacturer’s investment tax credit carryforwards of approximately $103,000,which will begin to expire in 2011, unless previously utilized.

 

Pursuant toSections 382 and 383 of the Internal Revenue Code, annual use of theCompany’s net operating loss and credit carryforwards may be limited in theevent of a cumulative change in ownership of more than 50% within a three-yearperiod.

 

**10.  Employee Benefit Plan**

 

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 31,2007 and 2006, the Company had not elected to make any contributions to the 401(k) plan.

 

**11.  Subsequent Event**

 

As of December 31,2007, the Company held $14.2 million of ARS with stated maturity dates rangingfrom 2022 to 2037 and reset dates primarily less than 30 days.   The recent negative conditions in the globalcredit markets have prevented some investors from liquidating their holdings,including their holdings of ARS. As of March 21, 2008, the Company heldtwo ARS, representing approximately $1.5 million.  There was insufficient demand at auction forthese two ARS. As a result,

 

77

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

these affected securitiesare currently not liquid, and the Company could be required to hold them untilthey are redeemed by the issuer or to maturity. In the event the Company needs to access the funds that are in anilliquid state, it will not be able to do so without a loss of principal, untila future auction on these investments is successful, the securities areredeemed by the issuer or they mature. At this time, management has notobtained sufficient evidence to conclude that these investments are impaired orthat they will not be settled in the short term, although the market for theseinvestments is presently uncertain. If the credit ratings of the securityissuers deteriorate and any decline in market value is determined to beother-than-temporary, the Company would be required to adjust the carryingvalue of the investment through an impairment charge.

 

78

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**Item 9.  Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.**

 

None.

 

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

 

**Evaluation of Disclosure Controls and Procedures**

 

As of the end of the period covered by this report, an evaluation wasperformed under the supervision and with the participation of our management,including our chief executive officer and chief financial officer(collectively, our “certifying officers”), of the effectiveness of the designand operation of our disclosure controls and procedures. Based on theirevaluation, our certifying officers concluded that these disclosure controlsand procedures are effective in providing reasonable assurance that theinformation required to be disclosed by us in our periodic reports filed withthe SEC is recorded, processed, summarized and reported within the time periodsspecified by the SEC’s rules and SEC reports.

 

We believe that a controls system, no matter how well designed andoperated, is based in part upon certain assumptions about the likelihood offuture events, and therefore can only provide reasonable, not absolute,assurance that the objectives of the controls system are met, and no evaluationof controls can provide absolute assurance that all control issues and instancesof fraud, if any, within a company have been detected.

 

In addition, we have reviewed our internal controls over financialreporting and have made no changes during the quarter ended December 31,2007, that our certifying officers concluded materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**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 statement.

 

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 assessed theeffectiveness of our internal control over financial reporting as of December 31,2007. We based this assessment on criteria for effective internal control overfinancial reporting described in “Internal Control-Integrated Framework” issuedby the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”). Our assessment included an evaluation of the design of our internalcontrol over financial reporting and testing of the operational effectivenessof its internal control over financial reporting. We reviewed the results of ourassessment with the Audit Committee.

 

79

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Based on this assessment,management determined that, as of December 31, 2007, 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.

 

This report does not include an attestation report of Ernst &Young, our registered public accounting firm regarding internal control overfinancial reporting. Our report was not subject to attestation by Ernst &Young pursuant to temporary rules of the Securities and ExchangeCommission that permit us to provide only management’s report in this report.

 

**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, 2007 pursuant to Regulation 14A(the “Proxy Statement”) for our annual meeting of stockholders to be held on May 28,2008, and certain information included in the Proxy Statement is incorporatedherein by reference.

 

**Item 10. Directors, Executive Officers and CorporateGovernance**

 

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 required bythis item will be set forth in the Proxy Statement and is incorporated in thisreport by reference.

 

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

 

The information required bythis item will be set forth in the Proxy Statement and is incorporated in thisreport by reference.

 

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

 

The information required bythis item will be set forth in the Proxy Statement and is incorporated in thisreport by reference.

 

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

 

The information required bythis item will be set forth in the Proxy Statement and is incorporated in thisreport by reference.

 

80

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**PART IV**

 

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

 

1. *Financial Statements*

 

SeeIndex to Consolidated Financial Statements in Item 8 of this report.

 

2. *Financial Statement Schedules*

 

None

 

3. *Exhibits*

 
| **Exhibit No.** | ** ** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                         |
|----------------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  | (3)        |       | Certificate of  Incorporation of Optimer Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                                                                 |
| 3.2                  | (7)        |       | Bylaws of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                                                                    |
| 4.1                  | (4)        |       | Common Stock Certificate  of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                                               |
| 4.2                  | (1)        |       | Investors’ Rights  Agreement by and among Optimer Pharmaceuticals, Inc. and certain  stockholders of the registrant dated November 30, 2005, as amended and  restated.                                                                                                                         |
| 4.3                  | (6)        |       | Registration Rights  Agreement, dated October 23, 2007, by and between Optimer  Pharmaceuticals, Inc. and the purchasers listed on the signature  pages thereto.                                                                                                                               |
| 10.1                 | (1)*       |       | Master Service Agreement  between Optimer Pharmaceuticals, Inc. and Advanced Biologics, LLC, dated  November 16, 2005, as amended by the Addendum to the Master Services  Agreement between Optimer Pharmaceuticals, Inc. and Advanced Biologics,  LLC, dated January 16, 2006.           |
| 10.2                 | (1)        |       | Grant to Optimer  Pharmaceuticals, Inc. by The National Institutes of Health dated  June 1, 2005.                                                                                                                                                                                                   |
| 10.3                 | (3)*       |       | Collaboration Research and  Development and License Agreement between Optimer Pharmaceuticals, Inc.  and Cempra Pharmaceuticals, Inc., dated March 31, 2006.                                                                                                                                   |
| 10.4                 | (4)*       |       | Agreement between Optimer  Pharmaceuticals, Inc. and Sloan-Kettering Institute for Cancer Research  dated July 31, 2002, as amended by the First Amendment to License  Agreement between Optimer Pharmaceuticals, Inc. and Sloan-Kettering Institute  for Cancer Research dated June 30, 2005. |
| 10.5                 | (3)*       |       | License Agreement between  Optimer Pharmaceuticals, Inc. and Nippon Shinyaku Co., Ltd., dated  June 10, 2004.                                                                                                                                                                                       |
| 10.6                 | (1)*       |       | License Agreement between  Optimer Pharmaceuticals, Inc. and The Scripps Research Institute dated  July 23, 1999.                                                                                                                                                                                   |
| 10.7                 | (1)*       |       | License Agreement between  Optimer Pharmaceuticals, Inc. and The Scripps Research Institute dated  May 30, 2001.                                                                                                                                                                                    |
| 10.8                 | (1)*       |       | License Agreement between  Optimer Pharmaceuticals, Inc. and The Scripps Research Institute dated  May 30, 2001.                                                                                                                                                                                    |
| 10.9                 | (1)*       |       | License Agreement between  Optimer Pharmaceuticals, Inc. and The Scripps Research Institute dated  June 1, 2004.                                                                                                                                                                                    |
| 10.10                | (3)        |       | Building Lease between  Optimer Pharmaceuticals, Inc. and Pacific Sorrento Technology Park dated  May 1, 2001, as amended by the First Amendment to Building Lease between  Optimer Pharmaceuticals, Inc. and Pacific Sorrento Technology Park dated  July 12, 2001.                      |
| 10.11                | (1)+       |       | Form of Employee  Proprietary Information Agreement of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                |
| 10.12                | (1)+       |       | Employment Agreement  between Optimer Pharmaceuticals, Inc. and Michael N. Chang dated  June 17, 2005.                                                                                                                                                                                              |
| 10.13                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and Sherwood L. Gorbach dated  October 6, 2005.                                                                                                                                                                                                 |
| 10.14                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and Kevin P. Poulos dated June 15,  2006.                                                                                                                                                                                                       |
| 10.15                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and John D. Prunty dated May 10,  2006.                                                                                                                                                                                                         |
| 10.16                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and Tessie M. Che dated August 30,  2001.                                                                                                                                                                                                       |
| 10.17                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and Youe-Kong Shue dated February 18,  2000.                                                                                                                                                                                                    |
| 10.18                | (1)+       |       | Form of  Indemnification Agreement between Optimer Pharmaceuticals, Inc. and its  directors and officers.                                                                                                                                                                                           |
| 10.19                | (1)+       |       | 1998 Stock Plan of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                                                        |

 

81

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| 10.20 | (1)+   |   | Stock Plan Stock Option  Agreement of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                     |
|-------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21 | (3)+   |   | 2006 Equity Incentive Plan  of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                            |
| 10.22 | (7)+   |   | Employee Stock Purchase  Plan of Optimer Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                             |
| 10.23 | (3)    |   | Prospective Buy-Back  Agreement between Optimer Pharmaceuticals, Inc. and Par  Pharmaceutical, Inc. dated January 19, 2007.                                                                                                                                                   |
| 10.24 | (5)*   |   | Supply Agreement with  Biocon Limited dated August 29, 2005, as amended on July 6, 2006 by  the Agreement to Amend Supply Agreement dated August 29, 2005  (Amendment 1).                                                                                                |
| 10.25 | (5)*   |   | Assignment letter between  Par Pharmaceutical, Inc. and Biocon Limited dated January 16, 2007.                                                                                                                                                                                     |
| 10.26 | (8)    |   | Summary of Optimer  Pharmaceuticals, Inc. 2008 Incentive Compensation Plan.                                                                                                                                                                                                             |
| 23.1  |   |   | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                   |
| 31.1  |   |   | Certification of principal  executive officer required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                   |
| 31.2  |   |   | Certification of principal  financial officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                                                  |
| 32    |   |   | Certification by the Chief  Executive Officer and the Chief Financial Officer of Optimer  Pharmaceuticals, Inc., as required by Rule 13a-14(b) or 15d-14(b) and  Section 1350 of Chapter 63 of Title 18 of the United States  Code (18 U.S.C. 1350). |

 

----

| +   |   | Indicates management  contract or compensatory plan.                                                                                                                                 |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *   |   | Confidential treatment has  been granted with respect to certain portions of this exhibit. Omitted portions  have been filed separately with the Securities and Exchange Commission. |
| (1) |   | Filed with Registrant’s  Registration Statement on Form S-1 on November 9, 2006.                                                                                      |
| (2) |   | Filed with Registrant’s  Amendment No. 2 to Registration Statement on Form S-1 on January 5,  2007.                                                              |
| (3) |   | Filed with Registrant’s  Amendment No. 3 to Registration Statement on Form S-1 on  January 22, 2007.                                                             |
| (4) |   | Filed with Registrant’s  Amendment No. 4 to Registration Statement on Form S-1 on  February 5, 2007.                                                             |
| (5) |   | Filed with the Registrant’s  Current Report on Form 8-K on February 26, 2007.                                                                                         |
| (6) |   | Filed with the  Registrant’s Current Report on Form 8-K on October 29, 2007.                                                                                          |
| (7) |   | Filed with the  Registrant’s Current Report on Form 8-K on September 18, 2007.                                                                                        |
| (8) |   | Filed with the  Registrant’s Current Report on Form 8-K on March 17, 2008.                                                                                            |

 

82

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| ** **                 | ** ** | ** ** | **OPTIMER  PHARMACEUTICALS** |
|----------------------------|------------|------------|------------------------------|
|                       |       |       |                         |
| Dated: March 26, 2008 |       |       | By:                          | /s/ Michael  N. Chang |
| ** **                 | ** ** | ** ** | **Name:**                    | **Michael N. Chang** |
| ** **                 | ** ** | ** ** | **Title:**                   | ***President and Chief Executive Officer*** |
|                            |            |            |                              |  |  |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated:

 

 
| **Signature**                  | ** ** | **Title**                                                                       | ** ** | **Date**             |
|--------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------|
| ** **                     | ** ** | ** **                                                                      | ** ** | ** **           |
| /s/  MICHAEL N. CHANG     |       | President, Chief Executive  Officer and Director  (Principal Executive Officer) |       | March 26,  2008 |
| Michael N.  Chang         |       |                                                                            |       |                 |
|                           |       |                                                                            |       |                 |
| /s/  JOHN D. PRUNTY       |       | Chief Financial Officer  (Principal Accounting and  Financial Officer)          |       | March 26,  2008 |
| John D.  Prunty           |       |                                                                            |       |                 |
|                           |       |                                                                            |       |                 |
| /s/  ANTHONY E. ALTIG          |       | Director                                                                        |       | March 26,  2008 |
| Anthony  E. Altig              |       |                                                                            |       |                 |
|                           |       |                                                                            |       |                 |
| /s/  MARK AUERBACH             |       | Director                                                                        |       | March 26,  2008 |
| Mark  Auerbach                 |       |                                                                            |       |                 |
|                           |       |                                                                            |       |                 |
| /s/  JOSEPH Y. CHANG      |       | Director                                                                        |       | March 26,  2008 |
| Joseph Y.  Chang          |       |                                                                            |       |                 |
|                           |       |                                                                            |       |                 |
| /s/  MARTIN C. MUENCHBACH |       | Director                                                                        |       | March 26,  2008 |
| Martin C.  Muenchbach     |       |                                                                            |       |                 |
|                           |       |                                                                            |       |                 |
| /s/  ALAIN B. SCHREIBER   |       | Director                                                                        |       | March 26,  2008 |
| Alain B.  Schreiber       |       |                                                                            |       |                 |

 

83

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                         |
|----------------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  | (3)        |       | Certificate of  Incorporation of Optimer Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                                                                 |
| 3.2                  | (7)        |       | Bylaws of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                                                                    |
| 4.1                  | (4)        |       | Common Stock Certificate  of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                                               |
| 4.2                  | (1)        |       | Investors’ Rights  Agreement by and among Optimer Pharmaceuticals, Inc. and certain  stockholders of Optimer Pharmaceuticals, Inc. dated November 30,  2005, as amended and restated.                                                                                                     |
| 4.3                  | (6)        |       | Registration Rights  Agreement, dated October 23, 2007, by and between Optimer  Pharmaceuticals, Inc. and the purchasers listed on the signature  pages thereto.                                                                                                                               |
| 10.1                 | (1)*       |       | Master Service Agreement  between Optimer Pharmaceuticals, Inc. and Advanced Biologics, LLC, dated  November 16, 2005, as amended by the Addendum to the Master Services  Agreement between Optimer Pharmaceuticals, Inc. and Advanced Biologics,  LLC, dated January 16, 2006.           |
| 10.2                 | (1)        |       | Grant to Optimer  Pharmaceuticals, Inc. by The National Institutes of Health dated  June 1, 2005.                                                                                                                                                                                                   |
| 10.3                 | (3)*       |       | Collaboration Research and  Development and License Agreement between Optimer Pharmaceuticals, Inc.  and Cempra Pharmaceuticals, Inc., dated March 31, 2006.                                                                                                                                   |
| 10.4                 | (4)*       |       | Agreement between Optimer  Pharmaceuticals, Inc. and Sloan-Kettering Institute for Cancer Research  dated July 31, 2002, as amended by the First Amendment to License  Agreement between Optimer Pharmaceuticals, Inc. and Sloan-Kettering Institute  for Cancer Research dated June 30, 2005. |
| 10.5                 | (3)*       |       | License Agreement between  the registrant and Nippon Shinyaku Co., Ltd., dated June 10, 2004.                                                                                                                                                                                                            |
| 10.6                 | (1)*       |       | License Agreement between  the registrant and The Scripps Research Institute dated July 23, 1999.                                                                                                                                                                                                        |
| 10.7                 | (1)*       |       | License Agreement between  the registrant and The Scripps Research Institute dated May 30, 2001.                                                                                                                                                                                                         |
| 10.8                 | (1)*       |       | License Agreement between  the registrant and The Scripps Research Institute dated May 30, 2001.                                                                                                                                                                                                         |
| 10.9                 | (1)*       |       | License Agreement between  the registrant and The Scripps Research Institute dated June 1, 2004.                                                                                                                                                                                                         |
| 10.10                | (3)        |       | Building Lease between  Optimer Pharmaceuticals, Inc. and Pacific Sorrento Technology Park dated  May 1, 2001, as amended by the First Amendment to Building Lease between  Optimer Pharmaceuticals, Inc. and Pacific Sorrento Technology Park dated  July 12, 2001.                      |
| 10.11                | (1)+       |       | Form of Employee  Proprietary Information Agreement of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                |
| 10.12                | (1)+       |       | Employment Agreement  between Optimer Pharmaceuticals, Inc. and Michael N. Chang dated  June 17, 2005.                                                                                                                                                                                              |
| 10.13                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and Sherwood L. Gorbach dated  October 6, 2005.                                                                                                                                                                                                 |
| 10.14                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and Kevin P. Poulos dated June 15,  2006.                                                                                                                                                                                                       |
| 10.15                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and John D. Prunty dated May 10,  2006.                                                                                                                                                                                                         |
| 10.16                | (1)+       |       | Offer letter between  Optimer Pharmaceuticals, Inc. and Tessie M. Che dated August 30,  2001.                                                                                                                                                                                                       |
| 10.17                | (1)+       |       | Offer letter between the  registrant and Youe-Kong Shue dated February 18, 2000.                                                                                                                                                                                                                         |
| 10.18                | (1)+       |       | Form of  Indemnification Agreement between Optimer Pharmaceuticals, Inc. and its  directors and officers.                                                                                                                                                                                           |
| 10.19                | (1)+       |       | 1998 Stock Plan of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                                                        |
| 10.20                | (1)+       |       | 1998 Stock Plan Stock  Option Agreement of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                                 |
| 10.21                | (3)+       |       | 2006 Equity Incentive Plan  of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                                             |
| 10.22                | (8)+       |       | Employee Stock Purchase  Plan of Optimer Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                                              |
| 10.23                | (3)        |       | Prospective Buy-Back  Agreement between Optimer Pharmaceuticals, Inc. and Par  Pharmaceutical, Inc. dated January 19, 2007.                                                                                                                                                                    |
| 10.24                | (5)*       |       | Supply Agreement with  Biocon Limited dated August 29, 2005, as amended on July 6, 2006 by  the Agreement to Amend Supply Agreement dated August 29, 2005  (Amendment 1).                                                                                                                 |
| 10.25                | (5)*       |       | Assignment letter between  Par Pharmaceutical, Inc. and Biocon Limited dated January 16, 2007.                                                                                                                                                                                                      |
| 10.26                | (8)        |       | Summary of Optimer  Pharmaceuticals, Inc. 2008 Incentive Compensation Plan.                                                                                                                                                                                                                              |
| 10.27                | (7)        |       | Optimer  Pharmaceuticals, Inc. Employee Stock Purchase Plan, as amended.                                                                                                                                                                                                                                 |
| 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 the Registrant, 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 compensatoryplan.

*                                           Confidential treatment has been granted withrespect to certain portions of this exhibit. Omitted portions have been filedseparately with the Securities and Exchange Commission.

(1)                                    Filed with Registrant’s RegistrationStatement on Form S-1 on November 9, 2006.

(2)                                    Filed with Registrant’s Amendment No. 2to Registration Statement on Form S-1 on January 5, 2007.

(3)                                    Filed with Registrant’s Amendment No. 3to Registration Statement on Form S-1 on January 22, 2007.

(4)                                    Filed with Registrant’s Amendment No. 4to Registration Statement on Form S-1 on February 5, 2007.

(5)                                    Filed with the Registrant’s Current Report onForm 8-K on February 26, 2007.

(6)                                    Filed with the Registrant’s Current Report onForm 8-K on October 29, 2007.

(7)                                    Filed with the Registrant’s Current Report onForm 8-K on September 18, 2007.

(8)                                    Filed with the Registrant’s Current Report onForm 8-K on March 17, 2008.

 

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