**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

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**Form 10-K**

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**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO SECTIONS 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

**(Mark One)**

x**                  ****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2006**

**or**

o                     **TRANSITION REPORT PURSUANT TO SECTION13 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)

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| **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 |

**Securitiesregistered pursuant to Section 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**                      |

**Securitiesregistered pursuant to Section 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)of the Act.    Yes  o    No  x.

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes  o    No  x

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 the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  x

Indicate by check mark if theregistrant is a large accelerated filer, an accelerated filer, or a non-acceleratedfiler. See definition of “accelerated filer and large accelerated filer” inRule 12b(2) of the Exchange Act. (Check one).

| Large accelerated  filer  o |   | Accelerated  filer  o |   | Non-accelerated  filer  x |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

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

The aggregate market value ofthe voting stock held by non-affiliates of the registrant, based upon theclosing stock price of the registrant’s common stock reported on the NASDAQGlobal Market on March 15, 2007  wasapproximately $125,201,865 excluding 10,488,552 shares of the registrant’s common stock held by currentexecutive officers, directors and stockholders whose ownership exceeds 5% ofthe registrant’s common stock outstanding at March 15, 2007.  Exclusion of such shares should not beconstrued to indicate that any such person possesses the power, direct orindirect, to direct or cause the direction of the management or policies of theregistrant or that such person is controlled by or under common control withthe registrants.  The registrant haselected to use March 15, 2007 as the calculation date, as on June 30, 2006 (the last business day of the registrant’s second fiscal quarter) the registrantwas a privately held concern.

The number of outstandingshares of the registrant’s common stock, par value $0.001 per share, as ofMarch 15, 2007 was 23,135,205.

 

 

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**OPTIMER PHARMACEUTICALS**

**FORM10-K—ANNUAL REPORTFor the Fiscal Year Ended December 31, 2006**

**Table ofContents**

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

 

 

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**PART I**

**CautionaryNote Regarding Forward-Looking Statements**

Some of the statementsunder “Business”, “Risk Factors,” “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and elsewhere in this annualreport on Form 10-K contain forward-looking statements.  In some cases, you can identifyforward-looking statements by the following words: “may,” “will,” “could,” “would,”“should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”“project,” “potential,” “continue,” “ongoing” or the negative of these terms orother comparable terminology, although not all forward-looking statementscontain these words.  These statementsinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, levels of activity, performance or achievements to bematerially different from the information expressed or implied by theseforward-looking statements.  Although webelieve that we have a reasonable basis for each forward-looking statementcontained in this Form 10-K, we caution you that these statements are based ona combination of facts and factors currently known by us and our projections ofthe future, about which we cannot be certain. Forward-looking statements include, but are not limited to, statementsabout:

·                  our ability to successfully completepre-clinical and clinical development of our product candidates and demonstratetheir safety and efficacy in clinical trials within anticipated time frames, ifat all;

·                  our ability to obtain and maintainregulatory approval of our product candidates and their labeling under anyapproval we may obtain;

·                  the success of our development andcommercialization efforts on our own or with existing or future collaborators,and our ability to enter into new collaborations and strategic alliances;

·                  the size and growth of the potentialmarkets, including estimates regarding the monetary value and number of peoplewith respect to such potential markets, for our product candidates and ourability to serve those markets;

·                  the content and timing of submissions toand decisions made by the FDA and other regulatory agencies;

·                  the accuracy of our estimates regardingexpenses, future revenues and capital requirements;

·                  our ability to obtain, maintain andsuccessfully enforce adequate patent and other intellectual property protectionfor our product candidates;

·                  our ability to develop a sufficientmarketing and sales force or enter into agreements with third parties to marketand sell any of our product candidates that may be approved for sale;

·                  the success of competing drugs that areor become available;

·                  our intent to license or develop specificproduct candidates;

·                  our plans to initiate or continueclinical trials of our product candidates, and the expected size and timing ofsuch trials;

·                  our expectations regarding futureresearch and development costs or other expenses;

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·                  our expectations about the future levelof research and development activity by external service providers;

·                  our ability to secure the manufacture of,sufficient amounts of our product candidates for clinical trials and, ifapproved, products for commercialization activities from our third-partymanufacturers; and

·                  our ability to raise additional funds inthe capital markets, through arrangements with collaborators or from othersources.

In addition, you shouldrefer to the “Risk Factors” section of this report for a discussion of otherimportant factors that may cause our actual results to differ materially fromthose expressed or implied by our forward-looking statements.  As a result of these factors, we cannotassure you that the forward-looking statements in this report will prove to beaccurate.  Furthermore, if ourforward-looking statements prove to be inaccurate, the inaccuracy may bematerial.  In light of the significantuncertainties in these forward-looking statements, you should not regard thesestatements as a representation or warranty by us or any other person that wewill achieve our objectives and plans in any specified time frame, or atall.  The Private Securities LitigationReform Act of 1995 and Section 27A of the Securities Act of 1933 do notprotect any forward-looking statements that we make in connection withthis report.

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**CorporateInformation**

**Item 1.Business**

**Overview**

Weare a biopharmaceutical company focused on discovering, developing andcommercializing innovative anti-infective products.  Our initial development efforts addressproducts that treat 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, Difimicin and Prulifloxacin.  Difimicin, our lead product candidate, is anantibiotic currently in a Phase 3 registration trial for the treatment of *Clostridium difficile*-associated diarrhea, or CDAD, the mostcommon nosocomial, or hospital-acquired, diarrhea.  Prulifloxacin is an antibiotic currently intwo Phase 3 trials for the treatment of travelers’ diarrhea, a form ofinfectious diarrhea.  We are developingadditional product candidates using our proprietary technology, including ourOptimer One-Pot Synthesis, or OPopS, drug discovery platform.

**Antibiotic Market Background**

Infectiousdiseases can be caused by bacteria present in the environment that enter thebody through the skin or mucous membranes of the lungs, nasal passages andgastrointestinal tract, or GI tract. These bacteria can be pathogenic, or disease-causing, and can overwhelmthe body’s immune system by establishing themselves throughout the body invarious tissues and organs where they proliferate.  This can cause a number of serious and, insome cases, fatal infections, including those of the GI tract, urinary tract,respiratory tract, bloodstream, skin and heart.

Bacteriacan be classified as 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 infections can be classified as eitherbroad-spectrum or narrow-spectrum. Currently used antibiotics are generally considered broad-spectrum,meaning they target a wide variety of bacteria. In contrast, narrow-spectrum antibiotics target a select group ofbacteria such as gram-positive or gram-negative bacteria.  Current research is increasingly focused onantibiotics that target specific bacteria, which may be beneficial for thetreatment of certain infections.

Antibioticsused to treat bacterial infections work by interfering with bacterial cellularactivities, such as cell wall synthesis or protein synthesis.  Antibiotics may be bacteriostatic orbactericidal.  Bacteriostatic antibioticsstop the growth of bacteria, which prevents the infecting bacteria frommultiplying and allows the patient’s own immune system to eradicate theinfecting 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.

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Theanti-infective market is one of the largest therapeutic categoriesworldwide.  According to IMS Health, thecombined market for prescription antibacterial drugs in 2004 for the UnitedStates, Japan, Korea, Germany, France, Italy, the United Kingdom and Spainexceeded $20.0 billion.  The market foranti-infective products is generally divided into two categories, nosocomialinfections and community-acquired infections, which represent approximately 30%and 70% of the anti-infectives market, respectively.  According to the U.S. Centers for DiseaseControl and Prevention, or CDC, approximately two million nosocomial infectionsoccur annually in the United States and these infections can increase averagelength of hospital stays by seven to nine days. Approximately four million nosocomial infections occur annually inEurope, three million in North America, two million in South America and twomillion in East Asia (excluding China). Nosocomial infections are costly toaddress, with an estimated annual aggregate healthcare cost in the UnitedStates and the United Kingdom of approximately $4.5 billion and $1.9 billion,respectively.  In addition, in the UnitedStates, nosocomial infections cause approximately 80,000 deaths annually, makingthem one of the five leading causes of death in the United States.  We believe that bacterial infections,especially infections caused by difficult-to-treat, drug resistant bacteria,cause or contribute to a majority of these deaths.

**Our Market Opportunity**

Manymarketed antibiotics used to treat infections have well documentedshortcomings.  For example, currentantibiotics often fail to reach sufficient concentrations at the site ofinfection to adequately eliminate harmful bacteria.  These antibiotics have also been associatedwith serious adverse side effects, including renal toxicities, heart rhythmabnormalities, phototoxicity, rashes and central nervous effects, such asseizures.  These side effects limit theuse of antibiotics for certain patients. In addition, certain antibiotics have interaction issues with prescribeddrugs, such as cholesterol lowering agents. Safety problems arise when increased doses of these antibiotics areneeded to treat resistant bacteria.  Ifbacteria develop resistance, the underlying infection can become difficult orimpossible to treat, 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 and undesirablefrequency and length of dosing.  Becauseof these shortcomings, marketed antibiotics often do not provide adequatetreatment.

**Our Product Candidates**

Webelieve that our product candidates may offer advantages over existingantibiotics in terms of efficacy, safety, potential for minimal bacterialresistance and more convenient dosing. We also believe that the markets for these product candidates present uswith significant commercial opportunities. Our product candidates are invarious stages of clinical development and none have been approved by the U.S.Food and Drug Administration, or FDA,****for sale byus.  Our ability to obtain FDA approvalof any of our product candidates requires us to successfully complete theclinical development of each such product candidate, including further clinicaltrials.  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.

Our current product candidate portfolio consists of the following:

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| **Product Candidate**           | ** ** | **Target Indications**                                                                                                       | ** ** | **Development Status**                                                                    | ** ** | **Commercial Rights** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ***Anti-Infectives***                |       |                                                                                                                              |       |                                                                                           |       |                       |       |
| Difimicin (OPT-80)  (1)              | * *   | CDAD treatment

CDAD prevention

Prevention of  VRE bloodstream infections

MRS prophylaxis

*Nasal carriage*

*Catheter-related* |       | Phase 3  Proof-of-concept Trial (2)  Proof-of-concept Trial (2)  Formulation  Formulation |       | Optimer  worldwide         |       |
| Prulifloxacin (OPT-99)  (3)          |       | Infectious  diarrhea                                                                                                              |       | Phase 3                                                                                   |       | Optimer  U.S.              |       |
| OPT-1068 and OPT-1273                |       | 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)          Wefiled an investigational new drug application, or IND, with the FDA forDifimicin (OPT-80) in August 2003.

(2)          Aproof-of-concept trial is an exploratory clinical trial to provide or establishevidence that a product candidate is efficacious for a target indication.

(3)          Wefiled an IND with the FDA for Prulifloxacin (OPT-99) in December 2005.

(4)          We have the right toreceive royalties from Cempra Pharmaceuticals, Inc. on any sales of OPT-1068and OPT-1273.

***Anti-Infective Product Candidates***

*Difimicin (OPT-80)*

*Overview*.  Weare initially developing Difimicin for the treatment of infections caused by *Clostridium difficile*, or *C. difficile*bacteria.  Difimicin is a differentiatedantibiotic for the treatment of CDAD, the most common nosocomial diarrhea.  Specifically, Difimicin has a narrow spectrumof activity against certain gram-positive bacteria.  Pre-clinical data indicates that Difimicin isbactericidal and acts by inhibiting RNA polymerase, a bacterial enzyme.  This data also shows that Difimicin inhibitsthe growth of other potentially harmful bacteria such as Staphylococci, commonbacteria that reside on the skin and in the GI tract, and Enterococci, commonbacteria that reside in the GI tract.

Weare currently in a Phase 3 registration trial for Difimicin for thetreatment of CDAD.  In April 2005, weentered into a collaboration agreement with Par pursuant to which we and ParPharmaceutical, Inc., or Par, exclusively collaborated in the clinicaldevelopment and commercialization of Difimicin. In February 2007, we elected to terminate the collaboration agreementwith Par, exercised our right under a prospective buy-back agreement torepurchase Par’s rights to develop and commercialize Difimicin in North Americaand Israel and paid Par a one-time $20.0 million termination fee. As a result,we now hold worldwide rights to Difimicin. The FDA has granted Fast Track status for Difimicin in the treatment ofCDAD.  Fast Track designation indicatesthat Difimicin has the potential to treat life-threatening diseases with unmetmedical needs.  Difimicin was also chosento 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,

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includinga program of continuous FDA feedback designed to streamline the developmentprocess.  Participation in these programswill not eliminate any phase of clinical development.

Currently,metronidazole and oral vancomycin are the two standard therapeutics used totreat CDAD.  Both have shortcomingsincluding lower efficacy, high recurrence rates, adverse side effects and poorcompliance.  Of these two therapeutics,only oral vancomycin is FDA-approved to treat CDAD.

*ClostridiumDifficile-Associated Diarrhea*.  CDAD is a serious illnesscaused by infection of the inner lining of the colon by *C. difficile*,bacteria that produce toxins resulting in inflammation, severe diarrhea and, inserious cases, death.  Outbreaks andillness related to *C. difficile*generally occur during or after therapy with broad-spectrum antibiotics.  Broad-spectrum antibiotics can cause CDAD bydisrupting normally occurring gastrointestinal bacteria, or gut flora, therebyallowing *C. difficile* to proliferate.  Recent studies have suggested that the use ofproton pump inhibitors, or PPIs, a widely used group of heartburn drugs, mayalso be linked to *C. difficile*infections.  CDAD accounts forapproximately 20% of antibiotic-associated diarrhea incidences as well as manycases of antibiotic-associated colitis, or inflammation of the colon.  C*. difficile*can be transmitted by direct or indirect contact with infected patients viaspores that can live for months on dry surfaces.  According to the CDC, CDAD is becoming moreprevalent outside the hospital.

Weestimate that CDAD affected over 500,000 patients in the United States in2005.  In the United Kingdom in 2005, thereported number of CDAD patients over 65 years of age was approximately 50,000,and we believe that CDAD incidence is growing in patients worldwide.  We believe that the incidence of CDAD may behigher than what is currently being reported because many hospitals are notrequired to and do not report incidents of CDAD.  Additionally, recent reports indicate thatthe incidence of community-acquired CDAD cases may be increasing.  For example, a study conducted in one majorU.S. city and cited at the 2006 Interscience Conference on Antimicrobial Agentsand Chemotherapy, or ICAAC, reported that the percentage of CDAD cases found tobe community-acquired increased from 12% in 2003 to 22% in 2004 and to 29% in2005.

Accordingto a study cited in the New England Journal of Medicine, the increased rates ofCDAD and severity of the disease may be caused by a combination of factorsincluding the excessive use of antibiotics and the emergence of a newhypervirulent strain of *C. difficile*known as North America Phenotype 1/027, or NAP1/027.  A study published in the medical journalLancet in September 2005 demonstrated that NAP1/027 produces 16 to 23 timesmore toxins *in vitro* than other strains.  NAP1/027 has been reported in 23 states inthe United States and is characterized by increased virulence, morbidity andmortality as well as potential antimicrobial resistance.  According to the data presented at the 2006ICAAC, NAP1/027 incidence in the United Kingdom increased an estimated 200% inthe two years since mandatory surveillance of the disease was initiated inhospitals in 2004.

Generally,CDAD results in longer hospital stays and increases average patient cost byapproximately $3,600 per patient in the United States, which is often notreimbursed to the hospital.  In morecomplicated cases of CDAD, hospitalization may be prolonged by up to two weeks,which can increase average patient costs by approximately an additional $6,000to $10,000 per patient in the United States. According to the data presented at the 2006 ICAAC, CDAD results in anestimated increase in average patient cost of over $6,000 per patient in theUnited Kingdom and the total projected annual cost for treating the disease inEurope is approximately $3.8 billion.

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Physicianscare for patients with CDAD by discontinuing previously administeredbroad-spectrum antibiotics, if possible, and providing supportive care such asfluid and electrolyte replacement.  Ifthese measures fail, the standard therapy for CDAD includes the administrationof metronidazole and/or oral vancomycin.

*CurrentTreatments and Limitations*.  Metronidazole is generallyused for patients in the United States and Europe experiencing their firstepisode or first recurrent episode of CDAD. Metronidazole is a generic drug that is used off-label to treat CDAD dueto its low cost and historical efficacy. The typical treatment regimen for metronidazole is 250 mg every sixhours, for a minimum of ten days. Metronidazole can be associated withsignificant adverse side effects such as seizures, toxic reactions to alcohol,leukopenia, or reduction of white blood cells, neuropathy, a disease affectingone or more nerves, unpleasant taste or dry mouth.

Oralvancomycin is used in the United States and also in Europe and Japan for thetreatment of CDAD.  As a result of itsbroad antibacterial activity, intravenously administered vancomycin isfrequently used for certain other life-threatening infections caused bymulti-drug resistant bacteria.  In aneffort to slow the continuing emergence of vancomycin-resistant bacteria, themedical community discourages the use of the drug for the treatment of CDADexcept for patients who are not responding to metronidazole or for patientswith severe, life-threatening colitis. Oral vancomycin’s recommended treatment protocol is 125 mg or 250 mgdoses every six hours, for approximately ten days.

Both metronidazole and oral vancomycin have shortcomings as treatmentsfor CDAD including:

·                  Poor Clinical Response.  Recent clinical studies conducted in NorthAmerica have shown that 10 to 15% of CDAD patients treated with oral vancomycinand 20 to 35% of CDAD patients treated with metronidazole do not respond totherapy, and these patients are at risk of developing more severe CDAD.

·                  High Recurrence Rate.  Approximately 20% of CDAD patients whoinitially respond to oral vancomycin and 30% of CDAD patients who initiallyrespond to metronidazole experience a clinical recurrence following thecessation of antibiotic administration.

·                  Bacterial Resistance.  Widespread use of oral vancomycin isdiscouraged for the treatment of CDAD in some hospitals due to concerns overthe development of cross-resistance, including vancomycin-resistantEnterococci, or VRE, and vancomycin-resistant Staphylococcus, which can alsocause other serious nosocomial infections. Furthermore, *C. difficile*resistance to metronidazole has been reported in at least one recent study.

·                  Adverse Side Effects.  Metronidazole, which is systemically absorbedand must be administered in high doses to treat CDAD, may result in seriousadverse side effects and complications, including seizures, toxic reactions toalcohol, leukopenia, neuropathy, unpleasant taste or dry mouth.

·                  Inducement of CDAD.  Oral vancomycin and metronidazole are bothbroad-spectrum antibiotics that disrupt the normal gut flora.  Because normal and healthy gut floragenerally

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suppress the growth of *C. difficile*,administration of oral vancomycin or metronidazole may actually induce thedevelopment of CDAD.

·                  Inconvenient Dosing and DifficultCompliance.  The current treatmentregimen for both oral vancomycin and metronidazole is inconvenient as both mustbe administered every six hours for a minimum of seven days, which may resultin lower levels of patient compliance.

*Potential Difimicin Advantages*.  Difimicin is a differentiatedmacrocycle antibiotic consisting of an 18-member ring structure.  Difimicin has significant differentiatingfeatures, including a narrow antimicrobial spectrum, fast-acting bactericidalactivity against *C. difficile*, minimalsystemic exposure and an enduring clinical effect.  Based on our clinical and pre-clinicalstudies of Difimicin for the treatment of CDAD, we believe Difimicin may offerthe following advantages:

·                  Demonstrated activityagainst *C. difficile*, includinghypervirulent strains such as NAP1/027, with low rates of treatment failuresand recurrences;

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

·                  Minimal systemic exposureresulting in a favorable safety profile;

·                  Limited disruption of normalgut flora resulting in a lower likelihood of inducement of CDAD and decreasedseverity of disease; and

·                  Convenient, twice dailydosing regimen.

*Clinical Development*

*Phase 3Pivotal Trials*.  Based on our Phase 2a clinical trialresults, in May 2006, we initiated a North American double blind, randomized,parallel group Phase 2b/3 study to compare the safety and efficacy ofDifimicin dosed at 200 mg twice daily (400 mg/day), versus oral vancomycindosed at its recommended dosing regimen of 125 mg every six hours (500 mg/day)for ten days, in CDAD patients.  In theinitial Phase 2b portion of the trial, we enrolled a total of 100 CDADpatients at 32 sites. Following an interim blinded safety analysis by anindependent data safety monitoring board, we transitioned into a Phase 3clinical trial in March 2007.  We arecurrently expanding the number of sites to approximately 100 with a targettotal enrollment of approximately 664 CDAD patients. The primary endpoint forthe Phase 3 trial is clinical cure of CDAD, as determined by the treatingphysician for each patient two days after the end of treatment.  A secondary endpoint is recurrence, asdetermined four weeks following treatment. We anticipate receiving data from this trial in the fourth quarter of2007.  We plan to initiate a secondPhase 3 pivotal trial of the same design in the first half of 2007 andanticipate receiving data from this trial in the first half of 2008.  If both trials are successful, we intend tofile an NDA in the second half of 2008.

*Phase 2aStudy*.  In July 2005, we completed an open-label,dose-ranging, randomized safety and clinical evaluation study of Difimicin inpatients with CDAD at five sites. Difimicin was administered to 48 patients.  Three patients withdrew from the trial forreasons unrelated to the administration of Difimicin, resulting in 45 patientseligible for evaluation.  Forty-one ofthese patients completed a ten-day therapy regimen consisting of twice dailydoses of 50 mg (100 mg/day), 100 mg (200 mg/day) or

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200mg (400 mg/day).  A primary endpoint ofthe trial was clinical cure of CDAD, as determined by the treating physicianfor each patient on the tenth day of administration.  Additional endpoints investigated weretime-to-resolution of diarrhea, recurrence rate through six weeks post-treatmentand total relief of CDAD symptoms, defined as complete relief of diarrhea,fever and abdominal pain, and normalized white blood cell counts by the end ofthe ten-day therapy.

Amongthe 45 evaluated patients, only four patients failed to achieve clinical cureby the end of ten days of therapy, two of whom were in the 100 mg/day dosegroup and two of whom were 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 subsequently monitored for six weeks followingtherapy for recurrence.  CDAD recurred intwo of the 41 cured subjects, one in the 100 mg/day dose group and one in the400 mg/day dose group.  The median curetimes, or time-to-resolution of diarrhea, were as follows: 5.5 days for the 100mg/day dose group, 3.5 days for the 200 mg/day dose group and 3.0 days for the400 mg/day dose group.

A summary of the results of the Phase 2a clinical trial forDifimicin 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 |

 

Pharmacokineticanalyses were performed on all patients. Difimicin was not detectable in the blood in half of the patients andonly three subjects had levels exceeding 0.02 mg/mL.  Stool concentrations of Difimicin averagedover 1,400 mg/g of stool at the 400 mg/day dose level at day ten.  As *C. difficile*is present mainly in the gut, high stool concentrations suggest that Difimicinis present where needed to treat CDAD and low concentrations in the bloodindicate Difimicin is minimally absorbed in the system, thus reducing the riskof side effects.  There were no adverseevents determined by the physicians to be related to Difimicin.  At one site in this Phase 2a trial, weperformed a microbiologic analysis of the stool of 29 patients.  This analysis showed that Difimicin did notcause any unusual disruptions of normal gut flora for patients in any of thethree dose groups.

*Phase 1Studies*.  We have completed two double-blind, oral,dose-escalating, placebo-controlled Phase 1 trials, one of which was aPhase 1a single-dose trial, and one of which was a Phase 1bmultiple-dose trial.  The trials weredesigned to determine the safety, tolerability, and pharmacokineticcharacteristics of Difimicin in healthy volunteers.  Each Phase 1a patient received twosingle oral administrations of either a 100 mg dose followed by a 300 mg dose,or a 200 mg dose followed by a 450 mg dose of Difimicin.  Each Phase 1b patient received dailyoral administrations of 150, 300, or 450 mg doses of Difimicin for tenconsecutive days.  In both trials, therewere eight subjects for each dose level, six of whom were randomly selected toreceive Difimicin and two of whom received placebo.  We collected blood, urine and stool samplesfor pharmacokinetic analysis.  Vitalsigns including blood pressure, pulse, body temperature and electrocardiogramswere measured following each dosing and on a regular basis throughout thestudy.  In both studies, Difimicin waswell tolerated by all subjects and no drug-related adverse events wereobserved.

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Difimicinalso exhibited a favorable pharmacokinetic profile for CDAD treatment.  After oral administration at either singledose or multiple doses, all blood samples had low, usually lower than 0.02mg/mL, or undetectable levels of Difimicin which indicates very low systemicabsorption.  In contrast, Difimicin wasfound to be present in high concentrations in the stool.  For example, at day ten for the 450 mg perday multiple-dose group, the mean Difimicin stool concentration exceeded 10,000times the MIC90, or minimum concentration of a drug needed toinhibit growth of 90% of microorganisms, of *C. difficile*.

*Pre-ClinicalDevelopment*.  Our pre-clinical studies of Difimicindemonstrated the potent narrow-spectrum antimicrobial activity of Difimicinagainst *C. difficile*, with an MIC90 of 0.125 mg/mL for thisorganism.  The same value was obtained ina separate experiment in which 110 genetically distinct strains of *C. difficile* were tested.  Based on our pre-clinical studies, Difimicinwas found to be four times more potent than metronidazole and 16 times morepotent than vancomycin against *C. difficile*.  Generally, Difimicin is 10 to 100 times morepotent against *C. difficile* than againstother gram-positive organisms, but is inactive against gram-negativeorganisms and yeast.

*Commercialization*

InApril 2005, we entered into a collaboration agreement with Par pursuant towhich we and Par exclusively collaborated to develop and commercializeDifimicin.  We had granted to Par anexclusive royalty-bearing license, with the right to sublicense, promote, market,distribute and sell Difimicin in a territory composed of the United States,Canada and Puerto Rico, with an option to extend the territory to includeIsrael.  We retained all other rights toDifimicin in the rest of the world.  InJanuary 2007, we entered into a prospective buy-back agreement with Par whichprovided us with an option to terminate the collaboration and repurchase therights to develop and commercialize Difimicin in North America and Israel.

InFebruary 2007, we elected to terminate the collaboration agreement pursuant tothe prospective buy-back agreement with Par and we have repurchased the rightsto develop and commercialize Difimicin in North America and Israel.  We now hold worldwide rights to Difimicin.  Under the terms of the prospective buy-backagreement, we paid Par a one-time $20.0 million termination fee and we are alsoobligated to pay****Par a one-time $5.0 millionmilestone payment, a 5% royalty on net sales by us or our affiliates ofDifimicin in North America and Israel, and a 1.5% royalty on net sales by us orour affiliates of Difimicin in the rest of the world.  In addition, in the event we license ourright to market Difimicin in the rest of the world, we will be required to payPar a 6.25% royalty on net revenues we receive related to Difimicin.  We are obligated to pay each these royalties,if any, on a country-by-country basis for seven years commencing on theapplicable commercial launch in each such country.  See “— Collaborations, Commercial and LicenseAgreements and Grants — Par Pharmaceutical, Inc.”

*Difimicin — OtherIndications*

Basedon our pre-clinical and clinical studies for CDAD treatment, we believeDifimicin may be effective against a broad range of indications withsignificant unmet medical needs.  Ourstrategy is to develop Difimicin for its lead indication, CDAD treatment, whilealso advancing its development for additional indications.

 

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*CDADPrevention.*  We believe Difimicin may be effective notonly for treating CDAD but also for preventing CDAD.  Patients at high risk of developing CDAD,such as elderly patients in long-term care facilities or hospital patients onbroad-spectrum antibiotics or PPIs, may benefit from prophylactic protectionfrom the disease.  Up to 20% of long-termcare patients are colonized with *C. difficile*.Thereis currently no therapeutic drug approved for the prevention of CDAD.  Incidence of CDAD outbreaks has beenincreasing in the hospital and community settings, and we believe Difimicin mayprovide safe, potent and narrow-spectrum bactericidal activity against *C. difficile*, thereby protecting high-risk patientswhile limiting disruption to normal gut flora. Independent investigators at Oxford University are planning to conduct aproof-of-concept clinical trial of Difimicin to prevent CDAD disease in highrisk populations utilizing grant funds in the second half of 2007. The purposeof the trial is to evaluate Difimicin for CDAD prevention in high-riskpatients.  If the trial results arepositive, we will consider a Phase 3 trial for this indication.

*Preventionof Nosocomial Vancomycin-Resistant Enterococci, or VRE, Bloodstream Infections*. Pre-clinical data indicate that Difimicin is active *in vitro*against antibiotic-resistant Enterococci, including VRE.  Enterococci are common bacteria that residein the GI tract and generally do not pose a serious health risk.  However, if Enterococci enter thebloodstream, they can cause serious and life-threatening infections, especiallyin subjects with weakened immune systems. Vancomycin is considered the last line of defense against suchinfection.  However, growing bacterialresistance to vancomycin has emerged, requiring new therapeutic options.

Biologicaland stool concentration data from our Phase 1 and 2a CDAD treatment trialsindicate Difimicin may be useful in the prevention of VRE bloodstreaminfections by minimizing the colonization of these bacteria in the GI tractbefore they enter into the bloodstream. We are planning to conduct a proof-of-concept clinical trial for thisadditional indication.

*Methicillin-ResistantStaphylococci, or MRS, Prophylaxis*.  We believe Difimicin may beuseful as prophylaxis for other bacterial infections such as MRS.  Methicillin is a narrow-spectrum antibioticthat was previously used to treat infections caused by susceptiblegram-positive bacteria, such as *Staphylococcus aureus*,or *S. aureus*, and *Staphylococcusepidermidis*, or *S. epidermidis*,that would otherwise be resistant to most penicillins.

·                  *NasalCarriage*. Pre-clinical data indicate that Difimicin may be useful for theprevention of nasal colonization of bacteria such as *S. aureus*,including methicillin resistant strains of *S. aureus*,including MRSA, and *S. epidermidis*,or MRSE.  The prevention anddecolonization of these pathogens in the nasal carriage are part of thestandard infection control program to reduce the risk of infection in high-riskpatients and healthcare workers. Mupirocin, a gram-positive topical antibiotic, is the only medicationcurrently approved for the treatment of nasal carriage infection but bacterialresistance to mupirocin is growing.  Webelieve that a non-irritating nasal formulation of Difimicin may be aneffective alternative to mupirocin to prevent nasal carriage infection.  We expect to develop a formulation ofDifimicin for the prevention of nasal carriage infection in 2007 and plan toinitiate pre-clinical and clinical development efforts in 2008.

·                  *Catheter-Related*.  Pre-clinical data indicate that Difimicin maybe useful for the prevention of catheter-related infections with *S. aureus*, including MRSA, and *S. epidermidis*,including

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MRSE. Prevention of the colonization of these pathogens around the entry pointof a catheter is important to reduce the risk of serious infection.  Most patients who require catheterization areat risk of infection.  The patients whoare at the highest risk of catheter-related infections include oncology, postsurgical and intensive care patients. Mupirocin is the only antibiotic currently approved for the preventionof catheter-related infections.  Webelieve that Difimicin may be an effective alternative to mupirocin for topicaluse to prevent the risk of catheter-related infections.  We plan to develop a formulation of Difimicinfor the prevention of catheter-related infections in 2007 and plan to initiatepre-clinical and clinical development efforts in 2008.

*Prulifloxacin (OPT-99)*

*Overview*.  Weare developing Prulifloxacin for the treatment of infectious diarrhea,including travelers’ diarrhea, a community-acquired infection which can becaused by a broad range of bacteria.  Wewill seek a label for Prulifloxacin for the treatment of infectious diarrheaand initially plan to focus commercialization efforts on the treatment oftravelers’ diarrhea.  Prulifloxacin is aprodrug in the fluoroquinolone class of antibiotics, a widely-used class ofbroad-spectrum antibiotics.  A prodrug isan inactive form of a compound that is converted in the body to an active drugeither by spontaneous chemical reaction or through the enzymatic process.  Following oral administration, Prulifloxacinis converted to ulifloxacin, which is rapidly bactericidal by killingsusceptible bacterial pathogens through inhibition of DNA replication.  Ulifloxacin has demonstrated potentbroad-spectrum activity against gram-positive and gram-negative bacteria.  We are currently conducting two Phase 3clinical trials of Prulifloxacin for the treatment of travelers’ diarrhea.  We believe that Prulifloxacin will be adifferentiated therapeutic option for travelers’ diarrhea due to its broad andpotent activity against gastrointestinal pathogens, favorable safety profile,clinical efficacy and convenient dosing regimen.

InJune 2004, we acquired from Nippon Shinyaku Co., Ltd., or Nippon Shinyaku**,** the exclusive rights to develop and commercializePrulifloxacin for all indications in the United States.  Prulifloxacin has been marketed by othercompanies in Japan since 2002 to treat a wide range of bacterial infections,including infectious diarrhea, and in Italy since 2004 to treat UTIs andRTIs.  Other parties have establishedthat Prulifloxacin is well-tolerated, as demonstrated by its use in thetreatment of more than two million patients as of December 2005.  A 1996 investigator-initiated clinical studyof Prulifloxacin in Japan by a third party for the treatment of infectiousdiarrhea evaluated the safety and efficacy of Prulifloxacin in 122 subjects,with an endpoint of clinical cure, as evidenced by eradication of bacterialpathogens.  Prulifloxacin was consideredeffective in approximately 98% of the 54 subjects evaluated for clinical cure.  Prulifloxacin also eradicated the bacterialpathogen in approximately 95% of the 77 subjects evaluated for bacteriologicaleffect.  One hundred eight of the 109subjects evaluated for safety had no adverse effects while one subjectexperienced a mild rash that was possibly related to Prulifloxacinadministration, but quickly recovered and continued to receive all scheduledtherapy.

*InfectiousDiarrhea*.  Infectious diarrhea is associated with aninfection caused by bacteria, viruses or parasites.  Its symptoms include stomach cramps,vomiting, nausea, fever and headache.  Infectious diarrhea is the world’ssecond-leading cause of morbidity and mortality.  It is a significant problem even in theUnited States where it is often found in otherwise healthy individuals.

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Travelers’diarrhea is infectious diarrhea contracted by the ingestion of contaminatedfood or water.  The CDC estimates thatthere are approximately 50,000 cases of travelers’ diarrhea each day among the50 million worldwide annual travelers to developing countries.  We estimate that approximately 23 million patientsare treated with antibiotics for infectious diarrhea annually in the UnitedStates.  Bacteria cause approximately 85%of travelers’ diarrhea in most localities, and the majority of these casesinvolve *E. coli*, Shigella orSalmonella.  Severe infections can causelarge fluid loss and result in 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’diarrhea during a one- to two-weekvisit.  The risk of infection increaseswith the duration of travel, and infection is possible throughout theworld.  A study of Americans visitingdeveloping countries found that 46% acquired diarrhea.

*CurrentTreatments and Limitations*.  Authorities such as theInfectious Disease Society of America and the CDC recommend treatment fortravelers’ diarrhea with an antibiotic that has an appropriate spectrum ofactivity against typical pathogens related to travelers’ diarrhea.  These antibiotics include fluoroquinolonessuch 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-line treatment for infectious diarrheabecause of their bactericidal nature, broad spectrum of activity and generallywell-tolerated profile.

Many of the treatments for travelers’ diarrhea have significantlimitations.  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 Activityand Antimicrobial Resistance.  Rifaximinis approved only for the treatment of travelers’ diarrhea caused by noninvasivestrains of *E. coli*.  Rifaximin is not recommended for thetreatment of diarrhea caused by other pathogens commonly associated withtravelers’ diarrhea such as Shigella, Salmonella, Aeromonas, Campylobacter,Plesiomonas, and Yersinia.  In addition,our studies with a panel of 582 infectious diarrhea-associated bacteria haveshown that 25% of *E. coli* and 67% of Shigellastrains associated with travelers’ diarrhea are resistant to TMP/SMX.

·                  Possible Side Effects.  Ciprofloxacin has been associated withphototoxicity and QT interval prolongation, a condition that is associated withpotentially life-threatening cardiac arrhythmias.  Rifaximin has been linked to allergicreactions to the drug.  TMP/SMX has beenassociated with both frequent mild allergic reactions and rare but seriousadverse effects including bone marrow suppression, severe liver damage, severerenal impairment and agranulocytosis, an acute condition related to leukopenia.

·                  Convenience andCompliance.  Ciprofloxacin is approved astherapy for infectious diarrhea with a dosing regimen of twice dailyadministrations for five to seven days. Rifaximin is approved as therapy for diarrhea caused by noninvasive *E. coli* and is given three times daily for three days.  These treatment regimens may be inconvenientfor traveling patients.

*PrulifloxacinAdvantages*.  We believe that Prulifloxacin will be adifferentiated and a better therapeutic course for bacterial infectiousdiarrhea for several reasons, including:

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·                  Efficacy.  Prulifloxacin has been established to be aneffective therapy for infectious diarrhea in clinical studies by third partiesin Japan.  Ulifloxacin, the activemetabolite of Prulifloxacin, quickly reached effective concentration levelsfollowing a single administration of the drug in patients with profusediarrhea.  Approximately two-thirds ofthe oral dose of Prulifloxacin remains in the stool after being converted toulifloxacin while approximately one-third is absorbed and accumulated intissues and in phagocytes, the white blood cells which engulf bacterialpathogens.  Ulifloxacin remains active inthese tissues and available in the body to eliminate invasive and intracellularpathogens such as Shigella and Salmonella and invasive forms of *E. coli*.

·                  Spectrum ofActivity.  Ulifloxacin has more potentantibacterial activity relative to other antibacterial agents againstinfectious diarrhea pathogens.  In apre-clinical study we commissioned, ulifloxacin was the most active of nineantibacterial agents tested against a panel of 582 international infectiousdiarrhea-associated bacteria.  Thepotency of six of these agents against common bacterial pathogens that causediarrhea is 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                                                 |       | 332 |   | £0.25 |   |

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(1)          Thepotency of an antibiotic normalized to rifaximin is expressed as the quotientobtained by dividing the MIC90 concentration of rifaximin by the MIC90 concentration of that antibiotic.

·                  Side Effects.  Prulifloxacin has an established andfavorable safety profile with minimal potential to produce adverse side effectsassociated with other treatments for travelers’ diarrhea, such as QT intervalprolongation, phototoxicity, or central nervous system effects.

·                  Convenience andCompliance.  Prulifloxacin will bemarketed as therapy for infectious diarrhea with a convenient dosing regimen ofone tablet daily for three days.

*On-GoingClinical Development and Next Steps*.  We are currently conducting twoPhase 3 clinical trials for the registration of Prulifloxacin in theUnited States for the treatment of bacterial infectious diarrhea, includingtravelers’ diarrhea.

·                  *Phase 3Trials*.  The first 375-patient trialbeing conducted in the United States, Mexico and Peru was initiated in July2006 and is a randomized, double-blind placebo-controlled clinical trial inwhich 250 patients will receive Prulifloxacin in 600 mg doses and 125 patientswill receive a placebo.  We initiated thesecond 250-patient trial in December 2006 in India, and we plan to addadditional sites in other countries such as Guatemala and Thailand. This secondtrial is also a randomized, double-blind placebo-controlled clinical trial inwhich 125 patients will receive Prulifloxacin in 600 mg doses and 125

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patients will receive placebo.  The primary endpoint of both trials is timeto last unformed stool.  Secondaryendpoints include microbiological eradication of the disease pathogen andrelief of other disease symptoms.  Wecurrently anticipate completion of both trials during the second half of 2007,with an NDA filing to follow in the first half of 2008.

·                  *ProposedPhase 4 Marketing Support Trial*.  This 320-patient trial contemplated to beconducted in the United States, Mexico and Peru will be a randomized,double-blind comparator-controlled clinical trial in which Prulifloxacin andciprofloxacin will each be administered to a total of 160 patients.  The primary endpoint of the trial isnon-inferiority of Prulifloxacin to ciprofloxacin with respect to the time tolast unformed stool.  We plan to initiatethis trial subsequent to NDA submission of Prulifloxacin.

*AdditionalIndication for Urinary Tract Infection*.  After the anticipated launchof Prulifloxacin for the treatment of infectious diarrhea, we may seekadditional approval of Prulifloxacin for the treatment of complicated urinarytract infections or UTIs, which arecommonly caused by bacteria such as *E. coli*,Staphylococcus saprophyticus and Pseudomonas aeruginosa.  According to the Kidney and UrologyFoundation of America, an estimated ten million physician office visits in 2002were due to UTIs, the second leading cause of infection following RTIs.  UTIs account for up to 40% of nosocomial infectionsand, when present, can increase the average hospital patient cost byapproximately $675 per patient. According to IMS Health,global sales of UTI prescription antibiotics exceeded $1.1 billion in 2003,with the United States accounting for approximately 62% of this market.  We believe Prulifloxacin’s advantages as atherapy for infectious diarrhea can be leveraged in the approval for treatmentof complicated UTIs.  Prulifloxacin iscurrently approved as therapy for complicated and uncomplicated UTIs in Italyand Japan.  Prulifloxacin was compared tociprofloxacin as therapy for complicated lower UTIs in a 257-patient,double-blind, comparator-controlled clinical trial that was conducted in Europeby third parties.  In patients that wereadministered Prulifloxacin once daily for 10 days, clinical resolution of theinfection was achieved in approximately 95% of patients and the pathogen waseradicated in approximately 90% of patients. In contrast, in patients that were administered ciprofloxacin twicedaily for 10 days, clinical resolution was achieved in approximately 93% ofpatients and the pathogen was eradicated in approximately 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 OPopS Drug Discovery Platform**

*Background*. Carbohydrates are the most abundant class of biological molecules innature and are fundamental to many physiological processes, which can beinhibited or augmented by carbohydrate-based drugs.  We believe these processes representpotential drug targets for infectious diseases, cancer and immune-relateddisorders.  Carbohydrates, however, canbe difficult to synthesize because of their complex molecular structure.  Historically, the synthesis of complexcarbohydrate molecules took weeks to months to complete, and thus carbohydratesynthesis for use in therapeutics has often been characterized as prohibitivelydifficult and time-consuming.  Numerousdrugs currently on the market have carbohydrate components, which are oftenimplicated in bacterial resistance, and numerous diseases involve interactionswith carbohydrate molecules.  Carbohydratesynthesis involves the

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manipulationof existing drugs to improve their spectrum of activity or significantly reducetheir side effects.  Such drugs includeaminoglycosides, glycopeptides, macrolides and antivirals.

*OurTechnology*.  Our proprietary OPopS drug discovery platformallows us to develop potential drug candidates through carbohydrate drugsynthesis.  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 OPopS technology that allow usto synthesize new compounds are:

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

·                  *De NovoGlycosylation*.  Thisprocess enables the addition of new carbohydrate groups on an existing drug tocreate new, patentable compounds.

Weacquired worldwide rights to this technology from The Scripps ResearchInstitute, or TSRI, in July 1999.  Wehave 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 able to reduce the timerequired for the synthesis of these molecules from weeks or months to hours.  We believe OPopS enables us to developpatentable drugs, optimizing drug performance, improving activity, overcomingbacterial resistance issues and/or improving side effect profiles.  Several of our pre-clinical drug candidateshave been developed with OPopS and we intend to use this technology to identifyadditional novel carbohydrate-based product candidates with significantcommercial potential.

***Other Pipeline Product Candidates***

Usingour OPopS technology, we are developing a pipeline of promising new drugcandidates for the treatment of various indications including osteoarthritisand breast cancer.  Our strategy is tolicense these drug candidates opportunistically to third-party partners inorder to maximize the potential for their development and commercialization.  The most advanced pipeline product candidatesare as follows:

*OPT-88: A Therapy forOsteoarthritis*

*Overview*.  Weintend to develop our carbohydrate-based product candidate OPT-88 as adisease-modifying intra-articular, or within the cavity of a joint, therapy forosteoarthritis.  Osteoarthritis is causedby the breakdown and eventual loss of the cartilage of one or more joints inthe body.  Key symptoms include pain injoints such as knees, hips and fingers, inability to walk or bear weight andinfection surrounding such joints.  Thereare no currently marketed treatments for the underlying disease.  According to the National Institute ofArthritis and Musculoskeletal and Skin Diseases, osteoarthritis is one of themost common types of joint diseases and is estimated to affect 33 million peoplein the United States in 2006. Pre-clinical studies of OPT-88 indicate reduced erosion of kneecartilage and a reduction of pain for up to nine days after a singleinjection.  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 in human cell cultures have shown that it significantlystimulates restoration of joint cartilage. Animal studies demonstrated a reduced

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pathologyand reduction in the erosion of knee cartilage. We plan to file an Investigational New Drug application, or IND, for OPT-88in 2007 to initiate a Phase 1 study for assessing the safety of repetitiveintra-articular injections in patients with knee osteoarthritis using anescalating dose scheme and if successful, followed by a proof-of-conceptPhase 2 efficacy study.**** After our Phase 2 study, we plan to seeka partner to fully develop and commercialize OPT-88.

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

*Overview*.  Weare currently developing our carbohydrate-based product candidate OPT-822combined with OPT-822’s adjuvant therapy OPT-821, acarbohydrate-based immunostimulant therapy, for the treatment of metastaticbreast cancer.  According to the AmericanCancer Society, breast cancer was the second most common form of cancer amongwomen in the United States, with more than 200,000 new cases and 40,000 deathsestimated in 2005.  The survival rate forpatients with metastatic breast cancer remains limited, with a median survivalof two to three years and a five-year survival rate of less than 20% for thosepatients diagnosed with late-stage cancer that has metastasized to other partsof the body.  In July 2002, we acquiredexclusive rights from Sloan-Kettering Institute for Cancer Research, or SKI, todevelop and commercialize OPT-822 worldwide.  Carbohydrate antigens are known to stimulatethe immune response against cancer cells in the body.  We have applied OPopS technology tomanufacture effectively complex carbohydrate cancer antigens, includingGlobo-H, a prominent antigen in breast cancer cells, and sialyl Lewis a, anantigen in breast and small lung cancer cells.  OPT-822 is a novel cancer immunotherapyand is composed of Globo H linked to a protein carrier.

*ClinicalStudies and Future Plans*.  SKI completed Phase 1 safety studies ofOPT-822 in prostate cancer patients and breast cancer patients in 1999and 2001, respectively.  In thesestudies, OPT-822 appeared to be well tolerated and to stimulate responseto tumor antigens.  Thirteen of 27metastatic breast cancer patients survived after six years.  We also plan to evaluate the clinicalefficacy of OPT-822 combined with OPT-822’s adjuvant therapy OPT-821.  We plan to identify a strategic partner,apply for government grants for subsequent clinical trials, and then initiate aPhase 2/3****clinical trial in Asia in 2007.

*OPT-1068 and OPT-1273:Macrolide and Ketolide Antibiotics*

Macrolideantibiotics have been marketed for the treatment of upper and lower respiratorytract infections.  Macrolides such aserythromycin and azithromycin and ketolides such as telithromycin are relatedclasses of antibiotics which have strong gram-positive activity and inhibitbacterial growth.  However, an increasingnumber of pathogens are now resistant to currently available macrolides andketolide.  Two of our leading productcandidates developed with our discovery technology, including glycooptimization,OPT-1068 and OPT-1273, 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 mostadvanced lead candidate, is orally active with potent efficacy in animal modelsafter once-a-day administration.  Cemprahas licensed from us a library of approximately 500 macrolides related to thesetwo product candidates.  Cempra hasinformed us that it is initially planning to develop OPT-1068 for RTIs inadults and children, including sinusitis, an infection of the sinus,pharyngitis, an infection of the pharynx, and community-acquired mild andmoderate pneumonia.

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**Our Strategy**

Our principal objective is to become a leading biopharmaceuticalcompany focused on the discovery, development and commercialization ofinnovative anti-infective compounds, with an initial focus on gastrointestinalinfections and related diseases.  Toachieve these objectives, our strategy includes the following key elements:

·                  *Build abranded anti-infective franchise through current and in-licensed productcandidates*.  Wecurrently have two late-stage antibiotic product candidates, Difimicin for thetreatment of CDAD, and Prulifloxacin for the treatment of infectious diarrhea,including travelers’ diarrhea.  We alsointend to develop these two lead products for additional indications andselectively in-license additional anti-infective compounds fordevelopment and/or commercialization.  Inaddition, in order to maximize the value of our franchise, we intend toopportunistically seek partners to commercialize our product candidates outsideof our core markets.  We believe ourmanagement’s industry knowledge and contacts will be a significant advantage inexecuting this part of our strategy.

·                  *Developour lead product candidates for clinical and regulatory approval*.  We are currently focusing our resources ondeveloping Difimicin and Prulifloxacin. Difimicin potentially offers significant advantages over existingtherapeutics for CDAD, a serious and growing hospital-acquired illness.  Prulifloxacin also offers significantadvantages over existing therapeutics for infectious diarrhea and has anextensive record of safety and efficacy, having been used in over two millionpatients in Europe and Japan.  If ourtrials for Difimicin for the treatment of CDAD are successful and completed ina timely manner, we plan to file an NDA for Difimicin in the second half of2008.  If our trials for Prulifloxacinfor the treatment of travelers’ diarrhea are successful and completed in atimely manner, we plan to file an NDA for Prulifloxacin in the first half of2008.

·                  *Buildmarketing and sales capabilities in our core markets*.  Our objective is to market innovativeantibiotics in areas of unmet medical needs for the treatment and prevention ofnosocomial and serious community-acquired infections.  Specifically, we initially plan tocommercialize and develop Difimicin and Prulifloxacin in key definedmarkets.  In order to achieve thesegoals, we intend to develop our own marketing organization and sales force, aswell as evaluate partnering alternatives to commercialize our productcandidates.

·                  *Leverageour internal discovery capabilities and expertise in carbohydrate chemistry toexpand our portfolio of product 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 productcandidates.  We may opportunisticallyseek partners for the development and commercialization of product candidatesin order to maximize value and maintain our strategic focus.

**Marketing and Sales**

Wecurrently have no marketing, sales or distribution capabilities.  However, we plan to develop thesecapabilities internally or through collaborations with third parties.  In February 2007, we elected to

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terminateour collaboration agreement with Par and exercised our right to repurchase Par’srights to develop and commercialize Difimicin in the North America andIsrael.  We now hold worldwide rights toDifimicin. We plan to build our own marketing and sales force for our targetmarkets for Difimicin in North America and****Europe,including Germany, France, Italy, the United Kingdom, Spain and Sweden, andLatin America, including Brazil, Mexico and Argentina.  In other markets, including Japan, we plan toseek collaborations with third parties. Following regulatory approval and prior to launch of Difimicin, weintend to build a marketing and sales organization that is appropriate for thesize of such markets.  We plan to targetour marketing and sales of Difimicin to hospital-based and long-term carephysicians, including gastroenterologists, infectious disease specialists andinternists.  If Difimicin andPrulifloxacin are approved by the FDA, we intend to leverage our marketing andsales force in the United States to commercialize both Difimicin andPrulifloxacin in this market.  We plan totarget our marketing and sales of Prulifloxacin to high-prescribing physiciansof antibiotics for travelers’ diarrhea, including those at travel clinics.

Wecontinue to evaluate the marketing and sales capabilities that will benecessary to launch and commercialize Difimicin and Prulifloxacin.  We are currently building a marketingdepartment and establishing a medical affairs group to introduce our productcandidates to key opinion leaders in CDAD and healthcare professionals focusingon infectious diseases and gastroenterology.

**Collaborations, Commercial and License Agreementsand Grants**

*Par Pharmaceutical,Inc. *In April 2005,we entered into a collaboration agreement with Par.  Under the terms of the agreement, we agreedto exclusively collaborate in the development and commercialization ofDifimicin.  We had granted to Par anexclusive royalty-bearing license, with the right to sublicense, promote,market, distribute and sell Difimicin in a territory composed of the UnitedStates, Canada and Puerto Rico, with an option to extend the territory toinclude Israel.  We also granted to Par anon-exclusive license to manufacture Difimicin for its territories.  We retained all other rights to Difimicin inthe rest of the world.  At the time ofexecution of this collaboration agreement, Par also purchased $12.0 million ofour Series C preferred stock. 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 Difimicin in North America and Israel.

*In February 2007, we elected to terminate the collaborationagreement pursuant to the prospective buy-back agreement with Par and we haverepurchased the rights to develop and commercialize Difimicin in North Americaand Israel.  We now hold worldwide rightsto Difimicin.  Under the terms of theprospective buy-back agreement, we paid Par a one-time $20.0 milliontermination fee and we are also obligated to pay Par a one-time $5.0 millionmilestone payment, a 5% royalty on net sales by us, or our affiliates ofDifimicin in North America and Israel, and a 1.5% royalty on net sales by us orour affiliates of Difimicin 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 us of our pivotal Phase 3 trial for Difimicin, (ii) our grant to athird party of the rights to Difimicin or (iii) the submission to the FDAof a new drug application for Difimicin. In the event we license our right to market Difimicin in the rest of theworld, we will be required to pay Par a 6.25% royalty on net revenues wereceive related to Difimicin.  We areobligated to pay each of these royalties, if any, on a country-by-country basisfor seven years commencing on the applicable commercial launch in each suchcountry.*  The buy-back agreement also provides that we seekPar’s consent for certain sublicenses of Difimicin within a one-year period

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following the terminationof our April 2005 collaboration with Par and for Par to provide certaintransition services.  The agreement alsoincludes a mutual release between the parties and our indemnification of Parfor actions related to Difimicin, the agreements assigned to us by Par andcertain other matters.

*Biocon*.  In connection with the exerciseof our rights under the prospective buy-back agreement, Par assigned to us asupply agreement with Biocon Limited, or Biocon, dated August 29, 2005, asamended on July 6, 2006, regarding the active pharmaceutical ingredient, orAPI, for Difimicin.  Under this supplyagreement, Biocon shall supply to us our requirements of API for certainmarkets.  We may be obligated to pay toBiocon a $3.0 million prepayment for capital investments made by Biocon, whichshall be subject to set-offs against future purchases by us of the API forDifimicin. The supply agreement will terminate upon the tenth anniversary ofthe commercial launch of Difimicin unless earlier terminated by mutualagreement or material default of either party.

*NipponShinyaku*.  In June 2004, we entered into a licenseagreement with Nippon Shinyaku.  Underthe terms of the agreement, we acquired the non-exclusive right to import andpurchase Prulifloxacin, and the exclusive right (with the right to sublicense),within the United States, to develop, make, use, offer to sell, sell andlicense 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.  The key patent will expire in February 2009;however, upon receiving final marketing approval of Prulifloxacin, we plan toapply to extend the term of this key patent, for up to an additional fiveyears, with the U.S. Patent and Trademark Office, or PTO, 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.

Underthe terms of the agreement, we paid Nippon Shinyaku a $1.0 million upfrontlicensing fee and will be required to pay Nippon Shinyaku a milestone paymentin the amount of $1.0 million upon the filing, if any, of the NDA forPrulifloxacin in the United States.  Wealso agreed to exclusively purchase Prulifloxacin from Nippon Shinyaku and topurchase a certain amount of Prulifloxacin annually that is to be mutuallyagreed upon by us and Nippon Shinyaku, commencing in the year of the firstcommercial sale of Prulifloxacin in the United States.  If Nippon Shinyaku is unable to supply uswith the required amount of Prulifloxacin, then Nippon Shinyaku will grant us anon-exclusive, worldwide license to make or have made Prulifloxacin, in whichevent we will owe Nippon Shinyaku a royalty based on the amount of net sales ofPrulifloxacin generated by us and our sublicensees.  Additionally, we will owe Nippon Shinyakucertain royalties based on the amount of net sales of Prulifloxacin less theamount of Prulifloxacin we buy from Nippon Shinyaku.

Eitherparty may terminate the agreement 60 days after giving notice of a materialbreach which remains uncured 60 days after written notice.  If not terminated earlier, the agreement willterminate upon the longer 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.

*Sloan-KetteringInstitute for Cancer Research*.  In July 2002, we entered intoa license agreement with SKI to acquire, together with certain non-exclusivelicenses, exclusive, worldwide licensing and

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sublicensingrights to certain patented and patent-pending carbohydrate-based cancerimmunotherapies.  As partialconsideration for the licensing rights, we paid to SKI a one-time feeconsisting of both cash and 55,383 shares of our common stock.  Under the agreement, which was amended inJune 2005, we owe SKI milestone payments in the following amounts for eachlicensed product: (i) $500,000 upon thecommencement 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, but only to the extent that we, and not a sublicensee, achieve suchmilestones.  We also owe SKI royaltiesbased on net sales generated from the licensed products and income we sourcefrom our sublicensing activities, which royalty payments are credited against aminimum annual royalty payment we owe to SKI during the term of the agreement.

Theterm of the agreement continues until the later of July 31, 2017, or theexpiration of the last to expire of the patents licensed under this agreement,unless the agreement is earlier terminated. The agreement can be terminated by SKI for a variety of reasons,including (i) upon 60 days’ notice in the event we fail to meet adevelopment milestone specified in the agreement or (ii) upon 30 days’notice, in the event we fail to pay any licensing fees, royalties or patentexpenses due under the agreement within 30 days of the due date and thereafterfail to pay such deficit in-full within the 30-day notice period.

*CempraPharmaceuticals, Inc*.  In March 2006, we entered into acollaborative research and development and license agreement with Cempra, abiotechnology company focused on anti-infectives.  We are collaborating with Cempra to discover,develop and commercialize drugs based on macrolide and ketolide compounds.  We granted to Cempra an exclusive worldwidelicense, except in ASEAN countries as of the effective date of the agreement,with the right to sublicense, our patent and know-how related to our macrolideand ketolide antibacterial program, several other pre-clinical compounds andour related proprietary technology. Cempra is responsible for many of the costs associated with thedevelopment and commercialization of product candidates arising underagreement, including manufacturing, marketing and sales costs.  As partial consideration for granting Cemprathe licenses, we obtained common stock of Cempra.  We will receive milestone payments as productcandidates are developed and/or co-developed by Cempra.  The milestone payments will be triggered uponthe completion of certain clinical development milestones and in certaininstances, regulatory approval of products. The aggregate amount of such milestone payments we may receive is basedin part on the number of products developed under the agreement and can exceed$24.5 million.  We will also receiveroyalty payments based on 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.

Theresearch term of this agreement continues until the earlier of our completionof all research activities set forth in the work plan under the agreement, orMarch 2008.  Subject to certainexceptions, on a country-by-country basis, the general terms of this agreementcontinue until the later of: (i) the expiration of the last to expirepatent rights of a covered product in the applicable country or (ii) tenyears from the first commercial sale of a covered product in the applicablecountry.  Either party may terminate theagreement in the event of a material breach by the other party, subject toprior notice and the opportunity to cure. Either party may also terminate the agreement for any reason upon 30days’ prior written notice provided that all licenses granted by theterminating party to the non-terminating party shall survive upon the expresselection of the non-terminating party.

 

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*TheScripps Research Institute*.  In July 1999, we acquiredexclusive, worldwide rights to OPopS technology from TSRI.  This agreement includes the license to us ofpatents, patent applications and copyrights related to OPopS technology.  We also acquired, pursuant to three separatelicense agreements with TSRI, exclusive, worldwide rights to over 20 TSRIpatents and patent applications related to other potential drug compounds andtechnologies, including HIV/FIV protease inhibitors, aminoglycoside antibiotics,polysialytransferase, selectin inhibitors, nucleic acid binders, carbohydratemimetics and osteoarthritis.

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

*AdvancedBiologics*.  In November 2005, we entered into a masterservices agreement with Advanced Biologics, as amended in January 2006.  Under the terms of the agreement, AdvancedBiologics 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 $24.2million 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 Advanced Biologics.

*NIHSmall Business Innovation Research Awards*.  InJune 2005, we received a National Institutes of Health Small BusinessInnovation Research Program Phase II Award in the amount of $612,000 fromthe National Institute of Allergy and Infectious Diseases, or NIAID.  The award is to facilitate discovery of a newmacrolide class of antibiotics through glycosylation, our proprietary chemistrytechnology, and

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evaluationof the lead compound in pre-clinical settings. The grant also contains a recommendation for future support in the amountof $575,000, which funds will be awarded subject to availability and thesatisfactory progress of the project, as determined by the NIAID.  The award provides funding support fromJuly 1, 2005 through June 30, 2007.

**Manufacturing**

Werely on third parties to manufacture our product candidates and currently haveno plans to develop our own manufacturing facility.  We require in our manufacturing andprocessing agreements that all third-party contract manufacturers andprocessors produce APIs, and finished products in accordance with cGMP and allother applicable laws and regulations. We maintain confidentiality agreements with potential and existingmanufacturers in order to protect our proprietary rights related to ourmarketed drug and drug candidates.

Parassigned to us its contract with Biocon to manufacture clinical trial suppliesof the API for Difimicin in February in connection with our repurchase ofrights to Difimicin for North America and Israel pursuant to the prospectivebuy-back agreement with Par.  However,Biocon’s facilities have not yet been approved by the FDA for the manufactureof our Difimicin drug supplies.  Weintend to contract with third-party contract manufacturers for the commercialsupply of Difimicin.

InJune 2004, as part of our license agreement for exclusive rights to develop andcommercialize Prulifloxacin in the United States, we entered into a supplyagreement with Nippon Shinyaku for the manufacture and supply of the API forPrulifloxacin.  In turn, Nippon Shinyakucontracts with Juzen Chemical Co. for the manufacture of the API forPrulifloxacin.  The tablets used in ourPhase 3 clinical trials for Prulifloxacin are manufactured by AngeliniACRAF, or Angelini.  We are also indiscussion with Angelini for 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.

Wehave used both in-house capabilities and outside third-party cGMPmanufacturers for the preparation of compounds for pre-clinical development andfor the manufacture of limited quantities of finished products for clinicaldevelopment.  We have developed aproprietary synthetic process in our laboratories for Globo-H, thecarbohydrate 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.

**IntellectualProperty**

Theproprietary nature of, and protection for, our products, product candidates,processes and know-how are important to our business.  We seek patent protection in the UnitedStates and internationally for our product candidates and other technologywhere available and when appropriate. Our policy is to patent or in-license the technology, inventionsand improvements that we consider important to the development of ourbusiness.  In addition, we use licenseagreements to selectively convey to others rights to our own intellectualproperty.  We also rely on trade secrets,know-how and continuing

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innovationto develop and maintain our competitive position.  We cannot be sure that patents will begranted with respect to 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.”

Wehave established and continue to build proprietary positions for our pipelineproduct candidates and technology in the United States and abroad.  We have built a portfolio of more than 81patents and patent applications that we either own or have licensed around ourkey products and technologies.  As ofMarch 15, 2007, this portfolio included 14 issued U.S. patents and 14 pendingU.S. patent applications.  Foreigncounterparts to these included 11 issued patents and 47 pending patentapplications.

Forour lead product candidate Difimicin, we have two pending patent cooperationtreaty, or PCT, patent applications and four U.S. pending patent applications,and thirteen pending foreign counterparts in Australia, Canada, China, Europe,Japan, South Korea, India, Taiwan, Mexico and Brazil.  If issued, these patent applications maycover specific methods for manufacturing Difimicin, methods of using Difimicinand pharmaceutical formulations containing the various components ofDifimicin.  If issued, these patentapplications would expire between 2023 and 2027.  For our other product candidatePrulifloxacin, we have licensed one issued U.S. patent and one pending U.S.patent application from Nippon Shinyaku. The U.S. patent, which expires in 2009, covers the compoundPrulifloxacin.  If issued, the U.S.pending patent application for Prulifloxacin would expire in 2023 and may coverprocesses for producing a 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 Product Approval**

*FDA Approval Process*

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

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Beforetesting any compounds with potential therapeutic value in human subjects in theUnited States, we must satisfy stringent government requirements forpre-clinical studies.  Pre-clinicaltesting 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 FDA as part of an IND and are reviewed by the FDAprior to the commencement of human clinical trials.  These pre-clinical data must provide anadequate basis for evaluating both the safety and the scientific rationale forthe initial trials in human volunteers. In order to test a new drug in humansin the United States, an IND must be filed with the FDA.  The IND will become effective automatically30 days after receipt by the FDA, unless the FDA raises concern or questionsabout the conduct of the trials as outlined in the IND prior to that time.  In this case, the IND sponsor and the FDAmust resolve any outstanding concerns before clinical trials can proceed.

Clinical trials are typically conducted in three sequential phases,Phases 1, 2 and 3, with Phase 4 trials potentially conducted afterinitial marketing approval.  These phasesmay be compressed, may overlap or may be omitted in some circumstances.

·                  *Phase 1*.  After an IND becomes effective, Phase 1human clinical trials may begin.  Thesetrials evaluate a drug’s safety profile and the range of safe dosages that canbe administered to healthy volunteers and/or patients, including the maximumtolerated dose that can be given to a trial subject with the target disease orcondition.  Phase 1 trials alsodetermine how a drug is absorbed, distributed, metabolized and excreted by thebody and the duration of its action.  Insome cases, we may decide to run what is referred to as a “Phase 1a”evaluation in which we administer single doses of a new drug candidate in asmall group of people to evaluate its pharmacokinetic properties, safety, doserange and side effects.  We may alsodecide to run what is referred to as a “Phase 1b” evaluation, which is asecond safety-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 typicallydesigned to evaluate the potential effectiveness of the drug in patients and tofurther ascertain the safety of the drug at the dosage given in a largerpatient population.  In some cases, wemay decide to run what is referred to as a “Phase 2a” evaluation, which isa trial to determine the ideal dosing regimen and length of treatment and toevaluate effectiveness and safety.  Wemay also decide to conduct what is referred to as a “Phase 2b” evaluation,which is a second, confirmatory Phase 2 clinical trial in which we collectmore efficacy and safety data prior to initiation of a Phase 3 clinicaltrial.  If positive and accepted by theFDA, results from Phase 2b study can serve as a part of pivotal clinicaltrial in the approval of a drug candidate.

·                  *Phase 3*.  In Phase 3 clinical trials, oftenreferred to as pivotal clinical trials, the drug is usually tested in one ormore controlled, randomized trials comparing the investigational new drug to anapproved form of therapy or placebo in an expanded and well-defined patientpopulation and at multiple clinical sites.  The goal of these trials is to obtaindefinitive statistical evidence of safety and effectiveness of the investigationalnew drug regimen as

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compared to a placebo or an approved standardtherapy in defined patient populations with a given disease and stage ofillness.

·                  *Phase 4*.  Phase 4 clinical trials are studiesrequired of or agreed to by a sponsor that are conducted after the FDA hasapproved a product for marketing.  Thesestudies are used to gain additional experience from the treatment of patientsin the intended therapeutic indication. These clinical trials are often referred to as Phase 3/4 postapproval clinical trials.  Failure topromptly conduct mandatory Phase 4 clinical trials could result inwithdrawal of approval for products approved under accelerated approvalregulations.

Aftercompletion of Phase 1, 2 and 3 clinical trials, if there is substantialevidence that the drug is safe and effective, an NDA is prepared and submittedfor the FDA to review.  The NDA mustcontain all of the essential information on the drug gathered to that date,including data from pre-clinical and clinical trials, and the content andformat of an NDA must conform to all FDA regulations and guidelines.  Accordingly, the preparation and submissionof an NDA is a significant undertaking for a company.The FDA reviews all submitted NDAs before itaccepts them for filing and may request additional information from the sponsorrather than accepting an NDA for filing. In this case, the NDA must be re-submitted with the additionalinformation and, again, is subject to review before filing.  Once the submission is accepted for filing,the FDA begins an in-depth review of the NDA.  Most NDAs are reviewed by the FDA within tenmonths of submission.  The review processis often significantly extended by the FDA through requests for additionalinformation and clarification.  The FDAmay refer the application to an appropriate advisory committee, typically apanel of clinicians, for review, evaluation and a recommendation as to whetherthe application should be approved.  TheFDA is not bound by therecommendation 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 refuse toapprove the NDA or issue a not approvable letter.

Anyproducts we manufacture or distribute under FDA approvals are subject topervasive and continuing regulation by the FDA, including record-keepingrequirements and reporting of adverse experiences with the products.  Drug manufacturers and their subcontractorsare required to register with the FDA and, where appropriate, state agencies,and are subject to periodic unannounced inspections by the FDA and state agenciesfor compliance with cGMPs regulations which impose procedural and documentationrequirements upon us and any third party manufacturers we utilize.

TheFDA closely regulates the marketing and promotion of drugs.  A company can make only those claims relatingto 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.

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TheFDA’s policies may change and additional government regulations may be enactedthat could prevent or delay regulatory approval of our product candidates orapproval of new indications after the initial approval of our existing productcandidates.  We cannot predict the likelihood,nature or extent of adverse governmental regulations that might arise fromfuture legislative or administrative action, either in the United States orabroad.

Wewill also be subject to a wide variety of foreign regulations governing thedevelopment, manufacture and marketing of our products.  Whether or not FDA approval has beenobtained, approval of a product by the comparable regulatory authorities offoreign countries must still be obtained prior to manufacturing or marketingthe product in those countries.  Theapproval process varies from country to country and the time needed to secureapproval may be longer or shorter than that required for FDA approval.  We cannot assure you that clinical trialsconducted in one country will be accepted by other countries or that approvalin one country will result in approval in any other country.

*Fast Track ProductsDesignation*

TheFDA has granted Fast Track status for Difimicin in the treatment of CDAD.  The FDA’s Fast Track program is intended tofacilitate the development and expedite the review of drugs that are intendedfor the treatment of a serious or life-threatening condition for which there isno effective treatment and demonstrate the potential to address unmet medicalneeds for their condition.  Under theFast Track program, the sponsor of a new drug may request the FDA to designatethe drug for a specific indication as a Fast Track product at any time duringthe clinical development of the product. The FDA must determine if the product qualifies for Fast Trackdesignation within 60 days of receipt of the sponsor’s request.

IfFast Track designation is obtained, the FDA may initiate review of sections ofan NDA before the application is complete. This rolling review is available if the applicant provides a schedulefor the submission of the remaining information and pays applicable userfees.  However, the time periodspecified in the Prescription Drug User FeesAct, which governs the time period goals the FDA has committed to reviewing anapplication, does not 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*

Difimicinwas also chosen to be the only investigational new drug in the FDA’s CMA,Pilot 2 Program in the Division of Anti-infectives and OphthalmologyProducts.  The CMA designation offersseveral potential benefits, including a program of continuous FDA feedbackdesigned to streamline the development process. In 2002, the FDA outlined the basic elements of two CMA pipelineprograms: CMA Pilot 1 and CMA Pilot 2.  Both programs apply only to certain new drugor biological products

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thathave been designated as Fast Track products. CMA Pilot 1 provides for the review of a limited number ofpre-submitted portions of an applicant’s marketing application based on theterms and conditions agreed upon by the applicant and the FDA.  Under the CMA Pilot 2 program in whichwe are a participant, the FDA and Fast Track drug applicants enter into anagreement to engage in frequent scientific feedback and interactions during theIND phase of product development. According to FDA guidelines, the CMA Pilot 2 program will evaluatethe cost of such enhanced interaction between the FDA and applicants andwhether it improves the efficiency and effectiveness of development programs,and will be limited to no more than one Fast Track product for each of 20participating FDA review divisions. According to the FDA guidelines, CMA Pilot 2 applications areevaluated based on the FDA’s overall assessment of (a) the potential valueof enhanced interaction, emphasizing the potential public health benefit resultingfrom development of the product, (b) the likelihood that concentratedscientific dialogue will facilitate the availability of a promising noveltherapy, and (c) the applicant’s demonstration of commitment to productdevelopment as evidenced by a thorough consideration of the rationale forparticipation in CMA Pilot 2. Participation in the CMA Pilot 2 program does not in any wayindicate product candidate efficacy or increase the likelihood of regulatoryapproval of the product candidate.

*Hatch-Waxman Act*

Thekey licensed patent under our agreement with Nippon Shinyaku coversPrulifloxacin for treating bacterial infections in humans and animals.  This patent will expire in February 2009.  We plan to apply to extend the term of thiskey patent under the Drug Price Competition and Patent Term Restoration Act,informally known as the Hatch-Waxman Act, which allows patent term extension ofa maximum of five years, if certain conditions are met.

**Competition**

Thepharmaceutical industry is highly competitive. We face significant competition from pharmaceutical companies andbiotechnology companies that are researching and selling products designed totreat infectious disease.  Many of thesecompanies have significantly greater financial, manufacturing, marketing andproduct development resources than us. Additionally, many of these companies have substantially greaterexperience developing, manufacturing and commercializing drugs which may allowthem to bring their products to market quicker than we can.  Several pharmaceutical and biotechnologycompanies have already established themselves in the markets for the treatmentof CDAD and/or infectious diarrhea and many additional companies are currentlydeveloping products forthetreatment of CDAD and/or infectious diarrhea, which we expect will compete withDifimicin and Prulifloxacin.  Potentiallysignificant competitors to Difimicin and Prulifloxacin, both currently marketedand in clinical development, include the following:
| **Product**                | ** ** | **Stage of Development** | ** ** | **Company**                         |
|----------------------------|------------|--------------------------|------------|-------------------------------------|
| **Difimicin  Competitors** |       |                     |       |                                |
| Metronidazole              |       | Marketed                 |       | Pfizer, Sanofi-Aventis and generics |
| Oral Vancomycin            |       | Marketed                 |       | Viropharma and generics             |
| TolevamerTM            |       | Phase 3             |       | Genzyme                             |
| Rifaximin                  |       | Phase 3             |       | Salix and generics                  |
| Ramoplanin                 |       | Phase 2  completed  |       | Oscient                             |
| Nitazoxanide               |       | Phase 3             |       | Romark                              |

 

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| CD Vaccine                     |   | Phase 1 |   | Acambis             |
|--------------------------------|--------|--------------|--------|---------------------|
| **Prulifloxacin  Competitors** |   |         |   |                |
| Ciprofloxacin                  |   | Marketed     |   | Bayer and generics  |
| Azithromycin                   |   | Marketed     |   | Pfizer              |
| Rifaximin                      |   | Marketed     |   | Salix and generics  |
| TMP/SMX                        |   | Marketed     |   | Roche and generics  |
| Doxycycline                    |   | Marketed     |   | Pfizer and generics |
| DukoralTM                  |   | Marketed     |   | Novartis            |
| ETEC Vaccine                   |   | Phase 2 |   | Iomai               |

**Research and Development**

**Ourresearch and development efforts are primarily focused on developing Difimicinand Prulifloxacin and our other product candidates.  Our research and development expense wasapproximately $10.5 million, $7.0 million and $8.6 million in years 2006, 2005and 2004, respectively.**

**Employees**

Asof March 15, 2007, we employed 39 persons, 17 of whom hold Ph.D., M.D. or DVMdegrees.  Fourteen employees were engagedin discovery research, eight in clinical research and regulatory affairs, fourin commercial and corporate development and 13 in support administration,including finance, information systems, facilities and human resources.  None of our employees is subject to acollective bargaining agreement.  Weconsider our relations with our employees to be good.

**ITEM 1A. RISK FACTORS**

**Risks Related to Our Business**

**We area company with limited sources of revenue, and we are largely dependent on thesuccess of our lead product candidate Difimicin and, to a lesser degree, ourother lead product candidate Prulifloxacin.**

Weare a biopharmaceutical company with no products approved for commercial saleand, to date, we have not generated any revenues from product sales.  Our ability to generate future revenuesdepends heavily on our success in:

·                  developing and securing U.S.and/or foreign regulatory approvals for Difimicin and Prulifloxacin and, to alesser extent, other product candidates;

·                  commercializing any productcandidates for which we receive approval from the FDA; and

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

Ourproduct candidates will require extensive additional clinical study andevaluation, regulatory approval in multiple jurisdictions, substantialinvestment and significant marketing efforts before we generate any revenuesfrom product sales.  We are not permittedto market or promote our product

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candidatesbefore we receive regulatory approval from the FDA or comparable foreignregulatory authorities.  We have notsubmitted an NDA, or received marketing approval for either Difimicin orPrulifloxacin, and we cannot be certain that either of these product candidateswill be successful in clinical trials or receive regulatory approval.  If we do not receive regulatory approval forand successfully commercialize Difimicin and Prulifloxacin, we will notgenerate any revenues from product sales for several years, if at all, and wemay not be able to continue our operations.

Webelieve our initial success will be more dependent on Difimicin than Prulifloxacin,because we believe that our market for the treatment of *Clostridiumdifficile*-associated diarrhea, or CDAD, is larger than our marketfor the treatment of infectious diarrhea. Even if we successfully obtain regulatory approval to market Difimicinor Prulifloxacin, our revenues for either drug candidate are dependent upon thesize of the markets in the territories for which we have commercialrights.  If the markets for the treatmentof CDAD or infectious diarrhea are not as significant as we estimate, ourbusiness and prospects will be harmed.

**We have incurred significant operating losses sinceinception and anticipate that we will incur continued losses for theforeseeable future.**

Wehave experienced significant operating losses since our inception in 1998.  As of December 31, 2006, we had anaccumulated deficit of approximately $51.6 million.  We have generated no revenues from productsales to date.  We have funded ouroperations to date from the sale of approximately $118.9 million of our securitiesand through research funding pursuant to collaborations with partners orgovernment grants.  We intend to use thenet proceeds from our initial public offering for the clinical trials and otherresearch and development activities of Difimicin and Prulifloxacin; to fundcommercialization activities, including conducting pre-launchpreparations;  to fund working capitaland general corporate purposes; and potential in-licenses and acquisitions ofproducts or product candidates.  Weexpect to continue to incur substantial additional operating losses for thenext several years as we advance our clinical trials and research anddevelopment initiatives and build our marketing and sales capabilities.  Because of the numerous risks anduncertainties associated with developing and commercializing antibiotics, weare unable to predict the extent of any future losses.  We may never successfully commercialize ourproduct candidates and thus may never have any significant future revenues orachieve and sustain profitability.

**If we fail to obtain additional financing, we may beunable to complete the development and commercialization of Difimicin,Prulifloxacin and other product candidates, or continue our other research anddevelopment programs.**

Ouroperations have consumed substantial amounts of cash since inception.  We expect to continue to spend substantialamounts to:

·                  complete the clinicaldevelopment of Difimicin and Prulifloxacin;

·                  license or acquireadditional product candidates;

·                  launch and commercialize anyproduct candidates for which we receive regulatory approval, including buildingour own sales force to address certain markets; and

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·                  continue our research anddevelopment programs to advance our product pipeline.

Wewill require additional capital to complete the development andcommercialization of our current lead product candidates Difimicin andPrulifloxacin.  We cannot be certain thatadditional funding will 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 oneor more of our current or future product candidates at an earlier stage thanotherwise would be desirable or on terms that are less favorable than mightotherwise be available; or

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

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

**We do notcurrently have sufficient resources to develop and commercialize Difimicin onour own. If we are unable to find a collaboration partner or are unable toeffectively collaborate with one or more partners for the development andcommercialization of Difimicin, we will not generate sufficient revenues fromsales of Difimicin and our business will be materially harmed.**

Wecurrently plan to build our own marketing and sales force for Difimicin andPrulifloxacin in the United States. However, we may also seek one or more partners for the commercializationof Difimicin.  We cannot be certain thatwe would be successful in attracting any such partners, due to our continuingobligations to pay royalties to Par, other terms of the prospective buy-backagreement or other factors.  If we werenot able to find appropriate partners for the continued development andcommercialization of Difimicin, we would either have to delay theseinitiatives, or raise significant additional funds to develop clinical andcommercialization capabilities internally. In either case, our business and prospects would be harmed.

Weare subject to a number of additional risks associated with our dependence oncollaborations with third parties.** **Conflicts may arise between us andcollaborators, such as conflicts concerning the interpretation of clinicaldata, the achievement of milestones, the interpretation of financial provisionsor the ownership of intellectual property developed during thecollaboration.  If any such conflictsarise, a collaborator could act in its own self-interest, which may be adverseto our best interests.  Any suchdisagreement between us and a collaborator could result in one or more of thefollowing, each of which could delay or prevent the development orcommercialization of Difimicin, and in turn prevent us from generatingsufficient revenues to achieve or maintain profitability:

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

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

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

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

Inaddition, a collaborator may shift its research, development, manufacturing andcommercialization resources to other product opportunities including those thatmight be competitive with Difimicin.

Weor a future collaborator could also fail to manage effectively themanufacturing relationship with Biocon. Biocon, is the manufacturer and thesupplier of API for Difimicin and is located in India. As such, Biocon will besubject to ongoing periodic unannounced inspections by the FDA and otheragencies for compliance with current good manufacturing practices regulations,or cGMP, and similar foreign standards. We or a future collaborator could fail to monitor Biocon’s compliancewith these regulations and standards and Biocon’s failure to comply couldresult in a temporary or permanent shutdown of Biocon’s manufacturingoperations, which would interrupt clinical and/or commercial supplies ofDifimicin.  In such event, we or ourcollaborator would be required to find and qualify an alternative supply ofDifimicin, which might not be available in the necessary quantities or onsuitable terms for our clinical or commercial needs.  Any alternative manufacturer would be requiredto be approved by the FDA and other regulatory authorities.  In addition, the search for an alternativesupply of Difimicin could be time consuming, causing distraction on the part ofour management team and potential delay of clinical trials, regulatoryapprovals or subsequent commercial sales of Difimicin.

Ifwe cannot commercialize Difimicin, we will have to rely solely on Prulifloxacinand earlier stage product candidates for any future revenues, and our abilityto achieve and sustain profitability will be materially and adversely harmed.  If either we or Par do not perform or devotesufficient resources to our respective obligations under the buy-backagreement, or if we and Par do not work effectively together, Difimicin may notbe successfully approved and commercialized. For example, through the transition period ending on April 30, 2007, Paris providing technical support and transferring technology to us for regulatoryfilings, manufacturing, and commercialization of Difimicin.  Subsequent to the transition period, we mayrequest Par to provide support in areas such as manufacturing, regulatory andpatent filings.  We may need to establishan alternative collaboration and we may not be able to do so on acceptableterms or at all.

**If we are unable to obtain FDA approval of ourproduct candidates, we will not be able to commercialize them in the UnitedStates.**

 

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

Thisregulatory review and approval process, which includes evaluation ofpre-clinical studies and clinical trials of our product candidates as well asthe evaluation of our manufacturing processes and our third-party contractmanufacturers’ facilities, is lengthy, expensive and uncertain.  To receive approval, we must, among otherthings, demonstrate with substantial evidence from well-controlled clinicaltrials that the product candidate is both safe and effective for eachindication for which approval is sought. Satisfaction of the approval requirements typically takes several yearsand the time needed to satisfy them may vary substantially, based on the type,complexity and novelty of the pharmaceutical product.  We cannot predict if or when we might receiveregulatory approvals for any of our product candidates currently underdevelopment.  Moreover, any approvalsthat we obtain may not cover all of the clinical indications for which we areseeking approval, or could contain significant limitations in the form ofnarrow indications, warnings, precautions or contra-indications with respect toconditions of use.  In such event, ourability to generate revenues from such products would be greatly reduced andour business would be harmed.

TheFDA has substantial discretion in the approval process and may either refuse toconsider our application for substantive review or may form the opinion afterreview of our data that our application is insufficient to allow approval ofour product candidates.  If the FDA doesnot consider or approve our application, it may require that we conductadditional clinical, pre-clinical or manufacturing validation studies andsubmit that data before it will reconsider our application.  Depending on the extent of these or any otherstudies, approval of any applications that we submit may be delayed by severalyears, or may require us to expend more resources than we have available.  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 applications for approval, which mightsignificantly harm our business and prospects.

Evenif we do receive regulatory approval to market a product candidate, any suchapproval may be subject to limitations on the indicated uses for which we maymarket the product.  It is possible thatnone of our existing product candidates or any product candidates we may seekto develop in the future will ever obtain the appropriate regulatory approvalsnecessary for us or our collaborators to commence product sales.  Moreover, recent events, includingcomplications arising from FDA-approved drugs such as Vioxx and Ketek, haveraised questions about the safety of marketed drugs and may result in increasedcautiousness by the FDA and comparable foreign regulatory authorities inreviewing new drugs based on safety, efficacy or other regulatoryapprovals.  This increased scrutiny byregulatory authorities may result in significant delays in obtaining regulatoryapprovals, as well as more stringent product labeling and post-marketing testingrequirements.  Any delay in obtaining, oran inability to obtain, applicable regulatory approvals would prevent us fromcommercializing our product candidates, generating revenues and achieving andsustaining profitability.

Althoughthe FDA has granted Fast Track status to Difimicin and selected it forparticipation in a CMA Pilot 2 Program, we cannot be certain that we willreceive any benefits from these designations or that the designations willexpedite regulatory review or approval of Difimicin.  Participation in these 

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programswill not eliminate any phase of clinical development.  Moreover, our participation in the CMAPilot 2 Program will involve frequent scientific discussions and otherinteractions with the staff of the FDA during the investigational new drugphase of our development of Difimicin. These frequent discussions could subject Difimicin to a greater level ofscrutiny than it might otherwise have received or require us to make morefrequent submissions and endure other burdens that would have been avoided ifwe had not participated in the program. Therefore, despite any potential benefits of Difimicin’s Fast Track andCMA Pilot 2 Program designations, significant uncertainty remainsregarding the clinical development and regulatory approval process forDifimicin.

**Clinical trials involve a lengthy and expensiveprocess with an uncertain outcome, and results of earlier studies and trialsmay not be predictive of future trial results.**

Clinicaltesting is expensive and can take many years to complete, and its outcome isuncertain.  Failure can occur at any timeduring the clinical trial process.  Theresults of pre-clinical studies and early clinical trials of our productcandidates may not be predictive of the results of later-stage clinicaltrials.  Product candidates in laterstages of clinical trials may fail to show the desired safety and efficacytraits despite having progressed through pre-clinical studies and initialclinical testing.  The time required toobtain approval by the FDA and similar foreign authorities is unpredictable buttypically takes many years following the commencement of clinical trials,depending upon numerous factors.  Inaddition, approval policies, regulations, or the type and amount of clinicaldata necessary to gain approval may change. We have not obtained regulatory approval for any product candidate.

Ourproduct candidates could fail to receive regulatory approval for many reasons,including the following:

·                  we may be unable todemonstrate to the satisfaction of the FDA or comparable foreign regulatoryauthorities that a product candidate is safe and effective for any indication;

·                  the results of clinicaltrials may not meet the level of statistical significance required by the FDAor comparable foreign regulatory authorities for approval;

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

·                  we may be unable todemonstrate that a product candidate’s clinical and other benefits outweigh itssafety risks;

·                  we may be unable todemonstrate 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 comparableforeign regulatory authorities may disagree with our interpretation of datafrom pre-clinical studies or clinical trials;

·                  the data collected fromclinical trials of our product candidates may not be sufficient to support thesubmission of a new drug application or other submission or to obtainregulatory approval in the United States or elsewhere;

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·                  the FDA or comparableforeign regulatory authorities may fail to approve the manufacturing processesor facilities of third-party manufacturers with which we or our collaboratorscontract for clinical and commercial supplies; and

·                  the approval policies orregulations of the FDA or comparable foreign regulatory authorities maysignificantly change in a manner rendering our clinical data insufficient forapproval.

**Delays in clinical trials are common and have manycauses, and any such delays could result in increased costs to us andjeopardize or delay our ability to achieve regulatory approval and commenceproduct sales as currently contemplated.**

Wemay experience delays in clinical trials of our product candidates.  Difimicin is currently in a Phase 3clinical trial for the treatment of CDAD. We anticipate receiving data from this trial in the fourth quarter of2007.  We plan to initiate a secondPhase 3 pivotal trial of the same design in the first half of 2007 andanticipate receiving data from this trial in the first half of 2008.  If both trials are successful, we intend tofile an NDA in the second half of 2008. In addition, we and third parties suchas independent investigators at Oxford University are currently planning toconduct clinical and proof-of-concept clinical trials for other indications ofDifimicin.  Prulifloxacin is in twoPhase 3 trials for the treatment of travelers’ diarrhea.  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 contract 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-treatment follow-up,in clinical sites dropping out of a trial, in adding new sites or in obtainingsufficient supplies of clinical trial materials.  Many factors affect patient enrollment,including the size and nature of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, the designof the clinical trial, competing clinical trials, clinicians’ and patients’perceptions as to the potential advantages of the drug being studied inrelation to other available therapies, including any new drugs that may beapproved for the indications we are investigating and whether the clinical trialdesign involves comparison to placebo. Several of our principal investigators have stated that the enrollmentrate in the clinical trials for Difimicin has been less than projected.  Our original projections were based onenrollment rates for our Phase 2a trial of Difimicin.  The enrollment rate for our Phase 2b trial ofDifimicin was approximately half of our original projections.  We have now added additional sites and expectto be able to continue to add additional sites in order to enroll the appropriatenumber of patients for these trials.  Asa result of the lower than expected enrollment rates, we transitioned ourPhase 3 trial in the first quarter of 2007 as opposed to the fourthquarter of 2006 as was originally scheduled. If we continue to experience lowerthan expected enrollment in the trials, the trials may not be completed ascurrently scheduled and we will incur delays in obtaining regulatory approvalas well as additional significant expenses. Furthermore, with respect to the clinical trials conducted by thirdparties, we will have no control over their timing or success.

Wecould encounter delays if prescribing physicians encounter unresolved ethicalissues associated with enrolling patients in clinical trials of our productcandidates in lieu of prescribing existing antibiotics that have establishedsafety and efficacy profiles or with administering placebo to patients in our 

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placebo-controlledtrials.  Further, a clinical trial may besuspended or terminated by us, our collaborators, the FDA or other regulatoryauthorities due to a number of factors, including failure to conduct theclinical trial in accordance with regulatory requirements or our clinicalprotocols, inspection of the clinical trial operations or trial site by the FDAor other regulatory authorities resulting in the imposition of a clinical hold,unforeseen safety issues or adverse side effects, failure to demonstrate abenefit from using a drug, changes in governmental regulations oradministrative actions or lack of adequate funding to continue the clinicaltrial.  In addition, our Prulifloxacinproduct candidate treats bacterial infections which tend to peak during hightravel seasons.  As a result, duringcertain times of the year, it is more difficult to enroll patients in ourtrials for Prulifloxacin.  If weexperience delays in the completion of, or termination of, any clinical trialof our product candidates, the commercial prospects of our product candidateswill be harmed, and our ability to generate product revenues from any of theseproduct candidates will be delayed.  Inaddition, any delays in completing our clinical trials will increase our costs,slow down our product development and approval process and jeopardize our abilityto commence product sales and generate revenues.  Any of these occurrences may harm ourbusiness, financial condition and prospects significantly.

**We may be required to suspend or discontinueclinical trials due to adverse events, adverse side effects or other safetyrisks that could preclude approval of our product candidates.**

Ourclinical trials may be suspended at any time for a number of reasons.  We may voluntarily suspend or terminate ourclinical trials if at any time we believe that they present an unacceptablerisk to participants.  In addition,regulatory agencies may order the temporary or permanent discontinuation of ourclinical trials at any time if they believe that the clinical trials are notbeing conducted in accordance with applicable regulatory requirements or thatthey present an unacceptable safety risk to participants.  In previous clinical trials of Difimicin,certain patients experienced non-drug related adverse events.  Patients treated with Prulifloxacin haveexperienced drug-related side effects including abdominal pain, diarrhea,nausea, renal toxicities, cardiac arrhythmias, photosensitivity, rash,excessive flushing of the skin and central nervous system effects, such asseizures.  The FDA recommended that weconduct a study to determine the effect, if any, of Prulifloxacin on theprolongation 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 our clinicaltrials.  Any of these occurrences mayharm our business and prospects significantly.

**We rely on third parties to conduct our clinicaltrials.  If these third parties do notsuccessfully carry out their contractual duties or meet expected deadlines, weand our collaborators may not be able to obtain regulatory approval for orcommercialize our product candidates.**

Wehave entered into agreements with third-party CROs, such as Advanced Biologics,LLC, or Advanced Biologics, to provide monitors for and to manage data for ouron-going clinical programs.  

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Weand the CROs conducting clinical trials for our product candidates are requiredto comply with current good clinical practices, or GCPs, regulations andguidelines enforced by the FDA for all of our products in clinical development.  The FDA enforces GCPs through periodicinspections of trial sponsors, principal investigators and trial sites.  If we or the CROs conducting clinical trialsof our product candidates fail to comply with applicable GCPs, the clinicaldata generated in the clinical trials may be deemed unreliable and the FDA mayrequire additional clinical trials before approving any marketingapplications.  We cannot assure you that,upon inspection, the FDA will determine that any clinical trials of our productcandidates comply with GCPs.  Inaddition, our clinical trials must be conducted with product produced undercGMP regulations, and will require a large number of test subjects.  Our failure to comply with these regulationsmay require us to repeat clinical trials, which would be costly and delay theregulatory approval process and commercialization of our product candidates.

Typically,the CROs conducting clinical trials of our product candidates have the right toterminate their agreements with us or our collaborators upon notice in theevent of an uncured material breach.  Inaddition, some CROs have an ability to terminate their respective agreementswith us if we fail to perform our obligations, if it can be reasonablydemonstrated that the safety of the subjects participating in our clinicaltrials warrants such termination, if we make a general assignment for thebenefit of our creditors or if we are liquidated.  Advanced Biologics has been heavily involvedin the clinical development and regulatory approval process for our leadproduct candidates and possesses significant experience with the regulatoryprocess.  We substantially rely onAdvanced Biologics to conduct the clinical trials for Difimicin andPrulifloxacin.  Advanced Biologics hasalso subcontracted with other third-party CRO’s for various aspects of theclinical trials.  If any relationshipswith Advanced Biologics or these other third-party CROs terminate, we or ourcollaborators may not be able to enter into arrangements with alternative CROsor we may enter into arrangements with alternative CROs that do not have theexpertise or relationships that Advanced Biologics has with governmentagencies.  In addition, these third-partyCROs are not our employees, and we cannot control whether or not they devote sufficienttime and resources to our on-going clinical programs.  These CROs may also have relationships withother commercial entities, including our competitors, for whom they may also beconducting clinical studies or other drug development activities, which couldharm our competitive position.  If CROsdo not successfully carry out their contractual duties or obligations or meetexpected deadlines, if they need to be replaced, or if the quality or accuracyof the clinical data they obtain is compromised due to the failure to adhere toour clinical protocols, regulatory requirements, or for other reasons, ourclinical trials may be extended, delayed or terminated, and we may not be ableto obtain regulatory approval for or successfully commercialize our productcandidates.  As a result, our financialresults and the commercial prospects for our product candidates would beharmed, our costs could increase and our ability to generate revenues could bedelayed.

**If we fail to gain and maintain approval from regulatoryauthorities in international markets for Difimicin and any future productcandidates for which we have rights in international markets, our marketopportunities will be limited.**

Salesof our product candidates outside of the United States will be subject toforeign regulatory requirements governing clinical trials and marketingapproval.  Even if the FDA grantsmarketing approval for a product candidate, comparable regulatory authoritiesof foreign countries must also approve the manufacturing and marketing of theproduct candidate in those countries. This is important 

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forthe commercialization of Difimicin for which we currently have exclusiveworldwide marketing rights.  Approval inone jurisdiction does not ensure approval in any other jurisdictions.  Obtaining foreign regulatory approvals couldresult in significant delays, difficulties and costs for us and requireadditional pre-clinical studies or clinical trials which would be costly andtime consuming.  Regulatory requirementscan vary widely from country to country and could delay the introduction of ourproducts in those countries.  Clinicaltrials conducted in one country may not be accepted by regulatory authoritiesin other countries, and regulatory approval in one country does not mean thatregulatory approval will be obtained in any other country.  In addition, our failure to obtain regulatoryapproval in any country may delay or have negative effects on the process forregulatory approval in others.  Otherthan Prulifloxacin, which is sold by other parties in Japan, Italy and certainother European countries, none of our product candidates is approved for salein any international market for which we have rights, and we do not haveexperience in obtaining regulatory approval in international markets.  If we fail to comply with regulatoryrequirements in our international markets or to obtain and maintain requiredapprovals, our target market will be reduced and our ability to generaterevenues will be diminished, which would significantly harm our business,results of operations and prospects.

**We currently have no marketing and salesorganization 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.**

Wecurrently do not have a sales organization for the marketing, sales anddistribution of pharmaceutical products. In order to commercialize any products, we must build our marketing,sales, distribution, managerial and other non-technical capabilities or makearrangements with third parties to perform these services.  We plan to build our own marketing and salesforce to commercialize Difimicin in our core markets and will seek third-partypartners in our non-core markets.  We ownexclusive rights to commercialize Prulifloxacin in the United States, and wecontemplate establishing our own sales force or seeking third-party partners tosell Prulifloxacin in the United States. The establishment and development of our own sales force to market anyproducts we may develop will be expensive and time consuming and could delayany product launch, and we cannot be certain that we will be able tosuccessfully develop this capability.  Wewill also have to compete with other pharmaceutical and biotechnology companiesto recruit, hire, train and retain marketing and sales personnel.  To the extent we rely on third parties tocommercialize our products, if any, we will receive less revenues than if wecommercialized these products ourselves. In addition, we may have little or no control over the sales efforts ofany third parties involved in commercializing our products.  In the event we are unable to develop our ownmarketing and sales force or collaborate with a third-party marketing and salesorganization, we would not be able to commercialize our product candidateswhich would negatively impact our ability to generate product revenues.

**We may not be able to adequately build our ownmarketing and sales capabilities or enter into acceptable agreements to marketand commercialize Difimicin successfully in international markets.**

Ifappropriate regulatory approvals are obtained, we intend to commercializeDifimicin in international markets by building our own marketing and salesforce and through collaboration arrangements with third parties.  We may be unable to enter into collaborationarrangements in international markets. In 

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addition,there can be no guarantee that if we enter into these collaborationarrangements with other parties that they will be successful or result in morerevenues than we could obtain by marketing Difimicin on our own.  We also plan to develop our own marketing andsales force.  We anticipate marketingDifimicin in a number of countries in Europe and Latin America tohospital-based and long-term care physicians, including gastroenterologists,infectious disease specialists and internists. 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 we are unable to develop an effective international sales force andfail to enter into collaboration arrangements for our products, our ability togenerate product revenues would be limited, which would adversely affect ourbusiness, financial condition, results of operations and prospects.

**If our product candidates are unable to competeeffectively with branded and generic antibiotics, our commercial opportunitywould be reduced or eliminated.**

Ifapproved, our lead product candidates will compete against both brandedantibiotic therapies, such as Vancocin Pulvules with respect to Difimicin andXifaxan® with respect to Prulifloxacin, and generic antibiotics such asmetronidazole and vancomycin with respect to Difimicin and ciprofloxacin withrespect to Prulifloxacin.  In addition,we anticipate that Difimicin will compete with other antibiotic andanti-infective product candidates currently in development for the treatment ofCDAD, such as TolevamerTM, a toxin absorber being developed by GenzymeCorporation, and Xifaxan®, an antibiotic being developed by SalixPharmaceuticals, Ltd.  Many of theseproducts have been or will be developed and marketed by major pharmaceuticalcompanies, who have significantly greater financial resources and expertise inresearch and development, pre-clinical testing, conducting clinical trials,obtaining regulatory approvals, manufacturing and marketing approved productsthan we do.  As a result, these companiesmay obtain regulatory approval more rapidly than we are able to and may be moreeffective in selling and marketing their products as well.  Smaller or early-stage companies may alsoprove to be significant competitors, particularly through collaborativearrangements with large, established companies.

Weanticipate that, if approved, Difimicin and Prulifloxacin will face increasingcompetition in the form of generic versions of branded products of competitorsthat will lose their patent exclusivity. For example, Difimicin, if approved, will immediately face steepcompetition from an inexpensive generic form of metronidazole.  Difimicin currently faces generic oralvancomycin competition in Europe and may face competition from generic oralvancomycin in the United States in 2008. Generic antibiotic therapies typically are sold at lower prices thanbranded antibiotics and are generally preferred by managed care providers ofhealth services.  For example, becausemetronidazole is sold at such a low price, we believe it will be difficult tosell Difimicin as a first-line therapy for the treatment of CDAD.  If we are unable to demonstrate to physiciansand patients that, based on experience, clinical data, side-effect profiles andother factors, our products are preferable to these generic antibiotictherapies, we may never generate meaningful product revenues.  In addition, many antibiotics experiencebacterial resistance over time because of their continued use.  There can be no guarantee that bacteria wouldnot develop resistance to Difimicin, 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.

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**We currently depend, and will in the future continueto depend, on third parties to manufacture our product candidates, includingDifimicin and Prulifloxacin.  If thesemanufacturers fail to provide us and our collaborators with adequate suppliesof clinical trial materials and commercial product or neglect to comply withthe requirements of regulatory authorities, we may be unable to develop orcommercialize our products.**

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

Ourability to develop and commercialize Difimicin and Prulifloxacin and any otherproduct candidates depends in part on our ability to arrange for collaboratorsor other third parties to manufacture our products at a competitive cost, inaccordance with strictly enforced regulatory requirements and in sufficientquantities for clinical testing and eventual commercialization.  We have not yet manufactured commercialbatches of Difimicin, Prulifloxacin or any of our other productcandidates.  Collaborators or third-partymanufacturers that we select to manufacture our product candidates for clinicaltesting or on a commercial scale may encounter difficulties with the small- andlarge-scale formulation and manufacturing processes required for suchmanufacture.  Such difficulties couldresult 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.  Once a product candidate isapproved and being marketed, such difficulties could also result in the laterrecall or withdrawal of the product from the market.  Further, development of large-scalemanufacturing processes will require additional validation studies, which theFDA must review and approve.  Even if weare able to establish additional or replacement manufacturers, identifyingthese sources and entering into definitive supply agreements and obtainingregulatory approvals may take a substantial amount of time and cost and suchsupply arrangements may not be available on acceptable economic terms.

Inaddition, we, our collaborators and other third-party manufacturers of ourproducts must comply with current strictly enforced cGMP requirements enforcedby the FDA through its facilities inspection program.  These requirements include quality control,quality assurance and the maintenance of recordsand documentation.  We rely on Biocon to manufacture Difimicindrug supplies, and we rely on Nippon Shinyaku, which contracts with JuzenChemical Corporation, or Juzen, and Angelini ACRAF/SpA, or Angelini, tomanufacture Prulifloxacin drug supplies. The manufacturing facilities of Biocon and Juzen have been inspected andapproved by the FDA for other companies’ drug products; however, neither Biocon’snor Juzen’s facilities have yet been approved for the manufacture of our drugsupplies.  Angelini’s facilities have notbeen inspected or approved by the FDA. We or other third-party manufacturers of our products may be unable tocomply with cGMP requirements and with other FDA, state, local and foreignregulatory requirements.  We and ourcollaborators have little control over third-party manufacturers’ compliancewith these regulations and standards.  Afailure to comply with these requirements by our third-party manufacturers,including Biocon, Juzen and Angelini, could result in the issuance of untitledletters and/or warning letters from authorities, as well as sanctions beingimposed on 

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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 harm ourbusiness and prospects significantly.

**The commercial success of our product candidateswill depend upon attaining significant market acceptance of these productcandidates among physicians, patients, healthcare payors and the medicalcommunity.**

Noneof our product candidates has been commercialized for any indication interritories for which we have rights. Even if our product candidates are approved by the appropriateregulatory authorities for marketing and sale, physicians may not prescribe ourproduct candidates, which would prevent us from generating revenues or becomingprofitable.  Market acceptance ofDifimicin, 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 forwhich the product candidate is approved;

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

·                  perceived advantages over alternativetreatments;

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

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

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

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

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

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

·                  relative convenience andease of administration; and

·                  prevalence and severity ofadverse side effects.

 

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

Weplan to target our marketing of Prulifloxacin primarily to high-prescribingphysicians of antibiotics for travelers’ diarrhea, including those at travelclinics.  Because of the number of thesephysicians in the United States, we will be required to expend significant timeand resources to obtain broad market acceptance of Prulifloxacin among thesephysicians.  We do not have experience inmarketing to this population of physicians and do not currently have theresources to be able to conduct such marketing efforts on our own.  As such, we may not be successful in any ofthese marketing efforts which would limit the commercial success ofPrulifloxacin.  In addition, 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 and commercialize otherproducts or product candidates, we may be unable to grow our business.**

Akey element of our strategy is to commercialize a portfolio of newanti-infective products in addition to Difimicin and Prulifloxacin.  As a significant part of our growth strategy,we intend to develop and commercialize additional products and productcandidates through our discovery research program using our proprietarytechnology, including OPopS.  The successof this strategy depends upon our ability to identify, select and acquirepharmaceutical product candidates and products that fit into our developmentplans on terms that are acceptable to us.

Anyproduct candidate we identify may require additional development efforts priorto commercial sale, including pre-clinical studies, extensive clinical testingand approval by the FDA and applicable foreign regulatory authorities.  All product candidates are prone to the risksof failure that are inherent in pharmaceutical product development, includingthe possibility that the product candidate will not be shown to be sufficientlysafe and/or effective for approval by regulatory authorities.  In addition, we cannot assure you that anysuch products that are approved will be manufactured or produced economically,successfully commercialized or widely accepted in the marketplace or be moreeffective than other commercially available alternatives.

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

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

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Ourfocus on drug discovery and development using our technology platform,including our patented proprietary OPopS drug discovery platform, is novel andunique.  As a result, we cannot becertain thatour productcandidates will produce commercially viable drugs that safely and effectivelytreat infectious diseases or other diseases. To date, our technology platform has yielded only a small number ofanti-infective product candidates.  Inaddition, we do not have significant clinical data with respect to any of thesepotential product candidates.  Even if weare successful in completing clinical development and receiving regulatoryapproval for one commercially viable drug for the treatment of one diseaseusing our technology platform and carbohydrate chemistry focus, we cannot becertain that we will also be able to develop and receive regulatory approvalfor other drug candidates 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 Difimicin and Prulifloxacin, and our business prospects would be harmedsignificantly.

**Our future growth depends on our ability to identifyand acquire or in-license products. If we do not successfully identify and acquire or in-licenserelated product candidates or integrate them into our operations, we may havelimited growth opportunities.**

Wein-licensed the U.S. rights to Prulifloxacin from Nippon Shinyaku who,along with Meiji-Seika Kaisha Ltd., conducted the initial development of thisproduct candidate.  An important part ofour business strategy is to continue to develop a pipeline of productcandidates by acquiring or in-licensing products, businesses ortechnologies that we believe are a strategic fit for our business.  Future in-licenses or acquisitions,however, may entail numerous operational and financial risks, including:

·                  exposure to unknownliabilities;

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

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

·                  higher than expectedacquisition and integration costs;

·                  increased amortizationexpenses;

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

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

·                  inability to retain keyemployees of any acquired businesses.

Wehave limited resources to identify and execute the acquisition or in-licensingof third-party products, businesses and technologies and integrate them intoour current infrastructure.  Inparticular, we may compete with larger pharmaceutical companies and othercompetitors in our efforts to establish new collaborations and in-licensingopportunities.  These competitors likelywill have access to greater 

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financialresources than us and may have greater expertise in identifying and evaluatingnew opportunities.  Moreover, we maydevote resources to potential acquisitions or in-licensing opportunitiesthat are never completed, or we may fail to realize the anticipated benefits ofsuch efforts.

**If we do not find collaborators for our futureproduct candidates, we may be required to reduce or delay our rate of productdevelopment and commercialization and/or increase our expenditures.**

Ourstrategy to develop and commercialize our product candidates in pre-clinicalstudies or early clinical trials includes entering into relationships withpharmaceutical or biotechnology companies to advance our programs.  We may not be able to negotiatecollaborations with these partners on acceptable terms.  If we are not able 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 with collaborators forour product candidates, those relationships will also be subject to a number ofrisks, including:

·                  collaborators may not pursuefurther development and commercialization of product candidates resulting fromour collaboration or may elect not to renew research and development programs;

·                  collaborators may delayclinical trials, underfund a clinical trial program, stop a clinical trial orabandon a product candidate, repeat or conduct additional clinical trials orrequire the development of a new formulation of a product candidate forclinical testing;

·                  a collaborator withmarketing and distribution rights to one or more of our products may not commitsufficient resources to the marketing and distribution of our products,limiting our potential revenues from the commercialization of these products;and

·                  disputes may arise delayingor terminating the research, development or commercialization of our productcandidates, or result in significant litigation or arbitration.

Evenif we successfully establish collaborations or commercial agreements, theserelationships may never result in the successfully development orcommercialization of any product candidates or the generation of sales orroyalty revenues.

**Our ability to pursue the development andcommercialization of Prulifloxacin, our other product candidates and our futureproduct candidates depends upon the continuation of our licenses from thirdparties.**

Ourlicense agreement with Nippon Shinyaku provides us with an exclusive license todevelop and commercialize Prulifloxacin for any indication in the UnitedStates, with a right to sublicense to third parties.  In the event Nippon Shinyaku is not able tosupply us with Prulifloxacin, the license agreement provides us with anon-exclusive, worldwide right and license to manufacture or have Prulifloxacinmanufactured for us.  Either we or NipponShinyaku may terminate the license agreement immediately upon the bankruptcy ordissolution of the other party or upon a breach of any material provision ofthe agreement if the breach is not cured within 60 days following writtennotice.  In addition, we are entitled 

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toterminate the agreement in the event that the FDA compels us to cease sales ofPrulifloxacin in the United States.  Ifour license agreement with Nippon Shinyaku terminates, we will lose our rightsto develop, manufacture and commercialize Prulifloxacin and our potentialrevenues would be limited.  Similarly, ifour agreement with The Scripps Research Institute, or TSRI, for the license ofour OPopS technology is terminated, we will not be able to further developfuture product candidates using our OPopS technology.

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

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

·                  decreased demand for our productcandidates;

·                  injury to our reputation;

·                  termination of clinicaltrial sites or entire clinical trial programs;

·                  withdrawal of clinical trialparticipants;

·                  significant litigationcosts;

·                  substantial monetary awardsto or costly settlement with patients;

·                  product recalls;

·                  loss of revenues; and

·                  the inability tocommercialize our product candidates.

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

Wehave global clinical trial liability insurance that covers our clinical trialsup to a $6.0 million annual aggregate limit. Our current or future insurance coverage may prove insufficient to coverany liability claims brought against us. We intend to expand our insurance coverage to include the sale ofcommercial products if marketing approval is obtained for our productcandidates, which would increase 

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ourinsurance premiums.  Because of theincreasing costs of insurance coverage, we may not be able to maintaininsurance coverage at a reasonable cost or obtain insurance coverage that willbe adequate to satisfy any liability that may arise.

**Even if we receive regulatory approval for ourproduct candidates, we will be subject to ongoing significant regulatoryobligations and oversight.**

Evenif we receive regulatory approval to sell our product candidates, the FDA andforeign regulatory authorities will likely impose significant restrictions onthe indicated uses or marketing of such products, or impose ongoingrequirements for potentially costly post-approval studies.  In addition, following any regulatoryapproval of our product candidates, we and our collaborators will be subject tocontinuing regulatory obligations, such as requirements for storage,recordkeeping and safety reporting, and additional post-marketing obligations,including regulatory oversight of the labeling, packaging, promotion andmarketing of our products.  If we or ourcollaborators become aware of previously unknown problems with any of ourproduct candidates here or overseas or at our third-party manufacturers’facilities, a regulatory agency may impose restrictions on our products, ourthird-party manufacturers or on us, including requiring us to reformulate ourproducts, conduct additional clinical trials, make changes in the labeling ofour products, implement changes to, or obtain re-approvals of, ourthird-party manufacturers’ facilities, or withdraw the product from the market.  In addition, we or our collaborators mayexperience a significant drop in the sales of the affected products and ourproductrevenues will bereduced, our reputation in the marketplace may suffer and we may become thetarget of lawsuits, including class action suits.  Moreover, if we or our collaborators orthird-party manufacturers fail to comply with applicable regulatoryrequirements, we may be subject to civil or criminal fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions, costly new manufacturing requirements and criminalprosecution.  Any of these events couldharm or prevent sales of the affected products and reduce our related revenuesor could substantially increase the costs and expenses of commercializing andmarketing these products, which would significantly harm our business,financial condition and prospects.

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

Oursuccess depends in part on our continued ability to attract, retain andmotivate highly qualified management, clinical and scientific personnel and onour ability to develop and maintain important relationships with leadingacademic institutions, clinicians and scientists.  We are highly dependent 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, Corporate Affairs, Youe-Kong Shue, Ph.D., our VicePresident, Clinical Development, and Kevin P. Poulos, our Vice President,Marketing and Sales.  The loss ofservices of any of Dr. Chang, Dr. Che, Dr. Shue orMr. Poulos or one or more of our other members of senior management coulddelay or prevent the successful completion of our planned clinical trials orthe commercialization of our product candidates.  Replacing key employees may be difficult andcostly and may take an extended period of time because of the limited number ofindividuals in our industry with the breadth of skills and experience requiredto develop and commercialize products successfully.  We do not maintain “key person” insurancepolicies on the lives of these individuals or the lives of any of our otheremployees.  We employ these 

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individualson an at-will basis and their employment can be terminated by us or themat any time, for any reason and with or without notice.

Wewill need to hire additional personnel as we expand our clinical developmentand commercial activities.  We may not beable to attract or retain qualified management and scientific personnel onacceptable terms in the future due to the intense competition for qualifiedpersonnel among biotechnology, pharmaceutical and other businesses,particularly in the San Diego, California area. If we are not able to attract and retain the necessary personnel toaccomplish our business objectives, we may experience constraints that willimpede significantly the achievement of our research and developmentobjectives, our ability to raise additional capital and our ability toimplement our business strategy.  Inparticular, if we lose any members of our senior management team, we may not beable to find suitable replacements, and our business and prospects may beharmed as a result.

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

Weare a small company with 39 employees as of March 15, 2007.  To continue our clinical trials andcommercialize our product candidates, we will need to expand our employee basefor managerial, operational, marketing, sales, financial and otherresources.  Future growth will imposesignificant added responsibilities on members of management, including the needto identify, recruit, maintain and integrate additional employees and may taketime away from 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 developmentefforts effectively;

·                  manage our current clinicaltrials for Difimicin and Prulifloxacin effectively;

·                  integrate additionalmanagement, administrative and manufacturing personnel;

·                  build a marketing and salesorganization; and

·                  maintain sufficientadministrative, accounting and management information systems and controls.

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

**Third-party payor coverage and reimbursement may beinsufficient or unavailable altogether for our product candidates, which coulddiminish our sales or affect our ability to sell our products profitably.**

Marketacceptance and sales of our product candidates will depend on reimbursementpolicies and may be affected by future healthcare reform measures.  Government third-party payors, such as theMedicare and Medicaid programs, and private payors, including healthmaintenance organizations, decide which 

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drugsthey will pay for and establish reimbursement levels for these drugs.  Because third-party payors increasingly arechallenging prices charged and the cost-effectiveness of medical products,significant uncertainty exists as to the ability of our product candidates toreceive adequate coverage and reimbursement. We cannot be sure that third-party payors will place our productcandidates on approved formularies or that reimbursement will be available inwhole or in part for any of our product candidates.  Also, we cannot be sure that insufficientreimbursement amounts will not reduce the demand for, or the price of, ourproducts.

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

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

**Recent proposed legislation may permit re-importationof drugs from foreign countries into the United States, including foreigncountries where the drugs are sold at lower prices than in the United States,which could materially adversely affect our operating results and our overallfinancial condition.**

Wemay face competition for our products from lower priced products from foreigncountries that have placed price controls on pharmaceutical products.  The Medicare Modernization Act of 2003, orMMA, contains provisions that may change U.S. importation laws and expandconsumers’ ability to import lower priced versions of our and competingproducts from Canada, where there are government price controls.  These changes to U.S. importation laws willnot take effect unless and until the Secretary of Health and Human Servicescertifies that the changes will lead to substantial savings for consumers andwill not create a public health safety issue. The Secretary of Health and Human Services has not yet announced anyplans to make the required certification. Even if the changes do not take effect, and other changes are notenacted, imports from Canada and elsewhere may continue to increase due tomarket and political forces, and the limited enforcement resources of the FDA,the U.S. Customs Service, and other government agencies.  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 drugfor personal use, when the drug otherwise complies with the Federal Food, Drugand Cosmetic Act.  Further, severalstates and local governments have implemented importation schemes for theircitizens, and, in the absence of federal action to curtail such activities, weexpect other 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.

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**Current healthcare laws and regulations and futurelegislative or regulatory reforms to the healthcare system may affect ourability to sell our product candidates profitably.**

Inboth the United States and certain foreign jurisdictions, there have been, andwe anticipate there will continue to be, a number of legislative and regulatorychanges to the healthcare system that could impact our ability to sell ourproducts profitably.  In particular, theMMA added an outpatient prescription drug benefit to Medicare, publicly fundedhealth insurance program in the United States generally for the elderly anddisabled, which became effective on January 1, 2006.  Drug benefits under this new benefit areadministered through private plans that negotiate price concessions frompharmaceutical manufacturers.  We cannotbe certain that Difimicin and Prulifloxacin or other current or future drugcandidates will successfully be placed on the list of drugs covered by particularhealth plan formularies, nor can we predict the negotiated price for our drugcandidates, which will be determined by market factors.

TheMMA also changed the formula for determining payment for certain drugs, whichinclude drugs provided in 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, that are scheduled to go into effect on January 1,2007.  These changes could lead toreduced payments to pharmacies.  Manystates have also created preferred drug lists and include drugs on those listsonly when the manufacturers agree to pay a supplemental rebate.  If Difimicin and Prulifloxacin or othercurrent or future drug candidates are not included on these preferred druglists, physicians may not be inclined to prescribe them to their Medicaidpatients, thereby diminishing the potential market for our products.

Asa result of legislative proposals and the trend towards managed healthcare inthe United States, third-party payors are increasingly attempting to containhealthcare costs by limiting both coverage and the level of reimbursement ofnew drugs.  They may also refuse toprovide any coverage of uses of approved products for medical indications otherthan those for which the FDA has granted market approvals.  As a result, significant uncertainty existsas to whether and how much third-party payors will reimburse for newly-approveddrugs, which in turn will put pressure on the pricing of drugs.  Further, we do not have experience inensuring approval by applicable third-party payors outside of the United Statesfor reimbursement of our products.  Theavailability of numerous generic antibiotics at lower prices than brandedantibiotics can also be expected to substantially reduce the likelihood ofreimbursement for Difimicin and Prulifloxacin. We also anticipate pricing pressures in connection with the sale of ourproducts due to the trend toward managed healthcare, the increasing influenceof health maintenance organizations and additional legislative proposals.

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

Weare subject to various federal and state laws pertaining to healthcare fraudand abuse, including anti-kickback laws and physician self-referral laws.  Violations of these laws are punishable bycriminal and civil sanctions, including, in some instances, exclusion from participationin federal and state healthcare programs, including Medicare and Medicaid, andthe curtailment or restructuring of operations. We believe that our operations are in material compliance with suchlaws.  However, because of thefar-reaching nature of these laws, there can be no assurance that we would notbe required to alter one or more of our practices to be in compliance withthese laws.  In addition, there can be noassurance that 

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theoccurrence of one or more violations of these laws or regulations would notresult in a material adverse effect on our financial condition and results ofoperations.

**Our business involves the use of hazardous materialsand we and our third-party manufacturers must comply with environmental lawsand regulations, which can be expensive and restrict how we do business.**

Ourthird-party manufacturers’ activities and, to a lesser extent, our ownactivities involve the controlled storage, use and disposal of hazardousmaterials, including the components of our product candidates and otherhazardous compounds.  We and ourmanufacturers are subject to federal, state and local laws and regulationsgoverning the use, manufacture, storage, handling and disposal of thesehazardous materials.  Although we believethat the safety procedures for handling and disposing of these materials complywith the standards prescribed by these laws and regulations, we cannoteliminate the risk of accidental contamination or injury from thesematerials.  We currently have insurancecoverage in the amount of approximately $250,000 for damage claims arising fromcontamination on our property.  Theseamounts may not be sufficient to adequately protect us from liability fordamage claims relating to contamination. If we are subject to liability exceeding our insurance coverage amounts,our business and prospects would be harmed. In the event of an accident, state or federal authorities may alsocurtail our use of these materials and interrupt our business operations.

**Our business and operations would suffer in theevent of computer, telecommunications or other system failure.**

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

**Risks Related to OurIntellectual Property**

**It is difficult and costly to protect ourintellectual property and our proprietary technologies, and we may not be ableto ensure their protection.**

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

 

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

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

·                  others may be able to makecompounds that are similar to our product candidates but that are not coveredby the claims of our pending patent applications or licensed patents, or forwhich we are not licensed under our license agreements;

·                  others may be able to makecompeting pharmaceutical formulations containing our product candidates orcomponents of our product formulations but that are not covered by the claimsof our licensed patents, or for which we are not licensed under our licenseagreements;

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

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

·                  others may independently developsimilar or alternative technologies or duplicate any of our technologies;

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

·                  our pending patentapplications or the pending patent applications and issued patents of ourlicensors may not provide us with any competitive advantages, may be designedaround by our competitors, including generic drug companies, or may be heldinvalid or unenforceable as a result of legal challenges by third parties;

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

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

Inaddition, to the extent we are unable to obtain and maintain patent protectionfor one of our lead product candidates or in the event such patent protectionexpires, it may no longer be cost effective to extend our portfolio by pursuingadditional development of a product candidate for follow-onindications.  While we have filed patentapplications for Difimicin with respect to formulations and 

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manufacturingprocesses, we do not yet have any issued patents for Difimicin.  Even if these patent applications becomeissued patents, our competitors, including generic drug companies, may be ableto design around our manufacturing processes and formulations forDifimicin.  As a result, our competitorsmay be able to develop competing products more effectively or less expensively.  In addition, although we have patentprotection on the use and formulations of Difimicin, patent protection may notbe available on the active ingredient of Difimicin without regard toformulation.  As a result, ourcompetitors, including generic drug companies, may be able to design moreeffective or less costly formulations of the active ingredient ofDifimicin.  In addition, assuming ourclinical trials are successful and completed in a timely manner, we plan tolaunch Prulifloxacin for the treatment of infectious diarrhea no earlier thanlate 2008.  However, the patent coveringPrulifloxacin is scheduled to expire in February 2009, and due to this shortremaining patent life we may be forced to abandon plans to pursue developmentand approval of Prulifloxacin for any indications, including infectiousdiarrhea. Although we also currently plan to apply for an extension of thispatent term until 2014, we cannot assure you that the PTO will grant theextension for the full additional five years, or at all.  In either event, our business and prospectswould be harmed significantly.

Wedepend, in part, on our licensors and collaborators to protect a portion of ourproprietary rights.  In such cases, ourlicensors and collaborators may be primarily or wholly responsible for themaintenance of patents and prosecution of patent applications relating toimportant areas of our business.  Forexample, Nippon Shinyaku, SKI, TSRI and Cempra are responsible for themaintenance of patents and prosecution of patent applications relating toPrulifloxacin, OPT-822/OPT-821 combination therapy, our OPopStechnology, and OPT-1068 and OPT-1273, respectively.  We are also dependent on Par to providetechnical support for patent applications relating to Difimicin.  If any of these parties fail to adequatelyprotect these product candidates with issued patents, our business andprospects would be harmed significantly.

Underour agreement with Nippon Shinyaku, in the event Nippon Shinyaku fails to takeall steps necessary to seek extension of the patents licensed to us in theUnited States 180 days after we request such action be taken, then we have theright to take all necessary actions to extend the licensed patents.  Our agreements with Par, SKI, TSRI and Cemprado 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 and prosecutepatent applications relating to technology licensed to or from us, we may berequired to take further action on our own to protect this technology.  However, we may not be successful inmaintaining such patents or prosecuting such patent applications and if so, ourbusiness and prospects would be harmed significantly.

Wealso may rely on trade secrets to protect our technology, especially where wedo not believe patent protection is appropriate or obtainable.  However, trade secrets are difficult toprotect.  Although we use reasonableefforts to protect our trade secrets, our employees, consultants, contractors,outside scientific collaborators and other advisors may unintentionally orwillfully disclose our information to competitors.  Enforcing a claim that a third-party entityillegally obtained and is using any of our trade secrets is expensive and timeconsuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willingto protect trade secrets.  Moreover, ourcompetitors may independently develop equivalent knowledge, methods and know-how.

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

**We may incur substantial costs as a result oflitigation or other proceedings relating to our patent, trademark and otherintellectual property rights, and we may be unable to protect our rights to, oruse, our technology.**

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

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

Althoughwe have conducted searches of third-party patents with respect to Difimicin andPrulifloxacin, these searches may not have identified all third-party patentsrelevant to those products and we have not conducted an extensive search ofpatents issued to third parties with respect to our other productcandidates.  Consequently, no assurancecan be given that third-party patents containing claims covering our products,technology or methods do not exist, have not been filed, or could not be filedor issued.  Because of the number ofpatents issued and patent applications filed in our technical areas or fields,we believe there is a significant risk that third parties may allege they havepatent rights encompassing our products, technology or methods.  In addition, we have not conducted anextensive search of third-party trademarks, so no assurance can be given thatsuch third-party trademarks do not exist, have not been filed, could not befiled or issued, or could not exist under common trademark law.  While we have filed a trademark applicationfor the names “Optimer” and “Optimer Pharmaceuticals,” we are aware that the 

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name“Optimer” has been registered as a trademark with the PTO by more than onethird party, including one in the biotechnology space.  As such, we believe there is a significantrisk that third parties may allege they have trademark rights encompassing thenames for which we have applied for protection.

Becausesome patent applications in the United States may be maintained in secrecyuntil the patents are issued, because patent applications in the United Statesand many foreign jurisdictions are typically not published until eighteenmonths after filing, and because publications in the scientific literatureoften lag behind actual discoveries, we cannot be certain that others have notfiled patent applications for technology covered by our licensors’ issuedpatents or our pending applications or our licensors’ pending applications, orthat we or our licensors were the first to invent the technology.  Our competitors may have filed, and may inthe future file, patent applications covering technology similar to ours.  Any such patent application may have priorityover our or our licensors’ patent applications and could further require us toobtain rights to issued patents covering such technologies.  If another party has filed a U.S. patentapplication on inventions similar to ours, we may have to participate in aninterference proceeding declared by the 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.

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

**Risks Related to theSecurities Market and Ownership of Our Common Stock**

**The market price of our common stock may be highlyvolatile.**

Beforeour initial public offering in February 2007, there has not been a publicmarket for our common stock.  We cannotassure you that an active 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

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

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

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

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

·                  the success of ourdevelopment efforts and clinical trials, particularly with respect to Difimicinand Prulifloxacin;

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·                  announcements by ourcollaborators with respect to clinical trial results and communications fromthe FDA or comparable foreign regulatory agencies;

·                  the success of our effortsto acquire or in-license additional products or product candidates;

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

·                  actual or anticipatedvariations in our quarterly operating results;

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

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

·                  third-party coverage orreimbursement policies;

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

·                  conditions or trends in thebiotechnology and biopharmaceutical industries;

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

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

·                  changes in the marketvaluations of similar companies;

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

·                  additions or departures ofkey scientific or management personnel;

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

·                  trading volume of our commonstock.

Inaddition, the stock market in general and the market for biotechnology andbiopharmaceutical companies in particular have experienced extreme price andvolume fluctuations that have often been unrelated and/or disproportionate tothe operating performance of those companies. These broad market and industry factors may significantly harm themarket price of our common stock, regardless of our operating performance.  In the past, following periods of volatilityin the market, securities class-action litigation has often been instituted againstcompanies.  Such litigation, if institutedagainst us, could result in substantial costs and diversion of management’sattention and resources, which could significantly harm our business, financialcondition and prospects.

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**Future sales of our commonstock in the public market could cause our stock price to decline.**

Personswho were our stockholders prior to the sale of shares in our initial publicoffering continue to hold a substantial number of shares of our common stockthat they will be able to sell in the public market following the expiration ofthe 180-day lock-up agreements entered into in connection with our recentinitial public offering. Significant portions of these shares are held by asmall number of stockholders. Sales by our current stockholders of asubstantial number of shares, or the expectation that such sales may occur,could significantly reduce the market price of our common stock.  Moreover, the holders of a substantial numberof shares of our common stock have rights, subject to certain conditions, torequire us to file registration statements to permit the resale of their sharesin the public market or to include their shares in registration statements thatwe may file for ourselves or other stockholders.

We have also registeredall common stock that we may issue under our employee benefits plans. As aresult, these shares can be freely sold in the public market upon issuance,subject to restrictions under the securities laws and any applicable lock-upagreement. In addition, our directors and executive officers may in the futureestablish programmed selling plans under Rule 10b5-1 of the SecuritiesExchange Act for the purpose of effecting sales of our common stock. If any ofthese events cause a large number of our shares to be sold in the publicmarket, the sales could reduce the trading price of our common stock and impedeour ability to raise future capital.

**Our principal stockholders and management own asignificant percentage of our stock and will be able to exercise significantinfluence over matters subject to stockholder approval.**

Ourexecutive officers, directors and principal stockholders, together with theirrespective affiliates, currently beneficially own approximately 22.8% of ourcommon stock.  Accordingly, thesestockholders will likely be able to influence the composition of our board ofdirectors, influence the approval of all matters requiring stockholder approvaland continue to have significant influence over our operations.  This concentration of ownership could havethe effect of delaying or preventing a change in our control or otherwisediscouraging a potential acquirer from attempting to obtain control of us,which in turn could cause the market value of our common stock to decline.

**We will incur significant increased costs as aresult of operating as a public company, and our management will be required todevote substantial time to new compliance initiatives.**

Asa public company, we will incur significant legal, accounting and otherexpenses that we did not incur as a private company.  Until we are able to implement comprehensiveaccounting policies and procedures, we may not be able to prepare and disclose,in a timely manner, our financial statements and other required disclosures orcomply with existing or new reporting requirements.  In addition, the Sarbanes-Oxley Act, as wellas rules subsequently implemented by the Securities and Exchange Commission, orSEC, and the Nasdaq Global Market, or Nasdaq, have imposed various newrequirements on public companies, including requiring establishment andmaintenance of effective disclosure and financial controls and changes incorporate governance practices.  Ourmanagement and other personnel will need to devote a substantial amount of timeto these new compliance initiatives. Moreover, these rules and regulations will increase our legal andfinancial compliance costs and will make some activities more time-consumingand costly.  For example, we expect theserules and 

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regulationsto make it more difficult and more expensive for us to maintain director andofficer liability insurance, and we may be required to incur substantial coststo maintain the same or similar coverage.

TheSarbanes-Oxley Act requires, among other things, that we maintain effectiveinternal controls for financial reporting and disclosure controls andprocedures.  In particular, commencing infiscal 2008, we must perform system and process evaluation and testing of ourinternal controls over financial reporting to allow management and ourindependent registered public accounting firm to report on the effectiveness ofour internal controls over financial reporting, as required by Section 404of the Sarbanes-Oxley Act.  Our testing,or the subsequent testing by our independent registered public accounting firm,may reveal deficiencies in our internal controls over financial reporting thatare deemed to be material weaknesses. Our compliance with Section 404 will require that we incursubstantial accounting expense and expend significant management efforts.  We currently do not have an internal auditgroup, and we will need to hire additional accounting and financial staff withappropriate public company experience and technical accounting knowledge.  We currently have three****employeesdedicated full-time and one employee dedicated part-time to accounting andfinance matters.  We currentlycontemplate hiring at least one more full-time employee in the accounting andfinance department to assist in ensuring 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 ofSection 404 in a timely manner, or if we or our independent registeredpublic accounting firm identifies deficiencies in our internal controls overfinancial reporting that are deemed to be material weaknesses, the market priceof our stock could decline and we could be subject to sanctions orinvestigations by Nasdaq, the SEC or other regulatory authorities, which wouldrequire additional financial and management resources.

**Some provisions of our charter documents andDelaware law may have anti-takeover effects that could discourage anacquisition of us by others, even if an acquisition would be beneficial to ourstockholders and may prevent attempts by our stockholders to replace or removeour current management.**

Provisions in our amended and restated certificate of incorporation andbylaws, as well as provisions of Delaware law, could make it more difficult fora third party to acquire us, even if doing so would benefit our stockholders,or remove our current management.  Theseprovisions include:

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

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

·                  limiting the removal ofdirectors by the stockholders;

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

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·                  a requirement of approval ofnot less than 662/3% of all outstanding shares of our capitalstock entitled to vote to amend any bylaws by stockholder action, or to amendspecific provisions of our certificate of incorporation;

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

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

Theseprovisions may frustrate or prevent any attempts by our stockholders to replaceor remove our current management by making it more difficult for stockholdersto replace members of our board of directors, which is responsible forappointing the members of our management. In addition, we are subject to Section 203 of the Delaware GeneralCorporation Law, which generally prohibits a Delawarecorporation from engaging in any of a broadrange of business combinations with a stockholder owning 15% or more of ouroutstanding voting stock for a period of three years following the date onwhich the stockholder became an interested stockholder, unless suchtransactions are approved by our board of directors.  This provision could have the effect ofdelaying or preventing a change of control, whether or not it is desired by orbeneficial to our stockholders.  Such adelay or prevention of a change of control transaction could cause the marketprice of our stock to decline.

**Item 1B.Unresolved Staff Comments**

None.

**Item 2.Properties**

Ourfacilities currently consist of approximately 18,000 square feet of space,approximately 65% of which is laboratory space and approximately 35% of whichis office space, located at our corporate headquarters in San Diego,California.  The current facilities areleased through November 2011, with an option to lease additional space and twooptions to extend the term for an additional five years each through November2021.  We believe these facilities areadequate to meet our current needs and that additional space will be availableon commercially reasonable terms as needed.

**Item 3.Legal Proceedings**

Weare not currently a party to any legal proceeding.

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

Nomatters were submitted to a vote of security holders during the fourth quarterof fiscal year ended December 31, 2006.

**PART II**

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

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**CommonStock Market Price**

Ourcommon stock commenced trading on the Nasdaq Global Market on February 9,2007 under the symbol “OPTR.” Prior to such time, there was no public marketfor our common stock.

Theclosing price for our common stock as reported by the Nasdaq Global Market onMarch 15, 2007 was $9.90 per share.

Asof March 15, 2007, there were approximately 156 holders of record of ourcommon stock.

**Dividends**

Wehave never declared or paid any cash dividends on our capital stock. Wecurrently intend to retain all available funds and future earnings, if any, tosupport our operations and finance the growth and development of our business.We do not intend to pay cash dividends on our common stock for the foreseeablefuture. Any future determination related to dividend policy will be made at thediscretion of our board of directors and will depend upon, among other factors,our results of operations, financial condition, capital requirements and contractualrestrictions.

**Recent Sales of Unregistered Securities**

During the fiscal year ended December 31, 2006, we sold an aggregateof 290,240 shares of our common stock and 6,666 shares of ourSeries D Preferred Stock.  279,147 shares of common stock were sold toservice providers pursuant to their exercise of outstanding options issuedunder our 1998 stock plan.  The exercise price per share of suchissuances ranged from approximately $0.22 to $2.17.  The shares wereissued under Rule 701 of the Securities Act of 1933.  The remaining 11,076shares of common stock were issued pursuant to an exercise of an outstandingwarrant at an exercise price of $1.08. The 6,666 shares of Series D Preferred Stock were issued pursuant to theexercise of an outstanding warrant at an exercise price per share of$7.80.  All shares we issued pursuant tothe exercise of outstanding warrants during the fiscal year ended December 31,2006 were issued under Regulation D of the Securities Act of 1933.

 

**Use of Proceeds from the Sale ofRegistered Securities**

OnFebruary 8, 2007, our registration statement on Form S-1 (Registration No.333-138555) was declared effective for our initial public offering.  On February 14, 2007, we sold 7,000,000shares of our common stock at $7.00 per share in connection with the closing ofour initial public offering for a total of $49.0 million in grossproceeds.  Piper Jaffray & Co. andJefferies & Company, Inc. acted as joint book-running managers.  JMP Securities LLC and Rodman & Renshaw,LLC acted as co-managers for the offering.

Inconnection with the initial public offering, we incurred approximately $3.4million in underwriting discounts and expenses and approximately $2.0 millionfor all other costs and expenses payable by us in connection with the sale ofour common stock pursuant to our initial public offering.

 

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Weinitially invested the approximately $43.6 million in net proceeds we receivedpursuant to our initial public offering in short-term interest-bearing,investment grade instruments, money market funds, certificates of deposit ordirect or guaranteed obligations of the United States government.  On February 26, 2007, we used $20.0 millionof the proceeds to repurchase Par’s rights to develop and commercializeDifimicin.  We intend to use theremaining approximately $23.6 million of net proceeds from our initial publicoffering for the clinical trials and other research and development activitiesof Difimicin and Prulifloxacin; to fund commercialization activities, includingconducting pre-launch preparations;  tofund working capital and general corporate purposes; and potential in-licensesand acquisitions of products or product candidates, all as more fully describedin the “Use of Proceeds” section of the final prospectus for our initial publicoffering.  There has been no materialchange in the planned use of proceeds described in our final prospectus for ourinitial public offering.

OnFebruary 20, 2007, the underwriters exercised in full their over-allotmentoption and purchased an additional 1,050,000 shares of our common stock from aselling stockholder.

**Repurchases of Equity****Securities**

We did notrepurchase any shares of our common stock during the fourth quarter of fiscalyear ended December 31, 2006.

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**Item6.  Selected Consolidated Financial Data**

Youshould read the following selected consolidated financial and operatinginformation for Optimer Pharmaceuticals, Inc. together with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour consolidated financial statements and notes thereto included elsewhere inthis Annual Report on Form 10-K.

Theconsolidated statements of operations data for the years endedDecember 31, 2006, 2005 and 2004, and the consolidated balance sheet dataas of December 31, 2006 and 2005 are derived from the audited consolidatedfinancial statements included elsewhere in this report. The consolidatedstatements of operations data for the years ended December 31, 2003 andDecember 31, 2002, and the consolidated balance sheet data as ofDecember 31, 2004, 2003 and 2002 are derived from audited consolidatedfinancial statements not included in this report. Historical results for anyprior period are not necessarily indicative of the results to be expected for afull fiscal year or for any future period.
| ** **                                                                 | ** ** | **Years Ended December 31**                            | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                 | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**                                          |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Collaboration and grant  revenues                                          |       | $                                                                     | 933        |   | $ | 2,147 |   | $ | 1,111 |   | $ | 542 |   | $ | — |   |
| Operating expenses:                                                        |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Research and  development                                                  |       | 10,481                                                                |       | 7,047 |   | 8,571 |   | 7,910 |   | 5,541 |   |
| General and  administrative                                                |       | 3,523                                                                 |       | 2,782 |   | 2,697 |   | 2,856 |   | 3,140 |   |
| Total operating  expenses                                                  |       | 14,004                                                                |       | 9,829 |   | 11,268 |   | 10,766 |   | 8,681 |   |
| Loss from  operations                                                      |       | (13,071                                                               | )          | (7,682 | ) | (10,157 | ) | (10,224 | ) | (8,681 | ) |
| Interest income  (expense) and other, net                                  |       | 1,169                                                                 |       | 237 |   | 247 |   | 441 |   | 936 |   |
| Net loss                                                                   |       | (11,902                                                               | )          | (7,445 | ) | (9,910 | ) | (9,783 | ) | (7,745 | ) |
| Accretion to  redemption amount of redeemable convertible preferred stock  |       | (329                                                                  | )          | (223 | ) | (12 | ) | (13 | ) | (12 | ) |
| Net loss attributable  to common stockholders                              |       | $                                                                     | (12,231    | ) | $ | (7,668 | ) | $ | (9,922 | ) | $ | (9,796 | ) | $ | (7,757 | ) |
| Basic and  diluted net loss per share attributable to common stockholders: |       | $                                                                     | (4.81      | ) | $ | (3.22 | ) | $ | (4.76 | ) | $ | (5.01 | ) | $ | (4.09 | ) |
| Weighted average shares  outstanding:                                      |       | 2,543                                                                 |       | 2,383 |   | 2,084 |   | 1,954 |   | 1,897 |   |

 
| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                         | ** ** | **(in thousands)**               | ** ** |
| **Balance  Sheet Data:**                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and short-term investments |       | $                                     | 21,341     |   | $ | 29,880 |   | $ | 1,953 |   | $ | 11,134 |   | $ | 19,277 |   |
| Working capital                                    |       | 17,990                                |       | 28,490 |   | 1,231 |   | 10,349 |   | 18,917 |   |
| Total assets                                       |       | 24,114                                |       | 32,335 |   | 4,903 |   | 14,837 |   | 24,030 |   |
| Redeemable  convertible preferred stock            |       | 65,460                                |       | 65,078 |   | 32,175 |   | 32,163 |   | 32,151 |   |
| Accumulated  deficit                               |       | (51,558                               | )          | (39,656 | ) | (32,212 | ) | (22,302 | ) | (12,518 | ) |
| Total stockholders’  deficit                  |       | (46,702                               | )          | (35,143 | ) | (28,463 | ) | (18,760 | ) | (8,958 | ) |
|                                                    |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperation**

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

**Overview**

Weare a biopharmaceutical company focused on discovering, developing andcommercializing innovative anti-infective products.  Our initial development efforts addressproducts that treat gastrointestinal infections and related diseases wherecurrent therapies have limitations, including diminished efficacy, seriousadverse side effects, drug-to-drug interactions, difficult patient complianceand bacterial resistance.

Wecurrently have two late-stage anti-infective product candidates, Difimicin andPrulifloxacin.  Difimicin, our leadproduct candidate, is an antibiotic currently in a Phase 3 registrationtrial for the treatment of CDAD, the most common nosocomial diarrhea.  Prulifloxacin is an antibiotic currently intwo Phase 3 trials for the treatment of travelers’ diarrhea.  We are developing additional productcandidates using our proprietary technology, including our OPopS drug discoveryplatform.

Wewere incorporated in November 1998. Since inception, we have focused on hiring our management team andinitial operating employees and on developing our product candidates, includingDifimicin and Prulifloxacin.  We havenever been profitable and have incurred significant net losses since ourinception.  As of December 31, 2006, wehad an accumulated deficit of $51.6 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 

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candidates,as well as acquire or in-license additional products or productcandidates, technologies or businesses that are complementary to our own.

Inconnection with our initial public offering, a 1-for-2.1667 reversestock split of our common stock was authorized by our board of directors andstockholders in January 2007, which has been given retroactive treatment.

**Financial Operations Overview**

*Collaboration and GrantRevenues*

Wehave not generated any revenues from sales of commercial products.  Since inception, we have generated revenuesprimarily as a result of various collaborations with pharmaceutical andbiotechnology companies and grants from government agencies.  We may also periodically recognize asrevenues non-refundable payments for achieving certain milestones, during theterm of our agreements.

*Research and DevelopmentExpense*

Researchand development expense consists of expenses incurred in connection withidentifying and developing our drug candidates and developing and advancing ourdrug discovery technology.  Our researchand development expenses consist primarily of salaries and related employeebenefits, costs associated with clinical trials managed by our CROs and costsassociated with non-clinical activities and regulatory approvals.  Our most significant costs are for clinicaltrials, including payments to vendors such as CROs, investigators,manufacturers of clinical supplies and related consultants.  Our historical research and developmentexpenses have related predominantly to clinical trials of Difimicin andPrulifloxacin, the development of our carbohydrate technology platform,including OPopS, in-licensing fees and general research activities.  We charge all research and developmentexpenses to operations as they are incurred because the underlying technologyassociated with these expenditures relates to our research and developmentefforts and has no alternative future uses. From inception through December 31, 2006, we incurred totalresearch and development expenses of approximately $42.8 million.

Weuse our internal research and development resources across several projects,much of which is not allocable to a specific project.  Accordingly, we do not account for all of ourinternal research and development costs on a project basis.  We use external service providers and vendorsto conduct our clinical trials, to manufacture our product candidates to beused in clinical trials and to provide various other research and developmentrelated products and services.  Theseexternal costs are allocable to a specific project.

Externalcosts are expensed as incurred.  We incurred$4.8 million, $2.8 million and $11.7 million of expenses directly related tothe development of Difimicin for the years ended December 31, 2006 and2005, and cumulatively through December 31, 2006, respectively.  We incurred $2.5 million, $935,000, and $4.7million of expenses directly related to the development of Prulifloxacin forthe years ended December 31, 2006 and 2005, and cumulatively throughDecember 31, 2006, respectively. All other research and development expenses were for other clinical programs.

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Weexpect our research and development expenses to increase substantially as weexpand our clinical trial activities with respect to Difimicin andPrulifloxacin, advance our other product candidates through the developmentprocess and invest in additional product opportunities and researchprograms.  Clinical trials andpre-clinical studies are time-consuming and expensive.  Our expenditures on current and future pre-clinicaland clinical development programs are subject to many uncertainties.  We test our product candidates in severalpre-clinical studies, and we then conduct clinical trials for those productcandidates 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 whoparticipate in the trials;

·                  the number of sites includedin the trials;

·                  the length of time requiredto enroll trial participants;

·                  the duration of patienttreatment and follow-up;

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

·                  the costs, requirements andtiming of, and the ability to secure, regulatory approvals.

Asa result of the uncertainties discussed above, we are unable to determine withany significant degree of certainty the duration and completion costs of ourresearch and development projects or when and to what extent we will generaterevenues from the commercialization and sale of any of our productcandidates.  However, while we do nothave specific estimates for the costs of all of our projects, we currentlyestimate that we will incur external costs of approximately $13.7 million tocomplete the Phase 3****clinicaltrials for Difimicin to treat CDAD and approximately $5.6 million to completethe Phase 3 clinical trials for Prulifloxacin to treat infectiousdiarrhea, including travelers’ diarrhea.

*General and AdministrativeExpense*

Generaland administrative expense consists primarily of compensation, includingstock-based, and other expenses related to an allocated portion of facilitycost, legal fees and other professional services expenses, our corporateadministrative employees and insurance costs. We anticipate increases in general and administrative expense as we addpersonnel, comply with the reporting obligations applicable to publicly-held companiesand continue to build our corporate infrastructure in support of our continueddevelopment of our product candidates and preparation for the potentialcommercialization of our product candidates.

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*Interest Income (Expense)and Other, Net*

Interestincome (expense) and other, net consists of interest earned on our cash, cashequivalents and short-term investments and other-than-temporary declines in themarket value of available-for-sale securities and cash and non-cashinterest charges related to bridge financings.

*Net Operating Losses and TaxCredit Carryforwards*

Asof December 31, 2006, we had federal, state and foreign net operating losscarryforwards of approximately $42.6 million, $40.8 million and $1.6million, respectively.  If not utilized,the net operating loss carryforwards will begin expiring in 2020 for federalpurposes and 2012 for state purposes. The foreign losses originate from our subsidiary in Taiwan.  The losses from our subsidiary in Taiwanexpire five years after origination.  Asof December 31, 2006, we had both federal and state research anddevelopment tax credit carryforwards of approximately $1.6 million and $1.0million, respectively.  The federal taxcredits will begin expiring in 2020 unless previously utilized and the statetax credits carryforward indefinitely. As of December 31, 2006, we had a state manufacturer’s investmenttax credit carryforward of approximately $103,000 which will begin to expire in2011, unless previously utilized.  UnderSection 382 of the Internal Revenue Code of 1986, as amended, substantialchanges in our ownership may limit the amount of net operating loss and taxcredit carryforwards that could be utilized annually in the future to offsettaxable income.  Any such annuallimitation may significantly reduce the utilization of the net operating lossesand tax credits before they expire.  Ineach period since our inception, we have recorded a valuation allowance for thefull amount of our deferred tax asset, as the realization of the deferred taxasset has not met the “more likely than not” threshold required underSFAS 109, Accounting For IncomeTaxes.  As a result, we have not recordedany federal or state income tax benefit in our statement of operations.

**Critical Accounting Policies and Estimates**

OurManagement’s Discussion and Analysis of our Financial Condition and Results ofOperations is based on our consolidated financial statements, which have beenprepared in conformity with generally accepted accounting principles in theUnited States.  The preparation of theseconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, expenses and relateddisclosures.  Actual results could differfrom those estimates. While our significant accounting policies are describedin more detail in Note 1 of the Notes to Consolidated Financial Statementsappearing elsewhere in this Form 10-K, we believe the following accountingpolicies to be critical to the judgments and estimates used in the preparationof our consolidated financial statements.

*Revenue Recognition*

Ourcollaboration agreements contain multiple elements, including non-refundableupfront fees, payments for reimbursement of third-party research costs,payments for ongoing research, payments associated with achieving specificdevelopment milestones and royalties based on specified percentages of netproduct sales, if any.  We apply therevenue recognition criteria outlined in Staff Accounting BulletinNo. 104, *Revenue Recognition* and EmergingIssues Task Force, or EITF, Issue 00-21, *RevenueArrangements with Multiple Deliverables*, or EITF 00-21.  In applying these revenue recognitioncriteria, we consider a variety of factors in determining the appropriatemethod of revenue recognition 

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underthese arrangements, such as whether the elements are separable, whether thereare determinable fair values and whether there is a unique earnings processassociated with each element of a 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.

Whena payment is specifically tied to a separate earnings process, revenues arerecognized when the specific performance obligation associated with the paymentis completed.  Performance obligationstypically consist of significant and substantive milestones.  Revenues from milestone payments may beconsidered separable from funding for research services because of theuncertainty surrounding the achievement of milestones for products in earlystages of development.  Accordingly,these milestone payments are allowed to be recognized as revenue if and whenthe performance milestone is achieved if they represent a substantive earningsprocess as described in EITF 00-21.

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

Revenuesderived from reimbursement of direct out-of-pocket expenses for research costsassociated with grants are recorded in compliance with EITF Issue 99-19,*Reporting Revenue Gross as a Principal Versus Netas an Agent*, and EITF Issue 01-14, *IncomeStatement Characterization of Reimbursements Received for “Out-of-Pocket”Expenses Incurred*.  Accordingto the criteria established by these EITF Issues, in transactions where we actas a principal, with discretion to choose suppliers, bear credit risk andperform part of the services required in the transaction, we record revenue forthe gross amount of the reimbursement. The costs associated with these reimbursements are reflected as acomponent of research and development expense in the consolidated statements ofoperations.

Noneof the payments that we have received from collaborators to date, whetherrecognized as revenue or deferred, are refundable even if the related programis not successful.

*Accrued Clinical Trial Costs*

Asubstantial portion of our on-going research and development activitiesare performed under agreements we enter into with external service providers,including CROs, who conduct many of our research and developmentactivities.  We accrue the costs incurredunder these contracts based on factors such as estimates of work performed,milestones achieved, patient enrollment and costs historically incurred forsimilar contracts.  As actual costsbecome known, we adjust our accruals.  Todate, our accruals have been within management’s estimates, and no materialadjustments to research and development expenses have been recognized.  We expect to significantly expand the levelof research and development activity to be performed by external serviceproviders and our estimated accruals will be more material to our futureoperations.  Subsequent changes inestimates may result in a material change in our accruals, which could alsomaterially affect our results of operations.

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*Stock-Based Compensation*

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting Standards,or SFAS, No. 123(R), *Share-Based Payment*,which revises SFAS No. 123, *Accounting for Stock-BasedCompensation* and supersedes Accounting Principles Board, or APB,Opinion No. 25, *Accounting for StockIssued to Employees*.  SFASNo. 123(R) requires that share-based payment transactions with employeesbe recognized in the financial statements based on their fair value andrecognized as compensation expense over the vesting period.  Prior to SFAS No. 123(R), we disclosedthe pro forma effects of applying SFAS No. 123 under the Black-Scholesmethod.  We adopted SFAS No. 123(R)effective January 1, 2006, prospectively for new equity awards issuedsubsequent to December 31, 2005. Under SFAS No. 123(R), we calculatethe fair value of stock option grants using the Black-Scholes option-pricingmodel.  The assumptions used in theBlack-Scholes model were 6.1 years for the expected term, 65.8% for theexpected volatility, 4.8% for the risk free rate and 0.0% for dividend yieldfor the year ended December 31, 2006. Future expense amounts for any particular quarterly or annual periodcould be affected by changes in our assumptions.

Theweighted average expected option term for 2006 reflects the application of thesimplified method set out in SEC Staff Accounting Bulletin, or SAB,No. 107 which was issued in March 2005. The simplified method defines the life as the average of the contractualterm of the options and the weighted average vesting period for all optiontranches.

Estimatedvolatility for fiscal 2006 also reflects the application of SAB No. 107interpretive guidance and, accordingly, incorporates historical volatility ofsimilar public entities.

Asof December 31, 2006, we had approximately $2.3 million of unrecognizedstock-based compensation costs related to non-vested equity awards.  As of December 31, 2006, we had outstandingvested options to purchase 903,753 shares of our common stock and unvestedoptions to purchase 593,192 shares of our common stock.

Thefair value of our common stock has historically been established by our boardof directors.  We have considered theguidance in the American Institute of Certified Public Accountants, or AICPA,Audit and Accounting Practice Aid Series, *Valuation ofPrivately-Held-Company Equity Securities Issued as Compensation*, todetermine the fair value of our common stock for purposes of setting theexercise prices of stock options granted to employees and others.  This guidance emphasizes the importance ofthe operational development in determining the value of the enterprise.  We are at the early stage of our development,and to date, have been focused on research and development activities.

Ourboard of directors estimated the fair value of our common stock based uponseveral factors, including our financial condition, our cash burn rate and ananalysis of the possible sources and costs of raising additional capital.  We are at an early stage of development,primarily focused on product development while preparing for the potentialcommercialization of two late-stage product candidates.  To date, we have been funded primarily byventure capitalists.  Prior to filing therevised protocol for the Phase 2b/3 Difimicin clinical trial in lateDecember 2005, and the FDA’s opening of the Prulifloxacin Investigational NewDrug, or IND, application in January 2006, we were considered to be in a stageof development, pursuant to the AICPA guidance where the preferences of thepreferred stockholders, in particular the liquidation preferences, are verysignificant when compared to the value of the company.  For these reasons, our common stock wasvalued at $1.08 per share.  In April2006, subsequent to achieving the two clinical development milestones mentionedabove but prior to the initiation of the 

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initialpublic offering process on October 5, 2006, our board of directorsallocated additional enterprise value to our common stock and increased thecommon stock valuation to $2.17 per share.

Inconnection with the initiation of the public offering process, weretrospectively reassessed the estimated fair value of our common stock as ofthe dates of the issuance of equity instruments, dating back to June 30,2005.  We have not historically obtainedcontemporaneous valuations by an unrelated valuation specialist because, at thetime of issuance of equity awards, we believed our estimates of the fair valueof our common stock to be reasonable and consistent with our understanding ofhow similarly situated companies in our industry were valued.  We determined that the fair value of ourcommon stock was $1.08 per share during the period from June 30, 2005through January 13, 2006, which was approximately the time when weachieved the clinical development milestones discussed above.  In addition, in reassessing the value ofcommon stock in 2005 and 2006, we considered the price we received in November2005 for our Series D preferred stock of $7.80 per share, as to whichapproximately 54% of the proceeds were from new investors that were unrelatedparties.  This Series D preferredstock financing was completed at the same price and on other similar terms asthe April 2005 Series C financing. Accordingly, we believe that the value of our common stock also remainedconstant during the same time period and until January 2006, or the time ofachievement of the two clinical development milestones described above.

Webelieve that after the completion of the two clinical development milestones,the fair value of our common stock increased to $5.37 per share in January 2006which represents 90% of the value of the Series D preferred stock, on anas-converted basis, after deducting the value of the common stockwarrants and assigning no value to the preferences of the Series Dpreferred stock.  In connection with thepreparation of our financial statements necessary for our initial public****offering, we reassessed the estimated fair value of ourcommon stock using a market based approach, which considered recently completedinitial public offerings by companies with similar market size and in a similarstage of development.  In determining thereassessed fair value of our common stock, we established $11.40 per share asthe reassessed fair value at October 5, 2006.  We also then reassessed the estimated fairvalue of our common stock from January 2006 through October 5, 2006 basedon the nature of our operations and the execution of our operating plan.  Based on this assessment, including the factthat subsequent to the two clinical development milestones previouslydescribed, there were no other significant scientific or operational milestonesduring that period.  As such, we ratablyincreased the estimated fair value of our common stock from $5.37 per share inJanuary 2006 to $11.40 per share at October 5, 2006.  On January 19, 2007, in connection withthe execution of the prospective buy-back agreement with Par, pursuant to whichwe have the right to repurchase Par’s rights to develop and commercializeDifimicin, we reassessed our fair value at that date to be $12.00 per shareafter consideration of this milestone. The reassessed fair values may not be reflective of the fair value whichwould result from the application of other valuations methods, includingaccepted valuation methods for tax purposes.

Basedon our reassessed fair values of our common stock dating back to June 30,2005, we concluded that the 35,076 stock options granted to employees betweenJuly 2005 and December 2005 were at fair value. We concluded that the stock options granted to employees and consultantsin March, May and September of 2006, which were initially determined by ourboard of directors in good faith to have exercise prices at fair value, were atexercise prices below the reassessed values. Accordingly, for the 15,692 options granted at $1.08 per share in March2006; the 600 options granted in May 2006 at $2.17 per share and the 71,999options granted in September 2006 at $2.17 per share, the reassessed fairvalues 

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weredetermined to be $6.72 per share, $8.06 per share and $10.75 per share,respectively.  Furthermore, in July 2006,we granted 251,534 options at $2.17 per share related to hiring two executiveofficers as well as our annual stock option grants to members of our board ofdirectors.  The reassessed fair values ofthese July 2006 stock options were determined to be $9.40 per share.

Equityinstruments issued to non-employees are recorded at their fair value asdetermined in accordance with SFAS No. 123(R) and Emerging Issues TaskForce 96-18, *Accounting for EquityInstruments That are Issued to Other Than Employees for Acquiring, or inConjunction with Selling Goods and Services*, and are periodicallyrevalued as the equity instruments vest and are recognized as expense over therelated service period.

**Results of Operations**

***Comparison of Years Ended December 31, 2006 and 2005***

*Collaborationand Grant Revenues*.  Collaboration and grant revenues decreased to$933,000 for the year ended December 31, 2006 from $2.1 million for theyear ended December 31, 2005.  Thedecrease of $1.2 million, or 57%, was primarily due to a decrease in revenuefrom Small Business Innovation Research Program, or SBIR grants, whichgenerated $494,000 in the current year versus $1.1 million in the prioryear.  In addition, we terminated themanufacturing supply agreement with Sloan-Kettering Institute for Cancer Researchas well as our development and license agreement with a pharmaceuticalcompany.  These two agreements generatedan additional $265,000 and $225,000 of revenue, respectively, in the prioryear.

*Researchand Development Expense*.  Research and development expense increased to$10.5 million for the year ended December 31, 2006 from $7.0 million forthe year ended December 31, 2005. The increase of $3.4 million, or 49%, was primarily due to costsincurred on our Difimicin Phase 2b/3 and Prulifloxacin Phase 3 clinicaltrials which we initiated in May 2006 and July 2006, respectively.

*Generaland Administrative Expense*.  General and administrativeexpense increased to $3.5 million for the year ended December 31, 2006from $2.8 million for the year ended December 31, 2005.  The increase of $741,000 or 27% was primarilydue to stock compensation expense of $415,000 recorded in accordance with FAS123(R) and the forgiveness of a note receivable to an officer of $263,000.

*InterestIncome and Other, net*.  Net interest income and other increased to$1.2 million for the year ended December 31, 2006 from $237,000 for theyear ended December 31, 2005, an increase of $932,000 from the prioryear.  The increase was primarily due tohigher cash and short-term investment balances resulting in an increase ininterest income of $663,000, as well as a decrease in interest expense 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.

***Comparison of Years Ended December 31, 2005 and 2004***

*Collaborationand Grant Revenues*.  Collaboration and grant revenues increased to$2.1 million for the year ended December 31, 2005 from $1.1 million forthe year ended December 31, 2004. The increase of $1.0 million, or 93%, was primarily due to an increasein research grant revenues of $879,000 and an 

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increasein collaboration revenues of $157,000. In 2005, we received three research grants to support certain antibioticand osteoarthritis drug candidates.

*Researchand Development Expense*.  Research and development expense decreased to$7.0 million for the year ended December 31, 2005 from $8.6 million forthe year ended December 31, 2004. The decrease of $1.6 million, or 18%, was primarily due to reductions inresearch and development personnel.

*Generaland Administrative Expense*.  General and administrativeexpense of $2.8 million for the year ended December 31, 2005 wasrelatively consistent with the $2.7 million of expense for the year endedDecember 31, 2004.

*InterestIncome (Expense) and Other, net*.  Net interest income (expense)and other of $237,000 for the year ended December 31, 2005 was relativelyconsistent with the $247,000 for the year ended December 31, 2004.

**Liquidity and Capital Resources**

*Sources of Liquidity*

Since inception, our operations have been financed primarily throughthe sale of equity securities.  ThroughMarch 15, 2007, we received gross proceeds of approximately $118.9 million fromthe sale of shares of our preferred and common stock as follows:

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

·                  from March 2001 to December2001, we sold a total of 4.1 million shares of Series B preferred stockfor proceeds of $32.2 million;

·                  in April 2005, we sold atotal of 1.5 million shares of Series C preferred stock for proceeds of$12.0 million; and

·                  from April 2005 to November2005, we sold a total of 2.9 million shares of Series D preferred stockfor proceeds of $22.3 million.

·                  in February 2007, we sold atotal of 7.0 million shares of our common stock in connection with our initialpublic offering for proceeds of $49.0 million.

Wehave invested a substantial portion of our available funds in money marketfunds and government agency securities for which credit loss is notanticipated.  We have establishedguidelines relating to diversification and maturities of our investments topreserve principal and maintain liquidity.

*Cash Flows*

Asof December 31, 2006, cash, cash equivalents and short-term investmentstotaled approximately $21.3 million as compared to $29.9 million as ofDecember 31, 2005, a decrease of approximately $8.6 

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million.  The decrease resulted from $8.5 million ofnet cash used in operating activities driven primarily by our net loss of $11.9million, offset by non-cash charges and changes in net operating assets.

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

InJune 2004, we entered into a license agreement with Nippon Shinyaku.  Under the terms of this agreement, weacquired the non-exclusive right to import and purchase Prulifloxacin, and theexclusive right (with the right to sublicense), within the United States, todevelop, make, use, offer to sell, sell and license products suitable forconsumption by humans containing Prulifloxacin. Under this agreement, we paid Nippon Shinyaku an up-front fee inthe amount of $1.0 million and will be required to make one future milestonepayment in the amount of $1.0 million upon filing, if any, our first NDA in theUnited States.  Under the agreement, wepay Nippon Shinyaku for certain materials. If Nippon Shinyaku is unable to supply us with the contracted amount ofPrulifloxacin, then Nippon Shinyaku will grant us a non-exclusive, worldwidelicense to make or have made Prulifloxacin, in which event we will owe NipponShinyaku a royalty based on the amount of net sales of Prulifloxacin generatedby us and our subsidiaries. Additionally, we will owe Nippon Shinyaku certain royalties based on theamount of net sales of Prulifloxacin less the amount of Prulifloxacin we buyfrom Nippon Shinyaku.

InApril 2005, we entered into a collaboration agreement with Par pursuant towhich we and Par exclusively collaborated to develop and commercializeDifimicin.  We had granted to Par anexclusive royalty-bearing license, with the right to sublicense, promote,market, distribute and sell Difimicin in a territory composed of the UnitedStates, Canada and Puerto Rico, with an option to extend the territory toinclude Israel.  We retained all otherrights to Difimicin in the rest of the world. In January 2007, we entered into a prospective buy-back agreement withPar which provided us with an option to terminate the collaboration andrepurchase the rights to develop and commercialize Difimicin in North Americaand Israel.

InFebruary 2007, we elected to terminate the collaboration agreement pursuant tothe prospective buy-back agreement with Par and we have repurchased the rightsto develop and commercialize Difimicin in North America and Israel.  We now hold worldwide rights to Difimicin.  Under the terms of the prospective buy-backagreement, we paid Par a one-time $20.0 million termination fee and we are alsoobligated to pay Par a one-time $5.0 million milestone payment, a 5% royalty onnet sales by us or our affiliates of Difimicin in North America and Israel, anda 1.5% royalty on net sales by us or our affiliates of Difimicin in the rest ofthe world.  In addition, in the event welicense our right to market Difimicin in the rest of the world, we will berequired to pay Par a 6.25% royalty on net revenues we receive related toDifimicin.  We are obligated to pay eachof these royalties, if any, on a country-by-country basis for seven yearscommencing on the applicable commercial launch in each such country**.  **See “— Collaborations,Commercial and License Agreements and Grants — Par Pharmaceutical, Inc.”

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*Funding Requirements*

Our future capital uses and requirements depend on numerous factorsincluding, but not limited to, the following:

·                  the progress of our clinicaltrials, including expenses to support the trials and the milestone payment thatmay become payable to Nippon Shinyaku;

·                  our ability to establish andmaintain strategic collaborations, including licensing and other arrangements;

·                  the costs involved inenforcing or defending patent claims or other intellectual property rights;

·                  the costs and timing ofregulatory approvals;

·                  the costs of establishingsales or distribution capabilities;

·                  the success of thecommercialization of our products; and

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

Webelieve that our existing cash and cash equivalents, along with the netproceeds from our initial public offering, will be sufficient to meet ourcapital requirements for at least the next 12 months.

Untilwe can generate significant cash from our operations, we expect to continue tofund our operations with existing cash resources that were primarily generatedfrom the proceeds of offerings of our equity securities and collaborations andgovernment grants.  In addition, we mayfinance future cash needs through the sale of additional equity securities,strategic collaboration agreements and debt financing.  However, we may not be successful inobtaining additional collaboration agreements, in receiving milestone orroyalty payments under new or existing collaboration agreements, in obtainingnew government grants or in obtaining debt financing.  In addition, we cannot be sure that ourexisting cash and investment resources will be adequate, that financing will beavailable when needed or that, if available, financing will be obtained onterms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale-back oreliminate some or all of our development programs, relinquish some or even allof our rights to product candidates at an earlier stage of development orrenegotiate less favorable terms than we would otherwise choose.  Failure to obtain adequate financing also mayadversely affect our ability to operate as a going concern.  If we raise funds by issuing equitysecurities, 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 inany off-balance sheet activities.

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**Contractual Obligations**

The following table describes our long-term contractual obligations andcommitments as of December 31, 2006:

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-2 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| ** **                  | ** ** | **(in thousands)**                   | ** ** |
| Operating lease  obligation |       | $                                         | 3,452      |   | $ | 776 |   | $ | 1,367 |   | $ | 1,309 |   | $ | — |   |
|                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Wehave contracted with a contract research organization, or CRO, for clinicalresearch services for the Difimicin Phase 3 clinical trials andPrulifloxacin Phase 3 clinical trials. We have issued purchase orders totaling $24.2 million for theseservices, $20.4 million of which were issued in 2006.  We can terminate the service agreement at anytime upon 60 days’ written notice to the CRO. We have not included any amounts related to the CRO contract in thetable above.

Thecontractual obligations table does not include (a) a potential futuremilestone payment in the amount of $1.0 million to Nippon Shinyaku due uponfiling 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, (e)  a future $5.0 million milestone payment and a potentialapproximately $1.9 million payment for Difimicin inventory to Par or (f) apotential $3.0 million prepayment to Biocon, subject to future set-offs, fromthe assignment by Par to us of its supply agreement with Biocon.  We may also be required to pay royalties onany net sales of Prulifloxacin, Difimicin 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.

**Related Party Transactions**

Fora description of our related party transactions, see the “Related PartyTransactions” in Item 13 of this Form 10-K.

**Recently Issued Accounting Pronouncements**

InJuly 2006, the Financial Accounting Standards Board, or FASB, issuedInterpretation No. 48, or FIN 48, *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB Statement No. 109*.  FIN 48 clarifies the recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  FIN 48 also providesguidance on recognition, classification, interest and penalties, accounting ininterim periods, 

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disclosureand transition.  FIN 48 is effectivefor fiscal years beginning after December 15, 2006.  We will adopt this interpretation asrequired.  We are currently evaluatingthe requirements of FIN 48; if any, of this interpretation on our consolidatedfinancial statements.

InSeptember 2006, the****FASB issuedStatement of Financial Accounting Standards No. 157, *Fair ValueMeasurements*, or SFAS 157, which defines fair value,establishes a framework for measuring fair value under GAAP, 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 requirements of SFAS 157; if any, on our consolidatedfinancial statements.

InSeptember 2006, the Staff of the SEC issued Staff Accounting BulletinNo. 108, *Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements*, or****SAB 108.  SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of determining whether the current year’sfinancial statements are materially misstated. SAB 108 is effective for our fiscal year 2006.  The adoption of SAB 108 did not have animpact on our consolidated financial statements.

InFebruary 2007, the FASB issued Statement of Financial Accounting Standards No.159, or SFAS No. 159, *The Fair Value Optionfor Financial Assets and Liabilities.* SFAS No. 159 permits entitiesto choose to measure many financial instruments and certain other items at fairvalue. SFAS No. 159 will be effective for our fiscal year beginning after November15, 2007. Early adoption is permitted. We have not determined the impact, ifany, that adopting this standard may have on our financial position, cashflows, and results of operations.

**Item7A. Quantitative and Qualitative Disclosures about Market Risk**

Ourcash and cash equivalents and short-term investments as of December 31,2006 consisted primarily of money market funds and government agencysecurities.  Our primary exposure tomarket risk is interest income sensitivity, which is affected by changes in thegeneral level of U.S. interest rates, particularly because the majority of ourinvestments are in short-term marketable securities.  The primary objective of our investmentactivities is to preserve principal while at the same time maximizing the incomewe receive from our investments without significantly increasing risk.  Due to the short-term duration of ourinvestment portfolio and the low risk profile of our investments, an immediate10% change in interest rates would not have a material effect on the fairmarket value of our portfolio. Accordingly, we would not expect our operating results or cash flows tobe affected to any significant degree by the effect of a sudden change inmarket interest rates on our securities portfolio.  In general, money market funds are notsubject to market risk because the interest paid on such funds fluctuates withthe prevailing interest rate.

 

75

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**Item 8. Financial Statements andSupplementary Data**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                    | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------|------------|
| Report of Independent  Registered Public Accounting Firm                                           |       |       |       |
| Consolidated Balance  Sheets                                                                       |       |       |       |
| Consolidated Statements  of Operations                                                             |       |       |       |
| Consolidated  Statements of Redeemable Convertible Preferred Stock and Stockholders’  Deficit |       |       |       |
| Consolidated Statements  of Cash Flows                                                             |       |       |       |
| Notes  to Consolidated Financial Statements                                                        |       |       |       |

** **

76

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders of

Optimer Pharmaceuticals,Inc.

We have audited the accompanyingconsolidated balance sheets of Optimer Pharmaceuticals, Inc. as ofDecember 31, 2006 and 2005 and the related consolidated statements ofoperations, redeemable convertible preferred stock and stockholders’ deficit,and cash flows for each of the three years in the period endedDecember 31, 2006.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial 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, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Optimer Pharmaceuticals, Inc.at December 31, 2006 and 2005, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2006, in conformity with U.S. generally accepted accountingprinciples.

Asdiscussed in Note 1 to the consolidated financial statements, OptimerPharmaceuticals, Inc. changed its method of accounting for Share-Based Paymentsin accordance with Statement of Financial Accounting Standards No. 123(revised 2004) on January 1, 2006.

/s/  ERNST & YOUNG LLP

San Diego, California

March 26, 2007

 

77

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                                                                                                                                                    | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                                                                                               |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                    |       | $                     | 6,122,438  |   | $ | 19,943,959 |   |
| Short-term  investments                                                                                                                                                                                                                                                       |       | 15,218,860            |       | 9,936,498 |   |
| Research grant  and contract receivables                                                                                                                                                                                                                                      |       | 163,502               |       | 630,128 |   |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                    |       | 1,549,062             |       | 99,873 |   |
| Total current assets                                                                                                                                                                                                                                                          |       | 23,053,862            |       | 30,610,458 |   |
| Property and equipment,  net                                                                                                                                                                                                                                                  |       | 744,564               |       | 1,149,262 |   |
| Note receivable from  officer                                                                                                                                                                                                                                                 |       | —                |       | 262,500 |   |
| Other assets                                                                                                                                                                                                                                                                  |       | 315,490               |       | 312,596 |   |
| Total assets                                                                                                                                                                                                                                                                  |       | $                     | 24,113,916 |   | $ | 32,334,816 |   |
| **LIABILITIES, REDEEMABLE  CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                       |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                                                                          |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                                                              |       | $                     | 1,753,394  |   | $ | 1,600,741 |   |
| Accrued expenses                                                                                                                                                                                                                                                              |       | 3,310,199             |       | 519,495 |   |
| Total current  liabilities                                                                                                                                                                                                                                                    |       | 5,063,593             |       | 2,120,236 |   |
| Deferred rent                                                                                                                                                                                                                                                                 |       | 292,384               |       | 279,414 |   |
| Commitments and  contingencies                                                                                                                                                                                                                                                |       | —                |       | — |   |
| Redeemable convertible  preferred stock, $0.001 par value:                                                                                                                                                                                                                    |       |                  |       |   |   |
| Series B  redeemable convertible, 6,461,439 shares authorized; 4,132,736 shares issued  and outstanding at December 31, 2006 and 2005, respectively                                                                                                                           |       | 32,198,929            |       | 32,187,024 |   |
| Series C  redeemable convertible, 1,615,359 shares authorized; 1,538,437 shares  outstanding at December 31, 2006 and 2005, respectively                                                                                                                                      |       | 11,494,052            |       | 11,342,267 |   |
| Series D  redeemable convertible, 3,923,016 shares authorized; 2,861,277 and 2,854,611  shares issued and outstanding at December 31, 2006 and 2005, respectively                                                                                                             |       | 21,766,662            |       | 21,549,146 |   |
| Stockholders’ deficit:                                                                                                                                                                                                                                                   |       |                  |       |   |   |
| Series A convertible  preferred stock, par value $0.001, 2,307,656 shares authorized; 1,523,051 and  1,569,204 shares issued and outstanding at December 31, 2006 and 2005,  respectively; liquidation preference of $3,300,000 and $3,400,000 at December  31, 2006 and 2005 |       | 1,523                 |       | 1,569 |   |
| Common stock,  $0.001 par value, 25,384,225 shares authorized; 2,704,476 and 2,414,236  shares issued and outstanding at December 31, 2006 and 2005,  respectively; 46,153 held in treasury                                                                              |       | 2,704                 |       | 2,414 |   |
| Treasury stock,  at cost; 46,153 shares                                                                                                                                                                                                                                       |       | (100,000              | )          | — |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                   |       | 4,997,421             |       | 4,558,456 |   |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                         |       | (44,971               | )          | (49,224 | ) |
| Accumulated  deficit                                                                                                                                                                                                                                                          |       | (51,558,381           | )          | (39,656,486 | ) |
| Total stockholders’  deficit                                                                                                                                                                                                                                             |       | (46,701,704           | )          | (35,143,271 | ) |
| Total liabilities, redeemable convertible preferred stock and stockholders’  deficit                                                                                                                                                                                     |       | $                | 24,113,916 |   | $  | 32,334,816 |   |

 

See accompanying notes.

78

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**OptimerPharmaceuticals, Inc.**

**Consolidated Statements ofOperations**

|                                                                                                        | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                             | ** ** | **2006**                                    | ** **  | **2005** | ** ** | **2004** | ** ** |
|                                                                                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                                              |       |                                        |        |   |   |   |   |
| Research grants                                                                                        |       | $                                           | 676,764     |   | $ | 1,355,134 |   | $ | 476,731 |   |
| Collaborative  research agreements                                                                     |       | 256,326                                     |        | 791,548 |   | 634,206 |   |
| Total revenues                                                                                         |       | 933,090                                     |        | 2,146,682 |   | 1,110,937 |   |
| Operating expenses:                                                                                    |       |                                        |        |   |   |   |   |
| Research and  development                                                                              |       | 10,480,924                                  |        | 7,046,625 |   | 8,571,119 |   |
| General and  administrative                                                                            |       | 3,523,221                                   |        | 2,781,966 |   | 2,697,358 |   |
| Total operating  expenses                                                                              |       | 14,004,145                                  |        | 9,828,591 |   | 11,268,477 |   |
| Loss from operations                                                                                   |       | (13,071,055                                 | )           | (7,681,909 | ) | (10,157,540 | ) |
| Interest income and  other, net                                                                        |       | 1,169,160                                   |        | 237,088 |   | 247,465 |   |
| Net loss                                                                                               |       | (11,901,895                                 | )           | (7,444,821 | ) | (9,910,075 | ) |
| Accretion to redemption  amount of  redeemable convertible  preferred stock                       |       | (329,207                                    | )           | (223,439 | ) | (11,905 | ) |
| Net loss allocable to  common stockholders                                                             |       | $                                           | (12,231,102 | ) | $ | (7,668,260 | ) | $ | (9,921,980 | ) |
|                                                                                                   |       |                                        |        |   |   |   |   |
| Basic and diluted net  loss per share  attributable to common  stockholders                       |       | $                                      | (4.81       | ) | $  | (3.22 | ) | $  | (4.76 | ) |
| Shares used to compute basic and diluted net  loss per share attributable to common  stockholders |       | 2,542,893                                   |        | 2,383,435 |   | 2,083,959 |   |

Seeaccompanying notes.

79

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**OptimerPharmaceuticals, Inc.**

**Consolidated Statements of RedeemableConvertible Preferred Stockand Stockholders’ Deficit**
| ** **                                                                                                     | ** ** | **Redeemable Convertible**         | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                     | ** ** | **Series B  Preferred Stock** | ** ** | **Series C  Preferred Stock** | ** ** | **Series D  Preferred Stock** | ** ** |
| ** **                                                                                                     | ** ** | **Shares**                              | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Balance  at December 31, 2003                                                                                  |       | 4,132,736                               |       | $ | 32,163,214 |   | — |   | $ | — |   | — |   | $ | — |   |
| Issuance  of common stock at $0.22 - $0.65 per share upon exercise of options                                  |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Accretion  of redemption amount for Series B convertible preferred stock                                       |       |                                    |       | 11,905 |   | — |   | — |   | — |   | — |   |
| Compensation  expense related to grants of consultant stock options                                            |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Technology  license acquired for stock                                                                         |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss:                                                                                           |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Foreign  currency translation adjustment                                                                       |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Net  loss                                                                                                      |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss                                                                                            |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Balance  at December 31, 2004                                                                                  |       | 4,132,736                               |       | 32,175,119 |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock upon exercise of options                                                             |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Issurance  of subscribed common stock                                                                          |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| 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 |   |
| Issuance  of warrants to acquire Series D convertible preferred stock                                          |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Beneficial  conversion related to Series D warrants                                                            |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Accretion  of redemption amount for Series B, C and D convertible preferred stock                              |       | —                                  |       | 11,905 |   | — |   | 101,189 |   | — |   | 110,345 |   |
| Compensation  expense related to grants of consultant stock options                                            |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss:                                                                                           |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized  loss on short-term investment                                                                      |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Foreign  currency translation adjustment                                                                       |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Net  loss                                                                                                      |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss                                                                                            |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Balance at December 31,  2005                                                                                  |       | 4,132,736                               |       | 32,187,024 |   | 1,538,437 |   | 11,342,267 |   | 2,854,611 |   | 21,549,146 |   |
| Issuance  of common stock upon exercise of options                                                             |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Accretion  of redemption amount for Series B, C and D convertible preferred stock                              |       | —                                  |       | 11,905 |   | — |   | 151,785 |   | — |   | 165,518 |   |
| Exercise  of Series D warrants                                                                                 |       |                                    |       |   |   |   |   |   |   | 6,666 |   | 51,998 |   |
| Compensation  expense related to grants of consultant stock options                                            |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Employee  stock based compensation under FAS123(R)                                                             |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Repurchase  of common stock                                                                                    |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Retirement  of Series A convertible preferred stock                                                            |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss:                                                                                           |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized  loss on short-term investment                                                                      |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Foreign  currency translation adjustment                                                                       |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Net  loss                                                                                                      |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss                                                                                            |       | —                                  |       | — |   | — |   | — |   | — |   | — |   |
| Balance  at December 31, 2006                                                                                  |       | 4,132,736                               |       | $ | 32,198,929 |   | 1,538,437 |   | $ | 11,494,052 |   | 2,861,277 |   | $ | 21,766,662 |   |

See accompanying notes.

80

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**OptimerPharmaceuticals, Inc.**

**Consolidated Statements ofRedeemable Convertible Preferred Stock and Stockholders’ Deficit (Continued)**
| ** **                                                                                                     | ** ** | **Stockholders’ Deficit**                      | ** ** | ** **            | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | **Series A Convertible  Preferred Stock** | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Capital** | ** ** | **Additional  paid-in** | ** ** | **Accumulated  other  comprehensive** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                                                     | ** ** | **Shares**                                               | ** ** | **Amount**            | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **subscription** | ** ** | **capital** | ** ** | **income (loss)** | ** ** | **deficit** | ** ** | **Total** | ** ** |
| Balance  at December 31, 2003                                                                                  |       | 1,569,204                                                |       |                  | $          | 1,569 |   |   | 1,957,838 |   |   | $ | 1,958 |   |   | — |   | $ | — |   |   | $ | 21,000 |   |   | $ | 3,531,439 |   |   | $ | (14,836 | ) |   | $ | (22,301,590 | ) | $ | (18,760,460 | ) |
| Issuance  of common stock at $0.22 - $0.65 per share upon exercise of options                                  |       | —                                                   |       |                  | —     |   |   | 387,956 |   |   | 388 |   |   | — |   | — |   |   | — |   |   | 127,172 |   |   | — |   |   | — |   | 127,560 |   |
| Accretion  of redemption amount for Series B convertible preferred stock                                       |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | (11,905 | ) |   | — |   |   | — |   | (11,905 | ) |
| Compensation  expense related to grants of consultant stock options                                            |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | 56,348 |   |   | — |   |   | — |   | 56,348 |   |
| Technology  license acquired for stock                                                                         |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | 25,000 |   |   | — |   |   | — |   |   | — |   | 25,000 |   |
| Comprehensive  loss:                                                                                           |       |                                                     |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign  currency translation adjustment                                                                       |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | 10,582 |   |   | — |   | 10,582 |   |
| Net  loss                                                                                                      |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | — |   |   | (9,910,075 | ) | (9,910,075 | ) |
| Comprehensive  loss                                                                                            |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (9,899,493 | ) |
| Balance  at December 31, 2004                                                                                  |       | 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 |   |
| Issurance  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                            |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | — |   |
| Issuance  of Series D convertible preferred stock and common stock warrants net of  issuance costs of $827,589 |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | 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                              |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | (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 | ) |
| Foreign  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                                                                                  |       | 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                              |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | (329,208 | ) |   | — |   |   | — |   | (329,208 | ) |
| Exercise  of Series D warrants                                                                                 |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | — |   |
| Compensation  expense related to grants of consultant stock options                                            |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | 158,850 |   |   | — |   |   | — |   | 158,850 |   |
| Employee  stock based compensation under FAS123(R)                                                             |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | 553,181 |   |   | — |   |   | — |   | 553,181 |   |
| Repurchase  of common stock                                                                                    |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | (46,153 | ) | (100,000 | ) |   | — |   |   | — |   |   | — |   |   | — |   | (100,000 | ) |
| Retirement  of Series A convertible preferred stock                                                            |       | (46,153                                                  | )          |                  | (46        | ) |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | (99,954 | ) |   | — |   |   | — |   | (100,000 | ) |
| Comprehensive  loss:                                                                                           |       |                                                     | ** ** |                  |       |   | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Unrealized  loss on short-term investment                                                                      |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | (5,872 | ) |   | — |   | (5,872 | ) |
| Foreign  currency translation adjustment                                                                       |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | 10,125 |   |   | — |   | 10,125 |   |
| Net  loss                                                                                                      |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | — |   |   | (11,901,895 | ) | (11,901,895 | ) |
| Comprehensive  loss                                                                                            |       | —                                                   |       |                  | —     |   |   | — |   |   | — |   |   | — |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (11,897,642 | ) |
| Balance  at December 31, 2006                                                                                  |       | 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 | ) |

See accompanying notes.

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**
| ** **                                                                        | ** ** | **Years Ended December 31,** | ** **  |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                        | ** ** | **2006**                                    | ** **  | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Operating  activities**                                                         |       |                                        |        |   |   |   |   |
| Net loss                                                                          |       | $                                           | (11,901,895 | ) | $ | (7,444,821 | ) | $ | (9,910,075 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:      |       |                                        |        |   |   |   |   |
| Depreciation and amortization                                                     |       | 496,211                                     |        | 885,733 |   | 879,339 |   |
| Stock based compensation                                                          |       | 712,031                                     |        | 43,997 |   | 56,348 |   |
| Non-cash interest expense related to warrants and  beneficial conversion          | ** ** | **—**                                  |        | 239,274 | ** ** | **—** | ** ** |
| Technology licenses acquired and expensed as in  process research and development |       | —                                      |        | — |   | 25,000 |   |
| Non-cash compensation related to forgiveness of note  receivable from officer     |       | 262,500                                     |        | 37,500 |   | — |   |
| Gain on disposal of assets                                                        |       | (45,339                                     | )           | 24,906 |   | — |   |
| Deferred revenue                                                                  |       | —                                      |        | (14,706 | ) | (260,297 | ) |
| Deferred rent                                                                     |       | 12,970                                      |        | 35,637 |   | 49,414 |   |
| Changes in operating assets and liabilities:                                      |       |                                        |        |   |   |   |   |
| Prepaids expenses and other current assets                                        |       | (1,449,189                                  | )           | 6,612 |   | (61,103 | ) |
| Research grant and contract receivables                                           |       | 466,626                                     |        | (525,775 | ) | 11,689 |   |
| Other assets                                                                      |       | (2,894                                      | )           | 111,943 |   | 19,029 |   |
| Accounts payable and accrued expenses                                             |       | 2,943,357                                   |        | 1,197,221 |   | 15,437 |   |
| Net cash used in  operating activities                                            |       | (8,505,622                                  | )           | (5,402,479 | ) | (9,175,219 | ) |
| ** **                                                                        |       |                                        |        |   |   |   |   |
| **Investing  activities**                                                         |       |                                        |        |   |   |   |   |
| Purchases of  short-term investments                                              |       | (10,478,237                                 | )           | (9,975,025 | ) | — |   |
| Sales or  maturity of short-term investments                                      |       | 5,190,000                                   |        | — |   | — |   |
| Purchase of  property and equipment                                               |       | (46,173                                     | )           | (44,743 | ) | (197,666 | ) |
| Net cash used in  investing activities                                            |       | (5,334,410                                  | )           | (10,019,768 | ) | (197,666 | ) |
| ** **                                                                        |       |                                        |        |   |   |   |   |
| **Financing  activities**                                                         |       |                                        |        |   |   |   |   |
| Proceeds from  sale of preferred stock, net of issuance costs                     |       | —                                      |        | 33,422,090 |   | — |   |
| Proceeds from  sale of common stock                                               |       | 156,386                                     |        | 7,427 |   | 127,560 |   |
| Proceeds from  exercise of Series D warrants                                      |       | 51,998                                      |        | — |   | — |   |
| Repurchase of  common stock                                                       |       | (100,000                                    | )           | — |   | — |   |
| Repurchase of  Series A preferred stock                                           |       | (100,000                                    | )           | — |   | — |   |
| Repayments of  proceeds from capital leases                                       |       | —                                      |        | (9,369 | ) | (47,815 | ) |
| Repayment from  employees                                                         |       | —                                      |        | — |   | 101,520 |   |
| Net cash  provided by financing activities                                        |       | 8,384                                       |        | 33,420,148 |   | 181,265 |   |
| Effect of  exchange rate changes on cash and cash equivalents                     |       | 10,127                                      |        | (6,443 | ) | 10,582 |   |
| Net increase  (decrease) in cash and cash equivalents                             |       | (13,821,521                                 | )           | 17,991,458 |   | (9,181,038 | ) |
| Cash and cash  equivalents at beginning of year                                   |       | 19,943,959                                  |        | 1,952,501 |   | 11,133,539 |   |
| Cash and cash  equivalents at end of year                                         |       | $                                           | 6,122,438   |   | $ | 19,943,959 |   | $ | 1,952,501 |   |
|                                                                              |       |                                        |        |   |   |   |   |
| **Supplemental  disclosure of cash flow information:**                            |       |                                        |        |   |   |   |   |
| Interest paid                                                                     |       | $                                           | —      |   | $ | 7,501 |   | $ | 2,061 |   |
| Common stock  issued for technology licenses                                      |       | $                                           | —      |   | $ | — |   | $ | 25,000 |   |

See accompanying notes.

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

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

OptimerPharmaceuticals, Inc. (“Optimer” or the “Company”) was incorporated in Delawareon November 18, 1998 and has three subsidiaries.  Optimer Biotechnology, Inc. is a wholly ownedsubsidiary of the Company and is incorporated in Taiwan while Optimer SingaporePTE LTD (“Optimer Singapore”) and Optimer Asia PTE LTD are incorporated inSingapore and are wholly owned subsidiaries of Optimer Biotechnology, Inc.  During the year ended December 31, 2006, theCompany had ceased operations of Optimer Asia PTE LTD and Optimer Singapore,respectively, neither have a material impact on the consolidated financialstatements.

Optimeris a biopharmaceutical company focused on discovering, developing andcommercializing innovative anti-infective products.  The Company currently has two anti-infectiveproduct candidates, Difimicin for the treatment of Clostridium difficile-associateddiarrhea, and Prulifloxacin, for the treatment of infectious diarrhea,including travelers’ diarrhea.

*Stock Split*

InDecember 2006 and January 2007, the Company’s board of directors andstockholders authorized a 1-for-2.1667 reverse stock split for alloutstanding preferred and common shares. All share information has been retroactively restated to reflect thereverse stock split.

*Principles of Consolidation*

Theconsolidated financial statements include all the accounts of the Company andits three wholly owned subsidiaries in Asia. All intercompany balances and transactions have been eliminated inconsolidation.

*Use of Estimates*

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

*Cash, Cash Equivalents andShort-Term Investments*

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

*Concentration of Credit Risk*

Financialinstruments that potentially subject the Company to a significant concentrationof credit risk consist primarily of cash and cash equivalents and short-terminvestments.  The Company maintainsdeposits in federally insured financial institutions in excess of federallyinsured limits.  However, 

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managementbelieves the Company is not exposed to significant credit risk due to thefinancial position of the depository institutions in which those deposits areheld.  Additionally, the Company hasestablished guidelines regarding diversification of its investments and theirmaturities, which are designed to maintain safety and liquidity.

*Property and Equipment*

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

*Deferred Rent*

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

*Redeemable ConvertiblePreferred Stock*

In connection with theclosing of the Company’s initial public offering in February 2007, all sharesof redeemable convertible preferred stock were converted to common stock.  Prior to the initial public offering, thecarrying value of redeemable convertible preferred stock was increased byperiodic accretions so that the carrying amount would equal the redemptionvalue at the redemption date.  Theseaccretions were effected through charges against additional paid in capital.

*Foreign Currency Translation*

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

*Fair Value of FinancialInstruments*

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

*Impairment of Long-LivedAssets*

Inaccordance with Statement of Financial Accounting Standards (“SFAS”)No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as property andequipment, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not 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 theasset.  If the carrying amount of anasset exceeds its estimated future cash flows, an 

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impairmentcharge is recognized by the amount by which the carrying amount of the assetexceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balancesheet and reported at the lower of the carrying amount or the fair value lesscosts to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held forsale would be presented separately in the appropriate asset and liabilitysections of the balance sheet.  Althoughthe Company has accumulated losses since inception, the Company believes thefuture cash flows to be received from the long-lived assets will exceed the assets’carrying value and, accordingly, the Company has not recognized any impairmentlosses through December 31, 2006.

*Income Taxes*

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

*Revenue Recognition*

TheCompany’s collaboration agreements contain multiple elements, includingnon-refundable upfront fees, payments for reimbursement of third-party researchcosts, payments for ongoing research, payments associated with achievingspecific development milestones and royalties based on specified percentages ofnet product sales, if any.  The Companyapplies the revenue recognition criteria outlined in Staff Accounting Bulletin(“SAB”) No. 104, *Revenue Recognition*and Emerging Issues Task Force (“EITF”) Issue 00-21, *Revenue Arrangements 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 areseparable,whether there are determinable fair values and whether there is a uniqueearnings process associated with each element of a contract.

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

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

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

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

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

*Research and DevelopmentExpenses*

TheCompany accounts for research and development costs in accordance with SFASNo. 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.

*Stock-Based Compensation*

EffectiveJanuary 1, 2006, the Company adopted the provisions of SFASNo. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modifiedprospective-transition-method and therefore, prior period results will not berestated.  SFAS No. 123(R)supersedes Accounting 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 transition method, thecompensation costs related to all equity instruments granted prior to, but notyet vested as of, the adoption date of SFAS 123(R) are recognized based onthe grant-date fair value which is estimated in accordance with the originalprovisions of SFAS 123. Compensation costs related to all equity instruments granted afterJanuary 1, 2006 are recognized at the grant-date fair value of the awardsin accordance with the provisions of SFAS 123(R).  Additionally, under the provisions ofSFAS 123(R), the Company is required to include an estimate of the valueof the awards that will be forfeited in calculating compensation costs, whichis recognized over the requisite service period of the awards on a straight-linebasis.

Duringthe year ended December 31, 2006, the Company recorded $553,181, or $0.22per share, of stock-based compensation expense as a result of the adoption ofSFAS 123(R).  Of this amount, theCompany allocated $138,478 and $414,703 to research and development and generaland administrative expenses, respectively, based on the department to which theassociated employee reported.  No related

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taxbenefits of the stock-based compensation expense have been recognized since theinception of the Company.

The Black-Scholes option-pricing model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  In addition,the Black-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected stock price volatility.  The following table shows the assumptionsused to compute stock-based compensation expense for the stock options grantedduring the year ended December 31, 2006 using the Black-Scholes optionpricing model:
| **Employee Stock Options** | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Risk-free  interest rate             |       | 4.75%-4.8 | 0%         | 4.00     | %          | 3.25     | %          |
| Dividend yield                       |       | 0.00      | %          | 0.00     | %          | 0.00     | %          |
| Expected life of  options (years)    |       | 6.08      |       | 5.00     |       | 5.00     |       |
| Volatility                           |       | 65.82     | %          | 70.00    | %          | 70.00    | %          |

 

Therisk-free interest rate assumption was based on the United States Treasury’srates for U.S. Treasury zero-coupon bonds with maturities similar to those ofthe expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of notpaying dividends in the foreseeable future. The weighted average expected life of options was calculated using thesimplified method as prescribed SAB No. 107, *Share-BasedPayment* (“SAB 107”). This decision was based on the lack of relevant historical data due tothe Company’s limited history.  Inaddition, due to the Company’s limited historical data, the estimatedvolatility also reflects the application of SAB 107, incorporating thehistorical volatility of comparable companies whose share prices are publiclyavailable.

Basedon these assumptions, the weighted average grant-date fair values of stockoptions granted during the****year endedDecember 31, 2006 was $8.55****per share.

Asof December 31, 2006, the total unrecognized compensation expense relatedto stock options was approximately $2,372,903 and the related weighted-averageperiod over which it is expected to be recognized is approximately 1.7 years.

Priorto January 1, 2006, the Company applied the intrinsic-value-based methodof accounting prescribed by APB Opinion 25, and related interpretationsincluding Financial Accounting Standards Board (“FASB”) InterpretationNo. 44, *Accounting for Certain Transactionsinvolving Stock Compensation — an interpretation of APB Opinion No. 25*,to account 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.

SFAS 123and SFAS No. 148, *Accounting for Stock-BasedCompensation — Transition and Disclosure, an amendment of FASB StatementNo. 123*, established accounting and disclosure requirementsusing a fair-value-based method of accounting for stock-based employee compensationplans.  As permitted by existingaccounting standards, the Company elected to continue to apply theintrinsic-value-based method of accounting described above, for options grantedthrough December 31, 2005.  Thefollowing table illustrates the effect on net loss as if the fair-value-basedmethod had been applied to all 

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outstandingand unvested awards in each period prior to the adoption of SFAS 123(R) onJanuary 1, 2006:
| ** **                                                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Net loss  attributable to common stockholders, as reported                                                         |       | $                                           | (7,668,260 | ) | $ | (9,921,980 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards. |       | (59,780                                     | )          | (74,800 | ) |
| Pro forma net  loss attributable to common stockholders                                                            |       | $                                           | (7,728,040 | ) | $ | (9,996,780 | ) |
| Net loss  attributable to common stockholders per share — basic and diluted, as  reported                     |       | $                                           | (3.22      | ) | $ | (4.76 | ) |
| Pro forma net loss  attributable to common stockholders per share — basic and diluted.                        |       | $                                           | (3.24      | ) | $ | (4.80 | ) |

 

Equityinstruments issued to non-employees are recorded at their fair value asdetermined in accordance with SFAS 123(R) and EITF Issue No. 96-18,*Accounting for Equity Instruments That are Issuedto Other Than Employees for Acquiring, or in Conjunction with Selling Goods andServices*, (“EITF 96-18”) and are periodically revalued asthe equity instruments vest and are recognized as expense over the relatedservice period.  ThroughDecember 31, 2006 and 2005, the Company issued options in conjunction withvarious consulting agreements to purchase 290,764 and 276,918 shares of commonstock, respectively, at exercise prices ranging from $0.22 to $1.08 pershare.  The options are exercisableimmediately upon grant and generally vest over a period of up to fouryears.  Expense related to optionsgranted to consultants, as determined under SFAS 123 and EITF 96-18,was $176,974, $43,997 and $56,348, for the years ended December 31, 2006,2005, and 2004, respectively.

*Comprehensive Income (Loss)*

TheCompany has applied SFAS No. 130, *Reporting ComprehensiveIncome*, which requires that all components of comprehensive income(loss), including net income (loss), be reported in the financial statements inthe period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during aperiod from transactions and other events and circumstances from non-ownersources.  Net income (loss) and othercomprehensive income (loss), including foreign currency translation adjustmentsand unrealized gains and losses on investments, shall be reported, net of theirrelated tax effect, to arrive at comprehensive income (loss).

*Net Loss Per ShareAttributable to Common Stockholders*

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

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| ** **                                                                                                   | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                                   | ** ** | **2006**                                    | ** **  | **2005** | ** ** | **2004** | ** ** |
| **Historical**                                                                                               |       |                                        |        |   |   |   |   |
| Numerator:                                                                                                   |       |                                        |        |   |   |   |   |
| Net loss  attributable to common stockholders                                                                |       | $                                           | (12,231,102 | ) | $ | (7,668,260 | ) | $ | (9,921,980 | ) |
| Denominator:                                                                                                 |       |                                        |        |   |   |   |   |
| Weighted average  common shares outstanding                                                                  |       | 2,542,893                                   |        | 2,383,435 |   | 2,083,959 |   |
| Net loss  attributable to common stockholders per share — basic and diluted                             |       | $                                           | (4.81       | ) | $ | (3.22 | ) | $ | (4.76 | ) |
| **Historical  outstanding anti-dilutive securities not included in diluted net loss per  share calculation** |       |                                        |        |   |   |   |   |
| Preferred stock  (as converted)                                                                              |       | 12,223,548                                  |        | 12,261,701 |   | 6,528,502 |   |
| Preferred stock  warrants (as converted)                                                                     |       | 22,705                                      |        | 30,705 |   | — |   |
| Common stock  options                                                                                        |       | 1,496,945                                   |        | 1,455,022 |   | 1,148,631 |   |
| Common stock warrants                                                                                        |       | 1,144,604                                   |        | 1,155,681 |   | 13,845 |   |
|                                                                                                         |       | 14,887,802                                  |        | 14,903,109 |   | 7,690,978 |   |

 

*Recent Accounting Pronouncements*

InJuly 2006, Financial Accounting Standards Board, or FASB, issued Interpretation(“FIN”) No. 48, *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB Statement No. 109* (“FIN 48”).  FIN 48 clarifies the recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  FIN 48 also providesguidance on recognition, classification, interest and penalties, accounting ininterim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006.  The Company willadopt this interpretation as required. The Company is currently evaluating the requirements of FIN 48; ifany, of this interpretation on its consolidated financial statements.

InSeptember 2006, the FASB issued FASB Statement No. 157, “*Fair Value Measurements*” (“SFAS 157”), which definesfair value, establishes a framework for measuring fair value under generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements.  SFAS 157 applies toother accounting pronouncements 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 requirements of SFAS 157;if any, on its consolidated financial statements.

InSeptember 2006, the staff of the Securities and Exchange Commission issuedStaff Accounting Bulletin No. 108, “*Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*” (“SAB 108”).  SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of determining whether the current year’sfinancial statements are materially misstated. SAB 108 is effective for the Company’s fiscal year 2006. Theadoption of SAB 108 did not have an impact on its consolidated financialstatements.

InFebruary 2007, the FASB issued Statement of Financial Accounting Standards No.159 (“SFAS No. 159”), *The Fair Value Optionfor Financial Assets and Liabilities.* SFAS No. 159 permits entitiesto choose to measure many financial instruments and certain other items at fairvalue. SFAS No. 159 will be effective for the Company’s fiscal year beginningafter November 15, 2007. Early adoption is permitted. The Company has notdetermined the impact, if any, that adopting this standard may have on ourfinancial position, cash flows, and results of operations.

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**2.             Short-Term Investments**

Thefollowing is a summary of the Company’s investment securities, all of which areclassified as available-for-sale and are due within one year by contractualmaturity.  Determination of estimatedfair value is based upon quoted market prices.
| ** **              | ** ** | **December 31, 2006** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Gross  Amortized Cost**  | ** ** | **Gross  Unrealized Gains** | ** ** | **Gross  Unrealized Losses** | ** ** | **Market Value** | ** ** |
| Government  obligations |       | $                               | 15,263,259 |   | $ | — |   | $ | (44,399 | ) | $ | 15,218,860 |   |
|                         |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **December 31, 2005** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Gross  Amortized Cost**  | ** ** | **Gross  Unrealized Gains** | ** ** | **Gross  Unrealized Losses** | ** ** | **Market Value** | ** ** |
| Government  obligations |       | $                               | 9,975,019  |   | $ | — |   | $ | (38,521 | ) | $ | 9,936,498 |   |
|                         |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Investments in a net unrealized loss position as of December 31,2006 are as follows:
| ** **              | ** ** | ** **                      | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|-------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **              | ** ** | **Number of  Investments** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Government  obligations |       | 3                               |       | $                                                                         | 15,263,259 |                                                                         | $          | (44,399                              | )          | $ | — |   | $ | — |   | $ | 15,263,259 |   | $ | (44,399 | ) |
|                         |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

TheCompany believes that the decline in value is temporary and primarily relatedto the change in market interest rates since purchase.  The Company anticipates full recovery ofamortized cost with respect to these securities at maturity or sooner in theevent of a change in the market interest rate environment.

**3.             Property and Equipment**

Property and equipment is stated at cost and consists of the following:
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Equipment                                       |       | $                     | 3,033,589  |   | $ | 2,880,627 |   |
| Furniture and  fixtures                         |       | 292,688               |       | 273,558 |   |
| Leasehold  improvements                         |       | 1,268,987             |       | 1,244,821 |   |
| Computer  equipment and software                |       | 197,793               |       | 198,997 |   |
|                                            |       | 4,793,057             |       | 4,598,003 |   |
| Less accumulated  depreciation and amortization |       | (4,048,493            | )          | (3,448,741 | ) |
|                                            |       | $                     | 744,564    |   | $ | 1,149,262 |   |

 

Depreciationof property and equipment is computed using the straight-line method over theestimated useful lives of the assets, which typically is five years.  Leasehold improvements and assets acquiredunder capital leases are amortized over their estimated useful life or therelated lease term, whichever is shorter. The depreciation of equipment under capital leases is included indepreciation expense.  As December 31,2006 and 2005, the Company did not have any capital leases.

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AtDecember 31, 2006 and 2005, the Company had long-lived assets in Asia of$0 and $44,378, respectively.

**4.**              Note Receivable from Officer

Notereceivable from officer of $262,500 as of December 31, 2005, represents anuncollateralized loan to an officer for housing and relocation assistance withan original balance of $300,000.  Withthe renewal of the officer’s employment agreement in June 2005, the board ofdirectors agreed to forgive the loan ratably over four years subject to theofficer being an employee of the Company. In November 2006, the loan and the related interest were forgiven.

**5.**              Accrued Expenses

Accrued expenses consisted of the following:
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accrued preclinical and  clinical expenses |       | $                     | 2,566,433  |   | $ | 150,325 |   |
| Accrued research  services                 |       | 132,367               |       | 103,874 |   |
| Accrued legal fees                         |       | 232,280               |       | 103,855 |   |
| Accrued salaries, wages  and benefits      |       | 206,469               |       | 160,185 |   |
| Other accrued  liabilities                 |       | 172,650               |       | 1,256 |   |
|                                       |       | $                     | 3,310,199  |   | $ | 519,495 |   |

**6.     Revenue and Other Collaborative Agreements**

*Revenues from ResearchGrants*

Since2003, the Company has received Small Business Innovative Research (“SBIR”)grants from U.S. government agencies totaling $2,333,213, including three SBIRgrants received in 2005 totaling $1,454,827 and a SBIR grant received in 2006totaling $578,386.  The purpose of thegrants was to support research on certain antibiotic and osteoarthritis drugcandidates being developed by the Company. For the years ended December 31, 2006, 2005 and 2004, the Companyrecognized revenues related to these grants of $493,960, $1,097,024 and$164,533, respectively.  Through 2006,the Company recognized revenues of $1,850,197 related to these grants.** **As ofDecember 31, 2006, $483,016 of revenue is remaining to be recognized underthe grants.

In2003, Optimer received a grant in the amount of $726,275 from the Philip MorrisExternal Research Program (“Philip Morris”) to support development of acarbohydrate-based cancer immunotherapy. The research grant was for a three-year research period and was subjectto renewal annually by Philip Morris. Optimer retains all rights to the data and novel glycosylation methodsdeveloped pursuant to research funded by the grant.  For the years ended December 31, 2006,2005 and 2004, the Company recognized revenue of $182,804, $239,416 and$253,497 respectively, under the grant.

In2001, Optimer Singapore received a $5.6 million grant from the EconomicDevelopment Board (“EDB”) of Singapore under its Research Incentive Scheme forCompanies (“RISC”) to conduct pharmaceutical research in Singapore.  In 2003, the amount of the grant wassubsequently reduced by the EDB to $2.0 million.  Under the terms of the grant, the EDBreimbursed Optimer Singapore for certain research expenditures incurred byOptimer Singapore during the period June 1, 2000 to May 31, 

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2005.  Through 2005, the Company recognized revenuesof $371,460 related to this grant which included $18,622 and $58,694 in 2005and 2004, respectively.

*Revenues from CollaborativeResearch Agreements*

Forthe years ended December 31, 2006, 2005 and 2004, the Company recognizedrevenues of $256,326, $791,548 and $634,206, respectively, under collaborativeresearch agreements with large pharmaceutical companies and researchinstitutions.

InMay 2003, Optimer entered into a manufacturing supply agreement with theSloan-Kettering Institute for Cancer Research (“SKI”) to manufacture certainconjugates for SKI in support of its on-going U.S. Phase 2 clinicaltrials for a product candidate to treat breast cancer.  According to the terms of the agreement,Optimer was eligible to receive up to $1,000,000 over the term of theagreement, if the Company met the manufacturing performance obligationscontained in the agreement.  Through 2004,the Company received a non-refundable advance payment of $250,000 under theagreement, all of which has been recognized ratably over the agreement term, asresearch contract revenue, including $14,705 and $172,795 in 2005 and 2004,respectively.  In 2004, the Companyinformed SKI that it intended to terminate the agreement after completion ofthe first $250,000 milestone payment under the contract.  In 2005, the Company achieved the firstmilestone and accordingly recognized $250,000 of research contractrevenue.  The Company terminated the agreementin 2005.

InNovember 2003, Optimer entered into a one-year research agreement with a majorbiotechnology company to develop certain glycosylated analogs of a proprietarypeptide therapeutic belonging to the biotechnology company.  Optimer recognized $450,000 of researchsupport and milestone revenue under the agreement, including $411,415 in2004.  This agreement expired in November2004.

InApril 2005, the Company entered into a collaboration agreement with Par****to develop and commercialize Difimicin.  The Company had granted to Par an exclusiveroyalty bearing license, with the right to sublicense, promote, market,distribute and sell Difimicin in a territory composed of the United States,Canada and Puerto Rico, with an option to extend the territory to includeIsrael.  The Company retained all otherrights to Difimicin in the rest of the world. At the time of execution of this collaboration agreement, Par alsopurchased $12.0 million of the Company’s Series C Preferred Stock (seeNote 8).

InJanuary 2007, we the Company entered into a prospective buy-back agreement withPar which provided us with an option to terminate the collaboration andrepurchase the rights to develop and commercialize Difimicin in North Americaand Israel.

InFebruary 2007, the Company elected to terminate the collaborationagreement with Par, exercised our rights under a prospective buy-back agreementto repurchase Par’s right to develop and commercialize Difimicin in NorthAmerica and Israel and paid Par a one-time $20.0 million termination fee.  We now hold worldwide rights to Difimicin.TheCompany is also obligated to pay Par a one-time $5.0 million milestone payment,a potential payment of approximately $1.9 million for Difimicin inventory toPar, a potential $3.0 million prepayment to Biocon, subject to future set-offsfollowing the assignment, if any, by Par to the Company of its supply agreementwith Biocon, a 5% royalty on net sales by the Company, its affiliates or itslicensees of Difimicin in North America and Israel, and a 1.5% royalty on netsales by the Company or its affiliates of Difimicin in the rest of theworld.  The one-time $5.0 millionmilestone payment shall be paid after the earliest to occur of (i) thesuccessful completion by the Company of its pivotal Phase 3 trial forDifimicin, (ii) the Company’s grant to a third party of the rights toDifimicin or 

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(iii) thesubmission to the FDA of an NDA for Difimicin. In addition, in the event the Company licenses its right to marketDifimicin in the rest of the world, the Company will be required to pay Par a6.25% royalty on net revenues received by it related to Difimicin.  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.

InJune 2005, Optimer entered into a binding letter agreement establishing adevelopment and license agreement with a pharmaceutical company to develop oneor more pharmaceutical products using Optimer’s proprietary carbohydratesynthesis technology.  Optimer wasreimbursed at an agreed upon rate for research services performed under thecontract.  The pharmaceutical company wasresponsible, at its own expense, for carrying out pre-clinical tests, animaltests, human clinical trials, marketing and commercializing any productcandidates pursued under the terms of the agreement.  The agreement included milestone and royaltypayments to Optimer assuming the successful development and commercializationof a product candidate.  In November2006, the collaboration was terminated. Through December 31, 2006, Optimerrecognized $678,168 of research revenue under the terms of the agreement.

*Other CollaborativeAgreements*

InMarch 2006, the Company entered into a collaborative research and developmentand license agreement 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, inaddition to 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 andwill be triggered upon the completion of certain clinical developmentmilestones and in certain 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 receive regulatoryapproval in ASEAN countries, as well as royalty payments on the net sales ofsuch products.  The research term of thisagreement continues until the earlier of the Company’s completion of allresearch activities set forth in the work plan under the agreement, or March2008.  Subject to certain exceptions, ona country-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 the non-terminatingparty.

InJune 2004, the Company entered into a license agreement with Nippon Shinyaku,Co., Ltd. (“Nippon Shinyaku”).  Under theterms of the agreement, the Company acquired the non-exclusive right to importand purchase Prulifloxacin, and the exclusive right (with the right tosublicense), within the United 

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States,to develop, make, use, offer to sell, sell and license products suitable forconsumption by humans containing Prulifloxacin. Under this agreement, the Company paid Nippon Shinyaku an up-frontfee in the amount of $1.0 million and will be required to make one futuremilestone payment in the amount of $1.0 million upon filing, if any, its firstNDA in the United States.  Under theagreement, the Company pays Nippon Shinyaku for certain materials.  If Nippon Shinyaku is unable to supply theCompany with the contracted amount of Prulifloxacin, then Nippon Shinyaku willgrant to the Company a non-exclusive, worldwide license to make or have madePrulifloxacin, in which event the Company will owe Nippon Shinyaku a royaltybased on the amount of net sales of Prulifloxacin generated by the Company andthe 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.

InJuly 2002, the Company entered into a license agreement with Sloan-KetteringInstitute for Cancer Research (“SKI”), to acquire, together with certainnonexclusive licenses, exclusive, worldwide licensing and sublicensing rightsto certain patented and patent-pending carbohydrate-based cancerimmunotherapies.  As partial considerationfor the licensing rights, the Company paid to SKI a one-time fee consisting ofboth cash and 55,383 shares of its common stock.  Under the agreement, which was amended inJune 2005, the Company owes SKI milestone payments in the following amounts foreach licensed product: (i) $500,000 upon the commencement of Phase 3clinical studies, (ii) $750,000 upon the filing of the first NDA,(iii) $1.5 million upon marketing approval in the United States and(iv) $1.0 million upon marketing approval in each and any of Japan, andcertain European countries, but only to the extent that the Company, and not asublicensee, achieves such milestones. The Company also owes SKI royalties based on net sales generated fromthe licensed products and income the Company sources from its sublicensingactivities, which royalty payments are credited against a minimum annualroyalty payment the Company owes to SKI during the term of the agreement.  The term of the agreement continues until thelater of July 31, 2017, or the expiration of the last to expire of thepatents licensed under this agreement, unless the agreement is earlierterminated.  The agreement can beterminated by SKI for a variety of reasons, including (i) upon 60 days’notice in the event the Company fails to meet a development milestone specifiedin the agreement or (ii) upon 30 days’ notice, in the event the Companyfails to pay any licensing fees, royalties or patent expenses due under theagreement within 30 days of the due date and thereafter fail to pay suchdeficit in-full within the 30-day notice period.

InJuly 1999, the Company acquired exclusive, worldwide rights to OPopS technologyfrom the Scripps Research Institute (“TSRI”). This agreement includes the license to the Company of patents, patentapplications and copyrights related to OPopS technology.  The Company also acquired, pursuant to threeseparate license agreements with TSRI, exclusive, worldwide rights to over 20TSRI patents and patent applications related to other potential drug compoundsand technologies, including HIV/FIV protease inhibitors, aminoglycosideantibiotics, polysialytransferase, selectin inhibitors, nucleic acid binders,carbohydrate mimetics and osteoarthritis. Under the four agreements, the Company paid TSRI license fees consistingof an aggregate of 239,996 shares of its common stock with a deemed aggregatefair market value of $46,400, as determined on the dates of each suchpayment.  Additionally, under eachagreement, the Company 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 

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agreements,the Company will also owe TSRI payments upon achievement of certainmilestones.  In three of the four TSRIagreements, the milestones are the initiation of a Phase 2 trial or itsforeign equivalent, the filing of an NDA or its foreign equivalent andgovernment marketing and distribution approval. In the remaining TSRI agreement, the milestones are the successfulcompletion of a Phase 3 trial or its foreign equivalent, the filing of anNDA or its foreign equivalent and government marketing and distributionapproval.  The aggregate potential amountof milestone payments the Company may be required to pay TSRI under all fourTSRI agreements is approximately $14.0 million. Each TSRI agreement terminates in part as follows: (i) with respectto each product 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*

TheCompany leases office and research facilities under operating lease agreementsthat extend through November 2011.  TheCompany has recorded deferred rent of $292,384 and $279,414 as ofDecember 31, 2006 and 2005, respectively, in conjunction with one of thelease agreements.

At December 31, 2006, annual minimum rental payments due under theCompany’s operating leases are as follows:
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2007                                         |       | $          | 775,554    |   |
| 2008                                         |       | 683,255    |       |
| 2009                                         |       | 683,255    |       |
| 2010                                         |       | 683,255    |       |
| 2011                                         |       | 626,317    |       |
| Total minimum lease  payments                |       | $          | 3,451,636  |   |

 

Rentexpense was $837,551, $817,813 and $1,027,807, for the years endedDecember 31, 2006, 2005, and 2004, respectively.

*Contract ResearchOrganization Purchase Orders*

TheCompany has contracted with a contract research organization (“CRO”), wherebythe CRO will provide clinical research services to the Company for theDifimicin Phase 3 clinical trials and Prulifloxacin Phase 3 clinicaltrials.  At December 31, 2006, theCompany has issued purchase orders totaling $24,197,092 for these services,$20,388,054 of which were issued in 2006. The Company can terminate the service agreement at any time upon 60 days’prior written notice to the CRO.

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**8.     Redeemable Convertible Preferred Stock and Stockholders’ Deficit**

*Redeemable ConvertiblePreferred Stock and Series A Convertible Preferred Stock*

Asof December 31, 2006, the Company had outstanding shares of common stock,Series A convertible preferred stock, Series B redeemable convertible preferredstock, Series C redeemable convertible preferred stock and Series D redeemableconvertible preferred stock.

InSeptember 2006, the Company repurchased and retired 46,153 shares of previouslyissued Series A convertible preferred stock at $2.17 per share from aformer executive officer.

Asummary of the issued preferred stock, as of December 31, 2006, is asfollows:
| ** **                                            | ** ** | **Shares  Authorized** | ** ** | **Shares  Outstanding** | ** ** | **Common  Shares as if  Converted** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|
| Series A  convertible preferred stock            |       | 2,307,656              |       | 1,523,051               |       | 1,523,051                                     |       |
| Series B  redeemable convertible preferred stock |       | 6,461,439              |       | 4,132,736               |       | 4,959,273                                     |       |
| Series C  redeemable convertible preferred stock |       | 1,615,359              |       | 1,538,437               |       | 2,307,655                                     |       |
| Series D  redeemable convertible preferred stock |       | 3,923,016              |       | 2,861,288               |       | 3,433,569                                     |       |
|                                                  |       | 14,307,470             |       | 10,055,512              |       | 12,223,548                                    |       |

 

Theamount of issuance costs, $107,147, $758,921 and $827,589 for Series B, Cand D preferred stock, respectively, have been netted against proceeds.  These issuance costs are being accreted andrecorded as a decrease to additional paid-in capital through March 2010for Series B preferred stock and through April 2010 for Series C andD preferred stock.  For the years endedDecember 31, 2006, 2005 and 2004, the accretion amount was $329,207,$223,439, and $11,905, respectively.

*Common Stock Issued forTechnology Licenses*

In2001, the Company agreed to issue 13,845 shares of common stock, valued at$0.65 per share, to a non-profit institution in connection with acquiring anexclusive license for patents relating to the institution’s bi-functionalantibodies technology.  Based on theearly stage of commercial and technological development of the technology, theCompany expensed the $9,000 value of the licenses in 2001, and the Companyissued the 13,845 shares in 2005.

Alsoin 2001, the Company agreed to issue 18,461 shares of common stock, valued at$0.65 per share, to a non-profit institution to acquire an exclusive licensefor patents and technology relating to the treatment of osteoarthritis.  Based on the early stage of commercial andtechnological development of the acquired technology, the Company expensed the$12,000 value of the licenses in 2001, and the Company issued the 18,461 sharesin 2005.  The Company also expensed$50,000 in 2005 for license fees due under the agreement.  In addition, the Company will make additionalfuture royalty and milestone payments to the institution based upon thecompletion of certain specified events.

In2002, the Company issued 55,383 shares of common stock, valued at $0.65 pershare, to SKI to acquire a non-exclusive license for patents related to acarbohydrate cancer immunotherapy.  Basedon the early stage of commercial and technological development of the acquiredtechnology, the value of the license was expensed in 2002.  In addition, the Company expensed $25,000 and$25,000 in 2004 and 2005, respectively, for license fees due under theagreement.  The Company will makeadditional royalty and milestone payments in the future based on the completionof certain specified events.

In2004, the Company agreed to issue 23,076 shares of common stock, valued at$1.08 per share, to a non-profit institution to acquire an exclusive licensefor certain patents and technology.  TheCompany will make additional royalty and milestone payments in the future ifcertain specified events are 

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completed.  Based on the early stage of commercial andtechnological development of the acquired technology, the Company expensed the$25,000 value of the licenses in 2004, and the Company issued the 23,076 sharesin 2005.

*Treasury Stock*

InSeptember 2006, the Company reacquired 46,153 shares of previously issuedcommon stock at $2.17 per share from a former executive officer.  The shares were recorded as treasury stock attheir cost.  The 46,153 shares of commonstock remain in treasury as of December 31, 2006.

*Warrants*

Theholders of Series D preferred stock each acquired a five-year warrant topurchase up to an aggregate additional 1,144,511 shares of Optimer common stockat an exercise price of $1.08 per share. The Company determined the fair value of the warrants on the grant dateas $742,211 using the Black-Scholes pricing model with the followingassumptions: volatility factor of 70%, dividend yield of 0%, risk free interestrate of 3.0% and weighted average life of five years.  These warrants expire upon the earliest of achange in control, an initial public offering or April 29, 2010.  The fair value of the warrants was recordedas an increase to additional paid-in-capital. As ofDecember 31, 2006, 11,076 shares had been issued pursuant to thewarrants.  The remaining 1,133,435 sharesof warrants issuable as December 31, 2006, were issued on February 8, 2007, thedate when the Company’s initial public offering was declared effective.

InMarch 2005, a member of the Company’s board of directors who resigned inNovember 2006 and an officer provided the Company $208,000 and $590,400,respectively, as bridge financing to theCompany’s proposed Series D preferred stock financing.  In consideration for their financing, theboard member and the officer were issued the right to purchase for $208 and$590, respectively, a warrant to purchase additional Series D preferredstock of 6,666 and 18,922 shares, respectively, at $7.80 per share.  In April 2005, the individuals were issuedSeries D preferred stock for the funds originally provided the Company andthe Company paid interest in the amount of $1,160 and $6,341 to the boardmember and the officer, respectively.  InJuly 2005, the individuals exercised their rights to purchase the Series Dpreferred stock warrants.  The Companydetermined the fair value of the warrants on the grant date, using theBlack-Scholes pricing model with the following assumptions: volatility factorof 70%, dividend yield of 0%, risk free interest rate of 3.0% and weightedaverage life of five years.  Theresulting aggregate expense was approximately $119,637, which was recordedagainst the principal balance and amortized over the term of the bridgefinancing which converted to equity in April 2005. Pursuant to EITFIssue No. 98-5, “*Accounting for ConvertibleSecurities with Beneficial Conversion Features*,” and EITFNo. 00-27, *Application ofIssue 98-5 to Certain Convertible Instruments*,” theCompany recorded an additional non-cash interest charge of approximately$119,637 against the principal balance of the notes.  This amount represents the difference betweenthe conversion price of the notes and the underlying value of the stockissuable upon conversion of the notes. The warrants to purchase Series Dpreferred stock were exercised and such Series D preferred stock were convertedto common stock in connection with our initial public offering in February2007.

Inconnection with the Company’s building lease agreement signed in 2000, theCompany issued a warrant to purchase 13,845 shares of common stock at apurchase price of $10.83 per share, which expires June 2010.  The estimated fair value of the warrant atthe date of grant was not material using the Black-Scholes valuation model. Asof December 31, 2006, no shares have been issued pursuant to thesewarrants.

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*Initial Public Offering*

TheCompany’s initial public offering of common stock (the “Offering”) was effectedthrough a Registration Statement on Form S-1 (File number 333-138555)that was declared effective by the Securities and Exchange Commission onFebruary 8, 2007. The Offering commenced on February 9, 2007 and did notterminate before any securities were sold. On February 14, 2007, theCompany sold 7,000,000 shares of common stock at $7.00 per share inconnection with the closing of our initial public offering resulting inaggregate proceeds of approximately $43.6 million, net of underwritingdiscounts and commissions and offering expenses. On February 20, 2007, theunderwriters exercised in full the over-allotment option to purchase anadditional 1,050,000 shares of the Company’s common stock from a sellingstockholder.

*Stock Options*

In1998, the Company adopted the 1998 Stock Plan (the “1998 Plan”).  The 1998 Plan allows for the grant of optionsand stock purchase rights to employees, directors and consultants of theCompany.  As of December 31, 2006,the Company has reserved 254,382 shares of common stock for issuance.  Options granted under the 1998 Plan expire nolater than 10 years from the date of grant. Options generally vest over a four-year period and may be immediatelyexercisable.  After one year, the optionsgenerally vest 25%.  Thereafter, optionsgenerally vest monthly in 36 equal installments.  The exercise price of incentive stock optionsshall not be less than 100% of the fair value of the Company’s common stock onthe date of grant.  The exercise price ofany option granted to a 10% stockholder may be no less than 110% of the fairvalue of the Company’s common stock on the date of grant.  The fair value of the Company’s common stockhas historically been established contemporaneously by the Company’s board ofdirectors all of whom are related parties. Through April 2006, the valuations were performed by the Company’s boardof directors who have experience in valuing early stage companies.

TheCompany has considered the guidance in the American Institute of CertifiedPublic Accountants (“AICPA”) Audit and Accounting Practice Aid Series, *Valuation of Privately-Held-Company Equity Securities Issued asCompensation*, to determine the fair value of its common stock forpurposes of setting the exercise prices of stock options granted to employeesand others.  This guidance emphasizes theimportance of the operational development in determining the value of theenterprise.  The Company is at an earlystage of development, and to date, has been focused on research and developmentactivities.  To date, the Company hasbeen funded primarily by venture capitalists. Prior to filing the revised protocol for the Phase 2b/3 Difimicinclinical trial in late December 2005, and the FDA’s opening of thePrulifloxacin investigational new drug application in January 2006, the Companywas considered to be in a stage of development, pursuant to the AICPA guidancewhere the preferences of the preferred stockholders, in particular theliquidation preferences, are very significant when compared to the value of theCompany.  For these reasons, the Company’scommon stock was valued at $1.08 per share. In April 2006, subsequent to the Company’s achieving the two clinicaldevelopment milestones mentioned above but prior to the initiation of theCompany’s initial public offering process on October 5, 2006, the Company’sboard of directors allocated additional enterprise value to its common stockand increased its common stock valuation to $2.17 per share.

Inconnection with the initiation of the public offering process, the Companyretrospectively reassessed the estimated fair value of its common stock as ofthe dates of the issuance of its equity instruments dating back toJune 30, 2005.  The Company has nothistorically obtained contemporaneous valuations by an unrelated valuationspecialist because, at the time of issuances of equity awards, the Company 

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believedits estimates of the fair value of its common stock to be reasonable andconsistent with its understanding of how similarly situated companies in itsindustry were valued.  The Companydetermined that the fair value of its common stock was $1.08 per share duringthe period from June 30, 2005 through January 13, 2006, which wasapproximately the time when it achieved the clinical development milestonesdiscussed above.  In addition, in reassessingthe value of common stock in 2005 and 2006, the Company considered the price itreceived in November 2005 for the Series D preferred stock of $7.80 pershare, as to which approximately 54% of the proceeds were from new investorsthat were unrelated parties.  ThisSeries D preferred stock financing was completed at the same price and onother similar terms as the April 2005 Series C financing which wascompleted in April 2005.  Accordingly,the Company believes that the value of the Company’s common stock also remainedconstant during the same time period and until January 2006, or the time ofachievement of the two clinical development milestones described above.

TheCompany believes that after the completion of the two clinical developmentmilestones, the fair value of the Company’s common stock increased to $5.37 pershare in January 2006 which represents 90% of the value of the Series Dpreferred stock, on an as-converted basis, after deducting the value ofthe common stock warrants and assigning no value to the preferences of theSeries D preferred stock.  Inconnection with the preparation of the Company’s financial statements necessaryfor the filing for an initial public offering in October 2006, the Companyreassessed the estimated fair value of its common stock using a market-basedapproach, which considered recently completed initial public offerings bycompanies with similar market size and in a similar stage of development.  In determining the reassessed fair value ofits common stock, the Company established $11.40 per share as the reassessedfair value at October 5, 2006.  TheCompany also then reassessed the estimated fair value of its common stock fromJanuary 2006 through October 5, 2006 based on the nature of its operationsand the execution of its operating plan. Based on this assessment, including the fact that subsequent to the twoclinical development milestones previously described, there were no othersignificant scientific or operational milestones during that period.  As such, the Company ratably increased theestimated fair value of its common stock from $5.37 per share in January 2006to $11.40 per share at October 5, 2006. On January 19, 2007, in connection with the prospective buy-backagreement with Par, pursuant to which the Company acquired the right torepurchase Par’s right to develop and commercialize Difimicin, the Companyreassessed its fair value at that date to be $12.00 per share afterconsideration of this milestone.  Thereassessed fair values may not be reflective of the fair value which wouldresult from the application of other valuation methods.

Basedon the reassessed fair values of our common stock dating back to June 30,2005, the Company concluded that the 35,076 stock options granted to employeesbetween July 2005 and December 2005 were at fair value.  The Company concluded that the stock optionsgranted to employees and consultants in March, May and September of 2006, whichwere initially determined by the Company’s board of directors, were at exerciseprices below the reassessed values. Accordingly, for the 15,692 options granted at $1.08 per share in March2006; the 600 options granted in May 2006 at $2.17 per share; and the 71,999options granted in September 2006 at $2.17 per share, the reassessed fairvalues were determined to be $6.72 per share, $8.06 per share and $10.75 pershare, respectively.  Furthermore, inJuly 2006, the Company granted 251,534 options at $2.17 per share related tohiring two executive officers as well as the Company’s annual stock optiongrants to members of the Company’s board of directors.  The reassessed fair values of these July 2006stock options were determined to be $9.40 per share.

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Theaggregate intrinsic value of options exercised during the year endedDecember 31, 2006 was approximately $2,409,227.  The aggregate intrinsic value of optionsoutstanding and options exercisable as of December 31, 2006 wasapproximately $15,315,464 and $9,543,580, respectively.

Following is a summary of stock option activity:
| ** **                            | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-------------|------------|---------------------------------------------|------------|
| Balance as of  December 31, 2003 |       | 1,441,747   |       | $                                           | 0.54       |   |
| Granted                               |       | 146,905     |       | $                                           | 1.08       |   |
| Exercised                             |       | (387,955    | )          | $                                           | 0.33       |   |
| Canceled                              |       | (52,066     | )          | $                                           | 0.65       |   |
| 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       |   |

 

Asof December 31, 2006, 1,496,945 options were outstanding under the 1998Plan at exercise prices ranging from $0.22 to $2.17 per share.  The weighted average remaining contractuallife of options outstanding at December 31, 2006 was 7.4 years with aweighted average exercise price of $1.17 per share.  Of the options outstanding, 903,753 optionswere vested as of December 31, 2006, with a weighted average remainingcontractual life of 6.2 years and a weighted average exercise price of $0.84per share, while 593,192 were unvested.

As of December 31, 2006, options were outstanding under the 1998Plan as follows:
| ** **                | ** ** | **December 31, 2006** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Options Outstanding**    | ** ** | **Options Exercisable** | ** ** |
| **Exercise   Price** | ** ** | **Number  Outstanding**         | ** ** | **Weighted Average  Remaining  Contractual  Life (in years)** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
| $0.22                     |       | 72,306                          |       | 4.0 |   | $ | 0.22 |   | 72,306 |   | $ | 0.22 |   |
| $0.65                     |       | 439,609                         |       | 5.0 |   | $ | 0.65 |   | 439,320 |   | $ | 0.65 |   |
| $1.08                     |       | 637,534                         |       | 8.1 |   | $ | 1.08 |   | 364,147 |   | $ | 1.08 |   |
| $2.17                     |       | 347,496                         |       | 9.6 |   | $ | 2.17 |   | 27,980 |   | $ | 2.17 |   |
|                      |       | 1,496,945                       |       | 7.4 |   | $ | 1.17 |   | 903,753 |   | $ | 0.84 |   |

*Effective with the Company’s initial public offering, whichwas declared effective on February 8, 2007, the 1998 Plan was terminated.  OnDecember 27, 2006, the Board approved the 2006 Equity Incentive Plan.  As of December 31, 2006, no options had beengranted under this plan.*

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*Common Stock Reserved forIssuance*

Common stock was reserved for issuance as follows:
| ** **                                                     | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Convertible  preferred stock                                   |       | 12,223,548                  |       | 12,261,701                  |       |
| Series D  redeemable convertible preferred stock warrants |       | 22,705                      |       | 30,705                      |       |
| Common stock  warrants                                         |       | 1,144,604                   |       | 1,155,681                   |       |
| Common stock  options outstanding                              |       | 1,496,945                   |       | 1,455,022                   |       |
| Common stock  options available for future grant               |       | 254,382                     |       | 21,634                      |       |
| Total common stock reserved  for future issuance               |       | 15,142,184                  |       | 14,924,743                  |       |

**9.**              Income Taxes

Significant components ofthe Company’s deferred tax assets as of December 31, 2006 and 2005 areshown below.  A valuation allowance hasbeen established as of December 31, 2006 and 2005 to offset the deferredtax assets as realization of such assets does not meet the more likely than notthreshold under SFAS 109.
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  assets:                        |       |                  |       |   |   |
| Net operating  loss carryforwards            |       | $                     | 17,170,000 |   | $ | 14,079,000 |   |
| Tax credits                                  |       | 2,217,000             |       | 2,029,000 |   |
| Other, net                                   |       | 599,000               |       | 241,000 |   |
| Total deferred  tax assets                   |       | 19,986,000            |       | 16,349,000 |   |
| Valuation  allowance for deferred tax assets |       | (19,986,000           | )          | (16,349,000 | ) |
|                                         |       | $                     | —     |   | $ | — |   |

 

Asof December 31, 2006, the Company had federal, state and foreign netoperating loss carryforwards of approximately $42,607,000, $40,838,000 and$1,588,000, respectively.  The federaland state tax loss carryforwards will begin expiring in 2020 and 2012, respectively,unless previously utilized.  The foreignlosses originate 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 $1,471,000, which will begin to expire in 2020, unless previouslyutilized.  As of December 31, 2006,the Company had California state research tax credit carryforwards ofapproximately $1,029,000, which do not expire and California state manufacturer’sinvestment tax credit carryforwards of approximately $103,000, which will beginto expire in 2011, unless previously utilized.

Pursuantto Sections 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**

EffectiveJanuary 1, 2000, the Company established a 401(k) plan coveringsubstantially all employees.  Employeesmay contribute up to 100% of their compensation per year (subject to a maximumlimit prescribed by federal tax law). The Company may elect to make a discretionary contribution or match adiscretionary percentage of employee contributions.  As of December 31, 2005 and 2006, theCompany had not elected to make any contributions to the 401(k) plan.

 

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**Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

None.

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

As of the end of the period covered by this report,an evaluation was performed under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer (collectively, our “certifying officers”), of the effectiveness of thedesign and 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 howwell designed and operated, is based in part upon certain assumptions about thelikelihood of future events, and therefore can only provide reasonable, notabsolute, assurance that the objectives of the controls system are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected.

In addition, we have reviewed our internal controlsover financial reporting and have made no changes during the quarter endedDecember 31, 2006, that our certifying officers concluded materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

**Item 9B. Other Information.**

None.

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**PART III**

**Item 10. Directors and ExecutiveOfficers and Corporate Governance**

**ExecutiveOfficers and Directors**

Our executive officers and directors and their respective ages andpositions are as follows:
| **Name**                            | ** ** | **Age** | ** ** | **Position**                                                    |
|-------------------------------------|------------|---------|------------|-----------------------------------------------------------------|
| Michael N. Chang, Ph.D.(1)     |       | 56      |       | President, Chief Executive Officer and Director                 |
| Tessie M. Che, Ph.D.(1)        |       | 56      |       | Senior Vice President, Corporate Affairs                        |
| Sherwood L. Gorbach, M.D.(1)   |       | 72      |       | Senior Vice President, Chief Medical Officer                    |
| Kevin P. Poulos(1)             |       | 47      |       | Vice President, Marketing and Sales                             |
| John D. Prunty(1)              |       | 45      |       | Chief Financial Officer, Vice President, Finance and  Secretary |
| Youe-Kong Shue, Ph.D.(1)            |       | 57      |       | Vice President, Clinical Development                            |
| Mark Auerbach(2)                    |       | 68      |       | Director                                                        |
| Joseph Y. Chang, Ph.D.(3)(4)   |       | 54      |       | Director                                                        |
| Joseph J. Chow(3)(4)           |       | 45      |       | Director                                                        |
| Howard S. Lee, Ph.D.(2)(4)     |       | 45      |       | Director                                                        |
| Martin C. Muenchbach, Ph.D.    |       | 36      |       | Director                                                        |
| Alain B. Schreiber, M.D.(2)(3) |       | 51      |       | Director                                                        |

----

(1)          Executive officer.

(2)          Member of the auditcommittee.

(3)          Member of thecompensation committee.

(4)          Member of the nominatingand corporate governance committee.

**ExecutiveOfficers**

*Michael N. Chang, Ph.D*. has served as our President and Chief Executive Officer since ourinception in November 1998.  FromNovember 1998 to January 2000, Dr. Chang was the Chief Scientific Officerof Nu Skin Enterprises, Inc., a NYSE-listed direct selling company based inUtah.  Dr. Chang joined Nu SkinEnterprises upon its acquisition of Pharmanex, Inc., a natural healthcarecompany, which he founded and where he was employed since January 1995 asSenior Vice President, Research and Development and Chief Science Officer.  Dr. Chang was also a co-founder ofPharmanex, which was purchased by Nu Skin Enterprises in 1998.  Before Pharmanex, Dr. Chang worked for15 years in the pharmaceutical industry, at Merck & Co, Inc., apublicly-traded research-driven pharmaceutical company, Rhone-Poulenc Rorer Inc.,which is now Sanofi-Aventis, a publicly-traded pharmaceutical company, andArQule, Inc., a development stage oncology company.  Dr. Chang received a B.S. degree inchemistry from Fu-Jen University in Taiwan, a Ph.D. degree in organicchemistry from Brandeis University and post-doctoral training at the MassachusettsInstitute of Technology, or MIT. Dr. Chang is married to Tessie M. Che, Ph.D., our Senior VicePresident, Corporate Affairs.

*Tessie M. Che, Ph.D*. has served as our Senior Vice President, Corporate Affairs sinceNovember 1999.  Dr. Che has over 20years of industrial and management experience at large companies includingExxon Mobil Corporation, a petroleum and petrochemical company, AventisPharmaceuticals, Inc., a pharmaceutical company, and EniChem S.p.A., a chemicalcompany.  From 1994 to 1996, Dr. Cheserved as the Chief Operating Officer and Vice President of the M and DPrecision Science Group, Inc., a biotechnology company.  In 1994, Dr. Che also co-foundedand headed Zhejiang Cinogen Pharmaceutical Co., Ltd., a pharmaceutical company,which later merged with and became a wholly-owned subsidiary of Pharmanex,Inc.  At Pharmanex, she served asDirector of Quality Assurance and Senior Director of Ingredient Sourcing from1995 to 1999.  Dr. Che has a B.S.degree in chemistry from 

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Illinois State University, a Ph.D. in physical-inorganic chemistry fromBrandeis University and did post-doctoral work at Columbia University.  Dr. Che is married to Michael N.Chang, Ph.D., our President and Chief Executive Officer.

*Sherwood L. Gorbach, M.D*. has served as our Senior Vice President, Chief Medical Officer sinceNovember 2005.  Since 1975,Dr. Gorbach has been at Tufts University School of Medicine serving as,among other things, a Professor of Family Medicine and Community Health and aProfessor in the School of Nutrition and Social Policy.  Dr. Gorbach also served as Chief ofInfectious Diseases at New England Medical Center from 1975 to 1987.  In 1990, he served as the President of theMassachusetts Infectious Diseases Society, and in 1995, he was the President ofthe Society of Microbial Ecology and Disease. Dr. Gorbach received the Lifetime Achievement Award in Recognitionof Exemplary Dedication and Leadership at the 3rd Congress on AnaerobicBacteria and Infections held in Glasgow, Scotland in 2003.  As editor of the Clinical Infectious Diseasesscientific journal and a member of the editorial board of the Journal ofAgromedicine, Dr. Gorbach is a renowned authority on infectious diseases.  Dr. Gorbach received his M.D. at theTufts University School of Medicine in Boston.

*Kevin P. Poulos* has served as our Vice President, Marketing and Sales since July2006.  Before joining Optimer,Mr. Poulos served as the Senior Director, New Product Marketing andBusiness Development, for Wyeth, a research-based, global pharmaceuticalcompany, from March 2004 to June 2006. From November 2002 to March 2004, Mr. Poulos was an executiveconsultant for KPP Consulting, LLC, a strategic consulting firm.  He worked for Cline, Davis & Mann,Inc., an advertising agency as a Senior Vice President from March 2002 toNovember 2002. Prior to joining Cline, Davis & Mann, Inc.,Mr. Poulos was employed by Saatchi & Saatchi, Inc. as aVice-President between September 1999 and March 2002.  Mr. Poulos has also served in amarketing and sales capacity in various positions for Pharmacia &Upjohn, Inc., a pharmaceutical research and development company, from 1998 to1999, Rhone Poulenc-Rorer Inc., now Sanofi-Aventis, from 1995 to 1998, LederlePharmaceuticals, a pharmaceutical company, from 1989 to 1995 and SmithKlineBeecham Pharmaceuticals, Plc, now GlaxoSmithKline Plc, a pharmaceuticalcompany, from 1982 to 1989. Mr. Poulos received his business administration degree in marketingmanagement from Old Dominion University and is a member of the American Societyof Microbiology.

*John D. Prunty, C.P.A*. has served as our Chief Financial Officer and Vice President Financesince June 2006 and Secretary since December 2006.  Before joining us, Mr. Prunty heldseveral key positions with Maxim Pharmaceuticals, Inc., a biopharmaceuticalcompany, from 2000 to 2006, including Chief Financial Officer, Vice Presidentof Finance, and Corporate Secretary. Prior to his employment at Maxim, Mr. Prunty served as SeniorDirector of Finance and Corporate Controller at Gen-Probe Incorporated, amanufacturer of nucleic acid tests that diagnose human diseases, from 1997 to2000.  He also held senior managementpositions at I-Bus, currently known as I-Bus/Phoenix, Inc., adivision of Maxwell Laboratories, Inc., an electronic device company.  Mr. Prunty began his career as anauditor at Ernst & Young LLP, an accounting firm, where he spent sevenyears in public accounting.  He is acertified public accountant and received a B.B.A. from the University of SanDiego and an M.S. in management from San Diego State University.

*Youe-Kong Shue, Ph.D*. joined us in June 2000 as Senior Director of Chemistry and has servedas Vice President, Clinical Development since January 2006.  Dr. Shue came to us with extensiveexperience in the pharmaceutical industry, most recently from AstraZeneca Plc,a pharmaceutical research company, where he led a drug development program toidentify novel therapies to combat H. pylori from 1996 to 2000.  From 1993 to 1996, he worked for Cubist Pharmaceuticals,Inc., a biopharmaceutical company, as Director of Chemistry, leading researchand development into anti-infective products. He started his 

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career in 1983 at Abbott Laboratories, a broad-based health carecompany, where he conducted neuroscience research.  Dr. Shue received his B.A. degree inchemistry from National Cheng-Kung University in Taiwan, his M.S. degreein chemistry from National Taiwan University, his Ph.D. in organic chemistryfrom the University of Pittsburgh and did his post-doctoral training atMIT.

**Directors**

*Mark Auerbach, C.P.A*. has served as a director since June 2005.  Mr. Auerbach is the current Chairman ofthe Board of Directors for Neuro-Hitech, Inc., an early-stage pharmaceuticalcompany specializing in brain degenerative diseases.  From September 2003 through October 2006,Mr. Auerbach served as Executive Chairman of the Board of Directors forPar Pharmaceutical Companies, Inc., principally a manufacturer and marketer ofgeneric pharmaceuticals and the parent of Par Pharmaceutical, Inc.  From 1993 to 2005, Mr. Auerbach servedas Chief Financial Officer of Central Lewmar LLP, a national fine paperdistributor.  Mr. Auerbach receivedhis B.S. degree in accounting from Rider University.

*Joseph Y. Chang, Ph.D*. has served as a director since November 1998.  Dr. Chang is Chief Scientific Officerand Executive Vice President of Nu Skin Enterprises.  Dr. Chang served as the President ofPharmanex, Nu Skin Enterprises’ nutritional supplement division, from April2000 to February 2006.  Dr. Changserved as Vice President of Clinical Studies and Pharmacology of Pharmanex from1997 until April 2000.  From 1994 until1997, he was the President and Chief Scientific Officer of Binary Therapeutics,Inc., a development stage company in the biotechnology industry.  From 1981 to 1991, Dr. Chang was aresearch executive at Wyeth Research, a research-based pharmaceutical productscompany and formerly known as Wyeth-Ayerst Research, and Aventis Pharma, nowSanofi-Aventis.  Dr. Chang receiveda B.S. degree from Portsmouth University and a Ph.D. degree from the Universityof London.

*Joseph J. Chow* has served as a director since May 2000.  Mr. Chow is the Managing Director of SBLife Science Equity Management, LLC, the advisor to SB Life Science VenturesLLP, which is the life science venture capital fund sponsored by SoftbankCorporation.  Prior to joining SB LifeScience in 2001, from 1992 to 2001, he was President of SingaporeBio-Innovations, a venture capital fund focused on the life sciences set up bythe Singapore government in 1990. Mr. Chow has over 10 years of venture capital experience in thebiotech industry.  Mr. Chowcompleted his undergraduate studies at U.C. Berkeley and received a M.Sc.in biochemical engineering from MIT as well as an M.B.A. in finance from theMIT Sloan School of Management.

*Howard S. Lee, Ph.D*. has served as a director since July 2006.  Dr. Lee is a Managing Director at SilverBiotech Management, Inc., a biotech management company.  Prior to joining Silver Biotech Management,he served as President of CDIB Biotech USA Investment Co. Ltd., an investmentbank, from October 2000 to June 2006 and as Vice President of China DevelopmentIndustrial Bank, a venture capital firm located in Taiwan, from 1995 to June2006.  Dr. Lee has broad industrialexperience from environmental engineering projects in diversifiedindustries.  He was an adjunct associateprofessor of organic chemistry, organosilicon and polymer chemistry at Fu-JenUniversity in Taiwan in 1983. Dr. Lee earned his B.Sc. at Fu-Jen University, his M.Sc. andPh.D. degrees in chemistry from the University of Southern California in 1990,and also completed his post-doctoral research at the Loker Hydrocarbon ResearchInstitute of USC.  Dr. Lee hasserved as a director for the Development Center of Biotechnology in Taiwan, theTaiwan Biotech Association and the Association of Technology Managers inTaiwan.

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*Martin C. Muenchbach, Ph.D*. has served as a director since December2005.  Dr. Muenchbach is anInvestment Manager at Bellevue Asset Management AG, a subsidiary of BellevueGroup AG, Kunacht, Switzerland, an independent financial group listed on theSWX Swiss Exchange specializing in investment banking, private banking andasset management.  Prior to joiningBellevue Asset Management AG in October 2004, Dr. Muenchbach was anInvestment Manager at HBM Partners AG, an investment advisory services companyspecializing in biotechnology, medical technology and related fields, fromFebruary 2003 to October 2004. Dr. Muenchbach was an Investment Manager at NMT New MedicalTechnologies AG, a venture capital fund co-founded by F. Hoffmann-LaRoche Ltd, a healthcare company, and Union Bank of Switzerland, from January2000 to February 2003.  Before becoming aventure capitalist, Dr. Muenchbach held positions in strategic marketingat Sanofi-Synthelabo. Dr. Muenchbach holds a Bachelor’s degree in biochemistry fromUniversity Tubingen, and a Ph.D. in protein chemistry, a M.Sc. in biochemistry and a Master in industrialmanagement from the Swiss Federal Institute of Technology (ETH), Zurich.

*Alain B. Schreiber, M.D*. has served as a director since May 2001.  Since 2000, Dr. Schreiber has been aManaging Partner at ProQuest Investments, a healthcare venture capitalfirm.  From May 1992 to June 2000,Dr. Schreiber served as President, Director and Chief Executive Officer ofVical Incorporated, a publicly-traded biopharmaceutical company.  From July 1985 to April 1992, he held variouspositions with Rhone Poulenc-Rorer Inc., which is now Sanofi-Aventis, mostrecently as Senior Vice President of Discovery Research.  Dr. Schreiber currently serves on theboard of directors of Cadence Pharmaceuticals, Inc., a publicly-tradeddevelopment stage pharmaceutical company, and several private development stagebiotechnology and pharmaceutical companies. Dr. Schreiber holds a B.S. in chemistry and an M.D. from the FreeUniversity Brussels and was awarded a post-doctoral fellowship at theWeizmann Institute in Israel.

*Term of Office*.  Our board of directors is divided into threeclasses as follows:

·              Class I, which consists of MichaelN. Chang and Howard S. Lee, and whose term will expire at our next annualmeeting of stockholders;

·              Class II, which consists of MartinC. Muenchbach and Alain B. Schreiber, and whose term will expire at our secondannual meeting of stockholders to be held following the date hereof; and

·              Class III, which consists of MarkAuerbach, Joseph Y. Chang and Joseph J. Chow, and whose term will expire at ourthird annual meeting of stockholders to be held following the date hereof.

**Audit Committee and Related Matters**

The Audit Committee of the Board of Directors oversees the Company’scorporate accounting and financial reporting process.  For this purpose, the Audit Committee performsseveral functions.  The Audit Committeeevaluates the performance of and assesses the qualifications of the independentregistered public accounting firm; determines and approves the  engagement of the independent registeredpublic accounting firm; determines whether to retain or terminate the existingindependent registered public accounting firm or to appoint and engage newindependent registered public accounting firm; reviews and approves theretention of the independent registered public accounting firm to perform anyproposed permissible non-audit engagement team as required by law; confers withmanagement and the independent registered public accounting firm regarding theeffectiveness of internal controls over financial reporting; establishes procedures,as required under applicable law, for 

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the receipt, retention and treatment of complaints received by usregarding accounting, internal accounting controls or auditing matters and theconfidential and anonymous submission by employees of concerns regardingquestionable accounting or auditing matters; reviews the financial statementsto be included in our Annual Report on Form 10-K; and discusses with managementand independent registered public accounting firm the results of the annualaudit and the results of the Company’s quarterly financial statements.

Three directors comprise our Audit Committee: Mr. Auerbach, and Drs.Lee and Schreiber.  Mr. Auerbach is thechairman of the Audit Committee.  Ourboard of directors has determined that Mr. Auerbach and Drs. Lee and Schreiberqualify as independent “audit committee financial experts,” as defined inapplicable SEC rules.  Our board ofdirectors made a qualitative assessment of each Audit Committee member’s levelof knowledge and experience based on a number of factors, including theirformal education and current and prior work.

**Section 16(a) Beneficial Ownership Reporting Compliance**

Section 16(a) of the Securities Exchange Act of1934 (the “1934 Act”) requires our directors and executive officers, andpersons who own more than ten percent of a registered class of our equitysecurities, to file with the SEC initial reports of ownership and reports ofchanges in ownership of our common stock and other equity securities. Officers,directors and greater than ten percent stockholders are required by SECregulation to furnish us with copies of all Section 16(a) forms they file.

We did not become subject to the reportingrequirements of the 1934 Act until our initial public offering in February2007, and, accordingly, during the fiscal year ended December 31, 2006,our directors and executive officers and persons owning more than 10% of ourcommon stock were not required to comply with Section 16(a) with respectto our common stock.

**Code of Ethics**

** **We haveadopted a Code of Business Conduct and Ethics that applies to all officers,directors and employees. The Code of Business Conduct and Ethics is availableon our website at www.optimerpharma.com. If we make any substantive amendmentsto the Code of Business Conduct and Ethics or grant any waiver from a provisionof the Code to any executive officer or director, we will promptly disclose thenature of the amendment or waiver on our website. We will promptly disclose onour website (i) the nature of any amendment to the policy that applies toour principal executive officer, principal financial officer, principalaccounting officer or controller, or persons performing similar functions and(ii) the nature of any waiver, including an implicit waiver, from a provisionof the policy that is granted to one of these specified individuals, the nameof such person who is granted the waiver and the date of the waiver.

**Item 11. Executive Compensation**

**CompensationCommittee Interlocks and Insider Participation**

No member of our compensation committee has ever been an executiveofficer or employee of ours.  None of ourexecutive officers currently serves, or has served during the last completedfiscal year, on the compensation committee or board of directors of any otherentity that has one or more executive officers serving as a member of our boardof directors or compensation committee. Prior to establishing 

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the compensation committee, our full board of directors made decisionsrelating to compensation of our executive officers.

**CompensationCommittee Report**

Our compensation committee has reviewed the following CompensationDiscussion and Analysis section and discussed the information therein withmanagement.  Based on its review anddiscussions with management, the committee recommended to our Board ofDirectors that the Compensation Discussion and Analysis be included in ourAnnual Report on Form 10-K for 2006.

**COMPENSATION DISCUSSION ANDANALYSIS**

**Objectivesand Philosophy of Executive Compensation**

The primary objectives of the compensation committee of our board ofdirectors with respect to executive compensation are to attract and retain themost talented and dedicated executives possible, to tie annual and long-termcash and stock incentives to achievement of measurable performance objectives,and to align executives’ incentives with stockholder value creation.  To achieve these objectives, the compensationcommittee expects to implement and maintain compensation plans that tie asubstantial portion of executives’ overall compensation to key strategicfinancial and operational goals such as the establishment and maintenance ofkey strategic relationships, the development of our product candidates, theidentification and advancement of additional product candidates and theperformance of our common stock price. The compensation committee evaluates individual executive performancewith the goal of setting compensation at levels the committee believes arecomparable with executives in other companies of similar size and stage ofdevelopment operating in the biotechnology industry while taking into accountour relative performance and our own strategic goals.

We have not retained a compensation consultant to review our policiesand procedures with respect to executive compensation.  We conduct an annual benchmark review of ourexecutive compensation, as well as the mix of elements used to compensate ourexecutive officers.  This review is basedon a number of sources.  The primarysource is the San Diego Biotech Employee Development Coalition survey ofexecutive compensation which reviews executive compensation of approximately 90participating public and private companies primarily from the San Diegobiotechnology community.  We benchmarkour base salary and annual bonus against the median updated compensation forthese participating companies.

**Elementsof Executive Compensation**

Executive compensation consists of the following elements:

***Base Salary***.  Basesalaries for our executives are established based on the scope of their responsibilities,taking into account competitive market compensation paid by other companies forsimilar positions.  Generally, we believe that executive basesalaries should be targeted near the median of the range of salaries forexecutives in similar positions with similar responsibilities at comparablecompanies, in line with our compensation philosophy.  Base salaries are reviewed annually, andadjusted from time to time to realign salaries with market levels after takinginto account individual responsibilities, performance and experience.  This review occurs each year in the fourthquarter.

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***Discretionary Annual Bonus***.  Thecompensation committee has the authority to award discretionary annual bonusesto our executive officers.  In 2006, thecompensation committee did not award any discretionary annual bonuses to ourexecutive officers.  The compensationcommittee expects to adopt a more formal process for discretionary annualbonuses in 2007.  The compensationcommittee intends to utilize annual incentive bonuses to compensate officersfor achieving financial and operational goals and for achieving individualannual performance objectives.  Theseobjectives will vary depending on the individual executive, but will relategenerally to strategic factors such as establishment and maintenance of keystrategic relationships, development of our product candidates, identificationand advancement of additional product candidates, and to financial factors suchas raising capital, improving our results of operations and increasing theprice per share of our common stock.

***Long-Term Incentive Program***.  Webelieve that long-term performance is achieved through an ownership culturethat encourages such performance by our executive officers through the use ofstock and stock-based awards.  Our stockplans have been established to provide our employees, including our executiveofficers, with incentives to help align those employees’ interests with theinterests of stockholders.  Thecompensation committee believes that the use of stock and stock-based awardsoffers the best approach to achieving our compensation goals.  We have historically elected to use stockoptions as the primary long-term equity incentive vehicle.  We have not adopted stock ownershipguidelines and our stock compensation plans have provided the principal method,other than through direct investment in our prior preferred stock offerings,for our executive officers to acquire equity in our company.  We believe that the annual aggregate value ofthese awards should be set near competitive median levels for comparablecompanies.  However, due to the earlystage of our business, we expect to provide a greater portion of totalcompensation to our executives through our stock compensation plans thanthrough cash-based compensation.

*Stock Options*.  Our stock plans authorize us to grant optionsto purchase shares of common stock to our employees, directors andconsultants.  Our compensation committeeoversees the administration of our stock option plan.  Stock option grants are made at thecommencement of employment and, occasionally, following a significant change injob responsibilities or to meet other special retention objectives.  The compensation committee reviews andapproves stock option awards to executive officers based upon a review ofcompetitive compensation data, its assessment of individual performance, areview of each executive’s existing long-term incentives, and retentionconsiderations.  Periodic stock optiongrants are made at the discretion of the compensation committee to eligibleemployees and, in appropriate circumstances, the compensation committeeconsiders the recommendations of members of management, such as Dr. Chang,our President and Chief Executive Officer. In 2006, certain named executive officers were awarded stock options inthe amounts indicated in the section entitled “Stock Option Grants to ExecutiveOfficers.” These grants included grants made in July 2006 in connection withthe commencement of employment of certain executive officers, and in September2006 in connection with merit-based grants made by the board of directors to alarge number of employees, including certain executive officers, which wereintended to encourage an ownership culture among our employees.  The September 2006 grants were made tocertain of our employees who had been employed with us for at least three yearsprior to September 2006 based on past performance of such employees and toencourage continued service with us. Stock options granted by us have an exercise price equal to the fairmarket value of our common stock on the day of grant, typically vest over afour-year period with 25% vesting twelve months after the vesting commencementdate and the remainder vesting ratably each month thereafter based uponcontinued employment, and generally expire ten years after the date ofgrant.  Incentive stock options alsoinclude certain other terms necessary to assure compliance with the InternalRevenue Code of 1986, as amended, or Internal Revenue Code.

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We expect to continue to use stock options as a long-term incentivevehicle because:

·                  Stock options align theinterests of executives with those of the shareholders, support apay-for-performance culture, foster employee stock ownership, and focus the managementteam on increasing value for the shareholders.

·                  Stock options areperformance based.  All the valuereceived by the recipient of a stock option is based on the growth of the stockprice.

·                  Stock options help toprovide a balance to the overall executive compensation program as base salaryand our discretionary annual bonus program focus on short-term compensation,while the vesting of stock options increases shareholder value over the longerterm.

·                  The vesting period of stockoptions encourages executive retention and the preservation of shareholdervalue.

In determining the number of stock options to be granted to executives,we take into account the individual’s position, scope of responsibility,ability to affect profits and shareholder value and the individual’s historicand recent performance and the value of stock options in relation to otherelements of the individual executive’s total compensation.

*Stock Appreciation Rights*.  Our 2006 equity incentive planauthorizes us to grant stock appreciation rights, or SARs.  An SAR represents a right to receive theappreciation in value, if any, of our common stock over the base value of theSAR.  The base value of each SAR equalsthe value of our common stock on the date the SAR is granted.  Upon surrender of each SAR, unless we electto deliver common stock, we will pay an amount in cash equal to the value ofour common stock on the date of delivery over the base price of the SAR.  SARs typically vest based upon continuedemployment on a pro-rata basis over a four-year period, and generally expireten years after the date of grant.  Ourcompensation committee is the administrator of our stock appreciation rightsplan.  To date, we have not granted anySAR under our 2006 equity incentive plan.

*Restricted Stock and Restricted Stock Units*.  Our2006 Equity Incentive Plan authorizes us to grant restricted stock andrestricted stock units.  To date, we havenot granted any restricted stock or restricted stock units under our 2006equity incentive plan.  We anticipatethat in order to implement the long-term incentive goals of the compensationcommittee we may grant restricted stock units.

*Other Compensation*.  Our executive officers who areparties to employment agreements will continue to be parties to such employmentagreements in their current form until such time as the compensation committeedetermines in its discretion that revisions to such employment agreements areadvisable.  In addition, consistent withour compensation philosophy, we intend to continue to maintain our currentbenefits for our executive officers, including medical, dental, vision and lifeinsurance coverage and the ability to contribute to a 401(k) retirement plan;however, the compensation committee in its discretion may revise, amend or addto the officer’s executive benefits if it deems it advisable.  We believe these benefits are currently lowerthan median competitive levels for comparable companies.  We have no current plans to change either theemployment agreements (except as required by law or as required to clarify thebenefits to which our executive officers are entitled as set forth herein) orlevels of benefits provided thereunder.

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*Change in Control and Severance Arrangements*.  Wegrant change in control and severance arrangements to our executive officers ona case-by-case basis.  Currently,Michael N. Chang, our president and chief executive officer, John D.Prunty, our chief financial officer, vice president, finance and secretary, andKevin Poulos, our vice president, marketing and sales, are the only executiveofficers who have any change in control and severance arrangements.  We believe that granting these arrangementsto certain key employees is an important element in the retention of suchemployees.

·                  For Dr. Chang, if he isterminated without cause or is the subject of a constructive termination, he isentitled to a severance payment equal to 12 months of his annual base salarythen in effect and the vesting of any of his outstanding stock options will beaccelerated by 12 months.  Currently,Dr. Chang’s annual base salary is $350,000 and Dr. Chang has 445,508shares of common stock subject to outstanding options, 232,860 of which sharesare currently invested.  Acceleration ofoutstanding stock options by 12 months would result in accelerated vesting of 92,008shares of common stock subject to currently unvested options.  In addition if Dr. Chang’s employment isterminated within 12 months following a change of control of our company, thenall unvested shares subject to the options to purchase 263,416 shares of commonstock granted to Dr. Chang on June 30, 2005 shall immediately vestand be exercisable.  Of the 263,416shares of common stock granted to Dr. Chang on June 30, 2005, 142,684of such shares are currently unvested.

For Dr. Chang, cause isdefined to be a material breach by Dr. Chang of his employment agreementor his failure to discharge his duties, the willful and continued failure orrefusal to substantially perform his duties (subject to a 20-day cureperiod following written notice), any willful violation of certain laws orpolicies (as determined by a disinterested majority of our board of directors),or any other misconduct that is materially injurious our company.  A constructive termination of Dr. Changmeans the continued assignment of any duties or the continued materialreduction in duties, either of which is materially inconsistent withDr. Chang’s position, for 30 days after notice by Dr. Chang of objectionto such assignment or reduction, the relocation of Dr. Chang’s employmentto a location more than 30 miles from our offices in San Diego, California, ora material reduction in compensation and benefits for 30 days afterDr. Chang provides written notice of such reduction.  A change of control is defined to be ourbeing merged with or into or combined with a third party such that our securityholders prior to such transaction do not hold at least 50% of the securities ofthe resulting entity after such transaction.

·                  For Mr. Prunty, if heis terminated without cause, he will be entitled to continued payment of hiscurrent base salary for three months following termination.  If he is terminated without cause within oneyear following a change of control, he will be entitled to continued payment ofhis current base salary for six months following termination and all of hisunvested options shall become immediately fully vested.  In each case, the receipt by Mr. Pruntyof any such termination payments shall be subject to his execution of a waiverand general release in favor of us and compliance with any provisions of hisoffer letter agreement that survive termination.  Currently, Mr. Prunty’s annual basesalary is $214,810 and three months’ salary is equal to $53,703 and six months’salary is equal to $107,405. Mr. Prunty has 126,536 shares of common stock subject to outstandingoptions, all of which shares are currently unvested.

·                  For Mr. Poulos, if heis terminated without cause, he will be entitled to continued payment of hiscurrent base salary for three months following termination.  If he is terminated without cause within oneyear following a change of control, he will be entitled to continued payment 

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of his current base salaryfor six months following termination and all of his unvested options shallbecome immediately fully vested.  In eachcase, the receipt by Mr. Poulos of any such termination payments shall besubject to his execution of a waiver and general release in favor of us andcompliance with any provisions of his offer letter agreement that survivetermination.  Currently, Mr. Poulos’annual base salary is $182,969 and three months’ salary is equal to $45,742 andsix months’ salary is equal to $91,485. Mr. Poulos has 119,536 shares of common stock subject to outstandingoptions, all of which shares are currently unvested.

For each ofMssrs. Prunty and Poulos, cause means failure to perform assigned dutiesafter notice from us, their engaging in any act of dishonesty, fraud ormisrepresentation, their violation of any law or regulation applicable to ourbusiness, their breach of any of their respective confidentiality agreement orinvention assignment agreement with us, or their being convicted of any crimeor committing any act of moral turpitude. In addition, for each of Mssrs. Prunty and Poulos, change ofcontrol means a sale, lease or disposition of all or substantially all of ourassets, or our merger or consolidation with or into any other entity or anyother corporation reorganization where our stockholders immediately prior tosuch event do not retain more than 50 percent of the voting power of andinterest in the successor entity (excluding any financing transactions).

**DirectorCompensation**

We have not provided cash compensation to directors for their servicesas directors or members of committees of the board of directors.  In the past, we have made annual grants ofoptions to the directors in consideration of their services on our board ofdirectors.  We have reimbursed and willcontinue to reimburse our non-employee directors for their reasonable expensesincurred in attending meetings of the board of directors and committees of theboard of directors.

The followingtable sets forth summary information concerning compensation paid or accruedfor services rendered to us in all capacities to the non-employee members ofour Board of Directors for the fiscal year ended December 31, 2006.

 
| **Name**                  | ** ** | **Fees Earned  or Paid in  Cash   ($)** | ** ** | **Stock  Awards   ($)** | ** ** | **Option  Awards(1)  ($)** | ** ** | **Non-Equity**

**Incentive Plan  Compensation   ($)** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings   ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|---------------------------|------------|-------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| Mark Auerbach             |       | —                                                      |       | —                       |       | $                          | 28,190     | (2)                                                              | —     |                                                                                                   | —     |                                  | —     |           | $          | 28,190 |   |
| Joseph Y. Chang,  Ph.D.   |       | —                                                      |       | —                       |       | 56,380                     | (3)        | —                                                           |       | —                                                                                                 |       | —                                |       | 56,380         |       |
| Joseph J. Chow            |       | —                                                      |       | —                       |       | 56,380                     | (4)        | —                                                           |       | —                                                                                                 |       | —                                |       | 56,380         |       |
| Howard S. Lee,  Ph.D.     |       | —                                                      |       | —                       |       | 56,380                     | (5)        | —                                                           |       | —                                                                                                 |       | —                                |       | 56,380         |       |
| Martin  Muenchbach, Ph.D. |       | —                                                      |       | —                       |       | 28,190                     | (6)        | —                                                           |       | —                                                                                                 |       | —                                |       | 28,190         |       |
| Alain B.  Schreiber, M.D. |       | —                                                      |       | —                       |       | 56,380                     | (7)        | —                                                           |       | —                                                                                                 |       | —                                |       | 56,380         |       |
| Chi-Huey Wong             |       | —                                                      |       | —                       |       | 56,380                     | (8)        | —                                                           |       | —                                                                                                 |       | —                                |       | 56,380         |       |
|                           |            |                                                             |            |                              |            |                            |            |                                                                  |            |                                                                                                        |            |                                       |            |                |            |  |  |

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(1)          The aggregate grant date fair value of stock option awards during 2006under our 1998 stock plan was computed in accordance with Statement ofFinancial Accounting Standards No. 123(R), or FAS 123(R).

(2)          Mr. Auerbach has outstanding options to purchase an aggregate of 3,461shares as of December 31, 2006.

(3)          Dr. Chang has outstanding options to purchase an aggregate of 25,381shares as of December 31, 2006.

(4)          Mr. Chow has outstanding options to purchase an aggregate of 25,381shares as of December 31, 2006.

(5)          Dr. Lee has outstanding options to purchase an aggregate of 21,920shares as of December 31, 2006.

(6)          Dr. Muenchbach has outstanding options to purchase an aggregate of 3,461shares as of December 31, 2006.

(7)          Mr. Schreiber has outstanding options to purchase an aggregate of114,226 shares as of December 31, 2006.

(8)          Mr. Wong has outstanding options to purchasean aggregate of 577 shares as of December 31, 2006.  Mr. Wongresigned from our board of directors inNovember 2006.

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All of our directors are eligible to participate in our 2006equity incentive plan and our employee directors are eligible to participatein our employee stock purchase plan.For a more detailed description of these plans, see “—EmployeeBenefit Plans.”

**Indemnificationand Insurance**

We have entered into indemnification agreements with each of ourexecutive officers and directors.  Theseindemnification agreements require us to indemnify these individuals to thefullest extent permitted by Delaware law. In addition, we have purchased a policy of directors’ and officers’liability insurance that insures our directors and officers against the cost ofdefense, settlement or payment of a judgment in some circumstances.

**ExecutiveCompensation**

The following table provides information regarding the compensationearned during the fiscal year ended December 31, 2006 by our chiefexecutive officer, our chief financial officer and our three other most highlycompensated executive officers who were employed by us as of December 31,2006 and whose total compensation exceeded $100,000 during that fiscalyear.  There are no other executiveofficers for 2006 whose total compensation exceeded $100,000 during that fiscalyear other than those set forth below. We refer to our chief executive officer, chief financial officer andthese other executive officers as our “named executive officers” elsewhere inthis report.

**SUMMARY COMPENSATION TABLE**
| **Name and Principal Position**                                                         | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards(1)  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------|------------|-----------------|------------|----------------|------------|------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| Michael N.  Chang, Ph.D. President, Chief Executive Officer and Member of the Board of  Directors |       | 2006     |       | $               | 299,061    |           | —     |                   | —     |                       | $          | 84,222                                                 | (2)        | —                                                                                           |       | —                                |       | $              | 365,057    | (3) | $ | 748,340 |   |
| John D.  Prunty Chief Financial Officer, Vice President, Finance and Secretary                    |       | 2006     |       | 121,288         |       | —         |       | —                 |       | 117,949                    |       | —                                                 |       | —                                                                                           |       | 72                                    |       | 239,309        |       |
| Tessie M.  Che, Ph.D. Senior Vice President, Corporate Affairs                                    |       | 2006     |       | 180,993         |       | —         |       | —                 |       | 8,351                      |       | —                                                 |       | —                                                                                           |       | 72                                    |       | 189,416        |       |
| Youe-Kong  Shue, Ph.D. Vice President, Clinical Development                                            |       | 2006     |       | 194,367         |       | —         |       | —                 |       | 9,101                      |       | —                                                 |       | —                                                                                           |       | 72                                    |       | 203,540        |       |
| Sherwood L.  Gorbach, M.D. Senior Vice President, Chief Medical Officer                           |       | 2006     |       | 157,500         |       | —         |       | —                 |       | 7,875                      |       | —                                                 |       | —                                                                                           |       | 72                                    |       | 165,447        |       |
|                                                                                                        |            |          |            |                 |            |                |            |                        |            |                            |            |                                                        |            |                                                                                                  |            |                                       |            |                |            |  |  |  |  |

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(1)          The amount was computed in accordance with FAS 123(R).

(2)          Includes options to purchase 6,922 shares of commonstock granted to Dr. Chang for his service on our board of directors in2006.

(3)          Dr. Chang received a relocation and housingassistance loan in connection with his employment, which was forgiven by us inNovember 2006.

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**Grants of Plan-Based Awards**

 

All plan-based awards granted to our named executive officers areincentive stock options, to the extent permissible under the Internal RevenueCode.  The exercise price per share ofeach option granted to our named executive officers was as determined in goodfaith by our board of directors to be equal to the fair market value of ourcommon stock as determined by our board of directors on the date of thegrant.  All options were granted underour 1998 stock plan.

The following table presents information concerning grants ofplan-based awards to each of the named executive officers during 2006.
| ** **               | ** ** | ** **      | ** ** | **Estimated Future Payouts  Under Non-Equity Incentive  Plan Awards** | ** ** | **Estimated Future Payouts  Under Equity Incentive  Plan Awards** | ** ** | **All Other  Stock  Awards:  Number of  Shares of  Stock** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying** | ** ** | **Exercise or  Base Price  of Option** | ** ** | **Grant Date  Fair Value  of Stock  and Option** | ** ** |
|--------------------------|------------|-----------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Name**                 | ** ** | **Grant  Date** | ** ** | **Threshold  ($)**                                                                             | ** ** | **Target  ($)**                                                                            | ** ** | **Maximum  ($)**                                                          | ** ** | **Threshold  (#)**                                                          | ** ** | **Target  (#)**                                       | ** ** | **Maximum  (#)**                                                     | ** ** | **or Units  (#)** | ** ** | **Options  (#)** | ** ** | **Awards  ($/Sh)** | ** ** | **Awards  ($/Sh)** | ** ** |
| Michael N.  Chang   |       | 7/12/2006       |       | —                                                                                         |       | —                                                                                     |       | —                                                                    |       | —                                                                      |       | —                                                |       | —                                                               |       | — |   | 6,922 |   | $ | 2.17 |   | $ | 8.15 |   |
| John D.  Prunty     |       | 7/12/2006       |       | —                                                                                         |       | —                                                                                     |       | —                                                                    |       | —                                                                      |       | —                                                |       | —                                                               |       | — |   | 101,536 |   | 2.17 |   | 8.15 |   |
| Tessie M.  Che      |       | 9/13/2006       |       | —                                                                                         |       | —                                                                                     |       | —                                                                    |       | —                                                                      |       | —                                                |       | —                                                               |       | — |   | 4,615 |   | 2.17 |   | 9.45 |   |
| Youe-Kong  Shue          |       | 913/2006        |       | —                                                                                         |       | —                                                                                     |       | —                                                                    |       | —                                                                      |       | —                                                |       | —                                                               |       | — |   | 4,615 |   | 2.17 |   | 9.45 |   |
| Sherwood L. Gorbach |       | —          |       | —                                                                                         |       | —                                                                                     |       | —                                                                    |       | —                                                                      |       | —                                                |       | —                                                               |       | — |   | — |   | — |   | — |   |
|                          |            |                 |            |                                                                                                |            |                                                                                            |            |                                                                           |            |                                                                             |            |                                                       |            |                                                                      |            |  |  |  |  |  |  |  |  |  |  |

**OutstandingEquity Awards at Fiscal Year-End**

The following table presents the outstanding equity awards held by eachof the named executive officers as of the fiscal year ended December 31,2006, including the value of the stock awards.
|                          | ** ** | **Option Awards**                                                                 | ** ** | **Stock Awards**                                                                    | ** ** |
|--------------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **Name**                 | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity  Incentive  Plan Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have Not  Vested ($)** | ** ** | **Equity  Incentive  Plan Awards:  Number of  Unearned  Shares, Units  or Other  Rights That  Have Not  Vested (#)** | ** ** | **Equity  Incentive  Plan Awards:  Market or  Payout Value  of Unearned  Shares, Units  or Other  Rights That  Have Not  Vested ($)** | ** ** |
| Michael N. Chang    |       | 30,769                                                                                 |       | —                                                                                   |       | 30,769 |   | $ | 0.22 |   | 1/10/2011 |   | — |   | — |   | — |   | — |   |
|                          |       | 3,461                                                                                  |       | —                                                                                   |       | 3,461 |   | 1.08 |   | 10/01/2014 |   | — |   | — |   | — |   | — |   |
|                          |       | 3,461                                                                                  |       | —                                                                                   |       | 3,461 |   | 1.08 |   | 10/01/2014 |   | — |   | — |   | — |   | — |   |
|                          |       | 37,479                                                                                 |       | —                                                                                   |       | 37,479 |   | 1.08 |   | 10/01/2014 |   | — |   | — |   | — |   | — |   |
|                          |       | 20,191                                                                                 |       | 25,962                                                                                   | (1)        | 46,153 |   | 1.08 |   | 6/30/2015 |   | — |   | — |   | — |   | — |   |
|                          |       | 95,052                                                                                 |       | 122,211                                                                                  | (1)        | 217,263 |   | 1.08 |   | 6/30/2015 |   | — |   | — |   | — |   | — |   |
|                          |       | 3,461                                                                                  |       | —                                                                                   |       | 3,461 |   | 2.17 |   | 7/12/2016 |   | — |   | — |   | — |   | — |   |
|                          |       | 1,442                                                                                  |       | 2,019                                                                                    | (1)        | 3,461 |   | 2.17 |   | 7/12/2016 |   | — |   | — |   | — |   | — |   |
| John D.  Prunty     |       | —                                                                                 |       | 101,536                                                                                  | (2)        | 101,536 |   | 2.17 |   | 7/12/2016 |   | — |   | — |   | — |   | — |   |
| Tessie M. Che       |       | 20,769                                                                                 |       | —                                                                                   |       | 20,769 |   | 0.65 |   | 8/30/2011 |   | — |   | — |   | — |   | — |   |
|                          |       | 4,518                                                                                  |       | 97                                                                                       | (1)        | 4,615 | (2) | 1.08 |   | 2/13/2013 |   | — |   | — |   | — |   | — |   |
|                          |       | 25,197                                                                                 |       | —                                                                                   |       | 25,197 |   | 1.08 |   | 10/01/2014 |   | — |   | — |   | — |   | — |   |
|                          |       | 10,624                                                                                 |       | 19,375                                                                                   | (1)        | 29,999 |   | 1.08 |   | 6/30/2015 |   | — |   | — |   | — |   | — |   |
|                          |       | —                                                                                 |       | 4,615                                                                                    | (2)        | 4,615 | (2) | 2.17 |   | 9/13/2016 |   | — |   | — |   | — |   | — |   |
| Youe-Kong  Shue          |       | 4,518                                                                                  |       | 97                                                                                       | (1)        | 4,615 |   | 1.08 |   | 2/13/2013 |   | — |   | — |   | — |   | — |   |
|                     |       | 5,047                                                                                  |       | 1,875                                                                                    | (1)        | 6,922 |   | 1.08 |   | 11/14/2013 |   | — |   | — |   | — |   | — |   |
|                     |       | 9,807                                                                                  |       | 17,884                                                                                   | (1)        | 27,691 |   | 1.08 |   | 6/30/2015 |   | — |   | — |   | — |   | — |   |
|                     |       | —                                                                                 |       | 4,615                                                                                    | (2)        | 4,615 |   | 2.17 |   | 9/13/2016 |   | — |   | — |   | — |   | — |   |
| Sherwood L. Gorbach |       | 11,825                                                                                 |       | 2,020                                                                                    | (1)        | 13,845 |   | 1.08 |   | 7/25/2013 |   | — |   | — |   | — |   | — |   |
|                          |       | 3,749                                                                                  |       | 3,173                                                                                    | (3)        | 6,922 |   | 1.08 |   | 12/02/2015 |   | — |   | — |   | — |   | — |   |
|                          |       | 8,077                                                                                  |       | 19,614                                                                                   | (2)        | 27,691 |   | 1.08 |   | 12/02/2015 |   | — |   | — |   | — |   | — |   |
|                          |            |                                                                                        |            |                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          1/48th of the total number of shares subject to theoption vest monthly.

(2)          1/4th of the shares subject to the option vest one yearfollowing vesting commencement date, and 1/48th of the total number of theshares subject to the option vest monthly thereafter.

(3)          1/36th of the total number of shares subject to theoption vest monthly.

 

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**Option Exercises and Stock Vested at Fiscal Year End**

The following table presents certain information concerning theexercise of options by each of the named executive officers during the fiscalyear ended December 31, 2006.
| ** **     | ** ** | **Option Awards**                                          | ** ** | **Stock Awards**                      | ** ** |
|----------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Name**       | ** ** | **Number of  Shares Acquired  on Exercise  (#)** | ** ** | **Value  Realized on  Exercise  ($)** | ** ** | **Number of  Shares  Acquired on  Vesting  (#)** | ** ** | **Value  Realized on  Vesting  ($)** | ** ** |
| Youe-Kong Shue |       | 36,922                                                          |       | 24,000                                     |       | — |   | — |   |

**Pension Benefits**

Noneof our named executive officers participates in or has account balances inqualified or non-qualified defined benefit plans sponsored by us.

**Nonqualified Deferred Compensation**

Noneof our named executive officers participate in or have account balances innon-qualified defined contribution plans or other deferred compensation plansmaintained by us.  The compensationcommittee, which will be comprised solely of “outside directors” as defined forpurposes of Section 162(m) of the Internal Revenue Code, may elect toprovide our officers and other employees with non-qualified definedcontribution or deferred compensation benefits if the compensation committeedetermines that doing so is in our best interests.

**Employment Contracts, Termination of Employment andChange-in-Control Arrangements**

Wecurrently have an employment agreement with one of our named executiveofficers, Michael N. Chang, our president and chief executiveofficer.  We have offer letter agreementswith our other named executive officers, John D. Prunty, our chieffinancial officer, vice president, finance and secretary, Tessie M. Che,our senior vice president, corporate affairs, Youe-Kong Shue, vicepresident, clinical development and Sherwood L. Gorbach, our senior vicepresident, chief medical officer.  Wealso have an offer letter agreement with our other executive officer,Kevin P. Poulos, our vice president, marketing and sales.

OnMarch 1, 2001, we entered into an employment agreement withMichael N. Chang, which was superseded and replaced on June 17, 2005by a new employment agreement.  Thecurrent agreement terminates on June 17, 2009 unless otherwise terminatedby the parties according to the terms therein. Dr. Chang’s employment agreement sets forth a base salary at$271,695 per year subject to adjustment. Dr. Chang’s current annual base salary is $350,000.  Dr. Chang is entitled to receive allcustomary and usual fringe benefits provided to our other executives.  Pursuant to the agreement, in June 2005,Dr. Chang was granted options to purchase an aggregate of 263,416 sharesof our common stock at an exercise price of $1.08 per share.  Twenty-five percent of the shares subject tothe stock option vested one year after the date of grant and the remainingshares subject to such options vest over three years in equal monthlyinstallments, subject to acceleration of vesting under certain circumstancesdescribed in Dr. Chang’s employment agreement.  Dr. Chang also received a relocation andhousing assistance loan of $300,000, which loan was forgiven by us in November2006.  The agreement provides that we mayterminate Dr. Chang’s employment at any time.  Dr. Chang may voluntarily resign at anytime on 30 days’ written notice.  If weterminate his employment or he resigns, he is entitled to receive any unpaid 

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proratedbase salary along with all benefits and expense reimbursements to which he isentitled.  If Dr. Chang isterminated without cause (whether through constructive termination orotherwise), he is also entitled to a severance payment equal to 12 months ofhis base salary then in effect and the vesting of any of his outstanding stockoptions will be accelerated by 12 months. If Dr. Chang’s employment is terminated within 12 months followinga change of control of our company, then all unvested shares subject to theoptions to purchase 263,416 shares of common stock granted to Dr. Chang onJune 30, 2005 shall immediately vest and be exercisable.  As of March 15, 2007, Dr. Chang hadoutstanding options to purchase 345,508 shares of common stock.  In addition, on March 29, 2007, Dr. Chang wasgranted an option to purchase 100,000 shares of our common stock at an exerciseprice of $9.70 per share.  Twenty-fivepercent of the shares subject to the option granted in March 2007 vest one yearfrom the date of grant and the remaining shares subject to such option vestover three years in equal monthly installments.

InAugust 2001, we entered into an offer letter agreement with Tessie M.Che.  The letter agreement sets forthDr. Che’s initial base salary of $180,000 per year.  Dr. Che’s current annual base salary is$236,031.  Dr. Che is entitled toreceive all customary and usual fringe benefits provided to our otherexecutives.  Pursuant to the agreement,in August 2001, Dr. Che was granted an option to purchase an aggregate of83,075 shares of our common stock at an exercise price of $0.65 per share.  As of March 15, 2007, Dr. Che hadoutstanding options to purchase 85,195 shares of common stock.  In addition, on March 29, 2007, Dr. Chewas granted an option to purchase 30,000 shares of our common stock at anexercise price of $9.70 per share.  Twenty-fivepercent of the shares subject to each option vest one year from the date ofgrant and the remaining shares subject to each such option vest over threeyears in equal monthly installments.

InFebruary 2000, we entered into an offer letter agreement with Youe-KongShue.  The letter agreement sets forthDr. Shue’s initial base salary of $150,000 per year.  Dr. Shue’s current annual base salary is$202,015.  Dr. Shue is entitled toreceive all customary and usual fringe benefits provided to our otherexecutives.  Pursuant to the agreement,in January 2001, Dr. Shue was granted an option to purchase an aggregateof 34,153 shares of our common stock at an exercise price of $0.22 pershare.  Twenty-five percent of the sharessubject to the stock options vest one year from the date of grant and theremaining shares subject to such options vest over three years in equal monthlyinstallments.  Pursuant to the agreement,in August 2001, Dr. Shue was also granted an option to purchase anaggregate of 36,922 shares of our common stock at an exercise price of $0.65per share.  Twenty-five percent of theshares subject to the stock options vest one year from the date of grant andthe remaining shares subject to such options vest over three years in equalmonthly installments.  Dr. Shue alsoreceived a relocation and housing assistance package of $100,000.  Pursuant to the agreement, Dr. Shuereceived a $45,000 bonus paid upon the closing of our sale of Series Bpreferred stock.  As of March 15, 2007,Dr. Shue had outstanding options to purchase 24,471 shares of commonstock.  In addition, on March 29, 2007,Dr. Shue was granted an option to purchase 20,000 shares of our common stock atan exercise price of $9.70 per share. Twenty-five percent of the shares subject to the option granted in March2007 vest one year from the date of grant and the remaining shares subject tosuch option vest over three years in equal monthly installments.

InMay 2006, we entered into an offer letter agreement with John D.Prunty.  The letter agreement sets forthMr. Prunty’s base salary of $210,000 per year.  Mr. Prunty’s current annual base salaryis $214,810.  Mr. Prunty is entitledto receive all customary and usual fringe benefits provided to our otherexecutives.  Pursuant to the agreement,in July 2006, Mr. Prunty was granted an option to purchase an aggregate of101,536 shares of our common stock at an exercise price of $2.17 pershare.  As of March 15, 2007, Mr. Pruntyhad outstanding options to purchase 101,536 shares of common stock.  In addition, on March 29, 2007, Mr. Pruntywas granted an option to purchase 25,000 shares of our common stock at anexercise price of $9.70 per share.  Twenty-fivepercent of the shares subject to each option vest one year from the date ofgrant and the remaining shares subject to each such option vest over threeyears in equal monthly installments.  Theoffer letter agreement provides that we may terminate Mr. Prunty’semployment at any time with or without cause, as defined in the agreement.  If we terminate Mr. Prunty’s employmentwithout cause, he will be entitled to continued payment of his current basesalary for three months following termination. If he is terminated without cause within one year following a change incontrol, he will be entitled to continued payment of his current base salaryfor six months following termination and all of his unvested options shallbecome immediately fully vested.  In eachcase, the receipt by Mr. Prunty of any such termination payments shall besubject to his execution of a waiver and general release in favor of us andcompliance with any provisions of the letter agreement that survivetermination.

InJune 2006, we entered into an offer letter agreement with Kevin P.Poulos.  The letter agreement sets forthMr. Poulos’ initial base salary of $180,000 per year.  Mr. Poulos is entitled to receive allcustomary and usual fringe benefits provided to our other executives.  Mr. Poulos’ current annual base salaryis 

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$182,969.  In July 2006, Mr. Poulos was granted anoption to purchase an aggregate of 101,536 shares of our common stock at anexercise price of $2.17 per share.  As ofMarch 15, 2007, Mr. Poulos had outstanding options to purchase 101,536shares of common stock.  In addition, onMarch 29, 2007, Mr. Poulos was granted an option to purchase 18,000 sharesof our common stock at an exercise price of $9.70 per share.  Twenty-five percent of the shares subject to eachstock option vest one year from the date of grant and the remaining sharessubject to each such option vest over three years in equal monthlyinstallments.  The offer letter agreementprovides that we may terminate Mr. Poulos’ employment at any time with orwithout cause, as defined in the agreement. If we terminate Mr. Poulos’ employment without cause, he will beentitled to continued payment of his current base salary for three monthsfollowing termination.  If he isterminated without cause within one year following a change in control, he willbe entitled to continued payment of his current base salary for six monthsfollowing termination and all of his unvested options shall become immediatelyfullyvested.  In each case, the receipt by Mr. Poulosof any such termination payments shall be subject to his execution of a waiverand general release in favor of us and compliance with any provisions of theletter agreement that survive termination.

InOctober 2005, we entered into an offer letter agreement with Sherwood L.Gorbach.  The letter agreement sets forthDr. Gorbach’s base salary of $90,000 per year and a cash incentive andbonus program in which cash awards of up to $500,000 are paid toDr. Gorbach if and when we achieve certain milestones.  Dr. Gorbach’s current annual base salaryis $154,500.  Dr. Gorbach isentitled to receive all customary and usual fringe benefits provided to ourother executives.  In September 2005, Dr. Gorbachwas granted a stock option to purchase an aggregate of 27,691 shares of ourcommon stock at an exercise price of $1.08 per share.  The shares subject to the options vest overthe next four years in equal monthly installments.  As of March 15, 2007, Dr. Gorbach hadoutstanding options to purchase 48,458 shares of common stock.  The offer letter agreement provides that wemay terminate Dr. Gorbach’s employment at any time with or without cause,as defined in the agreement.  If weterminate his employment or he resigns, he is entitled to receive any unpaidprorated base salary along with all benefits and expense reimbursements towhich he is entitled by virtue of his past employment with us.

***Employee Proprietary Agreement***

Eachof our named executive officers has also entered into a standard form agreementwith respect to proprietary information and inventions.  Among other things, this agreement obligateseach named executive officer to refrain from disclosing any of our proprietaryinformation received during the course of employment and, with some exceptions,to assign to us any inventions conceived or developed during the course ofemployment.

**Employee Benefit Plans**

***Stock Plans***

*1998 Stock Plan*

Our1998 stock plan was adopted by our board of directors in November 1998 andapproved by our stockholders in October, 1999. Our 1998 stock plan provides for the grant of incentive stock options,within the meaning of Section 422 of the Internal Revenue Code of 1986, asamended, to our employees and any parent and subsidiary corporations’employees, and for the grant of nonstatutory stock options to our employees,directors and consultants and any parent and subsidiary corporations’ employeesand consultants.  The 1998 stock planalso allows for awards of stock purchase rights.  As a result of completing our initial publicoffering in February 2007, we will not grant any additional awards under our1998 stock plan.  Instead we will grantawards in the future under our 2006 equity incentive plan.

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*ShareReserve*.  We have reserved a total of 2,463,684 sharesof our common stock for issuance pursuant to the 1998 stock plan.  As of December 31, 2006, options to purchase1,496,945 shares of common stock were outstanding and 254,382 shares wereavailable for future grant under this plan.

*Administration*.  Ourboard of directors or a committee appointed by our board administers our 1998stock plan.  Our compensation committeeis responsible for administering all of our equity compensation plans.  Under our 1998 stock plan, the administratorhas the power to determine the terms of the awards, including the serviceproviders who will receive awards, the exercise price, the number of sharessubject to each such award, the vesting schedule and exercisability of awardsand the form of consideration payable upon exercise.

*StockOptions and Stock Purchase Rights*.  With respect to all incentivestock options, the exercise price must at least be equal to the fair marketvalue of our common stock on the date of grant. For nonstatutory stock options, the exercise price must be at leastequal to 85% of the fair market value of our common stock on the date ofgrant.  The term of an option may notexceed ten years, except that with respect to an incentive stock option grantedto any participant who owns more than 10% of the voting power of all classes ofour outstanding stock as of the grant date, the term must not exceed five years. In addition, the exercise price of any option granted to a participantwho owns more than 10% of the voting power of all classes of our outstandingstock as of the grant date must equal at least 110% of the fair market value onthe grant date.

After termination of an employee, director or consultant, he or she mayexercise his or her option for the period of time as specified in the stockoption agreement subject to the following limitations:

·                  If the participant isterminated for any reason other than death, disability, or for cause, then theparticipant may exercise options vested as of the termination date within 3months of the termination date (or within a shorter period not to be less than30 days or a longer period as determined by the committee), but in no eventlater than the expiration date of the options;

·                  If the participant isterminated because of death or disability, then the participant may exerciseoptions vested as of the termination date within twelve months of thetermination date (or within a shorter period not to be less than 6 months orwithin a longer period as may be determined by the committee) but in no eventlater than the expiration date of the options.

Rightsto acquire restricted stock may also be granted under our 1998 stock plan.  Stock purchase rights generally are grantedsubject to a repurchase option in favor of us that expires pursuant to avesting schedule.  The purchase price ofthese awards must be at least equal to 85% of the fair market value of ourcommon stock on the grant date, although the price of stock purchase rightsgranted to a participant who owns more than 10% of the voting power of allclasses of our outstanding stock as of the grant date must at least be equal tothe fair market value of our common stock on the grant date.

Unlessthe administrator provides otherwise, our 1998 stock plan does not allow forthe transfer of awards other than by will or the laws of descent anddistribution and only the recipient of an award may exercise an award duringhis or her lifetime.

*Changein Control Transactions*.  Our 1998 stock plan provides that in theevent of our “change in control,” the successor corporation or its parent orsubsidiary may assume, substitute, or replace an equivalent award for eachoutstanding award.  If there is noassumption, substitution, or replacement of outstanding awards, the awards willbe, unless otherwise provided in any applicable option document, 

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fullyvested and exercisable, and if not exercised prior to the consummation of thetransaction, shall terminate.

*PlanAmendments and Termination*.  The 1998 stock plan wasterminated effective February 2007 in connection with our initial publicoffering.

*2006 Equity Incentive Plan. *Our boardof directors adopted our 2006 equity incentive plan in December 2006 and ourstockholders approved the plan in January 2007. Our 2006 equity incentive plan provides for the grant of incentive stockoptions, within the meaning of Section 422 of the Internal Revenue Code of1986, as amended, to our employees and any parent and subsidiary corporations’employees, and for the grant of nonstatutory stock options, restricted stock,restricted stock units, stock appreciation rights, performance units andperformance shares to our employees, directors and consultants and our parentand subsidiary corporations’ employees and consultants.

*Share Reserve*.  We have reserved a total of 2,000,000 sharesof our common stock for issuance pursuant to the 2006 equity incentiveplan.  In addition, our 2006 equityincentive plan provides for annual increases in the number of shares availablefor issuance thereunder on the first day of each fiscal year, beginning withour 2008 fiscal year, equal to the lesser of:

·                  5% of the outstanding sharesof our common stock on the last day of the immediately preceding fiscal year;

·                  750,000 shares; or

·                  such other amount as ourboard of directors may determine.

*Administration*.  Ourboard of directors or a committee of our board administers our 2006 equityincentive plan.  Our compensationcommittee will be responsible for administering all of our equity compensationplans.  In the case of options intendedto qualify as “performance based compensation” within the meaning of Section 162(m)of the Internal Revenue Code of 1986, as amended, the committee will consist oftwo or more “outside directors” within the meaning of Section 162(m) ofthe Internal Revenue Code of 1986, as amended. The administrator has the power to determine the terms of the awards,including the exercise price, the number of shares subject to each such award,the exercisability of the awards and the form of consideration payable uponexercise.  The administrator also has theauthority to institute an exchange program whereby the exercise prices ofoutstanding awards may be reduced, outstanding awards may be surrendered inexchange for awards with a lower exercise price, or outstanding awards may betransferred to a third party.

*StockOptions*.  The exercise price of options granted underour 2006 equity incentive plan must at least be equal to the fair market valueof our common stock on the date of grant. The term of an incentive stock option may not exceed ten years, exceptthat with respect to any participant who owns more than 10% of the voting powerof all classes of our outstanding stock as of the grant date, the term must notexceed five years and the exercise price must equal at least 110% of the fairmarket value on the grant date.  Theadministrator determines the term of all other options.

Aftertermination of an employee, director or consultant, he or she may exercise hisor her option for the period of time stated in the option agreement.  Generally, if termination is due to death ordisability, the option will remain exercisable for 12 months.  In all other cases, the option will generallyremain exercisable for three months. However, an option may not be exercised later than the expiration of itsterm.

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*StockAppreciation Rights*.  Stock appreciation rights may be grantedunder our 2006 equity incentive plan. Stock appreciation rights allow the recipient to receive theappreciation in the fair market value of our common stock between the exercisedate and the date of grant.  Theadministrator determines the terms of stock appreciation rights, including whensuch rights become exercisable and whether to pay the increased appreciation incash or with shares of our common stock, or a combination thereof.  Stock appreciation rights expire under thesame rules that apply to stock options.

*RestrictedStock Awards*.  Restricted stock may be granted under our2006 equity incentive plan.  Restrictedstock awards are shares of our common stock that vest in accordance with termsand conditions established by the administrator.  The administrator will determine the numberof shares of restricted stock granted to any employee.  The administrator may impose whateverconditions to vesting it determines to be appropriate.  For example, the administrator may setrestrictions based on the achievement of specific performance goals.  Shares of restricted stock that do not vestare subject to our right of repurchase or forfeiture.

*RestrictedStock Units*.  Restricted stock units may be granted underour 2006 equity incentive plan. Restricted stock units are awards of restricted stock, performanceshares or performance units that are paid out in installments or on a deferredbasis.  The administrator determines theterms and conditions of restricted stock units including the vesting criteriaand the form and timing of payment.

*PerformanceUnits and Shares*.  Performance units and performance shares maybe granted under our 2006 equity incentive plan.  Performance units and performance shares areawards that will result in a payment to a participant only if performance goalsestablished by the administrator are achieved or the awards otherwisevest.  The administrator will establishorganizational or individual performance goals in its discretion, which,depending on the extent to which they are met, will determine the number and/orthe value of performance units and performance shares to be paid out toparticipants.  Performance units shallhave an initial dollar value established by the administrator prior to thegrant date.  Performance shares shallhave an initial value equal to the fair market value of our common stock on thegrant date.  Payment for performanceunits and performance shares may be made in cash or in shares of our common stockwith equivalent value, or in some combination, as determined by theadministrator.

*Transferabilityof Awards*.  Unless the administrator provides otherwise,our 2006 equity incentive plan does not allow for the transfer of awards andonly the recipient of an award may exercise an award during his or herlifetime.

*Changein Control Transactions*.  Our 2006 equity incentive plan provides thatin the event of our “change in control,” the successor corporation or itsparent or subsidiary will assume or substitute an equivalent award for eachoutstanding award.  If there is noassumption or substitution of outstanding awards, the awards will fully vest,all restrictions shall lapse and become fully exercisable.  The administrator will provide notice to therecipient that he or she has the right to exercise the option and stockappreciation right as to all of the shares subject to the award, allrestrictions on restricted stock will lapse, and all performance goals or othervesting requirements for performance shares and units will be deemed achieved,and all other terms and conditions met. The option or stock appreciation right will terminate upon theexpiration of the period of time the administrator provides in the notice.  In the event the service of an outsidedirector is terminated on or following a change in control, other than pursuantto a voluntary resignation, his or her options and stock appreciation rightswill fully vest and become immediately exercisable, all restrictions onrestricted stock will lapse, and all performance goals or other 

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vestingrequirements for performance shares and units will be deemed achieved, and allother terms and conditions met.

*PlanAmendments and Termination*.  Our 2006 equity incentive planwill automatically terminate in 2016, unless we terminate it sooner.  In addition, our board of directors has theauthority to amend, suspend or terminate the 2006 equity incentive planprovided such action does not impair the rights of any participant.

*Employee Stock Purchase Plan*

Concurrentwith our initial public offering in February 2007, we established the employeestock purchase plan.  Our board ofdirectors adopted the employee stock purchase plan in December 2006, and ourstockholders approved the plan in January 2007.

*Share Reserve*.  A total of 200,000 shares of our common stockwill be made available for sale.  Inaddition, our employee stock purchase plan provides for annual increases in thenumber of shares available for issuance under the employee stock purchase planon the first day of each fiscal year, beginning with our 2008 fiscal year,equal to the lesser of:

·                  3% of the outstanding sharesof our common stock on the last day of the immediately preceding fiscal year;

·                  300,000 shares; or

·                  such other amount as may bedetermined by our board of directors.

*Administration*.  Ourboard of directors or a committee of our board administers the employee stockpurchase plan.  Our compensationcommittee will be responsible for administering all of our equity compensationplans.  Our board of directors or itscommittee has full and exclusive authority to interpret the terms of theemployee stock purchase plan and determine eligibility.

*Eligibility*.  All of our employees are eligible toparticipate if they are customarily employed by us or any participatingsubsidiary for at least 20 hours per week and more than five months in anycalendar year.  However, an employee maynot be granted rights to purchase stock if such employee:

·                  immediately after the grantwould own stock possessing 5% or more of the total combined voting power orvalue of all classes of our capital stock; or

·                  has rights to purchase stockunder all of our employee stock purchase plans which accrue at a rate thatexceeds $25,000 worth of our stock for each calendar year in which such rightsare outstanding.

*OfferingPeriods*.  Our employee stock purchase plan is intendedto qualify under Section 423 of the Internal Revenue Code of 1986, asamended, and provides for consecutive, non-overlapping six-month offeringperiods.  The offering periods generallystart on the first trading day on or after May 15 and November 15 ofeach year, except for the first such offering period which commenced onFebruary 9, 2007 and will end on the first trading day on or afterNovember 15, 2007.

*Limitations*.  Ouremployee stock purchase plan permits participants to purchase common stockthrough payroll deductions of up to 10% of their eligible compensation whichincludes a participant’s straight 

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timegross earnings, commissions, overtime and shift premium, exclusive of paymentsfor incentive compensation, bonuses and other compensation.  A participant may purchase a maximum of 1,000shares of common stock during a six-month offering period.

*Purchaseof Shares*.  Amounts deducted and accumulated by theparticipant are used to purchase shares of our common stock at the end of eachsix-month offering period.  The purchaseprice is 85% of the fair market value of our common stock at the lower of theexercise date or the first day of the applicable offering period.  Participants may end their participation atany time during an offering period, and will be paid their payroll deductionsto date.  Participation endsautomatically upon termination of employment with us.

*Transferability*.  Aparticipant may not transfer rights granted under the employee stock purchaseplan other than by will, the laws of descent and distribution or as otherwiseprovided under the employee stock purchase plan.

*Changeof Control Transactions*.  In the event of our “change of control,” asuccessor corporation may assume or substitute each outstanding purchaseright.  If the successor corporationrefuses to assume or substitute for the outstanding purchase rights, theoffering period then in progress will be shortened, and a new exercise datewill be set.

*PlanAmendments and Termination*.  Our employee stock purchaseplan will automatically terminate in 2016, unless we terminate it sooner.  In addition, our board of directors has theauthority to amend, suspend or terminate our employee stock purchase plan,except that, subject to certain exceptions described in the employee stockpurchase plan, no such action may adversely affect any outstanding rights topurchase stock under our employee stock purchase plan.

*401(k) Plan*

Wemaintain a retirement plan, the 401(k) Plan, which is intended to be atax-qualified retirement plan.  The401(k) Plan covers substantially all of our employees.  Currently, employees may elect to defer up to100% of their compensation, or the statutorily prescribed limit, if less, tothe 401(k) Plan.  Under the 401(k) Plan,we may elect to make a discretionary contribution or match a discretionarypercentage of employee contributions but we currently do not make anycontributions nor have we matched any employee contributions.  The 401(k) Plan has a discretionary profitsharing component, which to date we have not implemented, whereby we can make acontribution in an amount to be determined annually by the Board ofDirectors.  An employee’s interests inhis or her deferrals are 100% vested when contributed.  The 401(k) Plan is intended to qualify underSections 401(a) and 501(a) of the Internal Revenue Code.  As such, contributions to the 401(k) Plan andearnings on those contributions are not taxable to the employees untildistributed from the 401(k) Plan, and all contributions are deductible by uswhen made.

**Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

Thefollowing table sets forth the beneficial ownership information of our commonstock by:

·                  each person known to us tobe the beneficial owner of more than 5% of our common stock and anothersignificant stockholder;

·                  each named executiveofficer;

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·                  each of our directors;

·                  all of our executiveofficers and directors as a group; and

·                  the selling stockholder (tothe extent that the underwriters’ over-allotment option is exercised).

Wehave based our calculation of the percentage of beneficial ownership on23,135,205 shares of common stock outstanding on March 15, 2007.

Eachindividual or entity shown in the table has furnished information with respectto beneficial ownership. We have determined beneficial ownership in accordancewith the SEC’s rules. These rules generally attribute beneficial ownership ofsecurities to persons who possess sole or shared voting power or investmentpower with respect to those securities. In addition, the rules include sharesof common stock issuable pursuant to the exercise of stock options or warrantsthat are either immediately exercisable or exercisable on or before May 14,2007, which is 60 days after March 15, 2007. These shares are deemedto be outstanding and beneficially owned by the person holding those options orwarrants for the purpose of computing the percentage ownership of that person,but they are not treated as outstanding for the purpose of computing thepercentage ownership of any other person. Unless otherwise indicated, thepersons or entities identified in this table have sole voting and investmentpower with respect to all shares shown as beneficially owned by them, subjectto applicable community property laws.

Exceptas otherwise noted below, the address for each person or entity listed in thetable is c/o Optimer Pharmaceuticals, Inc., 10110 Sorrento Valley Road,Suite C , San Diego, California 92121.
| **Beneficial Owner**                                              | ** ** | **Number of  Shares  Beneficially  Owned** | ** ** | **Percentage of  Shares   Beneficially  Owned** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **5%  Stockholders:**                                                  |       |                                            |       |                                                      |       |
| ProQuest Investments II, L.P. (1)                                      |       | 1,329,463                                       |       | 5.7                                                       | %          |
| Formosa Healthcare Investments, L.P.                                   |       | 1,271,573                                       |       | 5.5                                                       | %          |
| Par Pharmaceutical, Inc.                                               |       | 1,257,655                                       |       | 5.4                                                       | %          |
| Baker Brothers Investments (2)                                         |       | 1,250,000                                       |       | 5.4                                                       | %          |
| **Directors  and Named Executive Officers:**                           |       |                                            |       |                                                      |       |
| Michael N. Chang(3)                                               |       | 652,531                                         |       | 2.8                                                       | %          |
| Sherwood L. Gorbach(4)                                            |       | 28,700                                          |       | *                                                         |       |
| Kevin P. Poulos                                                   |       | 600                                             |       | *                                                         |       |
| Tessie M. Che(5)                                                  |       | 652,531                                         |       | 2.8                                                       | %          |
| John D. Prunty                                                    |       | —                                          |       | *                                                         |       |
| Youe-Kong Shue(6)                                                      |       | 101,531                                         |       | *                                                         |       |
| Mark Auerbach(7)                                                       |       | 2,884                                           |       | *                                                         |       |
| Joseph Y. Chang(8)                                                |       | 209,416                                         |       | *                                                         |       |
| Joseph J. Chow(9)                                                 |       | 619,663                                         |       | 2.7                                                       | %          |
| Howard S. Lee(10)                                                 |       | 1,292,916                                       |       | 5.6                                                       | %          |
| Martin C. Muenchbach(11)                                          |       | 1,028,508                                       |       | 4.4                                                       | %          |
| Alain B. Schreiber(12)                                            |       | 1,443,112                                       |       | 6.2                                                       | %          |
| All directors  and executive officers as a group (12 persons)(13) |       | 5,379,800                                       |       | 22.8                                                      | %          |

----

*                           Lessthan 1%.

123

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(1)                    Includes (i)1,275,357 shares of common stock held by ProQuest Investments II, L.P. and (ii)54,106 shares of common stock held by ProQuest Investments II Advisors Fund,L.P.

(2)                    Includes (i)324,458 shares of common stock held by Baker Biotech Fund I, L.P.; (ii) 18,106shares of common stock held by Baker /Tisch Investments, L.P.; (iii) 1,959shares of common stock held by Baker Brothers Investments II, L.P.; (iv)877,500 shares of common stock held by Baker Brothers Life Sciences, L.P. and(v) 27,977 shares of common stock held by 14159 L.P.

(3)                    Includes (i)119,580 shares of common stock held by Dr. Chang; (ii) 224,198 shares ofcommon stock that Dr. Chang has the right to acquire from us within 60days of March 15, 2007 pursuant to the exercise of stock options; and(ii) 308,753 shares that his wife Tessie M. Che holds or has theright to acquire from us within 60 days of March 15, 2007 pursuant to theexercise of stock options.

(4)                    Includes (i)25,238 shares of common stock held by Dr. Gorbach and (ii) 3,462 shares ofcommon stock that Dr. Gorbach has the right to acquire from us within 60days of March 15, 2007 pursuant to the exercise of stock options.

(5)                    Includes(i) 244,423 shares of common stock held by Dr. Che; (ii) 64,330 shares ofcommon stock that Dr. Che has the right to acquire from us within 60 daysof March 15, 2007 pursuant to the exercise of stock options; and(iii) 343,778 shares that her husband Michael N. Chang holds or hasthe right to acquire from us within 60 days of March 15, 2007 pursuant tothe exercise of stock options.

(6)                    Includes(i) 71,985 shares of common stock held by Dr. Shue; (ii) 3,702 shares ofcommon stock that Dr. Shue has the right to acquire from us within 60 daysof March 15, 2007 pursuant to the exercise of stock options; and(iii) 25,844 shares of common stock owned by members of his immediatefamily.

(7)                    Includes 2,884shares of common stock that Mr. Auerbach, our director, has the right toacquire from us within 60 days of March 15, 2007 pursuant to the exerciseof stock options.

(8)                    Includes(i) 92,306 shares of common stock held by our director, Dr. Chang; (ii)24,804 shares of common stock that Dr. Chang, has the right to acquirefrom us within 60 days of March 15, 2007 pursuant to the exercise of stockoptions; and (iii) 92,306 shares of common stock held by his wife, WanPing Chang.

(9)                    Includes(i) 24,804 shares of common stock that Mr. Chow, our director, hasthe right to acquire from us within 60 days of March 15, 2007 pursuant tothe exercise of stock options; and (ii) 594,859  shares of common stock held by SB LifeScience Ventures I, L.P.  Mr. Chowis the Managing Director of SB Life Science Equity Management, LLC, the advisorto SB Life Science Ventures LLP and the general partner of SB Life ScienceVentures I, L.P.  Mr. Chow disclaimsbeneficial ownership of these shares except to the extent of his pecuniary interesttherein, if any.

(10)              Includes(i) 21,343 shares of common stock that Dr. Lee, our director, has theright to acquire from us within 60 days of March 15, 2007 pursuant to theexercise of stock options; and (ii) 1,271,573 shares of common stock heldby Formosa Healthcare Investments, L.P. Dr. Lee is the Managing Directorfor Silver Biotech, Inc. which manages Formosa Healthcare Investments,L.P.  Dr. Lee disclaims beneficialownership of these shares except to the extent of his pecuniary interest therein,if any.

(11)              Includes(i) 2,884 shares of common stock that Dr. Muenchbach, our director,has the right to acquire from us within 60 days of March 15, 2007 pursuantto the exercise of stock options; and (ii) 1,025,624 shares of commonstock held by BB Biotech Ventures II, L.P. BB Biotech Ventures II, L.P. ismanaged by Swissfirst Asset Management AG, where Dr. Muenchbach isemployed as an investment manager. Dr. Muenchbach disclaims beneficial ownership of these sharesexcept to the extent of his pecuniary interest therein, if any.

(12)              Includes(i) 113,649 shares of common stock that Dr. Schreiber, our director,has the right to acquire from us within 60 days of March 15, 2007 pursuantto the exercise of stock options; (ii) 1,329,463 shares of common stockheld by ProQuest Investments II, L.P. and ProQuest Investments II AdvisorsFund, L.P.  Dr. Schreiber is amanaging member of ProQuest Associates II LLC., the general partner of ProQuestInvestments II, L.P. and ProQuest Investments II Advisors Fund, L.P.  Dr. Schreiber disclaims beneficialownership of these shares except to the extent of his pecuniary interesttherein, if any.

(13)              Includes sharesdescribed in footnotes (3) through (12) above, except that Michael N.Chang’s stock ownership and Tessie M. Che’s stock ownership are notcombined in this line item.

124

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**Securities Authorized for Issuanceunder Equity Compensation Plans**

Thefollowing table sets forth certain information with respect to all of ourequity compensation plans in effect as of December 31, 2006:

**Equity Compensation Plan Information**
| **Plan Category**                                      | ** ** | **Number of Securities to be  Issued Upon Exercise of  Outstanding Options,  Warrants and Rights  (a)** | ** ** | **Weighted-Average Exercise  Price of Outstanding  Options, Warrants and Rights  (b)** | ** ** | **Number of Securities  Remaining Available  for Future Issuance Under  Equity Compensation Plans  (Excluding Securities  Reflected in Column(a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 1,496,945                                                                                                                                                 |       | $                                                                                                                    | 1.17       |                                                                                                                                                                                                            | 254,382    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                                    |       | —                                                                                                               |       | —                                                                                                                                                                                                          |       |
| Total                                                       |       | 1,496,945                                                                                                                                                 |       | $                                                                                                                    | 1.17       |                                                                                                                                                                                                            | 254,882    |   |

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

Thefollowing includes a description of transactions since January 1, 2006 towhich we have been a party, in which the amount involved in the transactionexceeds $120,000, and in which any of our directors, executive officers orholders of more than 5% of our capital stock had or will have a direct orindirect material interest. We believe the terms obtained or consideration thatwe paid or received, as applicable, in connection with the transactionsdescribed below were comparable to terms available or the amounts that would bepaid or received, as applicable, in arm’s-length transactions. Absentapproval by our board of directors, our audit committee reviews and approves inadvance any proposed related party transactions.

**Participation in Initial Public Offering**

Certainof our executive officers and principal stockholders and/or their affiliatesincluding Michael N. Chang, Kevin P. Poulos, ProQuest Investments II, L.P. andProQuest Investment II Advisors Fund, L.P. purchased an aggregate ofapproximately 275,565 shares of common stock in our initial public offering.

**ParPharmaceutical, Inc.**

From1990 through October 2006, Mark Auerbach served as Executive Chairman of theBoard of Directors for Par Pharmaceutical Companies, Inc., the parent companyof Par Pharmaceutical, Inc., a holder of greater than 5% of our outstandingcommon stock.

InApril 2005, we entered into a collaboration agreement with Par pursuant towhich we and****Par exclusively collaborated todevelop and commercialize Difimicin.  Wehad granted to Par an exclusive royalty-bearing license, with the right tosublicense, promote, market, distribute and sell Difimicin in a territorycomposed of the United States, Canada and Puerto Rico, with an option to extendthe territory to include Israel.  Weretained all other rights to Difimicin in the rest of the world.  In January 2007, we entered into a prospectivebuy-back agreement with Par which provided us with an option to terminate thecollaboration and repurchase the rights to develop and commercialize Difimicinin North America and Israel.

InFebruary 2007, we elected to terminate the collaboration agreement pursuant tothe prospective buy-back agreement with Par and we have regained the rights todevelop and commercialize Difimicin in North America and Israel.  We now hold worldwide rights to Difimicin.  Under the terms of the prospective buy-backagreement, we paid Par a one-time $20.0 million termination fee and we are alsoobligated to pay****Par a one-time $5.0 millionmilestone payment, a 5% royalty on net sales by us or our affiliates ofDifimicin in North America and Israel, and a 1.5% royalty on net sales by us orour affiliates of Difimicin in the rest of the world.  In addition, in the event we license ourright to market Difimicin in the rest of the world, we will be required to payPar a 6.25% royalty on net revenues we receive related 

125

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toDifimicin.  We are obligated to pay eachthese royalties, if any, on a country-by-country basis for seven yearscommencing on the applicable commercial launch in each such country.  See “— Collaborations, Commercial and LicenseAgreements and Grants — Par Pharmaceutical, Inc.”

**StockOption Grants to Executive Officers**

·                  In July 2006, we granted to Kevin P.Poulos an option to purchase 101,536 shares of our common stock at an exerciseprice of $2.17 per share, with one-fourth of the shares subject to the option vestingone year after the grant date, and one forty-eighth of the total shares vesteach month thereafter.

·                  In July 2006, we granted to John D.Prunty an option to purchase 101,536 shares of our common stock at an exerciseprice of $2.17 per share, with one-fourth of the shares subject to the optionvesting one year after the grant date, and one forty-eighth of the total sharesvest each month thereafter.

**Director Independence**

Ourboard of directors has determined that five of our seven directors are independentdirectors, as defined by Rule 4200(a)(15) of the National Association ofSecurities Dealers. The five independent directors are Mark Auerbach, Joseph Y.Chang, Joseph S. Chow, Howard S. Lee and Alain B. Schreiber.

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

Thefollowing table represents aggregate fees billed to us for fiscal years endedDecember 31, 2006 and 2005, by Ernst & Young LLP, our independentregistered public accounting firm.
| ** **          | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(In thousands)**         | ** ** |
| Audit Fees          |       | $                               | 51         |   | $ | 39 |   |
| Audit-related  Fees |       | —                          |       | — |   |
| All Other Fees      |       | 484                             |       | 2 |   |
| Total Fees          |       | $                               | 535        |   | $ | 41 |   |

 

The2006 fees described above were approved by the Audit Committee. All other feesinclude expenses related to the Company’s initial public offering.

Duringthe fiscal year ended December 31, 2006, there were no hours expended onthe Company’s financial audit by Ernst & Young LLP that were providedby persons other than Ernst & Young’s full-time permanent employees.

**Pre-Approval Policies and Procedures.**

TheAudit Committee has adopted a policy and procedures for the pre-approval ofaudit and non-audit services rendered by our independent auditor,Ernst & Young LLP. The policy generally pre-approves specifiedservices in the defined categories of audit services, and audit-relatedservices up to specified amounts. Pre-approval may also be given as part of theAudit Committee’s approval of the scope of the engagement of the independentauditor or on an individual explicit case-by-case basis before the independentauditor is engaged to provide each service. The pre-approval of services may bedelegated 

126

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toone or more of the Audit Committee’s members, but the decision must be reportedto the full Audit Committee at its next scheduled meeting.

TheAudit Committee has determined that the rendering of the services other thanaudit services by Ernst & Young is compatible with maintaining theprincipal accountant’s independence.

**PART IV**

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

1. *Financial Statements*

See Index to ConsolidatedFinancial Statements in Item 8 of this Annual Report on Form 10-K,which is incorporated herein by reference.

2. *Financial Statement Schedules*

None

3. *Exhibits*

 
| Exhibit No. | ** ** | **Description of Document**                                                                                                                                                                                                                                               |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         | (3)        | Amended and Restated Certificate of Incorporation of  the registrant.                                                                                                                                                                                                     |
| 3.2         | (2)        | Amended and Restated Bylaws of the registrant.                                                                                                                                                                                                                            |
| 4.1         | (4)        | Form of Common Stock Certificate of the registrant.                                                                                                                                                                                                                       |
| 4.2         | (1)        | Warrant Agreement between the registrant and Pacific  Sorrento Technology Park dated June 1, 2000.                                                                                                                                                                   |
| 4.3         | (1)        | Amended and Restated Investors’ Rights Agreement by  and among the registrant and certain stockholders of the registrant dated  November 30, 2005.                                                                                                                   |
| 10.1        | (1)*       | Master Service Agreement between the registrant and  Advanced Biologics, LLC, dated November 16, 2005, as amended by the  Addendum to the Master Services Agreement between the registrant and Advanced  Biologics, LLC, dated January 16, 2006.                |
| 10.2        | (1)        | Grant to the registrant by The National Institutes  of Health dated June 1, 2005.                                                                                                                                                                                    |
| 10.3        | (3)*       | Collaboration Research and Development and License  Agreement between the registrant and Cempra Pharmaceuticals, Inc., dated  March 31, 2006.                                                                                                                   |
| 10.4        | (4)*       | Agreement between the registrant and Sloan-Kettering  Institute for Cancer Research dated July 31, 2002, as amended by the  First Amendment to License Agreement between the registrant 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 the registrant and Pacific  Sorrento Technology Park dated May 1, 2001, as amended by the First  Amendment to Building Lease between the registrant and Pacific Sorrento  Technology Park dated July 12, 2001.                           |
| 10.11       | (1)+       | Form of Employee Proprietary Information Agreement  of the registrant.                                                                                                                                                                                                    |
| 10.12       | (1)+       | Employment Agreement between the registrant and  Michael N. Chang dated June 17, 2005.                                                                                                                                                                               |
| 10.13       | (1)+       | Offer letter between the registrant and Sherwood L.  Gorbach dated October 6, 2005.                                                                                                                                                                                  |
| 10.14       | (1)+       | Offer letter between the registrant and Kevin P.  Poulos dated June 15, 2006.                                                                                                                                                                                        |
| 10.15       | (1)+       | Offer letter between the registrant and John D.  Prunty dated May 10, 2006.                                                                                                                                                                                          |
| 10.16       | (1)+       | Offer letter between the registrant 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 the  registrant and its directors and officers.                                                                                                                                                                                 |
| 10.19       | (1)+       | Form of the 1998 Stock Plan of the registrant.                                                                                                                                                                                                                            |
| 10.20       | (1)+       | Form of 1998 Stock Plan Stock Option Agreement of  the registrant.                                                                                                                                                                                                        |
| 10.21       | (3)+       | Form of 2006 Equity Incentive Plan of the  registrant.                                                                                                                                                                                                                    |

 

127

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| 10.22 | (3)+   | Form of Employee Stock Purchase Plan of the  registrant.                                                                                                                                                                                                      |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23 | (3)    | Prospective Buy-Back Agreement between the  registrant 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.                                                                                                                                                                |
| 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). |

----

+              Indicatesmanagement contract or compensatory plan.

*                                         Confidentialtreatment has been requested with respect to certain portions of this exhibit.Omitted portions have been filed separately with the Securities and ExchangeCommission.

(1)                                  Filedwith Registrant’s Registration Statement on Form S-1 on November 9,2006.

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

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

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

(5)                                    Filedwith the Registrant’s Registration Statement on Form 8-K on February 26,2007.

 

128

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**SIGNATURES**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                       | ** ** | ** ** | **OPTIMER PHARMACEUTICALS** |
|-----------------------|------------|------------|-----------------------------|
|                  |       |       |                        |   |
| Dated: March 29, 2007 |       |       | By:                         | /s/ Michael  N. Chang |
|                  | ** ** | ** ** | **Name:**                   | **Michael  N. Chang** |
|                  | ** ** | ** ** | **Title:**                  | ***President  and Chief Executive Officer*** |
|                       |            |            |                             |  |  |

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

 
| Signature                     | ** ** | **Title**                                                                      | ** ** | **Date**       |
|-------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------|
| ** **                    | ** ** | ** **                                                                     | ** ** | ** **     |
| /s/ MICHAEL N. CHANG     |       | President, Chief Executive Officer and Director  (Principal Executive Officer) |       | March 29, 2007 |
| Michael N.  Chang        |       |                                                                           |       |           |
|                          |       |                                                                           |       |           |
| /s/ JOHN D. PRUNTY       |       | Chief Financial Officer (Principal Accounting and  Financial Officer)          |       | March 29, 2007 |
| John D.  Prunty          |       |                                                                           |       |           |
|                          |       |                                                                           |       |           |
| /s/ MARK AUERBACH             |       | Director                                                                       |       | March 29, 2007 |
| Mark Auerbach                 |       |                                                                           |       |           |
|                          |       |                                                                           |       |           |
| /s/ JOSEPH Y. CHANG      |       | Director                                                                       |       | March 29, 2007 |
| Joseph Y.  Chang         |       |                                                                           |       |           |
|                          |       |                                                                           |       |           |
| /s/ JOSEPH J. CHOW       |       | Director                                                                       |       | March 29, 2007 |
| Joseph J.  Chow          |       |                                                                           |       |           |
|                          |       |                                                                           |       |           |
| /s/ HOWARD S. LEE        |       | Director                                                                       |       | March 29, 2007 |
| Howard S.  Lee           |       |                                                                           |       |           |
|                          |       |                                                                           |       |           |
| /s/ MARTIN C. MUENCHBACH |       | Director                                                                       |       | March 29, 2007 |
| Martin C.  Muenchbach    |       |                                                                           |       |           |
|                          |       |                                                                           |       |           |
| /s/ ALAIN B. SCHREIBER   |       | Director                                                                       |       | March 29, 2007 |
| Alain B.  Scheiber       |       |                                                                           |       |           |

 

 

----

**EXHIBIT INDEX**

** **
| Exhibit No. | ** ** | **Description of Document**                                                                                                                                                                                                                                               |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         | (3)        | Amended and Restated Certificate of Incorporation of  the registrant.                                                                                                                                                                                                     |
| 3.2         | (2)        | Form of Bylaws of the registrant.                                                                                                                                                                                                                                         |
| 4.1         | (4)        | Form of Common Stock Certificate of the registrant.                                                                                                                                                                                                                       |
| 4.2         | (1)        | Warrant Agreement between the registrant and Pacific  Sorrento Technology Park dated June 1, 2000.                                                                                                                                                                   |
| 4.3         | (1)        | Amended and Restated Investors’ Rights Agreement by  and among the registrant and certain stockholders of the registrant dated  November 30, 2005.                                                                                                                   |
| 10.1        | (1)*       | Master Service Agreement between the registrant and  Advanced Biologics, LLC, dated November 16, 2005, as amended by the  Addendum to the Master Services Agreement between the registrant and Advanced  Biologics, LLC, dated January 16, 2006.                |
| 10.2        | (1)        | Grant to the registrant by The National Institutes  of Health dated June 1, 2005.                                                                                                                                                                                    |
| 10.3        | (3)*       | Collaboration Research and Development and License  Agreement between the registrant and Cempra Pharmaceuticals, Inc., dated  March 31, 2006.                                                                                                                   |
| 10.4        | (4)*       | Agreement between the registrant and Sloan-Kettering  Institute for Cancer Research dated July 31, 2002, as amended by the  First Amendment to License Agreement between the registrant 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 the registrant and Pacific  Sorrento Technology Park dated May 1, 2001, as amended by the First  Amendment to Building Lease between the registrant and Pacific Sorrento  Technology Park dated July 12, 2001.                           |
| 10.11       | (1)+       | Form of Employee Proprietary Information Agreement  of the registrant.                                                                                                                                                                                                    |
| 10.12       | (1)+       | Employment Agreement between the registrant and  Michael N. Chang dated June 17, 2005.                                                                                                                                                                               |
| 10.13       | (1)+       | Offer letter between the registrant and Sherwood L.  Gorbach dated October 6, 2005.                                                                                                                                                                                  |
| 10.14       | (1)+       | Offer letter between the registrant and Kevin P.  Poulos dated June 15, 2006.                                                                                                                                                                                        |
| 10.15       | (1)+       | Offer letter between the registrant and John D.  Prunty dated May 10, 2006.                                                                                                                                                                                          |
| 10.16       | (1)+       | Offer letter between the registrant 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 the  registrant and its directors and officers.                                                                                                                                                                                 |
| 10.19       | (1)+       | Form of the 1998 Stock Plan of the registrant.                                                                                                                                                                                                                            |
| 10.20       | (1)+       | Form of 1998 Stock Plan Stock Option Agreement of  the registrant.                                                                                                                                                                                                        |
| 10.21       | (3)+       | Form of 2006 Equity Incentive Plan of the  registrant.                                                                                                                                                                                                                    |
| 10.22       | (3)+       | Form of Employee Stock Purchase Plan of the  registrant.                                                                                                                                                                                                                  |
| 10.23       | (3)        | Prospective Buy-Back Agreement between the  registrant 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.                                                                                                                                                                            |
| 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).             |

----

+              Indicatesmanagement contract or compensatory plan.

*                                         Confidentialtreatment has been requested with respect to certain portions of this exhibit.Omitted portions have been filed separately with the Securities and ExchangeCommission.

(1)                                  Filedwith Registrant’s Registration Statement on Form S-1 on November 9,2006.

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

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

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

(5)                                  Filedwith the Registrant’s Registration Statement on Form 8-K on February 26,2007.

 

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