##### Table of Contents



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, 2009
 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)4350 Executive Drive, Suite 325
San Diego, California
(Address of principal executive 
offices)
    
    92121
(Zip Code)
 (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 o
 o
  Large accelerated filer o
    
    Accelerated Filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
  
 *
    
    Calculated based on 29,451,276 shares of common stock held as of June 30, 2009 by
non-affiliates and a per share market price of $9.42. Excludes 8,683,165 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, 2009, 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.




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##### 



CYPRESS BIOSCIENCE, INC.
FORM 10-K
INDEX
 PagePART IItem 1 Business
    
    
    1Item 1A Risk Factors
    
    
    13Item 1B Unresolved Staff Comments
    
    
    32Item 2 Properties
    
    
    32Item 3 Legal Proceedings
    
    
    32Item 4 (Removed and Reserved)
    
    
    32PART IIItem 5 Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    33Item 6 Selected Financial Data
    
    
    35Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    36Item 7A Quantitative and Qualitative Disclosure about Market Risk
    
    
    47Item 8 Financial Statements and Supplementary Data
    
    
    47Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    47Item 9A Controls and Procedures
    
    
    47Item 9B Other Information
    
    
    49PART IIIItem 10 Directors, Executive Officers and Corporate Governance
    
    
    50Item 11 Executive Compensation
    
    
    50Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    50Item 13 Certain Relationships, Related Transactions and Director Independence
    
    
    50Item 14 Principal Accounting Fees and Services
    
    
    50PART IVItem 15 Exhibits, Financial Statement Schedules
    
    
    51Signatures
    
    
    54EX-10.18EX-10.19EX-10.20EX-10.21EX-21.1EX-23.1EX-31.1EX-31.2EX-32
  Avise PG SM Avise
MCV SM . Savella TM
 i.




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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, should, 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 market Savella, our ability to create a successful
commercial organization, our ability to market our personalized medicine services, 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
  Savella Savella www.clinicaltrials.gov
 Savella Savella Savella in vitro Savella Savella Savella Savella Savella Savella
 Avise PG Avise MCV Avise
 1.




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##### Table of Contents



PG Avise MCV Savella
    Avise
 Savella (milnacipran HCl) for the Management of Fibromyalgia
 Savella
 Savella Savella in vitro Savella
 Ongoing Phase IV Trials
 Savella www.clinicaltrials.gov
 2.




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Personalized Medicine Services
 Avise MCV
 Avise MCV Avise MCV Avise MCV Avise MCV
 Avise PG
 Avise PG
 Other Personalized Medicine Services
   Licenses, Collaborations and Acquisitions
 Milnacipran Agreements
 Pierre Fabre Agreements
  3.




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Forest Laboratories Agreement
 Savella Savella
  Savella Savella
 4.




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Savella Savella Savella Savella
 Savella
 Acquisition of Proprius
 Merger Agreement
   
 5.




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
 Avise MCV Avise PG Avise MCV Avise PG
  Agreement with AlphaRx
  Patents, Trademarks and Proprietary Technology
  6.




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Avise PG Avise MCV Avise PG
   Competition
   Savella ® ® Savella
 7.




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Savella, ® ® Savella Savella
 Savella
   Manufacturing and Supply
 Savella Savella Savella Savella Savella Savella Savella
   8.




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Government Regulation
 Therapeutic Products
   
    
    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.
 9.




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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.
   Savella
 10.




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Savella Savella
    Personalized Medicine Services
  Avise MCV Avise PG
 11.




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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
 12.




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Item 1A.
    
    Risk Factors
  Risks related to our business
 We may not be successful in creating a successful commercial infrastructure.
 Savella Savella Savella Savella Savella Savella Savella
 Savella Savella
  We may encounter challenges in our personalized medicine services.
  13.




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
    
    we may be unable to drive awareness of, and to establish the clinical need for, these
personalized
medicine services, and therefore may be unable to successfully commercialize these products
and services;
    
    higher development or commercialization costs than we anticipate for the personalized
medicine services;
    
    challenges with running a service 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.
  If third-party payers, including managed care organizations and Medicare, do not provide
reimbursement for Avise PG or Avise MCV, their commercial success could be compromised.
  
    
    not experimental or investigational;
    
    medically necessary;
    
    appropriate for the specific patient and diagnosis;
    
    cost-effective;
    
    supported by peer-reviewed publications; and
    
    included in clinical practice guidelines.
    14.




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We have recently substantially increased the size of our organization and may need to continue to
increase the size of our organization, and we may experience difficulties in managing growth.
 Savella Savella Savella
 
    
    manage our internal development and commercialization efforts for our personalized
medicine services and Savellaeffectively while carrying out our contractual obligations to
collaborators and other third parties and complying with all applicable laws, rules and
regulations;
    
    continue to improve our operational, financial and management controls, reporting
systems and procedures; and
    
    attract and retain sufficient numbers of talented employees.
  We are dependent on our collaboration with Forest Laboratories to commercialize Savella and to
obtain additional regulatory approvals.
 Savella Savella Savella Savella Savella
  
    
    Forest Laboratories could fail to devote sufficient resources to the commercialization,
marketing and distribution of Savellaor any other products developed under our
collaboration agreement, including by failing to develop or expand sales forces if such
sales forces appear necessary for the most effective promotion of Savellaor any other
approved product;
 15.




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
    
    We and Forest Laboratories could disagree as to post approval development plans,
including the number and timing of clinical trials, or as to which additional indications
for Savella should be pursued, if any, and therefore Savellamay never be sold
for any indications other than FM;
    
    Forest Laboratories could fail to comply with applicable regulatory guidelines with
respect to the marketing and manufacturing of Savellawhich could result in administrative
or judicially imposed sanctions, including warning letters, civil and criminal penalties,
injunctions, product seizures or detention, product recalls, total or partial suspension of
production and refusal to approve any new drug applications;
    
    Forest Laboratories could independently develop, develop with third parties or acquire
products that could compete with Savella, including drugs approved for other indications
used by physicians off-label for the treatment of FM;
    
    Forest Laboratories could abandon or underfund the post approval development of
Savella, repeat or conduct additional clinical trials or require a new formulation of
milnacipran for further clinical testing, or delay the commencement of any post approval
clinical trials for Savellafor the management of FM; and
    
    Disputes regarding the collaboration agreement that delay or terminate the post
approval development or commercialization, 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.
 Savella
 All of our personalized medicine services are performed at a single laboratory and, in the event
this facility was to be affected by man-made or natural disasters, our personalized medicine
services operations could be severely impaired.
   16.




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Failure to timely or accurately bill for our personalized medicine services could have a material
adverse effect on our personalized medicine services net revenues and bad debt expense.
   
    
    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 have a financial risk related to collections for our personalized medicine services.
  We rely upon an exclusive license from Pierre Fabre in order to develop and sell Savella, and our
ability to pursue the further development and commercialization of Savella for the management of FM
depends upon the continuation of our license from Pierre Fabre.
  17.




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Savella
 We rely upon Pierre Fabre as our exclusive supplier of the active ingredient in Savella and if Pierre Fabre fails to supply us sufficient quantities of the active ingredient it may
delay or prevent us from further commercializing Savella.
 Savella Savella Savella Savella
 Savella
 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.
 Savella Savella
 18.




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We are at an early stage of commercialization and we may never generate any significant revenues.
 Savella Savella Savella
  Savella
 Our failure to comply with the HIPAA security and privacy regulations and other state regulations
may increase our operational costs.
  
 
 
 
  19.




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Our business presents the risk of product liability claims.
 Savella Savella Savella
  The FDA approval of any future product candidate is uncertain and will involve the commitment of
substantial time and resources.
    
    
    a product candidate may not be safe or effective;
    
    we may not achieve statistical significance for the primary endpoint;
 20.




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
    
    FDA officials may interpret data from preclinical testing, clinical trials, and/or
pharmacovigilance data 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;
    
    the FDA may change its approval policies or adopt new regulations; and
    
    the FDA may request additional data.
 In light of our regulatory approval for Savella and if we ever receive regulatory approval for any
other future product candidate, and secure and maintain regulatory approvals related to our
personalized medicine services, we will be subject to ongoing FDA, CLIA and state regulatory
obligations and continuing regulatory review by applicable regulatory authorities.
 Savella Savella Savella Savella
 If advances in technology allow others to perform and/or provide personalized medicine services
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 services may not meet
with demand in the marketplace or the demand for these services may decrease.
  The FDA may decide to exercise enforcement discretion and require FDA approval or clearance of our
personalized medicine services.
  21.




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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 any of our other future product candidates.
  Even if our product candidates are approved, the market may not accept these products or services
or our existing products and services.
 Savella
 
    
    timing of market entry relative to competitive services and products;
    
    extent of marketing efforts by us and with respect to Savella, the marketing efforts of
Forest Laboratories;
    
    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;
 22.




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
    
    availability of third-party reimbursement; and
    
    the prevalence or severity of side effects or unfavorable publicity concerning our
products or similar products.
 Savella
 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.
   Savella ® ® Savella Savella, ® ® Savella Savella
 Savella
   23.




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We are subject to uncertainty relating to health care reform measures and reimbursement policies
which, if not favorable to our products or services or product candidates, could hinder or prevent
the commercial success of our products, services or product candidates.
  
    
    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.
 Savella Savella
   24.




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We rely on our employees and consultants for their scientific and technical expertise in
connection with our business operations.
 Savella
 We have a history of operating losses and we may never be profitable.
 Savella
 We will need substantial additional funding and may be unable to raise capital when needed, which
could force us to scale back or eliminate our sales efforts and the development of future product
candidates and personalized medicine services or to discontinue pursuing any proposed
acquisitions, or which could adversely affect our ability to realize the expected benefits of any
completed acquisitions.
 Savella
 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.
  25.




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The investment of our cash balance and short-term investments are subject to risks which may cause
losses and affect the liquidity of these investments.
  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 commercial sales of Savellaand our personalized medicine services;
    
    development of our personalized medicine services and other product candidates;
    
    developments in our relationship with Forest Laboratories, including the termination of
our agreement;
    
    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;
 26.




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
    
    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.
  We expect to continue incurring significant costs as a result of enacted and proposed changes in
laws and regulations relating to corporate governance matters.
  27.




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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 ability to operate our
business and investors view of us.
  Risks related to our intellectual property
 We rely primarily on method of use patents to protect our proprietary technology for the sales of
Savella, and our ability to compete may decrease or be eliminated if we are not able to protect our
proprietary technology.
 Savella
   28.




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Savella Savella
 Savella
  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 products and
services and product and service candidates or the technologies we rely upon;
    
    others may independently develop similar or alternative technologies or duplicate any
of our technologies;
    
    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;
 29.




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
    
    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.
  
    
    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, services and product and service candidates; or
 30.




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
    
    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, services and product and service
candidates.
 The patent applications of pharmaceutical, biotechnology and personalized medicine companies
involve highly complex legal and factual questions, which could negatively impact our patent
position.
    31.




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. (Removed and Reserved)
 32.




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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, 2009:First Quarter
    
    $
    10.10
    
    
    $
    6.78Second Quarter
    
    
    9.68
    
    
    
    6.70Third Quarter
    
    
    9.95
    
    
    
    6.85Fourth Quarter
    
    
    8.37
    
    
    
    5.24Year Ended December 31, 2008:First Quarter
    
    $
    11.09
    
    
    $
    6.66Second Quarter
    
    
    8.85
    
    
    
    6.17Third Quarter
    
    
    9.13
    
    
    
    5.45Fourth Quarter
    
    
    7.41
    
    
    
    4.90
  Recent Sales of Unregistered Securities
  33.




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Stock Performance Graph and Cumulative Total Return
  
 
 34.




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Item 6. Selected Financial Data
  Years Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Statement of Operations Data:Revenues:Revenues under collaborative agreement
    
    $
    10,026,307
    
    
    $
    16,659,099
    
    
    $
    13,440,603
    
    
    $
    4,322,468
    
    
    $
    8,384,636Commercial revenues
    
    
    16,976,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Revenues from personalized medicine services
    
    
    332,372
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,334,879
    
    
    
    16,659,099
    
    
    
    13,440,603
    
    
    
    4,322,468
    
    
    
    8,384,636Operating expenses:Cost of personalized medicine testing services
    
    
    1,986,722
    
    
    
    267,361
    
    
    
    
    
    
    
    
    
    
    
    Research and development
    
    
    11,996,169
    
    
    
    9,171,076
    
    
    
    7,210,684
    
    
    
    9,184,404
    
    
    
    15,839,737Selling, general and administrative
    
    
    42,138,458
    
    
    
    17,602,820
    
    
    
    10,027,358
    
    
    
    8,379,031
    
    
    
    5,448,160In-process research and development
    
    
    
    
    
    
    12,590,000
    
    
    
    
    
    
    
    
    
    
    
    Goodwill impairment
    
    
    1,100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense (benefit)  variable
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,749,135
    )57,221,349
    
    
    
    39,631,257
    
    
    
    17,238,042
    
    
    
    17,563,435
    
    
    
    19,538,762Other income (expense):Interest income
    
    
    1,634,507
    
    
    
    4,746,547
    
    
    
    7,285,023
    
    
    
    4,923,290
    
    
    
    3,501,381Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,382
    )Gain (loss) on disposal of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,1861,634,507
    
    
    
    4,746,547
    
    
    
    7,285,023
    
    
    
    4,923,290
    
    
    
    3,503,185Net income (loss)
    
    $
    (28,251,963
    )
    
    $
    (18,225,611
    )
    
    $
    3,487,584
    
    
    $
    (8,317,677
    )
    
    $
    (7,650,941
    )Net income (loss) per share  basic
    
    $
    (0.74
    )
    
    $
    (0.48
    )
    
    $
    0.10
    
    
    $
    (0.26
    )
    
    $
    (0.25
    )Shares used in computing net income (loss) per
share  basic
    
    
    38,150,054
    
    
    
    37,733,737
    
    
    
    35,205,783
    
    
    
    32,094,785
    
    
    
    31,105,271Net income (loss) per share  diluted
    
    $
    (0.74
    )
    
    $
    (0.48
    )
    
    $
    0.10
    
    
    $
    (0.26
    )
    
    $
    (0.25
    )Shares used in computing net income (loss) per
share  diluted
    
    
    38,150,054
    
    
    
    37,733,737
    
    
    
    36,616,091
    
    
    
    32,094,785
    
    
    
    31,105,271As of December 31,2009
    
    2008
    
    2007
    
    2006
    
    2005Balance Sheet Data:Cash, cash equivalents
and short-term
investments
    
    $
    141,673,371
    
    
    $
    145,494,605
    
    
    $
    181,806,574
    
    
    $
    102,778,328
    
    
    $
    109,613,278Total assets
    
    
    176,064,710
    
    
    
    174,592,523
    
    
    
    182,699,850
    
    
    
    103,824,941
    
    
    
    110,791,798Total stockholders equity
    
    
    140,584,003
    
    
    
    159,915,208
    
    
    
    168,014,978
    
    
    
    87,097,297
    
    
    
    89,975,440Working capital
    
    
    140,503,944
    
    
    
    138,751,122
    
    
    
    177,975,517
    
    
    
    99,508,212
    
    
    
    105,536,094
 35.




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##### Table of Contents



Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations
 overview
  Savella Savella www.clinicaltrials.gov
 Savella Savella Savella in vitro Savella Savella Savella Savella Savella Savella
 Avise PG Avise MCV Avise PG Avise MCV Savella
  36.




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##### Table of Contents



Results of Operations
 Comparison of Years Ended December 31, 2009 and 2008
 Revenues Under Collaborative Agreement
 Savella Savella Savella Savella Savella
 Commercial Revenues
 Savella
  Year EndedDecember 31,2009
    
    
    2008Royalty revenue
    
    $
    4,850,687
    
    
    $
    Revenue from milestones
    
    
    1,254,640
    
    
    
    Co-promotion reimbursement
    
    
    10,870,873
    
    
    
    $
    16,976,200
    
    
    $
    
 37.




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##### Table of Contents



Savella
 ,
   Revenues From Personalized Medicine Services
  Cost of Personalized Medicine Services
  Research and Development
  Savella
 38.




---



##### Table of Contents



Selling, General and Administrative
  Year EndedDecember 31,2009
    
    
    2008Sales and marketing
    
    $
    25,139,875
    
    
    $
    4,921,301General and administrative
    
    
    16,998,583
    
    
    
    12,681,519$
    42,138,458
    
    
    $
    17,602,820
   In-Process Research and Development
    39.




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##### Table of Contents



Goodwill Impairment
    Interest Income
  Comparison of Years Ended December 31, 2008 and 2007
 Revenues Under Collaborative Agreement
 Savella Savella Savella Savella
  40.




---



##### Table of Contents



Cost of Personalized Medicine Testing Services
  Research and Development
 Savella Savella
 Selling, General and Administrative
  In-Process Research and Development
  Interest Income
  Liquidity and Capital Resources
  41.




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##### Table of Contents



Less than1 year
    
    1  3 years
    
    4  5 years
    
    More than 5Total
    
    (2010)
    
    (2011  2013)
    
    (2014  2015)
    
    years (2016 +)Operating leases
    
    $
    2,370,594
    
    
    $
    903,062
    
    
    $
    1,460,308
    
    
    $
    7,224
    
    
    $
    Purchase obligations (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,370,594
    
    
    $
    903,062
    
    
    $
    1,460,308
    
    
    $
    7,224
    
    
    $
    
 
 (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, 2009.  42.




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##### Table of Contents




    
    the costs of establishing a commercial infrastructure;
    
    the costs and timing of development and regulatory approvals for all our products and
services;
    
    the costs associated with operating a clinical laboratory;
    
    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 sales milestones and other events
under our collaboration agreement; and
    
    the costs of commercialization of any future products and services.
  43.




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##### Table of Contents



Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  Revenue Recognition
   Savella Savella Savella
 44.




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##### Table of Contents



Research and Development Expenses
  Stock-Based Compensation
     45.




---



##### Table of Contents



Goodwill
    New Accounting Pronouncements
  46.




---



##### 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
  
 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
  47.




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
 .
       
 48.




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##### Table of Contents



Item 9B. Other Information
  49.




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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
  50.




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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(*)
    
    Exhibit 2.1 to Form 8-K
filed on March 5, 2008,
File No. 000-129433.1
    
    Second Amended and Restated
Certificate of Incorporation
    
    Appendix C to Definitive
Proxy Statement filed with
the Securities and Exchange
Commission on August 11,
2003, File No. 000-129433.2
    
    Certificate of Amendment of
Second Amended and Restated
Certificate of Incorporation
    
    Exhibit 3.2 to Form 10-Q
for the quarter ended
September 30, 2009, File
No. 000-129433.3
    
    Fourth Amended and Restated Bylaws
    
    Exhibit 3.1 to Form 8-K
filed on May 6, 2009, File
No. 000-129434.1
    
    Form of Stock Certificate
    
    Exhibit 4.1 to Form S-1
Registration Statement No.
33-4122510.1
    
    2000 Equity Incentive Plan()
    
    Exhibit 10.25 to Form 10-K
for the year ended December
31, 2000, File No.
000-1294310.2
    
    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, 2000, File No.
000-1294310.3
    
    2009 Equity Incentive Plan()
    
    Exhibit 99.1 to Form 8-K
filed on June 17, 2009,
File No. 000-1294310.4
    
    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, 2003, File No.
000-1294310.5
    
    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, 2003, File No.
000-1294310.6
    
    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, File No.
000-1294310.7
    
    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, File No.
000-1294310.8
    
    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, File No.
000-12943
 51.




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##### Table of Contents



ExhibitNo.
    
    Description
    
    Incorporated by Reference to10.9
    
    License and Collaboration
Agreement dated January 9, 2004
between the Registrant and Forest
Laboratories Ireland Limited(*)
    
    Exhibit 10.26 to the Form
10-K for the year ended
December 31, 2003, File No.
000-1294310.10
    
    Side Letter dated January 9, 2004
among the Registrant, Forest
Laboratories Ireland Limited and
Pierre Fabre Medicament(*)
    
    Exhibit 10.27 to the Form
10-K for the year ended
December 31, 2003, File No.
000-1294310.11
    
    Letter Agreement dated January 9,
2004 among the Registrant, Forest
Laboratories Ireland Limited and
Pierre Fabre Medicament(*)
    
    Exhibit 10.28 to the Form
10-K for the year ended
December 31, 2003, File No.
000-1294310.12
    
    License and Collaboration
Agreement dated June 29, 2005
between the Registrant and
Organon (Ireland) Ltd. (*)
    
    Exhibit 10.1 to Form 10-Q
for the quarter ended June
30, 2005, File No.
000-1294310.13
    
    First Amendment to Office Lease
dated September 6, 2006 between
the Registrant and CA-Park Plaza
Limited Partnership
    
    Exhibit 10.28 to Form 10-Q
for the quarter ended
September 30, 2006, File
No. 000-1294310.14
    
    2009 Bonus Plan()
    
    Exhibit 10.1 to the Form
8-K filed on April 14,
2009, File No. 000-1294310.15
    
    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,
2008, File No. 000-1294310.16
    
    Amended and Restated Employment
Agreement dated December 31, 2008
between the Registrant and Dr.
Jay Kranzler()
    
    Exhibit 10.19 to the Form
10-K for the year ended
December 31, 2008, File No.
000-1294310.17
    
    Amended and Restated Severance
Benefits Plan adopted on December
31, 2008()
    
    Exhibit 10.20 to the Form
10-K for the year ended
December 31, 2008, File No.
000-1294310.18
    
    Form of Restricted Stock Unit
Agreement for use with 2009
Equity Incentive Plan()10.19
    
    Amendment to Amended and Restated
Employment Agreement dated
December 24, 2009 between Dr. Jay
Kranzler and the Registrant()10.20
    
    Second Amendment to Lease dated
December 21, 2009, by and between
ARE-SD REGION NO. 20, LLC and the
Registrant10.21
    
    Fourth Amendment to Lease dated
December 29, 2009 between by and
between UTC PROPERTIES LLC and
the Registrant21.1
    
    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)
 52.




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##### Table of Contents



ExhibitNo.
    
    Description
    
    Incorporated by Reference to32
    
    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. 53.




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##### Table of Contents



SIGNATURES
  Cypress Bioscience, Inc.Date: March 30, 2010
    By:
    /s/ Jay D. KranzlerChief Executive OfficerDate: March 30, 2010
    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 30, 2010Jay D. Kranzler, M.D., Ph.D.
    
    (Principal Executive Officer)/s/ Sabrina Martucci Johnson
    
    Chief Financial Officer,Sabrina Martucci Johnson
    
    Chief Operating Officer and Executive Vice
President
    
    March 30, 2010(Principal Financial and Accounting Officer)/s/ Roger Hawley
    
    Director
    
    March 30, 2010Roger Hawley/s/ Amir H. Kalali
    
    Director
    
    March 30, 2010Amir H. Kalali/s/ Jon W. McGarity
    
    Director
    
    March 30, 2010Jon W. McGarity/s/ Jean-Pierre Millon
    
    Director
    
    March 30, 2010Jean-Pierre Millon/s/ Perry B. Molinoff
    
    Director
    
    March 30, 2010Perry B. Molinoff/s/ Tina S. Nova
    
    Director
    
    March 30, 2010Tina S. Nova/s/ Daniel H. Petree
    
    Director
    
    March 30, 2010Daniel H. Petree
 54.




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31, 2009, 2008 and 2007
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 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.
 
 CONSOLIDATED BALANCE SHEETS
 As of December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    38,617,954
    
    
    $
    52,490,414Short-term investments
    
    
    103,055,417
    
    
    
    93,004,191Receivable from Forest Laboratories
    
    
    5,611,476
    
    
    
    165,880Prepaid expenses and other current assets
    
    
    4,792,134
    
    
    
    1,048,668Total current assets
    
    
    152,076,981
    
    
    
    146,709,153Property and equipment, net
    
    
    1,273,026
    
    
    
    1,088,749Goodwill
    
    
    21,928,598
    
    
    
    26,465,627Restricted cash
    
    
    487,111
    
    
    
    Other assets
    
    
    298,994
    
    
    
    328,994Total assets
    
    $
    176,064,710
    
    
    $
    174,592,523LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,172,916
    
    
    $
    2,055,567Accrued compensation
    
    
    4,640,265
    
    
    
    1,055,056Accrued liabilities
    
    
    221,487
    
    
    
    377,992Payable to Forest Laboratories
    
    
    336,313
    
    
    
    1,118,000Current portion of deferred revenue
    
    
    5,202,056
    
    
    
    3,351,416Total current liabilities
    
    
    11,573,037
    
    
    
    7,958,031Deferred rent
    
    
    20,423
    
    
    
    16,452Deferred revenue, net of current portion
    
    
    23,400,136
    
    
    
    6,702,832Other liabilities
    
    
    487,111
    
    
    
    Commitments and contingenciesStockholders equity:Preferred stock, $.001 par value;
15,000,000 shares authorized; no shares
issued and outstanding
    
    
    
    
    
    
    Common stock, $.001 par value;
90,000,000 shares authorized; 38,375,206
and 37,906,994 shares issued and
outstanding at December 31, 2009 and
2008, respectively
    
    
    38,375
    
    
    
    37,907Additional paid-in capital
    
    
    336,825,601
    
    
    
    327,595,174Accumulated other comprehensive income
    
    
    171,017
    
    
    
    481,154Accumulated deficit
    
    
    (196,450,990
    )
    
    
    (168,199,027
    )Total stockholders equity
    
    
    140,584,003
    
    
    
    159,915,208$
    176,064,710
    
    
    $
    174,592,523
 See accompanying notes to the consolidated financial statements.
 F-3




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Revenues:Revenues under collaborative agreement
    
    $
    10,026,307
    
    
    $
    16,659,099
    
    
    $
    13,440,603Commercial revenues
    
    
    16,976,200
    
    
    
    
    
    
    
    Revenues from personalized medicine services
    
    
    332,372
    
    
    
    
    
    
    
    Total revenues
    
    
    27,334,879
    
    
    
    16,659,099
    
    
    
    13,440,603Operating expenses:Cost of personalized medicine services
    
    
    1,986,722
    
    
    
    267,361
    
    
    
    Research and development
    
    
    11,996,169
    
    
    
    9,171,076
    
    
    
    7,210,684Selling, general and administrative
    
    
    42,138,458
    
    
    
    17,602,820
    
    
    
    10,027,358In-process research and development
    
    
    
    
    
    
    12,590,000
    
    
    
    Goodwill impairment
    
    
    1,100,000
    
    
    
    
    
    
    
    Total operating expenses
    
    
    57,221,349
    
    
    
    39,631,257
    
    
    
    17,238,042Loss from operations
    
    
    (29,886,470
    )
    
    
    (22,972,158
    )
    
    
    (3,797,439
    )Interest income
    
    
    1,634,507
    
    
    
    4,746,547
    
    
    
    7,285,023Net income (loss)
    
    $
    (28,251,963
    )
    
    $
    (18,225,611
    )
    
    $
    3,487,584Net income (loss) per share basic
    
    $
    (0.74
    )
    
    $
    (0.48
    )
    
    $
    0.10Shares used in computing net income (loss) per share  basic
    
    
    38,150,054
    
    
    
    37,733,737
    
    
    
    35,205,783Net income (loss) per share diluted
    
    $
    (0.74
    )
    
    $
    (0.48
    )
    
    $
    0.10Shares used in computing net income (loss) per share  diluted
    
    
    38,150,054
    
    
    
    37,733,737
    
    
    
    36,616,091
 See accompanying notes to the consolidated financial statements.
 F-4




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
 AccumulatedOtherCommon Stock
    
    
    Additional
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Paid-in Capital
    
    
    Income (Loss)
    
    
    Deficit
    
    
    TotalBalance at December 31, 2006
    
    
    32,169,380
    
    
    
    32,169
    
    
    
    240,594,665
    
    
    
    (68,537
    )
    
    
    (153,461,000
    )
    
    
    87,097,297Issuance 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Stock-based compensation for options
issued to non-employees
    
    
    
    
    
    
    
    
    
    
    184,567
    
    
    
    
    
    
    
    
    
    
    
    184,567Stock-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
    )
    
    
    168,014,978Issuance of stock upon options exercised
    
    
    133,742
    
    
    
    134
    
    
    
    499,698
    
    
    
    
    
    
    
    
    
    
    
    499,832Issuance of stock upon warrants exercised
    
    
    300,000
    
    
    
    300
    
    
    
    1,472,400
    
    
    
    
    
    
    
    
    
    
    
    1,472,700Stock-based compensation for options
issued to non-employees
    
    
    
    
    
    
    
    
    
    
    20,245
    
    
    
    
    
    
    
    
    
    
    
    20,245Stock-based compensation for options
issued to employees
    
    
    
    
    
    
    
    
    
    
    7,356,623
    
    
    
    
    
    
    
    
    
    
    
    7,356,623Issuance of stock to match 401(k)
contributions
    
    
    49,668
    
    
    
    49
    
    
    
    355,071
    
    
    
    
    
    
    
    
    
    
    
    355,120Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,225,611
    )
    
    
    (18,225,611
    )Unrealized gain on short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421,321
    
    
    
    
    
    
    
    421,321Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,804,290
    )Balance at December 31, 2008
    
    
    37,906,994
    
    
    $
    37,907
    
    
    $
    327,595,174
    
    
    $
    481,154
    
    
    $
    (168,199,027
    )
    
    $
    159,915,208Issuance of stock upon options exercised
    
    
    316,580
    
    
    
    316
    
    
    
    850,823
    
    
    
    
    
    
    
    
    
    
    
    851,139Stock-based compensation for options
issued to employees
    
    
    
    
    
    
    
    
    
    
    7,242,946
    
    
    
    
    
    
    
    
    
    
    
    7,242,946Issuance of stock to match 401(k)
contributions
    
    
    151,632
    
    
    
    152
    
    
    
    1,136,658
    
    
    
    
    
    
    
    
    
    
    
    1,136,810Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,251,963
    )
    
    
    (28,251,963
    )Unrealized loss on short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (310,137
    )
    
    
    
    
    
    
    (310,137
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,562,100
    )Balance at December 31, 2009
    
    
    38,375,206
    
    
    $
    38,375
    
    
    $
    336,825,601
    
    
    $
    171,017
    
    
    $
    (196,450,990
    )
    
    $
    140,584,003
 See accompanying notes to the consolidated financial statements.
 F-5




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Operating ActivitiesNet income (loss)
    
    $
    (28,251,963
    )
    
    $
    (18,225,611
    )
    
    $
    3,487,584Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    497,897
    
    
    
    99,895
    
    
    
    37,990In-process research and development
    
    
    
    
    
    
    12,590,000
    
    
    
    Amortization of premium/discount on short-term
investments
    
    
    847,386
    
    
    
    (1,236,996
    )
    
    
    (4,134,496
    )Stock-based compensation for options issued to
non-employees
    
    
    
    
    
    
    20,245
    
    
    
    184,567Stock-based compensation for stock and options
issued to employees
    
    
    8,379,756
    
    
    
    7,711,743
    
    
    
    5,113,986Non-cash portion of asset acquisition
    
    
    487,111
    
    
    
    
    
    
    
    Goodwill impairment
    
    
    1,100,000
    
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of
effects from purchase of Proprius:Prepaid expenses and other assets
    
    
    (306,437
    )
    
    
    (697,518
    )
    
    
    (40,683
    )Receivable from Forest Laboratories
    
    
    (5,445,596
    )
    
    
    (23,130
    )
    
    
    207,622Accounts payable and other accrued liabilities
    
    
    2,546,053
    
    
    
    2,215,080
    
    
    
    709,048Payable to Forest Laboratories
    
    
    (781,687
    )
    
    
    1,118,000
    
    
    
    (530,000
    )Deferred rent
    
    
    3,971
    
    
    
    10,779
    
    
    
    (2,484
    )Deferred revenue
    
    
    18,547,944
    
    
    
    (3,351,416
    )
    
    
    (2,219,336
    )Net cash (used in) provided by operating activities
    
    
    (2,375,565
    )
    
    
    231,071
    
    
    
    2,813,798Investing ActivitiesCash paid to acquire Proprius, net of cash acquired
    
    
    
    
    
    
    (39,084,627
    )
    
    
    Purchases of short-term investments
    
    
    (88,869,501
    )
    
    
    (124,117,596
    )
    
    
    (162,574,366
    )Proceeds from sale of short-term investments
    
    
    77,660,752
    
    
    
    144,484,871
    
    
    
    125,210,000Purchase of property and equipment
    
    
    (652,174
    )
    
    
    (1,089,262
    )
    
    
    (51,592
    )Deposit of restricted cash
    
    
    (487,111
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (12,348,034
    )
    
    
    (19,806,614
    )
    
    
    (37,415,958
    )Financing ActivitiesProceeds from exercise of stock options and warrants
    
    
    851,139
    
    
    
    1,972,532
    
    
    
    2,127,020Proceeds from secondary offering of common stock, net
    
    
    
    
    
    
    
    
    
    
    69,876,154Net cash provided by financing activities
    
    
    851,139
    
    
    
    1,972,532
    
    
    
    72,003,174(Decrease) increase in cash and cash equivalents
    
    
    (13,872,460
    )
    
    
    (17,603,011
    )
    
    
    37,401,014Cash and cash equivalents at beginning of the year
    
    
    52,490,414
    
    
    
    70,093,425
    
    
    
    32,692,411Cash and cash equivalents at end of the year
    
    $
    38,617,954
    
    
    $
    52,490,414
    
    
    $
    70,093,425
 See accompanying notes to the consolidated financial statements.
 F-6




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##### Table of Contents



CYPRESS BIOSCIENCE, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
 The Company
  Principles of Consolidation
  Accounting Estimates in the Preparation of Financial Statements
  Subsequent Events
  Cash and Cash Equivalents
  Short-Term Investments
  Concentrations of Credit Risk
  F-7




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##### Table of Contents



Property and Equipment
  Goodwill
  Long-Lived Assets
  Fair Value of Financial Instruments
  Revenue Recognition
   Savella Savella
 F-8




---



##### Table of Contents



Savella
  Cost of Personalized Medicine Services
  Shipping and Handling Expenses
  Segment Reporting
   F-9




---



##### Table of Contents



Comprehensive Income (Loss)
  Research and Development
  Stock-Based Compensation
   Net Income (Loss) Per Share
  Income Taxes
  F-10




---



##### Table of Contents



Reclassification
  Impact of Recently Issued Accounting Standards
  2. SHORT-TERM INVESTMENTS
  December 31, 2009Amortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government and agency debt
    
    $
    93,037,626
    
    
    $
    159,185
    
    
    $
    (28,944
    )
    
    $
    93,167,867Corporate debt securities
    
    
    9,846,774
    
    
    
    45,410
    
    
    
    (4,634
    )
    
    
    9,887,550$
    102,884,400
    
    
    $
    204,595
    
    
    $
    (33,578
    )
    
    $
    103,055,417
 December 31, 2008Amortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government and agency debt
    
    $
    87,637,614
    
    
    $
    468,401
    
    
    $
    (11,312
    )
    
    $
    88,094,703Corporate debt securities
    
    
    600,000
    
    
    
    2,208
    
    
    
    
    
    
    
    602,208Commercial paper
    
    
    1,985,423
    
    
    
    8,763
    
    
    
    
    
    
    
    1,994,186Certificates of deposit
    
    
    2,300,000
    
    
    
    13,094
    
    
    
    
    
    
    
    2,313,094$
    92,523,037
    
    
    $
    492,466
    
    
    $
    (11,312
    )
    
    $
    93,004,191
    Fair ValueDue within 1 year
    
    $
    90,257,632After 1 year but within 2 years
    
    
    12,797,785Total
    
    $
    103,055,417
 F-11




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##### Table of Contents



3. FAIR VALUE DISCLOSURES
   Fair Value Measurements at December 31, 2009Quoted Prices in
    
    
    Significant Other
    
    
    SignificantBalance as of
    
    
    Active Markets
    
    
    Observable Inputs
    
    
    UnobservableDescription
    
    December 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)Financial instruments owned:Money market funds
    
    $
    38,430,110
    
    
    $
    38,430,110
    
    
    $
    
    
    
    $
    U.S. government and agency debt
    
    
    93,167,867
    
    
    
    
    
    
    
    93,167,867
    
    
    
    Corporate debt securities
    
    
    9,887,550
    
    
    
    
    
    
    
    9,887,550
    
    
    
    Total financial instruments owned
    
    $
    141,485,527
    
    
    $
    38,430,110
    
    
    $
    103,055,417
    
    
    $
    
 4. ACQUISITION OF PROPRIUS
 On March 4, 2008, the Company acquired all of the outstanding stock of Proprius, a
privately-held specialty pharmaceutical company. The Company acquired Proprius to expand its
strategy to include providing personalized medicine services to rheumatologists, as well as to
expand its product pipeline with the addition of two early clinical-stage therapeutic candidates,
which include a product to treat pain and a product to treat rheumatoid arthritis. The Company is
not currently in active development with respect to either early clinical-stage therapeutic
candidate.
  F-12




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##### Table of Contents



Cash paid for Proprius business
    
    $
    37,633,247Estimated transaction costs
    
    
    1,451,380Total estimated purchase price
    
    $
    39,084,627
  As Originally
    
    
    
    
    
    AdjustedReported
    
    Adjustments
    
    AllocationOther assets
    
    $
    29,000
    
    
    $
    
    
    
    $
    29,000In-process research and development
    
    
    12,590,000
    
    
    
    
    
    
    
    12,590,000Contingent compensation
    
    
    
    
    
    
    3,437,029
    
    
    
    3,437,029Goodwill
    
    
    26,465,627
    
    
    
    (3,437,029
    )
    
    
    23,028,598Total purchase price
    
    $
    39,084,627
    
    
    $
    
    
    
    $
    39,084,627
    F-13




---



##### Table of Contents



5. GOODWILL
 Avise Savella
      F-14




---



##### Table of Contents



PersonalizedMedicine
    
    Corporate/Therapeutics
    
    Services
    
    Unallocated
    
    TotalGoodwill, December 31, 2008 (1)
    
    $
    
    
    
    $
    
    
    
    $
    26,465,627
    
    
    $
    26,465,627Adjustment
    
    
    
    
    
    
    
    
    
    
    (3,437,029
    )
    
    
    (3,437,029
    )Assigned to reporting units
    
    
    21,928,598
    
    
    
    1,100,000
    
    
    
    (23,028,598
    )
    
    
    Impairment
    
    
    
    
    
    
    (1,100,000
    )
    
    
    
    
    
    
    (1,100,000
    )Goodwill, December 31, 2009
    
    $
    21,928,598
    
    
    $
    
    
    
    $
    
    
    
    $
    21,928,598
 
 (1)
    
    As of December 31, 2008, the Company operated as one segment with one reporting unit. During
the third quarter of 2009, the Company made the determination that its two product lines,
consisting of therapeutic products (Savella)and the personalized medicine services (Avise
products), met the criteria to be reported as separate operating segments and separate reporting
units. Goodwill was assigned to each of the reporting units as reflected in the table above. 6. STOCKHOLDERS EQUITY
 Public Offering of Shares of Common Stock
  Warrants
  7. STOCK-BASED COMPENSATION
 Stock-Based Compensation Plans
 2009 EQUITY INCENTIVE PLAN
  2000 EQUITY INCENTIVE PLAN
  F-15




---



##### Table of Contents



1996 EQUITY INCENTIVE PLAN
  Stock Options
  Years Ended December 31,2009
    
    2008
    
    2007Risk-free interest rate
    
    
    2.1
    %
    
    
    2.5
    %
    
    
    4.5
    %Expected volatility
    
    
    70
    %
    
    
    73
    %
    
    
    76
    %Expected option term (in years)
    
    
    5.9
    
    
    
    6.0
    
    
    
    5.9Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    2009
    
    
    2000
    
    
    1996
    
    
    
    
    
    
    WeightedEquity
    
    
    Equity
    
    
    Equity
    
    
    Number of
    
    
    AverageIncentive
    
    
    Incentive
    
    
    Incentive
    
    
    Options Under
    
    
    ExercisePlan Options
    
    
    Plan Options
    
    
    Plan Options
    
    
    All Plans
    
    
    PricesBalance 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/Expired
    
    
    
    
    
    
    (73,363
    )
    
    
    (3,333
    )
    
    
    (76,696
    )
    
    
    13.69Balance December 31, 2007
    
    
    
    
    
    
    4,279,186
    
    
    
    48,969
    
    
    
    4,328,155
    
    
    
    7.91Granted
    
    
    
    
    
    
    2,924,174
    
    
    
    
    
    
    
    2,924,174
    
    
    
    8.00Exercised
    
    
    
    
    
    
    (109,251
    )
    
    
    (24,491
    )
    
    
    (133,742
    )
    
    
    3.74Canceled/Expired
    
    
    
    
    
    
    (144,064
    )
    
    
    (312
    )
    
    
    (144,376
    )
    
    
    11.24Balance December 31, 2008
    
    
    
    
    
    
    6,950,045
    
    
    
    24,166
    
    
    
    6,974,211
    
    
    
    7.96Granted
    
    
    222,407
    
    
    
    1,009,411
    
    
    
    
    
    
    
    1,231,818
    
    
    
    7.02Exercised
    
    
    
    
    
    
    (299,914
    )
    
    
    (16,666
    )
    
    
    (316,580
    )
    
    
    2.69Canceled/Expired
    
    
    (3,000
    )
    
    
    (176,499
    )
    
    
    
    
    
    
    (179,499
    )
    
    
    6.41Balance December 31, 2009
    
    
    219,407
    
    
    
    7,483,043
    
    
    
    7,500
    
    
    
    7,709,950
    
    
    $
    8.06
 F-16




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##### Table of Contents



Year Ended December 31,2009
    
    
    2008
    
    
    2007Cost of personalized medicine services
    
    $
    187,927
    
    
    $
    34,525
    
    
    $
    Research and development expenses
    
    
    1,327,068
    
    
    
    1,357,558
    
    
    
    817,430Selling, general and administrative expenses
    
    
    5,727,951
    
    
    
    5,964,540
    
    
    
    4,117,730$
    7,242,946
    
    
    $
    7,356,623
    
    
    $
    4,935,160
    8. SIGNIFICANT LICENSING AND COLLABORATION AGREEMENTS AND ASSET PURCHASE AGREEMENT
 License and Collaboration Agreement with Forest Laboratories
 Savella Savella
 F-17




---



##### Table of Contents



Savella
 Savella Savella Savella Savella
 Savella
 Licensing Agreement with Pierre Fabre
  F-18




---



##### Table of Contents



Cellatope Asset Purchase Agreement
    9. INCOME TAXES
  F-19




---



##### Table of Contents



December 31,2009
    
    
    2008
    
    
    2007Unrecognized tax benefits as of the beginning of the year
    
    $
    1,039,000
    
    
    $
    913,000
    
    
    $
    913,000(Decreases) increases related to prior year tax positions
    
    
    (21,000
    )
    
    
    17,000
    
    
    
    Decreases related to expirations of prior year tax positions
    
    
    (47,000
    )
    
    
    (5,000
    )
    
    
    Increases related to current year tax positions
    
    
    
    
    
    
    
    
    
    
    Settlements
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    114,000
    
    
    
    Unrecognized tax benefits as of the end of the year
    
    $
    971,000
    
    
    $
    1,039,000
    
    
    $
    913,000
       2009
    
    
    2008Net operating loss carryforwards
    
    $
    22,719,000
    
    
    $
    25,423,000Deferred revenue
    
    
    11,654,000
    
    
    
    4,097,000Capitalized research and development
    
    
    9,310,000
    
    
    
    9,022,000Capitalized intangibles
    
    
    5,137,000
    
    
    
    3,785,000Tax credits
    
    
    1,331,000
    
    
    
    1,290,000Stock-based compensation expense
    
    
    7,174,000
    
    
    
    5,473,000Other
    
    
    1,442,000
    
    
    
    16,00058,767,000
    
    
    
    49,106,000Valuation allowance
    
    
    (58,767,000
    )
    
    
    (49,106,000
    )$
    
    
    
    $
    
 F-20




---



##### Table of Contents



2009
    
    
    2008
    
    
    2007Tax at federal statutory rate
    
    $
    (9,875,029
    )
    
    $
    (6,378,964
    )
    
    $
    1,220,654State income tax, net of federal benefits
    
    
    (1,621,198
    )
    
    
    (1,047,243
    )
    
    
    200,397In-process research and development
    
    
    
    
    
    
    5,129,921
    
    
    
    Stock-based compensation
    
    
    918,073
    
    
    
    729,670
    
    
    
    420,707Other
    
    
    651,504
    
    
    
    (44,282
    )
    
    
    156,252Change in valuation allowance
    
    
    9,926,650
    
    
    
    1,610,898
    
    
    
    (1,998,010
    )$
    
    
    
    $
    
    
    
    $
    
   10. RELATED PARTY TRANSACTIONS
   11. RETIREMENT PLAN
 Savella
 12. COMMITMENTS AND CONTINGENCIES
 Leases
  F-21




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##### Table of Contents



OperatingYears Ending December 31,
    
    Leases2010
    
    $
    903,0622011
    
    
    815,9512012
    
    
    615,4592013
    
    
    28,8982014
    
    
    7,224Total minimum lease payments
    
    $
    2,370,594
  Licensing Agreements
 Savella
 13. SEGMENT INFORMATION
 Savella Avise
 Savella
   F-22




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##### Table of Contents



PersonalizedTherapeutic
    
    
    MedicineProducts
    
    
    Services
    
    
    TotalYear ended December 31, 2009:Revenues
    
    $
    27,002,507
    
    
    $
    332,372
    
    
    $
    27,334,879Cost of personalized medicine services
    
    
    
    
    
    
    1,986,722
    
    
    
    1,986,722Research and development
    
    
    8,981,337
    
    
    
    3,014,832
    
    
    
    11,996,169Segment operating income (loss)
    
    
    18,021,170
    
    
    
    (4,669,182
    )
    
    
    13,351,988Operating expenses:Selling, general and administrative
    
    
    
    
    
    
    
    
    
    
    42,138,458Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    1,100,000Loss from operations
    
    
    
    
    
    
    
    
    
    $
    (29,886,470
    )Year ended December 31, 2008(1):Revenues
    
    $
    16,659,099
    
    
    $
    
    
    
    $
    16,659,099Cost of personalized medicine services
    
    
    
    
    
    
    267,361
    
    
    
    267,361Research and development
    
    
    8,335,403
    
    
    
    835,673
    
    
    
    9,171,076Segment operating income (loss)
    
    
    8,323,696
    
    
    
    (1,103,034
    )
    
    
    7,220,662Operating expenses:Selling, general and administrative
    
    
    
    
    
    
    
    
    
    
    17,602,820In-process research and development
    
    
    
    
    
    
    
    
    
    
    12,590,000Loss from operations
    
    
    
    
    
    
    
    
    
    $
    (22,972,158
    )
  PersonalizedTherapeutic
    
    Medicine
    
    Corporate andProducts
    
    Services
    
    Unallocated
    
    TotalAs of December 31, 2009:Receivable from Forest Laboratories
    
    $
    5,611,476
    
    
    $
    
    
    
    $
    
    
    
    $
    5,611,476Prepaid expenses and other current
assets
    
    
    
    
    
    
    7,242
    
    
    
    4,784,892
    
    
    
    4,792,134Property and equipment, net
    
    
    
    
    
    
    471,602
    
    
    
    801,424
    
    
    
    1,273,026Goodwill
    
    
    
    
    
    
    
    
    
    
    21,928,598
    
    
    
    21,928,598Other assets
    
    
    
    
    
    
    278,994
    
    
    
    20,000
    
    
    
    298,994As of December 31, 2008(1):Receivable from Forest Laboratories
    
    $
    165,880
    
    
    $
    
    
    
    $
    
    
    
    $
    165,880Prepaid expenses and other current
assets
    
    
    
    
    
    
    6,997
    
    
    
    1,041,671
    
    
    
    1,048,668Property and equipment, net
    
    
    
    
    
    
    247,135
    
    
    
    841,614
    
    
    
    1,088,749Goodwill
    
    
    
    
    
    
    
    
    
    
    26,465,627
    
    
    
    26,465,627Other assets
    
    
    
    
    
    
    308,994
    
    
    
    20,000
    
    
    
    328,994
 
 (1)
    
    The Company determined in 2009 that they were no longer a
single reportable segment. The Company became two reportable segments with the
launch of Savella, receipt of Savella sales reports
from Forest Laboratories and changes to the management structure for
personalized medicine services.
The Company has presented the 2008 reportable segment information consistent with its 2009 reportable segment disclosure. F-23




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##### Table of Contents



14. QUARTERLY INFORMATION (UNAUDITED)
  2009First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterRevenues
    
    $
    7,858,394
    
    
    $
    5,805,436
    
    
    $
    5,612,329
    
    
    $
    8,058,720Total operating expenses
    
    $
    17,654,035
    
    
    $
    14,904,347
    
    
    $
    11,336,031
    
    
    $
    13,326,936Other income
    
    $
    635,137
    
    
    $
    490,008
    
    
    $
    254,335
    
    
    $
    255,027Net loss (1)
    
    $
    (9,160,504
    )
    
    $
    (8,608,903
    )
    
    $
    (5,469,367
    )
    
    $
    (5,013,189
    )Net loss per share  basic and diluted (2)
    
    $
    (0.24
    )
    
    $
    (0.23
    )
    
    $
    (0.14
    )
    
    $
    (0.13
    )Shares used in calculating per share amounts
 basic and diluted
    
    
    37,981,814
    
    
    
    38,059,838
    
    
    
    38,257,303
    
    
    
    38,296,6252008First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterRevenues (3)
    
    $
    13,715,700
    
    
    $
    1,014,794
    
    
    $
    979,310
    
    
    $
    949,295Total operating expenses (3)
    
    $
    18,297,686
    
    
    $
    6,175,141
    
    
    $
    6,110,123
    
    
    $
    9,048,307Other income
    
    $
    1,701,005
    
    
    $
    1,169,137
    
    
    $
    1,018,590
    
    
    $
    857,815Net loss (4)
    
    $
    (2,880,981
    )
    
    $
    (3,991,210
    )
    
    $
    (4,112,223
    )
    
    $
    (7,241,197
    )Net loss per share  basic and diluted (2)
    
    $
    (0.08
    )
    
    $
    (0.11
    )
    
    $
    (0.11
    )
    
    $
    (0.19
    )Shares used in calculating per share amounts
 basic and diluted
    
    
    37,523,645
    
    
    
    37,641,610
    
    
    
    37,883,074
    
    
    
    37,883,334
 
 (1)
    
    During the first quarter of 2009, the Company paid a $3.0 million milestone payment to Pierre
Fabre upon NDA approval and a $2.0 million payment recognized as research and development
expense in connection with its asset purchase agreement with Cellatope. Additionally, during
the fourth quarter of 2009, the Company recorded a $1.1 million impairment charge for goodwill
related to its personalized medicine services business.(2)
    
    Net loss per share is computed independently for each of the quarters presented. Therefore,
the sum of the quarterly net loss per share may not necessarily equal the total for the year.(3)
    
    The Company reclassified a $0.5 million sublicense fee paid to Pierre Fabre during the first
quarter of 2008 to revenue (recognized on a net basis with the milestone payment received upon
NDA acceptance) from research and development expenses.(4)
    
    During the first quarter of 2008, the Company recognized a milestone payment of $10.0 million
upon NDA acceptance, net of a $0.5 million sublicense fee, and $3.2 million also upon NDA
acceptance as reimbursement for one-third of the costs paid in connection with the second
Phase III trial for Savella. Additionally, the Company recognized a charge in the amount of
$12.6 million during the first quarter of 2008 for in-process research and development in
connection with the Proprius acquisition. 15. SUBSEQUENT EVENT
  F-24