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United States
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 Commission File No. 0-12943
 CYPRESS BIOSCIENCE, INC.
  
 Delaware
    
    22-2389839(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)4350 Executive Drive, Suite 325San Diego, California
    
    92121(Address of principal executive
    
    (Zip Code)offices)
 (858) 452-2323
  Title of Each Class:
    
    Name of Exchange on which RegisteredCommon Stock $.001 Par Value
    
    The NASDAQ Stock Market
 NONE
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated Filer þ
    
    Non-accelerated filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
 
 
 *
    
    Calculated based on 37,004,774 shares of common stock held as of June 30, 2007 by non-affiliates
and a per share market price of $13.26. Excludes 323,220 shares of common stock held by directors
and executive officers and stockholders whose ownership exceeds ten percent of the common stock
outstanding at June 30, 2007, who are deemed to be affiliates only for purposes of this
calculation. Exclusion of such shares should not be construed to indicate that any such person
possesses the power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under common control with the
Registrant.




---



##### 



CYPRESS BIOSCIENCE, INC.
FORM 10-K
INDEX
 PagePART IItem 1 Business
    
    
    1Item 1A Risk Factors
    
    
    18Item 1B Unresolved Staff Comments
    
    
    38Item 2 Properties
    
    
    38Item 3 Legal Proceedings
    
    
    38Item 4 Submission of Matters to a Vote of Security Holders
    
    
    38PART IIItem 5 Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    40Item 6 Selected Financial Data
    
    
    42Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    43Item 7A Quantitative and Qualitative Disclosures about Market Risk
    
    
    53Item 8 Financial Statements and Supplementary Data
    
    
    53Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    53Item 9A Controls and Procedures
    
    
    54Item 9B Other Information
    
    
    56PART IIIItem 10 Directors, Executive Officers and Corporate Governance
    
    
    57Item 11 Executive Compensation
    
    
    57Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    57Item 13 Certain Relationships, Related Transactions and Director Independence
    
    
    57Item 14 Accounting Fees and Services
    
    
    57PART IVItem 15 Exhibits, Financial Statement Schedules
    
    
    58Signatures
    
    
    60EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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PART I
 Except for the historical information contained herein, the information contained herein
contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including, in
particular, statements about our plans, strategies and prospects. These statements, which may
include words such as may, will, expect, believe, intend, plan, anticipate,
estimate, or similar words, are based on our current beliefs, expectations and assumptions and
are subject to a number of risks and uncertainties. Although we believe that our beliefs,
expectations and assumptions reflected in these statements are reasonable, our actual results and
financial performance may prove to be very different from what we might have predicted on the date
of this Form 10-K. Factors that could cause or contribute to differences include, but are not
specifically limited to, our ability to develop milnacipran for Fibromyalgia Syndrome, our ability
to acquire and develop any compounds or products to treat any other indications we may pursue in a
timely manner, or at all, as well as the other risks detailed in this Form 10-K and in our other
SEC filings.
 
 Item 1. Business
 Company Overview
     1.




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www.clinicaltrials.gov
  Milnacipran for the Treatment of Fibromyalgia
 Milnacipran
  Milnacipran Development Status
 Results of Phase II Trial
  2.




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Results of First Phase III Trial
   3.




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Results of the Second Phase III Trial
  4.




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Most Common Side Effects
  New Drug Application
  5.




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Ongoing Phase III Trials
   Personalized Medicine Laboratory Services
 Early Rheumatoid Arthritis (RA) Prediction Algorithm
 Early RA Prediction Algorithm Early RA Prediction Algorithm
 Methotrexate (MTX) Polyglutamates Test
 MTX Polyglutamates Test MTX Polyglutamates Test MTX Polyglutamates Test
 6.




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Other Personalized Medicine Laboratory Services
  Licenses, Collaborations and Acquisitions
 Milnacipran Agreements
 Pierre Fabre Agreements
    7.




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Forest Laboratories Agreement
    8.




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Collegium Agreement
  Acquisition of Proprius
 Merger Agreement
  9.




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
    
    $20.0 million upon the dosing of the first subject in any human phase III clinical trial
involving PRO-406 (the topical non-steroidal anti-inflammatory drug [NSAID] therapy for the
symptomatic treatment of osteoarthritis), that could be used, or in the case of a Phase
II/II clinical trial that is used, as one of the pivotal trials required for filing a NDA.
In the event that Cypress determines, in its sole discretion, to engage in a transaction
(other than a change of control transaction) pursuant to which a substantial portion of the
intellectual property rights owned by Cypress immediately after the effective time and
necessary for the production, development and sale of PRO-406 are sold or licensed to or
acquired by a third party prior to achievement of the $20.0 million milestone for PRO-406,
in lieu of the $20.0 million milestone payment, the Proprius stockholders will receive 50%
of the proceeds from such disposition after subtraction of Cypress development costs
related to PRO-406, but the amount Proprius stockholders will receive cannot exceed $20.0
million; and
    
    $17.5 million upon the earlier of our Board of Directors formally approving the
initiation of a Phase III clinical trial for PRO-515 (the oral DMARD therapy for the
treatment of RA), or the dosing of the first subject in a Phase III clinical trial
involving PRO-515 or certain other product candidates.
 Early RA Prediction Algorithm MTX Polyglutamate Test Early RA Treatment Algorithm MTX Polyglutamates Test
  Agreement with AlphaRx
  10.




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Patents, Trademarks and Proprietary Technology
  MTX
Polyglutamates Test Early RA Prediction Algorithm MTX Polyglutamates Test
  11.




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Competition
   ® ®
  12.




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Manufacturing and Supply
    Government Regulation
 Therapeutic Products
  13.




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
    
    completion of preclinical laboratory tests, animal pharmacology and toxicology
studies and formulation studies performed in compliance with the FDAs Good Laboratory
Practice, or GLP regulations;
    
    the submission of an investigational new drug application, or IND, to the FDA
for human clinical testing that must be accepted by the FDA before human clinical
trials may commence;
    
    performance of adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product candidate for the proposed indication of use;
    
    the submission of an NDA to the FDA; and
    
    FDA approval of the NDA prior to any commercial sale or shipment of the drug.
   
    
    ensure receipt from participants of signed consents that inform them of risks;
    
    detail the protocol and objectives of the study;
    
    detail the parameters to be used to monitor safety; and
    
    detail the safety and efficacy criteria to be evaluated.
 14.




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
    
    obtain initial indications of the efficacy of the drug for specific, targeted indications;
    
    determine dosage tolerance and optimal dosage; and
    
    identify possible adverse affects and safety risks.
   15.




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Personalized Medicine Laboratory Services
  16.




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Early RA Prediction Algorithm MTX
Polyglutamates Test
   17.




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
    
    exclusion from participation in Medicare/Medicaid programs;
    
    asset forfeitures;
    
    civil and criminal fines and penalties; and
    
    the loss of various licenses, certifications and authorizations necessary to operate
our business.
  Employees
  Available Information
 www.cypressbio.com
 
 Item 1A. Risk Factors
 Risks related to our business
 The FDA approval of milnacipran or any future product candidate is uncertain and will involve the
commitment of substantial time and resources.
   18.




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
    
    a product candidate may not be safe or effective;
    
    we may not achieve statistical significance for the primary endpoint;
    
    FDA officials may interpret data from preclinical testing, clinical trials, and/or
pharmacovigilance data from use of milnacipran outside of the United States in different
ways than we interpret such data;
    
    the FDA might not approve our manufacturing processes or facilities, or the processes or
facilities of any future collaborators or contract manufacturers, including Pierre Fabres
facility for the manufacture of the active ingredient in milnacipran;
    
    the FDA may change its approval policies or adopt new regulations; and
    
    the FDA may request additional data.
 19.




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We may not successfully integrate the business or personnel we recently acquired in connection with
our acquisition of Proprius.
  
    
    higher development or commercialization costs than we anticipate for the personalized
medicine laboratory services and therapeutic products;
    
    challenges with running a services business;
    
    higher than expected licensing and integration costs;
    
    exposure to liabilities of licensed and acquired intellectual property, compounds,
products and services; and
    
    disruption of our business and diversion of our managements time and attention as part
of integrating Proprius business with our operations.
  We may not be successful in creating a commercial infrastructure.
  20.




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We are dependent on our collaboration with Forest Laboratories to develop and commercialize
milnacipran and to obtain regulatory approval. Events or circumstances may occur that delay or
prevent the development and commercialization of milnacipran.
   
    
    Forest Laboratories could fail to devote sufficient resources to the development,
approval, commercialization, or marketing and distribution of any products developed under
our collaboration agreement, including by failing to develop specialty sales forces if such
sales forces are necessary for the most effective distribution of any approved product;
    
    We and Forest Laboratories could disagree as to development plans, including the number
and timing of clinical trials or regulatory approval strategy, or as to which additional
indications for milnacipran should be pursued, if any, and therefore milnacipran may never
be developed for any indications other than FM;
    
    Forest Laboratories could independently develop, develop with third parties or acquire
products that could compete with milnacipran, including drugs approved for other
indications used by physicians off-label for the treatment of FM;
 21.




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
    
    Forest Laboratories could stop the ongoing third Phase III clinical trial of milnacipran
for the treatment of FM or any other clinical trials for milnacipran or abandon or
underfund the development of milnacipran, repeat or conduct additional clinical trials or
require a new formulation of milnacipran for clinical testing, or delay the commencement of
any additional clinical trials for milnacipran for the treatment of FM; and
    
    Disputes regarding the collaboration agreement that delay or terminate the development,
commercialization or receipt of regulatory approvals of milnacipran, may delay or prevent
the achievement of clinical or regulatory objectives that would result in the payment of
milestone payments or result in significant litigation or arbitration.
  All of our personalized medicine laboratory services are going to be performed at a single
laboratory and, in the event this facility was to be affected by man-made or natural disasters, our
operations could be severely impaired.
   Failure to timely or accurately bill for our personalized medicine laboratory services could have a
material adverse effect on our net revenues and bad debt expense.
  22.




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
    
    exclusion from participation in Medicare/Medicaid programs;
    
    asset forfeitures;
    
    civil and criminal fines and penalties; and
    
    the loss of various licenses, certificates and authorizations necessary to operate our
business.
  We rely upon an exclusive license from Pierre Fabre in order to develop and sell our milnacipran
product candidate, and our ability to pursue the development and commercialization of milnacipran
for the treatment of FM depends upon the continuation of our license from Pierre Fabre.
  We rely upon Pierre Fabre as our exclusive supplier of the compound used as the active ingredient
in our milnacipran product candidate and if Pierre Fabre fails to supply us sufficient quantities
of the active ingredient it may delay or prevent us from developing and commercializing
milnacipran.
  23.




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Our agreements with Pierre Fabre and Forest Laboratories restrict our ability to develop specified
compounds, which limits how we can expand our product candidates.
  Provisions in our collaboration agreement with Forest Laboratories and our license agreement with
Pierre Fabre may prevent or delay a change in control.
  24.




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We are at an early stage of development and we do not have and may never develop any commercial
services or products that generate revenues.
   MTX Polyglutamates Test Early RA
Prediction algorithm
 If we receive regulatory approval for milnacipran or any other future product candidate, and secure
and maintain regulatory approvals related to our personalized medicine laboratory services, we will
be subject to ongoing FDA, CLIA and state regulatory obligations and continuing regulatory review
by applicable regulatory authorities.
  25.




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If advances in technology allow others to perform diagnostic tests which are similar to or better
than ours or to perform such services in a more efficient or cost-effective manner than is
currently possible, our personalized medicine laboratory services may not meet with demand in the
marketplace or the demand for these services may decrease.
  We rely on third parties to conduct all of our clinical trials. If these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we may not be able to
obtain regulatory approval for or commercialize milnacipran or any of our other future product
candidates.
  Even if our product candidates are approved or our personalized medicine laboratory service
candidates are commercialized, the market may not accept these products or services.
 MTX Polyglutamates Test Early RA Prediction Algorithm
 26.




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
    
    timing of market entry relative to competitive services and products;
    
    extent of marketing efforts by us and third-party distributors or agents retained by us;
    
    rate of adoption by healthcare practitioners;
    
    rate of a products acceptance by the target community;
    
    availability of alternative therapies;
    
    price of our services and products relative to alternative therapies;
    
    availability of third-party reimbursement; and
    
    the prevalence or severity of side effects or unfavorable publicity concerning our
products or similar products.
 MTX Polyglutamates Test Early RA Prediction Algorithm
 Our competitors may develop and market products and services that are less expensive, more
effective or safer, which may diminish or eliminate the commercial success of any products or
services we may commercialize.
   ® ®
 27.




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We have agreed to pay certain external expenses associated with our second Phase III clinical trial
evaluating milnacipran for FM and may never receive the second payment of approximately $6.5
million.
  We are subject to uncertainty relating to health care reform measures and reimbursement policies
which, if not favorable to our product candidates or personalized medicine laboratory services,
could hinder or prevent our product candidates or personalized medicine laboratory services
commercialization success.
  
    
    our ability to set a price we believe is fair for our products and services;
    
    our ability to generate revenues and achieve or maintain profitability;
    
    the future revenues and profitability of our potential customers, suppliers and
collaborators; and
    
    the availability of capital.
 28.




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We rely on our employees and consultants for their scientific and technical expertise in connection
with our business operations.
  29.




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We may be subject to product liability claims that could cause us to incur liabilities beyond our
insurance coverage.
  We have a history of operating losses and we may never be profitable.
  We will need substantial additional funding and may be unable to raise capital when needed, which
could force us to scale back or discontinue the completion of any proposed acquisitions or
adversely affect our ability to realize the expected benefits of any completed acquisitions.
  30.




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Raising additional funds by issuing securities, or through collaboration and licensing
arrangements, may cause dilution to existing stockholders, restrict our operations, or require us
to relinquish propriety rights.
  We may lose our net operating loss carryforwards, which could prevent us from offsetting future
taxable income.
  Our stock price has been very volatile and will likely continue to be volatile.
  
    
    the results of the FDAs review of the NDA that we submitted for milnacipran for the
treatment of FM;
    
    the results of any clinical trials for milnacipran;
    
    development of our personalized medicine laboratory services and other product
candidates;
    
    our ability to integrate the Proprius business and its employees;
    
    developments in our relationship with Forest Laboratories, including the termination of
our agreement;
 31.




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
    
    developments in our relationship with Pierre Fabre, including the termination of our
agreement;
    
    our entering into, or failing to enter into, an agreement for the acquisition of any
products, product candidates or companies, or an agreement with any corporate collaborator;
    
    our available cash;
    
    announcements of technological innovations or new products by us or our competitors;
    
    developments in our patent or other proprietary rights;
    
    fluctuations in our operating results;
    
    litigation initiated by or against us;
    
    developments in domestic and international governmental policy or regulation; and
    
    economic and other external factors or other disaster or crisis.
 The concentration of ownership among our existing officers, directors and principal stockholders
may result in the entrenchment of management, prevent other stockholders from influencing
significant corporate decisions and depress our stock price.
  Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
  32.




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We expect to continue incurring significant costs as a result of enacted and proposed changes in
laws and regulations relating to corporate governance matters.
  If we fail to maintain proper
and effective internal controls, our ability to produce accurate
financial statements could be impaired, which could adversely affect our operating results, our
ability to operate our business and investors view of us.
  33.




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Risks related to our intellectual property
 We rely primarily on method of use patents to protect our proprietary technology for the
development of milnacipran, and our ability to compete may decrease or be eliminated if we are not
able to protect our proprietary technology.
  MTX
Polyglutamates Test Early RA Prediction Algorithm MTX Polyglutamates Test
  34.




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Our ability to compete may decline if we do not adequately protect our proprietary rights.
   
    
    we may not have been the first to make the inventions covered by our pending patent
applications or issued patents;
    
    we may not have been the first to file patent applications for our product and service
candidates or the technologies we rely upon;
    
    others may independently develop similar or alternative technologies or duplicate any of
our technologies;
 35.




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
    
    our disclosures in patent applications may not be sufficient to meet the statutory
requirements for patentability;
    
    any or all of our pending patent applications may not result in issued patents;
    
    we may not seek or obtain patent protection in all countries that will eventually
provide a significant business opportunity;
    
    any patents issued to us or our collaborators may not provide a basis for commercially
viable products, may not provide us with any competitive advantages or may be challenged by
third parties;
    
    some of our technologies may not be patentable;
    
    others may design around our patent claims to produce competitive products which fall
outside of the scope of our patents; or
    
    others may identify prior art which could invalidate our patents.
   A dispute concerning the infringement or misappropriation of our proprietary rights or the
proprietary rights of others could be time consuming and costly and an unfavorable outcome could
harm our business.
  36.




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
    
    payment of damages, potentially treble damages, if we are found to have willfully
infringed such parties patent rights;
    
    injunctive or other equitable relief that may effectively block our ability to further
develop, commercialize and sell products and product candidates; or
    
    we or our collaborators having to enter into license arrangements that may not be
available on commercially acceptable terms, if at all. As a result, we could be prevented
from commercializing current or future products and product candidates.
 The patent applications of pharmaceutical and biotechnology and diagnostic companies involve
highly complex legal and factual questions, which could negatively impact our patent position.
    37.




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Executive Officers
  NAME
    
    AGE
    
    POSITIONJay D. Kranzler, M.D., Ph.D.
    
    
    50
    
    
    Chief Executive Officer and Chairman of the Board of DirectorsR. Michael Gendreau, M.D., Ph.D.
    
    
    51
    
    
    Vice President of Clinical Development and Chief Medical OfficerSabrina Martucci Johnson
    
    
    41
    
    
    Executive Vice President, Chief Operating Officer and Chief Financial OfficerSrinvas Rao
    
    
    39
    
    
    Chief Scientific OfficerMichael Walsh
    
    
    49
    
    
    Executive Vice President and Chief Commercial OfficerDenise Wheeler
    
    
    38
    
    
    General Counsel
 Jay D. Kranzler
  38.




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R. Michael Gendreau
  Sabrina Martucci Johnson
  Srinivas Rao
  Michael Walsh
  Denise Wheeler
 LP
 39.




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PART II
 
 Item 5 Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  Price Range of Common StockHigh
    
    LowYear Ended December 31, 2007:First Quarter
    
    $
    9.20
    
    
    $
    6.91Second Quarter
    
    
    18.20
    
    
    
    7.34Third Quarter
    
    
    15.60
    
    
    
    11.45Fourth Quarter
    
    
    15.48
    
    
    
    10.85Year Ended December 31, 2006:First Quarter
    
    $
    6.42
    
    
    $
    5.29Second Quarter
    
    
    8.03
    
    
    
    5.26Third Quarter
    
    
    7.50
    
    
    
    5.27Fourth Quarter
    
    
    8.91
    
    
    
    7.02
  40.




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41.




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Item 6. Selected Financial Data
  Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Statement of Operations Data:Revenues:Revenues under collaborative agreement
    
    $
    13,940,603
    
    
    $
    4,322,468
    
    
    $
    8,384,636
    
    
    $
    14,414,619
    
    
    $
    Costs and expenses:Research and development
    
    
    7,710,684
    
    
    
    9,184,404
    
    
    
    15,839,737
    
    
    
    15,650,328
    
    
    
    11,644,494General and administrative
    
    
    10,027,358
    
    
    
    8,379,031
    
    
    
    5,448,160
    
    
    
    11,762,813
    
    
    
    4,336,014Compensation expense (benefit) 
variable stock options
    
    
    
    
    
    
    
    
    
    
    (1,749,135
    )
    
    
    (699,033
    )
    
    
    5,879,27717,738,042
    
    
    
    17,563,435
    
    
    
    19,538,762
    
    
    
    26,714,108
    
    
    
    21,859,785Other income (expense):Interest income
    
    
    7,285,023
    
    
    
    4,923,290
    
    
    
    3,501,381
    
    
    
    1,092,404
    
    
    
    121,679Interest expense
    
    
    
    
    
    
    
    
    
    
    (2,382
    )
    
    
    (5,826
    )
    
    
    (9,097
    )Gain (loss) on disposal of assets
    
    
    
    
    
    
    
    
    
    
    4,186
    
    
    
    (2,095
    )
    
    
    4,9317,285,023
    
    
    
    4,923,290
    
    
    
    3,503,185
    
    
    
    1,084,483
    
    
    
    117,513Net income (loss)
    
    $
    3,487,584
    
    
    $
    (8,317,677
    )
    
    $
    (7,650,941
    )
    
    $
    (11,215,006
    )
    
    $
    (21,742,272
    )Net income (loss) per share  basic
    
    $
    0.10
    
    
    $
    (0.26
    )
    
    $
    (0.25
    )
    
    $
    (0.40
    )
    
    $
    (1.21
    )Shares used in computing net income
(loss) per share  basic
    
    
    35,205,783
    
    
    
    32,094,785
    
    
    
    31,105,271
    
    
    
    27,764,975
    
    
    
    17,924,353Net income (loss) per share  diluted
    
    $
    0.10
    
    
    $
    (0.26
    )
    
    $
    (0.25
    )
    
    $
    (0.40
    )
    
    $
    (1.21
    )Shares used in computing net income
(loss) per share  diluted
    
    
    36,616,091
    
    
    
    32,094,785
    
    
    
    31,105,271
    
    
    
    27,764,975
    
    
    
    17,924,353
 As of December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003Balance Sheet Data:Cash, cash equivalents and short-term
investments
    
    $
    181,806,574
    
    
    $
    102,778,328
    
    
    $
    109,613,278
    
    
    $
    112,023,998
    
    
    $
    23,524,646Total assets
    
    
    182,699,850
    
    
    
    103,824,941
    
    
    
    110,791,798
    
    
    
    118,389,524
    
    
    
    23,806,681Total stockholders equity
    
    
    168,014,978
    
    
    
    87,097,297
    
    
    
    89,975,440
    
    
    
    94,173,809
    
    
    
    22,129,122Working capital
    
    
    177,975,517
    
    
    
    99,508,212
    
    
    
    105,536,094
    
    
    
    112,837,533
    
    
    
    22,049,874
 42.




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Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations
 overview
       43.




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www.clinicaltrials.gov
  Results of Operations
 Comparison of Years Ended December 31, 2007 and 2006
 Revenues
   44.




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##### Table of Contents



Research and Development
   General and Administrative
  Interest Income
  45.




---



##### Table of Contents



Comparison of Years Ended December 31, 2006 and 2005
 Revenues
  Research and Development
  General and Administrative
  46.




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##### Table of Contents



Compensation Benefit  Variable Stock Options
 Share-Based Payment Accounting for Certain
Transaction Involving Stock Compensation  An Interpretation of APB 25
 Interest Income
  Liquidity and Capital Resources
    47.




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##### Table of Contents



Less than1 year
    
    1  3 years
    
    3 - 5 years
    
    More than 5Total
    
    (2008)
    
    (2009  2011)
    
    (2012 - 2014)
    
    years (2015 +)Operating leases
    
    $
    926,117
    
    
    $
    190,045
    
    
    $
    610,982
    
    
    $
    125,090
    
    
    $
    Purchase obligations (1)
    
    
    1,870,114
    
    
    
    1,870,114
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,796,231
    
    
    $
    2,060,159
    
    
    $
    610,982
    
    
    $
    125,090
    
    
    $
    
 
 (1)
    
    Purchase obligations include agreements to purchase goods or services, including consulting
services, that are enforceable and legally binding on us and that specify all significant
terms. This includes contracts that are cancelable with notice and the payment of an early
termination penalty. Purchase obligations exclude agreements that are cancelable without
penalty and also exclude accrued liabilities to the extent presented on the balance sheet as of
December 31, 2007.   48.




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##### Table of Contents




    
    the costs and timing of development and regulatory approvals for milnacipran
and the products and services we acquired in connection with the Proprius acquisition;
    
    the costs of establishing a commercial infrastructure;
    
    the extent to which we acquire or invest in other products, product candidates
and businesses;
    
    the costs of in-licensing drug candidates;
    
    the ability of Forest Laboratories and us to reach milestones, and other events
or developments under our collaboration agreement; and
    
    the costs of commercialization of any future products and services.
  49.




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##### Table of Contents



Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Recognition in Financial
Statements
 50.




---



##### Table of Contents



Research and Development Expenses
  Share-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation
    51.




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##### Table of Contents



New Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Accounting for
Certain Investments in Debt and Equity Securities
 Accounting for Nonrefundable Advance
Payments for Goods or Services to be Used in Future Research and Development Activities
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property.
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements
 52.




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosure about Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9 . Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
  53.




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##### Table of Contents



Item 9A. Controls and Procedures
 Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
   Managements Report on Internal Control Over Financial Reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
   Managements Remediation Efforts
  Changes in Internal Control Over Financial Reporting
  54.




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##### Table of Contents



Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
 
 .
       
 55.




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##### Table of Contents



Item 9B. Other Information
  56.




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  www.cypressbio.com
 
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  
 Item 13. Certain Relationships, Related Transactions and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  57.




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules
     ExhibitNo.
    
    Description
    
    Incorporated by Reference to2.1
    
    Agreement and Plan of Merger dated February
23, 2008 by among the Registrant, Propel
Acquisition Sub, Inc., Proprius, Inc. and
Michael J. Walsh, as the Stockholders
Representative(*)
    
    Form 8-K filed on March 5, 20083.1
    
    Second Amended and Restated Certificate of
Incorporation
    
    Appendix C to Definitive Proxy Statement filed
with the Securities and Exchange Commission on
August 11, 20033.2
    
    Third Amended and Restated By-Laws
    
    Exhibit 3.1 to Form 8-K filed on July 27, 20074.1
    
    Form of Stock Certificate
    
    Exhibit 4.1 to Form S-1 Registration Statement
No. 33-4122510.1
    
    1996 Equity Incentive Plan (the 1996 Plan")()
    
    Exhibit 99.2 to Form 10-Q for the quarter ended
March 31, 1996 (File No. 0-12943)10.2
    
    Form of Incentive Stock Option Agreement under
the 1996 Plan()
    
    Exhibit 99.3 to Form 10-Q for the quarter ended
March 31, 1996 (File No. 0-12943)10.3
    
    Form of Non-Statutory Stock Option Agreement
under 1996 Equity Incentive Plan()
    
    Exhibit 99.4 to Form 10-Q for the quarter ended
March 31, 1996 (File No. 0-12943)10.4
    
    Incentive Stock Option and Appreciation Plan,
as amended June 29, 1992()
    
    Exhibit 99.4 to Form S-8 Registration Statement
No. 333-0677110.5
    
    Form of Stock Option Agreement for issuances
of all non-plan options()
    
    Exhibit 99.8 to Form S-8 Registration Statement
No. 333-0677110.6
    
    Amended and Restated License and Distribution
Agreement dated January 19, 2001 among the
Registrant, Fresenius HemoCare, Inc. and
Fresenius HemoCare GmbH(*)
    
    Exhibit 2.2 to Form 8-K filed on January 23, 200110.7
    
    2000 Equity Incentive Plan()
    
    Exhibit 10.25 to Form 10-K for the year ended
December 31, 200010.8
    
    Form of Stock Option Agreement for use with
the 2000 Equity Incentive Plan()
    
    Exhibit 10.26 to Form 10-K for the year ended
December 31, 200010.9
    
    Letter Amendment dated February 1, 2002 to the
Amended and Restated License Agreement dated
January 19, 2001 among the Registrant,
Fresenius HemoCare, Inc. and Fresenius
HemoCare GmbH
    
    Exhibit 10.24 to Form 10-K for the year ended
December 31, 200110.10
    
    Reformulation and New Product Agreement dated
August 22, 2002 between the Registrant and
Collegium Pharmaceuticals, Inc.(*)
    
    Exhibit 10.2 to Form 10-Q for the quarter ended
September 30, 200210.11
    
    Common Stock Issuance Agreement dated October
31, 2002 between the Registrant and Collegium
Pharmaceuticals, Inc.(*)
    
    Exhibit 10.3 to Form 10-Q for the quarter ended
September 30, 2002
 58.




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##### Table of Contents



ExhibitNo.
    
    Description
    
    Incorporated by Reference to10.12
    
    Equity Investment Agreement dated June 6, 2003
between the Registrant and Pierre Fabre
Medicament
    
    Exhibit 10.2 to Form 10-Q for the quarter ended
June 30, 200310.13
    
    Warrant to purchase Common Stock of the
Registrant issued to Pierre Fabre Medicament
on June 6, 2003
    
    Exhibit 10.3 to Form 10-Q for the quarter ended
June 30, 200310.14
    
    Amended and Restated Employment Agreement
dated August 11, 2003 between the Registrant
and Jay D. Kranzler, M.D., Ph.D()
    
    Exhibit 10.4 to Form 10-Q for the quarter ended
June 30, 200310.15
    
    Third Restated License Agreement dated January
9, 2004 between the Registrant and Pierre
Fabre Medicament(*)
    
    Exhibit 10.23 to the Form 10-K for the year
ended December 31, 2003.10.16
    
    First Restated Trademark Agreement dated
January 9, 2004 between the Registrant and
Pierre Fabre Medicament(*)
    
    Exhibit 10.24 to the Form 10-K for the year
ended December 31, 2003.10.17
    
    Purchase and Supply Agreement dated January 9,
2004 between the Registrant and Pierre Fabre
Medicament(*)
    
    Exhibit 10.25 to the Form 10-K for the year
ended December 31, 2003.10.18
    
    License and Collaboration Agreement dated
January 9, 2004 between the Registrant and
Forest Laboratories(*)
    
    Exhibit 10.26 to the Form 10-K for the year
ended December 31, 2003.10.19
    
    Side Letter dated January 9, 2004 among the
Registrant, Forest Laboratories and Pierre
Fabre Medicament(*)
    
    Exhibit 10.27 to the Form 10-K for the year
ended December 31, 2003.10.20
    
    Letter Agreement dated January 9, 2004 among
the Registrant, Forest Laboratories and Pierre
Fabre Medicament(*)
    
    Exhibit 10.28 to the Form 10-K for the year
ended December 31, 2003.10.21
    
    Amendment to Forest Agreement(*)
    
    Exhibit 10.1 to Form 10-Q for the quarter ended
June 30, 200510.22
    
    License and Collaboration Agreement dated June
29, 2005 between Organon (Ireland) Ltd. and
Cypress(*)
    
    Exhibit 10.1 to Form 10-Q for the quarter ended
September 30, 200510.23
    
    First Amendment to Office Lease
    
    Exhibit 10.28 to Form 10-Q for the quarter ended
September 30, 200610.24
    
    2007 Bonus Plan()
    
    Exhibit 10.1 to the Form 8-K filed on October
31, 200610.25
    
    First Amendment dated January 26, 2007 to the
Amended and Restated Employment Agreement
dated August 11, 2003 between the Registrant
and Jay D. Kranzler, M.D., Ph.D
    
    Exhibit 10.1 to the Form 8-K filed on January
30, 2007.10.26
    
    2008 Bonus Plan()
    
    Exhibit 10.1 to the Form 8-K filed on January
28, 200810.27
    
    Employment Agreement dated February 23, 2008
between the Registrant and Michael J. Walsh
    
    Exhibit 10.1 to the Form 8-K filed on February
25, 200810.28
    
    Non-Competition Agreement dated February 23,
2008 among the Registrant, Proprius, Inc. and
Michael J. Walsh
    
    Exhibit 10.3 to the Form 8-K filed on February
25, 200810.29
    
    Form of Retention Agreement among the
Registrant, Proprius, Inc. and the Key
Employee as defined therein
    
    Exhibit 10.4 to the Form 8-K filed on February
25, 200821.1
    
    Subsidiaries of the registrant23.1
    
    Consent of Independent Registered Public
Accounting Firm24.1
    
    Power of Attorney
    
    Reference is made to the signature page of this
report31.1
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the Public Company
Accounting Reform and Investor Protection Act
of 2002 (18 U.S.C. §1350, as adopted)31.2
    
    Certification of Chief Financial Officer
pursuant to Section 302 of the Public Company
Accounting Reform and Investor Protection Act
of 2002 (18 U.S.C. §1350, as adopted)32.1
    
    Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section
906 of the Public Company Accounting Reform
and Investor Protection Act of 2002 (18 U.S.C.
§1350, as adopted)
 
 *
    
    Confidential Treatment has been granted to certain portions of this agreement.
    
    Indicates management contract or compensatory plan or arrangement. 59.




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##### Table of Contents



SIGNATURES
  Cypress Bioscience, Inc.Date: March 17, 2008
    By:
    /s/  Jay D. KranzlerChief Executive OfficerDate: March 17, 2008
    By:
    /s/ Sabrina Martucci JohnsonChief Financial Officer, ChiefOperating Officer and
Executive Vice President POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Jay D. Kranzler
    
    Chief Executive Officer and Chairman
of the Board
    
    March 17, 2008Jay D. Kranzler, M.D., Ph.D.
    
    (Principal Executive Officer)/s/ Sabrina Martucci Johnson
    
    Chief Financial Officer,
    
    March 17, 2008Sabrina Martucci Johnson
    
    Chief
Operating Officer and
Executive Vice President(Principal Financial and
Accounting Officer)/s/ Roger Hawley
    
    Director
    
    March 17, 2008Roger Hawley/s/ Amir H. Kalali
    
    Director
    
    March 17, 2008Amir H. Kalali/s/ Jon W. McGarity
    
    Director
    
    March 17, 2008Jon W. McGarity
 60.




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Jean-Pierre Millon
    
    Director
    
    March 17, 2008Jean-Pierre Millon/s/ Perry B. Molinoff
    
    Director
    
    March 17, 2008Perry B. Molinoff/s/ Tina S. Nova
    
    Director
    
    March 17, 2008Tina S. Nova/s/ Daniel H. Petree
    
    Director
    
    March 17, 2008Daniel H. Petree
 61.




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Balance Sheets as of December 31, 2007 and 2006
    
    
    F-3Statements of Operations for the years ended December 31, 2007, 2006 and 2005
    
    
    F-4Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005
    
    
    F-5Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    
    F-7Notes to Financial Statements
    
    
    F-8
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 F-2




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 BALANCE SHEETS
 As of December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    70,093,425
    
    
    $
    32,692,411Short-term investments
    
    
    111,713,149
    
    
    
    70,085,917Receivable from Forest Laboratories
    
    
    142,750
    
    
    
    350,372Prepaid expenses and other current assets
    
    
    651,144
    
    
    
    598,999Total current assets
    
    
    182,600,468
    
    
    
    103,727,699Property and equipment, net
    
    
    79,382
    
    
    
    65,780Other assets
    
    
    20,000
    
    
    
    31,462Total assets
    
    $
    182,699,850
    
    
    $
    103,824,941LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    443,734
    
    
    $
    373,556Accrued compensation
    
    
    307,164
    
    
    
    91,556Accrued liabilities
    
    
    522,637
    
    
    
    99,375Payable to Forest Laboratories
    
    
    
    
    
    
    530,000Current portion of deferred revenue
    
    
    3,351,416
    
    
    
    3,125,000Total current liabilities
    
    
    4,624,951
    
    
    
    4,219,487Deferred rent
    
    
    5,673
    
    
    
    8,157Deferred revenue, net of current portion
    
    
    10,054,248
    
    
    
    12,500,000Commitments and contingenciesStockholders equity:Preferred stock, $.001 par value; 15,000,000 shares
authorized; no
shares issued and outstanding
    
    
    
    
    
    
    Common
stock, $.001 par value; 60,000,000 shares authorized; 37,423,584 and 32,169,380 shares issued and
outstanding at December 31, 2007 and 2006, respectively
    
    
    37,424
    
    
    
    32,169Additional paid-in capital
    
    
    317,891,137
    
    
    
    240,594,665Accumulated other comprehensive income (loss)
    
    
    59,833
    
    
    
    (68,537
    )Accumulated deficit
    
    
    (149,973,416
    )
    
    
    (153,461,000
    )Total stockholders equity
    
    
    168,014,978
    
    
    
    87,097,297$
    182,699,850
    
    
    $
    103,824,941
 See accompanying notes to the financial statements.
 F-3




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 STATEMENTS OF OPERATIONS
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Revenues under collaborative agreement
    
    $
    13,940,603
    
    
    $
    4,322,468
    
    
    $
    8,384,636Costs and expenses:Research and development
    
    
    7,710,684
    
    
    
    9,184,404
    
    
    
    15,839,737General and administrative
    
    
    10,027,358
    
    
    
    8,379,031
    
    
    
    5,448,160Compensation benefit  variable stock
options
    
    
    
    
    
    
    
    
    
    
    (1,749,135
    )Total costs and expenses
    
    
    17,738,042
    
    
    
    17,563,435
    
    
    
    19,538,762Loss from operations
    
    
    (3,797,439
    )
    
    
    (13,240,967
    )
    
    
    (11,154,126
    )Other income (expense):Interest income
    
    
    7,285,023
    
    
    
    4,923,290
    
    
    
    3,501,381Interest expense
    
    
    
    
    
    
    
    
    
    
    (2,382
    )Gain on disposal of assets
    
    
    
    
    
    
    
    
    
    
    4,186Total other income
    
    
    7,285,023
    
    
    
    4,923,290
    
    
    
    3,503,185Net income (loss)
    
    $
    3,487,584
    
    
    $
    (8,317,677
    )
    
    $
    (7,650,941
    )Net income (loss) per share basic
    
    $
    0.10
    
    
    $
    (0.26
    )
    
    $
    (0.25
    )Shares used in computing net income (loss)
per share  basic
    
    
    35,205,783
    
    
    
    32,094,785
    
    
    
    31,105,271Net income (loss) per share diluted
    
    $
    0.10
    
    
    $
    (0.26
    )
    
    $
    (0.25
    )Shares used in computing net income (loss)
per share  diluted
    
    
    36,616,091
    
    
    
    32,094,785
    
    
    
    31,105,271
 See accompanying notes to the financial statements.
 F-4




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 STATEMENTS OF STOCKHOLDERS EQUITY
 YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 AccumulatedOtherCommon Stock
    
    
    Additional
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Paid-in Capital
    
    
    Income (Loss)
    
    
    Deficit
    
    
    TotalBalance at December 31, 2004
    
    
    30,363,994
    
    
    $
    30,364
    
    
    $
    231,474,500
    
    
    $
    161,327
    
    
    $
    (137,492,382
    )
    
    $
    94,173,809Issuance of stock upon options exercised
    
    
    361,958
    
    
    
    362
    
    
    
    1,097,506
    
    
    
    
    
    
    
    
    
    
    
    1,097,868Issuance of stock upon warrants exercised
    
    
    1,179,048
    
    
    
    1,179
    
    
    
    2,767,336
    
    
    
    
    
    
    
    
    
    
    
    2,768,515Issuance of warrants in connection with
Organon agreement
    
    
    
    
    
    
    
    
    
    
    615,000
    
    
    
    
    
    
    
    
    
    
    
    615,000Compensation related to stock options and
warrants issued to consultants for services
    
    
    
    
    
    
    
    
    
    
    864,191
    
    
    
    
    
    
    
    
    
    
    
    864,191Issuance of stock to match 401(k)
contributions
    
    
    15,632
    
    
    
    16
    
    
    
    133,386
    
    
    
    
    
    
    
    
    
    
    
    133,402Stock benefit on variable employee stock
options
    
    
    
    
    
    
    
    
    
    
    (1,749,135
    )
    
    
    
    
    
    
    
    
    
    
    (1,749,135
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,650,941
    )
    
    
    (7,650,941
    )Unrealized gain on short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (277,269
    )
    
    
    
    
    
    
    (277,269
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,928,210
    )Balance at December 31, 2005
    
    
    31,920,632
    
    
    
    31,921
    
    
    
    235,202,784
    
    
    
    (115,942
    )
    
    
    (145,143,323
    )
    
    
    89,975,440Issuance of stock upon options exercised
    
    
    227,836
    
    
    
    227
    
    
    
    467,567
    
    
    
    
    
    
    
    
    
    
    
    467,794Share-based compensation for options issued
to
non-employees
    
    
    
    
    
    
    
    
    
    
    143,756
    
    
    
    
    
    
    
    
    
    
    
    143,756Share-based compensation for options issued
to
Employees
    
    
    
    
    
    
    
    
    
    
    4,638,078
    
    
    
    
    
    
    
    
    
    
    
    4,638,078Issuance of stock to match 401(k)
contributions
    
    
    20,912
    
    
    
    21
    
    
    
    142,480
    
    
    
    
    
    
    
    
    
    
    
    142,501Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,317,677
    )
    
    
    (8,317,677
    )Unrealized loss on short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,405
    
    
    
    
    
    
    
    47,405Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,270,272
    )Balance at December 31, 2006
    
    
    32,169,380
    
    
    
    32,169
    
    
    
    240,594,665
    
    
    
    (68,537
    )
    
    
    (153,461,000
    )
    
    
    87,097,297
 F-5




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##### Table of Contents



AccumulatedOtherCommon Stock
    
    
    Additional
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Paid-in Capital
    
    
    Income (Loss)
    
    
    Deficit
    
    
    TotalIssuance of stock in secondary offering, net
of offering costs
    
    
    4,700,000
    
    
    
    4,700
    
    
    
    69,871,454
    
    
    
    
    
    
    
    
    
    
    
    69,876,154Issuance of stock upon options exercised
    
    
    535,736
    
    
    
    536
    
    
    
    2,126,480
    
    
    
    
    
    
    
    
    
    
    
    2,127,016Issuance of stock upon warrants exercised
    
    
    3,729
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Share-based compensation for options issued
to
non-employees
    
    
    
    
    
    
    
    
    
    
    184,567
    
    
    
    
    
    
    
    
    
    
    
    184,567Share-based compensation for options issued
to
Employees
    
    
    
    
    
    
    
    
    
    
    4,935,160
    
    
    
    
    
    
    
    
    
    
    
    4,935,160Issuance of stock to match 401(k)
contributions
    
    
    14,739
    
    
    
    15
    
    
    
    178,811
    
    
    
    
    
    
    
    
    
    
    
    178,826Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,487,584
    
    
    
    3,487,584Unrealized gain on short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128,370
    
    
    
    
    
    
    
    128,370Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,615,954Balance at December 31, 2007
    
    
    37,423,584
    
    
    $
    37,424
    
    
    $
    317,891,137
    
    
    $
    59,833
    
    
    $
    (149,973,416
    )
    
    $
    168,014,978
 See accompanying notes to the financial statements.
 F-6




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 STATEMENTS OF CASH FLOWS
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Operating ActivitiesNet income (loss)
    
    $
    3,487,584
    
    
    $
    (8,317,677
    )
    
    $
    (7,650,941
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in)
operating activities:Depreciation and amortization
    
    
    37,990
    
    
    
    31,846
    
    
    
    30,127Accretion of debt discount on short-term investments
    
    
    (4,134,496
    )
    
    
    (3,152,035
    )
    
    
    (1,559,259
    )Warrants issued in connection with licensing agreement
    
    
    
    
    
    
    
    
    
    
    615,000Share-based compensation for options issued to non-employees
    
    
    184,567
    
    
    
    143,756
    
    
    
    864,191Share-based compensation for stock and options issued to employees
    
    
    5,113,986
    
    
    
    4,780,579
    
    
    
    133,402Share-based compensation benefit on variable employee options
    
    
    
    
    
    
    
    
    
    
    (1,749,135
    )Gain on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    (4,186
    )Changes in operating assets and liabilities:Prepaid expenses and other assets
    
    
    (40,683
    )
    
    
    (37,669
    )
    
    
    40,391Receivable from Forest Laboratories
    
    
    207,622
    
    
    
    184,561
    
    
    
    5,122,031Accounts payable and other accrued liabilities
    
    
    709,048
    
    
    
    (568,960
    )
    
    
    (349,833
    )Payable to Forest Laboratories
    
    
    (530,000
    )
    
    
    (385,000
    )
    
    
    115,000Deferred rent
    
    
    (2,484
    )
    
    
    (9,754
    )
    
    
    (2,654
    )Deferred revenue
    
    
    (2,219,336
    )
    
    
    (3,125,000
    )
    
    
    (3,125,000
    )Net cash provided by (used in) operating activities
    
    
    2,813,798
    
    
    
    (10,455,353
    )
    
    
    (7,520,866
    )Investing ActivitiesPurchases of short-term investments
    
    
    (162,574,366
    )
    
    
    (129,149,627
    )
    
    
    (119,025,100
    )Proceeds from sale of short-term investments
    
    
    125,210,000
    
    
    
    150,525,000
    
    
    
    94,813,000Purchase of property and equipment
    
    
    (51,592
    )
    
    
    (46,831
    )
    
    
    (37,536
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    36,179Net cash (used in) provided by investing activities
    
    
    (37,415,958
    )
    
    
    21,328,542
    
    
    
    (24,213,457
    )Financing ActivitiesProceeds from exercise of stock options and warrants
    
    
    2,127,020
    
    
    
    467,794
    
    
    
    3,866,383Proceeds from secondary offering of common stock, net
    
    
    69,876,154
    
    
    
    
    
    
    
    Payments on capital lease obligation
    
    
    
    
    
    
    
    
    
    
    (36,870
    )Net cash provided by financing activities
    
    
    72,003,174
    
    
    
    467,794
    
    
    
    3,829,513Increase (decrease) in cash and cash equivalents
    
    
    37,401,014
    
    
    
    11,340,983
    
    
    
    (27,904,810
    )Cash and cash equivalents at beginning of the year
    
    
    32,692,411
    
    
    
    21,351,428
    
    
    
    49,256,238Cash and cash equivalents at end of the year
    
    $
    70,093,425
    
    
    $
    32,692,411
    
    
    $
    21,351,428Supplemental disclosure of cash flow informationInterest paid
    
    $
    
    
    
    $
    
    
    
    $
    2,382
 See accompanying notes to the financial statements.
 F-7




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
 The Company
  Accounting Estimates in the Preparation of Financial Statements
  Restatement of Prior Period
 Materiality Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Quarterly Information (Unaudited).
 F-8




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##### Table of Contents



Reclassification
  Cash and Cash Equivalents
  Short-Term Investments
 Accounting
for Certain Investments in Debt and Equity Securities
 Concentrations of Credit Risk
  Property and Equipment
  Long-Lived Assets
  Fair Value of Financial Instruments
  F-9




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##### Table of Contents



Revenue Recognition
 Revenue Recognition in Financial Statements
 Segment Reporting
  Comprehensive Income (Loss)
 Comprehensive
Income
 Research and Development
   Share-Based Compensation
 Accounting for Stock Issued to Employees , Accounting for Stock-Based Compensation . ,
 F-10




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##### Table of Contents



Share-Based Payment ,
 Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with
Selling Goods or Services
 Pro Forma Financial Information for Periods Prior to 2006
  2005Net loss, as reported
    
    $
    (7,650,941
    )Add: Stock-based employee compensation benefit included in
reported net loss
    
    
    (1,749,135
    )Deduct: Additional stock-based employee compensation
determined under fair value based methods
    
    
    (4,540,250
    )Pro forma net loss
    
    $
    (13,940,326
    )Net loss per sharebasic and diluted, as reported
    
    $
    (0.25
    )Pro forma net loss per sharebasic and diluted
    
    $
    (0.45
    )
 Net Income (Loss) Per Share
  F-11




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##### Table of Contents



Income Taxes
  Accounting for
Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
 Impact of Recently Issued Accounting Standards
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Accounting for
Certain Investments in Debt and Equity Securities
 Accounting for Nonrefundable Advance
Payments for Goods or Services to be Used in Future Research and Development Activities
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property.
 F-12




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##### Table of Contents



Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements
 2. SHORT-TERM INVESTMENTS
  December 31, 2007Amortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government and agency debt
    
    $
    98,037,775
    
    
    $
    112,030
    
    
    $
    (10,489
    )
    
    $
    98,139,316Commercial paper
    
    
    5,989,083
    
    
    
    
    
    
    
    (4,949
    )
    
    
    5,984,134Certificates of deposit
    
    
    7,600,000
    
    
    
    936
    
    
    
    (11,237
    )
    
    
    7,589,699$
    111,626,858
    
    
    $
    112,966
    
    
    $
    (26,675
    )
    
    $
    111,713,149
 December 31, 2006Amortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government and agency debt
    
    $
    69,649,270
    
    
    $
    1,026
    
    
    $
    (62,952
    )
    
    $
    69,587,344Certificates of deposit
    
    
    500,000
    
    
    
    
    
    
    
    (1,427
    )
    
    
    498,573$
    70,149,270
    
    
    $
    1,026
    
    
    $
    (64,379
    )
    
    $
    70,085,917
    Fair ValueDue within 1 year
    
    $
    106,472,247After
1 year but within 2 years
    
    
    5,240,902Total
    
    $
    111,713,149
 F-13




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##### Table of Contents



3. STOCKHOLDERS EQUITY
 Public Offering of Shares of Common Stock
  Shelf Registration
  Warrants
  4. SHARE-BASED COMPENSATION
 Share-Based Compensation Plans
 2000 EQUITY INCENTIVE PLAN
  1996 EQUITY INCENTIVE PLAN
  F-14




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##### Table of Contents



Stock Options
  Years Ended December 31,2007
    
    2006
    
    2005Risk-free interest rate
    
    
    4.5
    %
    
    
    4.7
    %
    
    
    3.5
    %Expected volatility
    
    
    76
    %
    
    
    82
    %
    
    
    95
    %Expected option term (in years)
    
    
    5.9
    
    
    
    5.7
    
    
    
    4.0Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    2000
    
    1996
    
    
    
    
    
    WeightedEquity
    
    Equity
    
    Number of
    
    AverageIncentive
    
    Incentive
    
    Options Under
    
    ExercisePlan Options
    
    Plan Options
    
    All Plans
    
    PricesBalance December 31,
2004
    
    
    2,479,867
    
    
    
    371,156
    
    
    
    2,851,023
    
    
    $
    4.93Granted
    
    
    830,125
    
    
    
    
    
    
    
    830,125
    
    
    
    13.35Exercised
    
    
    (270,003
    )
    
    
    (91,955
    )
    
    
    (361,958
    )
    
    
    3.03Canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance December 31,
2005
    
    
    3,039,989
    
    
    
    279,201
    
    
    
    3,319,190
    
    
    
    7.25Granted
    
    
    839,693
    
    
    
    
    
    
    
    839,693
    
    
    
    5.88Exercised
    
    
    (95,433
    )
    
    
    (202,939
    )
    
    
    (298,372
    )
    
    
    2.91Canceled
    
    
    (35,929
    )
    
    
    
    
    
    
    (35,929
    )
    
    
    8.96Expired
    
    
    (32,884
    )
    
    
    (4,375
    )
    
    
    (37,259
    )
    
    
    14.62Balance December 31,
2006
    
    
    3,715,436
    
    
    
    71,887
    
    
    
    3,787,323
    
    
    
    7.19Granted
    
    
    1,187,249
    
    
    
    
    
    
    
    1,187,249
    
    
    
    8.78Exercised
    
    
    (550,136
    )
    
    
    (19,585
    )
    
    
    (569,721
    )
    
    
    4.23Canceled
    
    
    (73,363
    )
    
    
    
    
    
    
    (73,363
    )
    
    
    13.77Expired
    
    
    
    
    
    
    (3,333
    )
    
    
    (3,333
    )
    
    
    12.00Balance December 31,
2007
    
    
    4,279,186
    
    
    
    48,969
    
    
    
    4,328,155
    
    
    $
    7.91
  F-15




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##### Table of Contents



Years Ended December 31,2007
    
    2006
    
    2005Risk-free interest rate
    
    
    4.4
    %
    
    
    4.7
    %
    
    
    3.6
    %Expected volatility
    
    
    75
    %
    
    
    80
    %
    
    
    92
    %Expected option term (in years)
    
    
    5.6
    
    
    
    5.4
    
    
    
    4.0Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 Stock Option Cancel and Re-Grant Program
   F-16




---



##### Table of Contents



5. SIGNIFICANT LICENSING AND COLLABORATION AGREEMENTS
 License and Collaboration Agreement with Forest Laboratories
   F-17




---



##### Table of Contents



Licensing Agreement with Pierre Fabre
 Accounting for Research and Development Costs
   F-18




---



##### Table of Contents



Reformulation and New Product Agreement
  6. INCOME TAXES
   Balance at January 1, 2007
    
    $
    913,000Increases related to prior year tax positions
    
    
    Increases related to current year tax positions
    
    
    Settlements
    
    
    Balance at December 31, 2007
    
    $
    913,000
    F-19




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##### Table of Contents



2007
    
    
    2006Net operating loss carryforwards
    
    $
    23,208,000
    
    
    $
    24,445,000Deferred revenue
    
    
    5,462,000
    
    
    
    6,367,000Capitalized research and development
    
    
    7,537,000
    
    
    
    8,273,000Capitalized intangibles
    
    
    3,544,000
    
    
    
    4,016,000Tax credits
    
    
    1,270,000
    
    
    
    2,222,000Share-based compensation expense
    
    
    3,029,000
    
    
    
    1,559,000Other
    
    
    37,000
    
    
    
    41,00044,087,000
    
    
    
    46,923,000Valuation allowance
    
    
    (44,087,000
    )
    
    
    (46,923,000
    )$
    
    
    
    $
    
  2007
    
    
    2006
    
    
2005Tax at
federal statutory rate
    
    $
    1,220,654
    
    
    $
    (2,911,187
    )
    
    $
    (2,677,829
    )State income
tax, net of federal benefits
    
    
    200,397
    
    
    
    (477,934
    )
    
    
    (439,623
    )Share-based
compensation
    
    
    420,707
    
    
    
    377,130
    
    
    
    (306,223
    )Other
    
    
    156,252
    
    
    
    38,183
    
    
    
    16,452Change in
valuation allowance
    
    
    (1,998,010
    )
    
    
    2,973,808
    
    
    
    3,407,223$
    
    
    
    $
    
    
    
    $
    
   7. RELATED PARTY TRANSACTIONS
  F-20




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##### Table of Contents



8. RETIREMENT PLAN
  9. COMMITMENTS AND CONTINGENCIES
 Office Lease
   OperatingYears Ending December 31,
    
    Leases2008
    
    $
    190,0452009
    
    
    196,8532010
    
    
    203,6612011
    
    
    210,4682012
    
    
    125,090Total minimum lease payments
    
    $
    926,117
  Licensing Agreements
  F-21




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##### Table of Contents



10. QUARTERLY INFORMATION (UNAUDITED)
  2007First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterAs reported:Revenues
    
    $
    960,851
    
    
    $
    5,948,789
    
    
    $
    971,276
    
    
    $
    6,059,687Total costs and expenses
    
    $
    3,464,854
    
    
    $
    5,160,868
    
    
    $
    3,879,746
    
    
    $
    5,232,574Other income
    
    $
    1,188,112
    
    
    $
    1,433,311
    
    
    $
    1,790,819
    
    
    $
    2,175,423Net income (loss) (1)
    
    $
    (1,315,891
    )
    
    $
    2,221,232
    
    
    $
    (1,117,651
    )
    
    $
    3,002,536Net income (loss) per share  basic
    
    $
    (0.04
    )
    
    $
    0.07
    
    
    $
    (0.03
    )
    
    $
    0.08Net income (loss) per share  diluted
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.08Adjustment to other income (2)
    
    $
    94,768
    
    
    $
    117,710
    
    
    $
    484,880
    
    
    $
    As adjusted:Revenues
    
    $
    960,851
    
    
    $
    5,948,789
    
    
    $
    971,276
    
    
    $
    6,059,687Total costs and expenses
    
    $
    3,464,854
    
    
    $
    5,160,868
    
    
    $
    3,879,746
    
    
    $
    5,232,574Other income
    
    $
    1,282,880
    
    
    $
    1,551,021
    
    
    $
    2,275,699
    
    
    $
    2,175,423Net income (loss) (1)
    
    $
    (1,221,123
    )
    
    $
    2,338,942
    
    
    $
    (632,771
    )
    
    $
    3,002,536Net income (loss) per share  basic
    
    $
    (0.04
    )
    
    $
    0.07
    
    
    $
    (0.02
    )
    
    $
    0.08Net income (loss) per share  diluted
    
    $
    (0.04
    )
    
    $
    0.07
    
    
    $
    (0.02
    )
    
    $
    0.08Shares used in calculating per share
amounts  basic, as reported
    
    
    32,262,555
    
    
    
    33,715,858
    
    
    
    37,360,788
    
    
    
    37,403,753Shares used in calculating per share
amounts  diluted, as reported
    
    
    32,262,555
    
    
    
    35,134,985
    
    
    
    37,360,788
    
    
    
    38,912,841
 
 (1)
    
    During the second and fourth quarters, the Company recognized milestone payments of $5.0
million as a consequence of the results of the second Phase III trial for milnacipran and the
filing of an NDA for milnacipran, respectively.(2)
    
    During the first three quarters of 2007, the Company did not recognize the accretion of the
debt discount on its short-term investments. The results for the first three quarters of 2007
have been adjusted to properly reflect interest income for these periods as reflected in the
table above. The results for the year ended December 31, 2007 are properly stated in the
Statements of Operations. F-22




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##### Table of Contents



2006First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterAs reported:Revenues
    
    $
    1,216,140
    
    
    $
    1,015,305
    
    
    $
    1,144,208
    
    
    $
    946,815Total costs and expenses
    
    $
    5,766,058
    
    
    $
    4,452,730
    
    
    $
    4,046,415
    
    
    $
    3,298,232Other income
    
    $
    1,016,489
    
    
    $
    1,231,146
    
    
    $
    1,477,690
    
    
    $
    1,268,310Net loss
    
    $
    (3,533,429
    )
    
    $
    (2,206,279
    )
    
    $
    (1,424,517
    )
    
    $
    (1,083,107
    )Net loss per share  basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    
    $
    (0.03
    )Adjustment to other income (1)
    
    $
    (178,329
    )
    
    $
    132,530
    
    
    $
    (69,236
    )
    
    $
    44,690As adjusted:Revenues
    
    $
    1,216,140
    
    
    $
    1,015,305
    
    
    $
    1,144,208
    
    
    $
    946,815Total costs and expenses
    
    $
    5,766,058
    
    
    $
    4,452,730
    
    
    $
    4,046,415
    
    
    $
    3,298,232Other income
    
    $
    838,160
    
    
    $
    1,363,676
    
    
    $
    1,408,454
    
    
    $
    1,313,000Net loss
    
    $
    (3,711,758
    )
    
    $
    (2,073,749
    )
    
    $
    (1,493,753
    )
    
    $
    (1,038,417
    )Net loss per share  basic and diluted
    
    $
    (0.12
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )Shares used in calculating per share
amounts  basic and diluted, as
reported
    
    
    32,018,307
    
    
    
    32,072,345
    
    
    
    32,135,189
    
    
    
    32,151,392
 
 (1)
    
    During 2006, the Company did not recognize the accretion of the debt discount on its
short-term investments. The results for the each of the quarters in 2006 have been adjusted
to properly reflect interest income for these periods as reflected in the table above. The
results for the year ended December 31, 2006 have been restated as described in Note 1. 11. SUBSEQUENT EVENTS
 Acquisition of Proprius
   F-23




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##### Table of Contents



FDA Acceptance for Review of NDA for Milnacipran
  F-24