**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM10-Q**

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| x                                                       |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                    |   |                                                                                          |
| **For the  quarterly period ended March 31, 2007** |
|                                                    |   |                                                                                          |
| **or**                                                  |
|                                                    |   |                                                                                          |
| o                                                       |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                    to                    **

**CommissionFile Number 001-33291**

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**OPTIMERPHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

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| **Delaware**                     | ** ** | **33-0830300**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

**10110Sorrento Valley Road, Suite CSan Diego, CA 92121**

(Address ofprincipal executive office)

**(858) 909-0736**

(Registrant’stelephone number, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days:

Yes x      No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer o           Accelerated Filer o           Non-acceleratedFiler x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act):

Yes o      No x

Thenumber of shares of the registrant’s Common Stock, no par value, outstanding asof May 1, 2007 was 23,136,127 shares.

 

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**OPTIMER PHARMACEUTICALS, INC.FORM 10-QFor the Quarterly Period Ended March 31, 2007TABLE OF CONTENTS**
| **PART I – FINANCIAL INFORMATION**                                                                   |   |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                      |   |   |
| Item 1.  Financial Statements (unaudited)                                                            |   |   |
|                                                                                                      |   |   |
| Condensed  Consolidated Balance Sheets – March 31, 2007 and December 31, 2006              |   |   |
|                                                                                                      |   |   |
| Condensed  Consolidated Statements of Operations – Three months ended March 31,  2007 and 2006  |   |   |
|                                                                                                      |   |   |
| Condensed  Consolidated Statements of Cash Flows – Three months ended March 31, 2007  and 2006  |   |   |
|                                                                                                      |   |   |
| Notes  to Condensed Consolidated Financial Statements                                                     |   |   |
|                                                                                                      |   |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |   |   |
|                                                                                                      |   |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  |   |   |
|                                                                                                      |   |   |
| Item 4.  Controls and Procedures                                                                     |   |   |
|                                                                                                      |   |   |
| **PART II – OTHER INFORMATION**                                                                      |   |   |
|                                                                                                      |   |   |
| Item 1A. Risk Factors                                                                                |   |   |
|                                                                                                      |   |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 |   |   |
|                                                                                                      |   |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         |   |   |
|                                                                                                      |   |   |
| Item 6. Exhibits                                                                                     |   |   |
|                                                                                                      |   |   |
| SIGNATURE                                                                                                 |   |   |
|  EXHIBIT  31.1                                                                                       |   |   |
|  EXHIBIT  31.2                                                                                       |   |   |
|  EXHIBIT 32                                                                                          |   |   |

 

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**Optimer Pharmaceuticals, Inc.Consolidated Balance Sheets(unaudited)**
| ** **                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                   | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                                                                                              |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                                                                                                   |       | $                  | 11,885,444 |                  | $          | 6,122,438 |   |
| Short-term  investments                                                                                                                                                                                                                                                                                                                                                      |       | 31,340,388         |       | 15,218,860            |       |
| Research  grant and contract receivables                                                                                                                                                                                                                                                                                                                                     |       | 169,015            |       | 163,502               |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                                                                                                                                                                   |       | 679,932            |       | 1,549,062             |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                                         |       | 44,074,779         |       | 23,053,862            |       |
| Property and equipment,  net                                                                                                                                                                                                                                                                                                                                                 |       | 778,660            |       | 744,564               |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                 |       | 302,054            |       | 315,490               |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                 |       | $                  | 45,155,493 |                  | $          | 24,113,916 |   |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                                                                             |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                         |       |               |       |                  |       |
| Accounts  payable                                                                                                                                                                                                                                                                                                                                                            |       | $                  | 2,487,380  |                  | $          | 1,753,394 |   |
| Accrued  expenses                                                                                                                                                                                                                                                                                                                                                            |       | 2,765,984          |       | 3,310,199             |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                   |       | 5,253,364          |       | 5,063,593             |       |
| Deferred rent                                                                                                                                                                                                                                                                                                                                                                |       | 290,265            |       | 292,384               |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                                                                |       |               |       |                  |       |
| Redeemable preferred  stock, $0.001 par value:                                                                                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| Series  B redeemable convertible, no shares and 6,461,439 shares authorized at March  31, 2007 and December 31, 2006, respectively; no shares and 4,132,736 shares  issued and outstanding at March 31, 2007 and December 31, 2006, respectively                                                                                                                             |       | —             |       | 32,198,929            |       |
| Series  C redeemable convertible, no shares and 1,615,359 shares authorized at March  31, 2007 and December 31, 2006, respectively; no shares and 1,538,437 shares  outstanding at March 31, 2007 and December 31, 2006, respectively                                                                                                                                        |       | —             |       | 11,494,052            |       |
| Series  D redeemable convertible, no shares and 3,923,016 shares authorized at March  31, 2007 and December 31, 2006, respectively; no shares and 2,861,277 shares  issued and outstanding at March 31, 2007 and December 31, 2006, respectively                                                                                                                             |       | —             |       | 21,766,662            |       |
| Stockholders’ equity  (deficit):                                                                                                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Series  A convertible preferred stock, par value $0.001, no shares and 2,307,656 shares  authorized at March 31, 2007 and December 31, 2006, respectively; no shares  and 1,523,051 shares issued and outstanding at March 31, 2007 and December  31, 2006, respectively; liquidation preference of $0 and $3,300,000 at March  31, 2007 and December 31, 2006, respectively |       | —             |       | 1,523                 |       |
| Common  stock, $0.001 par value, 75,000,000 shares and 25,384,225 shares authorized  at March 31, 2007 and December 31, 2006, respectively; 23,181,356 and  2,704,476 shares issued and outstanding at March 31, 2007 and December 31,  2006 respectively; 46,153 held in treasury                                                                                      |       | 23,181             |       | 2,704                 |       |
| Treasury  stock, at cost; 46,153 shares                                                                                                                                                                                                                                                                                                                                      |       | (100,000           | )          | (100,000              | )          |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                  |       | 115,767,449        |       | 4,997,421             |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                                                                                        |       | (16,172            | )          | (44,971               | )          |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                         |       | (76,062,594        | )          | (51,558,381           | )          |
| Total stockholders’  equity (deficit)                                                                                                                                                                                                                                                                                                                                   |       | 39,611,864         |       | (46,701,704           | )          |
| Total liabilities,  redeemable convertible preferred stock and stockholders’ equity (deficit)                                                                                                                                                                                                                                                                           |       | $                  | 45,155,493 |                  | $          | 24,113,916 |   |

 

See accompanyingnotes.

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**Optimer Pharmaceuticals, IncConsolidated Statements of Operations****(unaudited)**
| ** **                                                                                       | ** ** | **Three Months Ended** | ** **  |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                                       | ** ** | **March 31,**               | ** **  |
| ** **                                                                                       | ** ** | **2007**                         | ** **  | **2006** | ** ** |
|                                                                                             | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Revenues:                                                                                        |       |                             |        |   |   |
| Research  grants                                                                                 |       | $                                | —      |   | $ | 204,059 |   |
| Collaborative  research agreements                                                               |       | 146,298                          |        | 217,163 |   |
| Total  revenues                                                                                  |       | 146,298                          |        | 421,222 |   |
| Operating expenses:                                                                              |       |                             |        |   |   |
| Research  and development                                                                        |       | 23,446,267                       |        | 2,097,985 |   |
| Marketing                                                                                        |       | 551,997                          |        | — |   |
| General  and administrative                                                                      |       | 1,094,468                        |        | 619,119 |   |
| Total  operating expenses                                                                        |       | 25,092,732                       |        | 2,717,104 |   |
| Loss from operations                                                                             |       | (24,946,434                      | )           | (2,295,882 | ) |
| Interest income and  other, net                                                                  |       | 442,221                          |        | 291,273 |   |
| Net loss                                                                                         |       | (24,504,213                      | )           | (2,004,609 | ) |
| Accretion to redemption  amount of redeemable convertible preferred stock                        |       | —                           |        | (82,302 | ) |
| Net loss allocable to  common stockholders                                                       |       | $                                | (24,504,213 | ) | $ | (2,086,911 | ) |
|                                                                                             |       |                             |        |   |   |
| Basic and diluted net  loss per share attributable to common stockholders                        |       | $                                | (1.75       | ) | $ | (0.85 | ) |
| Shares used to compute  basic and diluted net loss per share attributable to common stockholders |       | 14,039,248                       |        | 2,445,820 |   |

 

See accompanyingnotes.

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**
| ** **                                                                    | ** ** | **Three Months Ended March 31,** | ** **  |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                    | ** ** | **2007**                                             | ** **  | **2006** | ** ** |
| **Operating  activities**                                                     |       |                                                 |        |   |   |
| Net loss                                                                      |       | $                                                    | (24,504,213 | ) | $ | (2,004,609 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:  |       |                                                 |        |   |   |
| Depreciation  and amortization                                                |       | 76,024                                               |        | 142,647 |   |
| Stock  based compensation                                                     |       | 245,267                                              |        | 76,473 |   |
| Non-cash  compensation related to forgiveness of note receivable from officer |       | —                                               |        | 18,750 |   |
| Deferred  rent                                                                |       | (2,119                                               | )           | 3,729 |   |
| Changes  in operating assets and liabilities:                                 |       |                                                 |        |   |   |
| Prepaids  expenses and other current assets                                   |       | 869,130                                              |        | (38,927 | ) |
| Research  grant and contract receivables                                      |       | (5,513                                               | )           | 306,311 |   |
|  Other assets                                                            |       | 13,436                                               |        | (838 | ) |
| Accounts  payable and accrued expenses                                        |       | 189,771                                              |        | (419,813 | ) |
| Net cash used in  operating activities                                        |       | (23,118,217                                          | )           | (1,916,277 | ) |
| ** **                                                                    |       |                                                 |        |   |   |
| **Investing  activities**                                                     |       |                                                 |        |   |   |
| Purchases of short-term  investments                                          |       | (26,623,302                                          | )           | (66,726 | ) |
| Sales or maturity of  short-term investments                                  |       | 10,500,000                                           |        | — |   |
| Purchase of property  and equipment                                           |       | (110,120                                             | )           | (12,590 | ) |
| Net cash used in  investing activities                                        |       | (16,233,422                                          | )           | (79,316 | ) |
| ** **                                                                    |       |                                                 |        |   |   |
| **Financing  activities**                                                     |       |                                                 |        |   |   |
| Proceeds from sale of  common stock                                           |       | 43,713,805                                           |        | 28,427 |   |
| Proceeds from exercise  of warrants                                           |       | 1,370,267                                            |        | — |   |
| Net cash provided by  financing activities                                    |       | 45,084,072                                           |        | 28,427 |   |
| Effect of exchange rate  changes on cash and cash equivalents                 |       | 30,573                                               |        | (2,791 | ) |
| Net increase (decrease)  in cash and cash equivalents                         |       | 5,763,006                                            |        | (1,969,957 | ) |
| Cash and cash  equivalents at beginning of period                             |       | 6,122,438                                            |        | 19,943,959 |   |
| Cash and cash  equivalents at end of period                                   |       | $                                                    | 11,885,444  |   | $ | 17,974,002 |   |
|                                                                          |       |                                                 |        |   |   |
| **Supplemental  disclosure of cash flow information:**                        |       |                                                 |        |   |   |
| Conversion of  redeemable convertible preferred stock to common stock         |       | 65,461,166                                           |        | — |   |

 

See accompanying notes.

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**Optimer Pharmaceuticals,Inc.Notes to Condensed Consolidated Financial Statements(Unaudited)**

**1.**              Interim FinancialInformation

**Organization and Business Activities**

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

Optimer is abiopharmaceutical company focused on discovering, developing andcommercializing innovative anti-infective products.  The Company currently has two anti-infectiveproduct candidates, OPT-80 formerly known as “PAR-101” or “Difimicin”, for thetreatment of Clostridium difficile-associated diarrhea, and Prulifloxacin, forthe treatment of infectious diarrhea, including travelers’ diarrhea.

Optimeris subject to risks common to companies in the biotechnology industryincluding, but not limited to, risks and uncertainties related to drugdiscovery, development and commercialization, obtaining regulatory approval ofany products it or its collaborators may develop, competition from otherbiotechnology and pharmaceutical companies, its effectiveness at managing its financialresources, difficulties or delays in its clinical trials, difficulties ordelays in manufacturing its clinical trial materials, implementation of itscollaborations, the level of efforts that its collaborative partners devote todevelopment and commercialization of its product candidates, its ability tosuccessfully market and sell any products it develops, the scope and validityof patent protection for its products and proprietary technology, dependence onkey personnel, product liability, litigation, its ability to comply withU.S. Food and Drug Administration (“FDA”) and other government regulationsand its ability to obtain additional funding to support its operations.

***Basis ofPresentation***

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of these interimperiods have been included. The results of operations for the three monthsended March 31, 2007 are not necessarily indicative of the results thatmay be expected for the full year. These unaudited consolidated financialstatements should be read in conjunction with the audited financial statementsand related notes thereto included in the Company’s Annual Report on Form 10-Kfor 

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the fiscal yearended December 31, 2006, which was filed with the Securities and ExchangeCommission (“SEC”) on March 30, 2007.

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the condensedconsolidated financial statements and accompanying notes. Actual results coulddiffer materially from those estimates.

**2.****           Summaryof Significant Accounting Policies**

*Cash, Cash Equivalents andShort-Term Investments*

Investments withoriginal maturities of less than 90 days at the date of purchase are consideredto be cash equivalents.  All otherinvestments are classified as short-term investments which are deemed bymanagement to be available-for-sale and are reported at fair value with netunrealized gains or losses reported within accumulated other comprehensive lossin the condensed consolidated balance sheets. Realized gains and losses, and declines in value judged to be other thantemporary, are included in investment income or interest expense. The cost ofsecurities sold is computed using the specific identification method.

*Revenue Recognition*

The Company’scollaboration agreements contain multiple elements, including non-refundableupfront fees, payments for reimbursement of third-party research costs,payments for ongoing research, payments associated with achieving specificdevelopment milestones and royalties based on specified percentages of netproduct sales, if any.  The Companyapplies the revenue recognition criteria outlined in Staff Accounting Bulletin(“SAB”) No. 104, *Revenue Recognition*and Emerging Issues Task Force (“EITF”) Issue 00-21, *Revenue Arrangements with Multiple Deliverables* (“EITF 00-21”).  In applying these revenue recognitioncriteria, the Company considers a variety of factors in determining theappropriate method of revenue recognition under these arrangements, such aswhether the elements are separable, whether there are determinable fair valuesand whether there is a unique earnings process associated with each element ofa contract.

Cash received inadvance of services being performed is recorded as deferred revenue andrecognized as revenue as services are performed over the applicable term of theagreement.

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

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In connection withcertain research collaboration agreements, revenues are recognized fromnon-refundable upfront fees, which the Company does not believe are specificallytied to a separate earnings process, ratably over the term of theagreement.  Research fees are recognizedas revenue as the related research activities are performed.

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

None of thepayments that the Company has received from collaborators to date, whetherrecognized as revenue or deferred, are refundable even if the related programis not successful.

*Research and DevelopmentExpenses*

The Companyaccounts for research and development costs in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 2, *Accountingfor Research and Development Costs*. SFAS 2 specifies that research and development costs should be chargedto expense until technological feasibility has been established for theproduct.  Once technological feasibilityis established, all product costs should be capitalized until the product isavailable for general release to customers. The Company has determined that technological feasibility for itsproduct candidates will be reached when the requisite regulatory approvals areobtained to make the product available for sale, or approval of the new drugapplication (“NDA”) for such product. The Company’s research and development expenses consist primarily oflicense fees, salaries and related employee benefits, costs associated withclinical trials managed by the Company’s contract research organizations, orCROs, and costs associated with non-clinical activities and regulatoryapprovals.  The Company uses externalservice providers and vendors to conduct clinical trials, to manufacturesupplies of product candidates to be used in clinical trials and to providevarious other research and development-related products and services.

*Comprehensive Income (Loss)*

The Company hasapplied SFAS No. 130, *Reporting ComprehensiveIncome*, which requires that all components of comprehensive income(loss), including net income (loss), be reported in the financial statements inthe period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during aperiod from transactions and other events and circumstances from non-ownersources.  Net income (loss) and othercomprehensive income (loss), including foreign currency translation adjustmentsand unrealized gains and losses on investments, shall be reported, net of theirrelated tax effect, to arrive at comprehensive income (loss).  The comprehensive loss was $24.5 million and$2.0 million for the three months ended March 31, 2007 and 2006, respectively.

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*Net Loss Per ShareAttributable to Common Stockholders*

The Companycomputes net loss per share in accordance with SFAS No. 128, *Earnings per Share*. Under the provisionsof SFAS 128, basic net loss per common share is computed by dividing net lossby the weighted-average number of common shares outstanding. Diluted net lossper common share is computed by dividing net loss by the weighted-averagenumber of common shares and dilutive common share equivalents then outstanding.Common equivalent shares consist of the incremental common shares issuable uponthe conversion of preferred stock, and common shares issuable upon the exerciseof stock options and warrants. Since the Company has a net loss for all periodspresented, the effect of all potentially dilutive securities is anti-dilutive.Accordingly, basic and diluted net loss per share is the same.

*RecentAccounting Pronouncements*

In September 2006,the Financial Accounting Standards Board (“FASB”) issued FASB StatementNo. 157, “*Fair Value Measurements*” (“SFAS 157”),which defines fair value, establishes a framework for measuring fair valueunder generally accepted accounting principles, and expands disclosures aboutfair value measurements.  SFAS 157applies to other accounting pronouncements that require or permit fair valuemeasurements.  The new guidance iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and for interim periods within those fiscal years.  The Company is currently evaluating therequirements of SFAS 157; if any, on its consolidated financialstatements.

In February 2007,the FASB issued SFAS No. 159, *The Fair ValueOption for Financial Assets and Liabilities.* SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. SFAS No. 159 will be effective for our fiscal yearbeginning after November 15, 2007. Early adoption is permitted. We have notdetermined the impact, if any, that adopting this standard may have on ourfinancial position, cash flows, and results of operations.

In June 2006, theFASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes,an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN48”). FIN 48 creates a single model to address accounting for uncertainty inincome tax positions. FIN 48 prescribes a minimum threshold that an income taxposition is required to meet before being recognized in the financialstatements. The interpretation also provides guidance on derecognition andmeasurement criteria in addition to classification, interest and penalties andinterim period accounting, and it significantly expands disclosure provisionsfor uncertain tax positions that have been or are expected to be taken in acompany’s tax return. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006 and the Company, accordingly, adopted this statement as ofJanuary 1, 2007.  The cumulative effectof adopting FIN 48 will be recorded in retained earnings and other accounts asapplicable.

As a result of theadoption of FIN 48, the Company has not recorded any change to retainedearnings at January 1, 2007 the Company had no unrecognized tax benefits that,if recognized, would favorably affect the Company’s effective income tax ratein future periods. At March 31, 2007, the Company had no unrecognized taxbenefits. The Company’s continuing practice is to 

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recognize interestand/or penalties related to income tax matters in income tax expense. TheCompany had no accrued interest or penalties at January 1, 2007 and no accruedinterest or penalties at March 31, 2007.

The Company has not currently completed a study toassess whether a change in control has occurred or whether there have beenmultiple changes of control since the Company’s formation due to thesignificant complexity and cost associated with such study and the possibilitythat there could be additional changes in the future.  If the Company experienced a greater than 50percentage point change or shift in ownership over a 3-year time frame sinceits formation, utilization of its NOL or R&D credit carryforwards would besubject to an annual limitation under Sections 382 and 383.  The annual limitation generally is determinedby multiplying the value of the Company’s stock at the time of the ownershipchange (subject to certain adjustments) by the applicable long-term tax-exemptrate.  Any limitation may result inexpiration of a portion of the NOL or R&D credit carryforwards beforeutilization.  Further, until a study iscompleted and any limitation known, no amounts are being presented as anuncertain tax position under FIN 48.

***3.*****             ****Reverse Stock Split**

The Company’sboard of directors and stockholders authorized a 1-for-2.1667reverse stock split in December 2006 and January 2007, respectively, for alloutstanding preferred and common shares. All share information has been retroactively restated to reflect thereverse stock split.

**4.****           InitialPublic Offering**

*On February 14, 2007, 7,000,000 shares of common stockwere sold at a price of $7.00 per share, resulting in aggregate proceeds ofapproximately $43.6 million, net of underwriting discounts and commissionsand offering expenses.  In addition,during February 2007, the underwriters exercised in full theover-allotment option to purchase an additional 1,050,000 shares of the Company’scommon stock from a selling stockholder.*

**5.****              Short-TermInvestments**

The following is asummary of the Company’s investment securities, all of which are classified asavailable-for-sale and all of which are due within one year by contractualmaturity with the exception of the other securities which are taxable auctionrate securities.  Determination ofestimated fair value is based upon quoted market prices.

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| ** **                                        | ** ** | **March 31, 2007**   | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **Gross  Amortized Cost** | ** ** | **Gross  Unrealized Gains** | ** ** | **Gross  Unrealized Losses** | ** ** | **Market Value** | ** ** |
| Certificates of  deposits                         |       | $                              | 2,000,985  |   | $ | — |   | $ | (1,305 | ) | $ | 1,999,680 |   |
| Commercial Paper                                  |       | 1,999,706                      |       | — |   | (646 | ) | 1,999,060 |   |
| Corporate debt  securities                        |       | 5,002,127                      |       | 779 |   | (4,649 | ) | 4,998,257 |   |
| Foreign debt securities                           |       | 1,782,831                      |       | — |   | (1,907 | ) | 1,780,924 |   |
| U.S. securities and  other government obligations |       | 12,935,913                     |       | — |   | (38,446 | ) | 12,897,467 |   |
| Other securities                                  |       | 7,665,000                      |       | — |   | — |   | 7,665,000 |   |
|                                              |       | $                              | 31,386,562 |   | $ | 779 |   | $ | (46,953 | ) | $ | 31,340,388 |   |

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

 

Investments in anet unrealized loss position as of March 31, 2007 are as follows:
| ** **                                        | ** ** | ** **                      | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **Number of  Investments** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Certificates of deposits                          |       | 2                               |       | $                                                                         | 1,999,680  |                                                                         | $          | (1,305                               | )          | $ | — |   | $ | — |   | $ | 1,999,680 |   | $ | (1,305 | ) |
| Commercial Paper                                  |       | 1                               |       | 1,999,060                                                                 |       | (646                                                                         | )          | —                               |       | — |   | 1,999,060 |   | (646 | ) |
| Corporate debt  securities                        |       | 5                               |       | 4,184,897                                                                 |       | (4,649                                                                       | )          | —                               |       | — |   | 4,184,897 |   | (4,649 | ) |
| Foreign debt securities                           |       | 2                               |       | 1,780,924                                                                 |       | (1,907                                                                       | )          | —                               |       | — |   | 1,780,924 |   | (1,907 | ) |
| U.S. securities and  other government obligations |       | 4                               |       | 12,897,467                                                                |       | (38,446                                                                      | )          | —                               |       | — |   | 12,897,467 |   | (38,446 | ) |
|                                              |       | 14                              |       | $                                                                         | 22,862,028 |                                                                         | $          | (46,953                              | )          | $ | — |   | $ | — |   | $ | 22,862,028 |   | $ | (46,953 | ) |

 

The Companybelieves that the decline in value is temporary and primarily related to thechange in market interest rates since purchase. The Company anticipates full recovery of amortized cost with respect tothese securities at maturity or sooner in the event of a change in the marketinterest rate environment.

**6.****              StockBased Compensation**

EffectiveJanuary 1, 2006, the Company adopted the provisions of SFASNo. 123(R), Share-Based Payment, using the modifiedprospective-transition-method and therefore, prior period results will not berestated.  SFAS No. 123(R)supersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB Opinion 25”),and related interpretations, and revises guidance in SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”).  Under this transition method, thecompensation costs related to all equity instruments granted prior to, but notyet vested as of, the adoption date of SFAS 123(R) are recognized based onthe grant-date fair value which is estimated in accordance with the originalprovisions of SFAS 123. Compensation costs related to all equity instruments granted afterJanuary 1, 2006 are recognized at the grant-date fair value of the awardsin accordance with

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theprovisions of SFAS 123(R). Additionally, under the provisions of SFAS 123(R), the Company isrequired to include an estimate of the value of the awards that will beforfeited in calculating compensation costs, which is recognized over therequisite service period of the awards on a straight-line basis.

During the threemonths ended March 31, 2007, the Company recorded $227,429, or $0.02 pershare, of stock-based compensation expense as a result of the adoption ofSFAS 123(R).  Of this amount, theCompany allocated $89,924, $53,306 and $84,199 to research and development,marketing and general and administrative expenses, respectively, based on thedepartment to which the associated employee reported.  No related tax benefits of the stock-basedcompensation expense have been recognized since the inception of the Company.

The Black-Scholesoption-pricing model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fullytransferable.  In addition, theBlack-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected stock price volatility.  The following table shows the assumptionsused to compute stock-based compensation expense for the stock options grantedduring the three months ended March 31, 2007 and 2006, using theBlack-Scholes option pricing model:
|                                   | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** |
| Risk-free  interest rate          |       | 4.80                             | %          | 4.80                             | %          |
| Dividend yield                    |       | 0.00                             | %          | 0.00                             | %          |
| Expected life of  options (years) |       | 6.08                             |       | 6.08                             |       |
| Volatility                        |       | 65.82                            | %          | 65.82                            | %          |

 

The risk-freeinterest rate assumption was based on the United States Treasury’s rates forU.S. Treasury zero-coupon bonds with maturities similar to those of the expectedterm of the award being valued.  Theassumed dividend yield was based on the Company’s expectation of not payingdividends in the foreseeable future.  Theweighted average expected life of options was calculated using the simplifiedmethod as prescribed SAB No. 107, *Share-Based Payment*(“SAB 107”).  This decision wasbased on the lack of relevant historical data due to the Company’s limitedhistory.  In addition, due to the Company’slimited historical data, the estimated volatility also reflects the applicationof SAB 107, incorporating the historical volatility of comparablecompanies whose share prices are publicly available.

Based on theseassumptions, the per share weighted-average grant-date fair values of stockoptions granted during the****three monthsended March 31, 2007 was $6.49****per share.

At March 31, 2007,the total unrecognized compensation expense related to non-vested stock optionswas approximately $3,540,539 and the related weighted-average period over whichit is expected to be recognized is approximately 1.9 years.

Total stock-basedcompensation expense, related to all of the Company’s stock-based optionsgranted, recognized for the three months ended March 31, 2007 and 2006 wascomprised as follows:

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| ** **                                                            | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
| Research and  development                                             |       | $                                | 89,924     |   | $ | 6,480 |   |
| Marketing                                                             |       | 53,306                           |       | — |   |
| General and  administrative                                           |       | 84,199                           |       | 12,366 |   |
| Stock-based  compensation expense                                     |       | $                                | 227,429    |   | $ | 18,846 |   |
| Stock-based compensation expense, per common share, basic and diluted |       | $                                | 0.02       |   | $ | — |   |

 

**7.**              Collaboration Agreement

In January 2007,the Company entered into a prospective buy-back agreement with ParPharmaceuticals, or Par, which provided the Company with an option to terminatethe collaboration agreement entered in April 2005 that provided Par to developand commercialize OPT-80 and granted Par an exclusive royalty bearing license,with the right to sublicense, promote, market, distribute and sell OPT-80 in aterritory composed of the United States, Canada and Puerto Rico, with an optionto extend the territory to include Israel. The Company retained all other rights to OPT-80 in the rest of theworld.

InFebruary 2007, the Company elected to terminate the collaborationagreement with Par, and exercised the rights under a prospective buy-backagreement to repurchase Par’s right to develop and commercialize OPT-80 inNorth America and Israel.  The Companypaid Par a one-time $20.0 million termination fee and recorded the payment asresearch and development expense.  TheCompany now holds worldwide rights to OPT-80. The Company is also obligated topay Par a one-time $5.0 million milestone payment, a potential payment to Parof approximately $1.9 million for OPT-80 inventory, a 5% royalty on net salesby the Company, its affiliates or its licensees of OPT-80 in North America andIsrael, and a 1.5% royalty on net sales by the Company or its affiliates ofOPT-80 in the rest of the world.  Inaddition, the Company assumed Par’s obligation to make a potential prepaymentto Biocon Limited, or Biocon, subject to future set offs as a result of suchassumption and assignment, pursuant to Par’s agreement with Biocon.  The one-time $5.0 million milestone paymentshall be paid after the earliest to occur of (i) the successful completionby the Company of its pivotal Phase 3 trial for OPT-80, (ii) theCompany’s grant to a third party of the rights to OPT-80 or (iii) thesubmission to the FDA of an NDA for OPT-80. In addition, in the event the Company licenses its right to market OPT-80in the rest of the world, the Company will be required to pay Par a 6.25%royalty on net revenues received by it related to OPT-80.  The Company is obligated to pay each of theseroyalties, if any, on a country-by-country basis for seven years commencing onthe applicable commercial launch in each such country.

**8.**              Stockholders’ Equity (Deficit)

*Stock Options*

In November 1998,the Company adopted the 1998 Stock Plan (the “1998 Plan”).  As a result of completing of the Company’sinitial public offering in February 2007, the 1998 Plan was terminated and noadditional grants will be issued from this Plan. In December 2006, the board 

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of directorsapproved the 2006 Equity Incentive Plan (the “2006 Plan”).  The 2006 Plan provides for the grant ofincentive stock options, within the meaning of Section 422 of the InternalRevenue Code of 1986, as amended, to the Company’s employees and any parent andsubsidiary corporations’ employees, and for the grant of nonstatutory stockoptions, restricted stock, restricted stock units, stock appreciation rights,performance units and performance shares to the Company’s employees, directorsand consultants and any parent and subsidiary corporations’ employees andconsultants. The Company has reserved a total of 2,000,000 shares of its commonstock for issuance pursuant to the 2006 Plan. In addition, the 2006 Plan provides for annual increases in the numberof shares available for issuance thereunder on the first day of each fiscalyear, beginning with the Company’s 2008 fiscal year, equal to the lesser of (i)5% of the outstanding shares of our common stock on the last day of theimmediately preceding fiscal year;(ii) 750,000 shares; or (iii) such otheramount as the board of directors may determine. Under the 2006 Plan, the exerciseprice of options granted must at least be equal to the fair market value of theCompany’s common stock on the date of grant. The term of an incentive stock option may not exceed the years from thedate of grant (five years for a 10% stockholder).  Options generally vest over a period of fouryears.  The 2006 Plan is administered bythe compensation committee of the Company’s board of directors.

The aggregateintrinsic value of options exercised during the quarter ended March 31, 2007was approximately $1,014,783.

Following is asummary of stock option activity for the three months ended March 31, 2007:
| ** **                            | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-------------|------------|---------------------------------------------|------------|
| Balance as of  December 31, 2006 |       | 1,496,945   |       | $                                           | 1.17       |   |
| Granted                               |       | 233,753     |       | $                                           | 9.18       |   |
| Exercised                             |       | (100,291    | )          | $                                           | 0.93       |   |
| Canceled                              |       | (—     | )          | $                                           | —     |   |
| Balance as of March 31, 2007     |       | 1,630,407   |       | $                                           | 0.85       |   |

 

As ofMarch 31, 2007, options were outstanding under the 1998 Plan and the 2006Plan as follows:
| ** **                | ** ** | **March 31, 2007** | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
| **Exercise   Price** | ** ** | **Number  Outstanding**      | ** ** | **Weighted Average  Remaining  Contractual  Life (in years)** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
| $0.22                     |       | 67,690                       |       | 3.8 |   | $ | 0.22 |   | 67,690 |   | $ | 0.22 |   |
| $0.65                     |       | 412,595                      |       | 4.7 |   | $ | 0.65 |   | 412,595 |   | $ | 0.65 |   |
| $1.08                     |       | 568,892                      |       | 7.9 |   | $ | 1.08 |   | 330,285 |   | $ | 1.08 |   |
| $2.17                     |       | 363,630                      |       | 9.3 |   | $ | 2.17 |   | 35,045 |   | $ | 2.17 |   |
| $9.70                     |       | 217,600                      |       | 10.0 |   | $ | 9.70 |   | — |   | $ | — |   |
|                      |       | 1,630,407                    |       | 7.5 |   | $ | 2.33 |   | 845,615 |   | $ | 0.85 |   |

 

Of the optionsoutstanding, 845,615 options were vested as of March 31, 2007, with aweighted average remaining contractual life of 6.0 years and a weighted averageexercise price of $0.85 per share, while 784,792 were unvested.

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*Employee Stock Purchase Plan*

Concurrent withthe Company’s initial public offering in February 2007, it established theemployee stock purchase plan.  TheCompany’s board of directors adopted the employee stock purchase plan inDecember 2006, and the stockholders approved the plan in January 2007.  A total of 200,000 shares of our common stockwill be made available for sale.  Inaddition, the employee stock purchase plan provides for annual increases in thenumber of shares available for issuance under the employee stock purchase planon the first day of each fiscal year, beginning with the Company’s 2008 fiscalyear, equal to the lesser of (i) 3% of the outstanding shares of the Company’scommon stock on the last day of the immediately preceding fiscal year; (ii)300,000 shares; or (iii) such other amount as may be determined by the board ofdirectors.

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperation**

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

**Overview**

We are abiopharmaceutical company focused on discovering, developing and commercializinginnovative anti-infective products.  Ourinitial development efforts address products that treat gastrointestinalinfections and related diseases where current therapies have limitations,including diminished efficacy, serious adverse side effects, drug-to-druginteractions, difficult patient compliance and bacterial resistance.

We currently havetwo late-stage anti-infective product candidates, OPT-80 andPrulifloxacin.  OPT-80, our lead productcandidate, is an antibiotic currently in a Phase 3 registration trial forthe treatment of CDAD, the most common nosocomial diarrhea.  In April 2005, we entered into acollaboration agreement with Par pursuant to which we and Par Pharmaceutical,Inc., or Par, exclusively collaborated in the clinical development andcommercialization of OPT-80.  In February2007, we elected to terminate the collaboration agreement with Par, exercisedour right under a prospective buy-back agreement to repurchase Par’s rights todevelop and commercialize OPT-80 in North America and Israel and paid Par aone-time $20.0 million termination fee. As a result, we now hold worldwiderights to OPT-80.  The FDA has grantedFast Track status for OPT-80 in the treatment of CDAD.  Fast Track designation indicates that OPT-80has the potential to treat life-threatening diseases with unmet medicalneeds.  OPT-80 was also chosen to be theonly investigational new drug in the Continuous Marketing Applications, or CMA,Pilot 2 Program in the Division of Anti-Infective and OphthalmologyProducts.  The CMA designation offersseveral potential benefits, including a program of continuous FDA feedbackdesigned to streamline the development process. Participation in these programs will not eliminate any phase of clinicaldevelopment.  Prulifloxacin is anantibiotic currently in two Phase 3 trials for the treatment of infectiousdiarrhea, including travelers’ diarrhea, a community-acquired infection whichcan be caused by a broad range of bacteria. We will seek a label for Prulifloxacin for the treatment of infectiousdiarrhea and initially plan to focus commercialization efforts on the treatmentof travelers’ diarrhea.  Prulifloxacin isa prodrug in the fluoroquinolone class of antibiotics, a widely-used class ofbroad-spectrum antibiotics.   We are developingadditional product candidates using our proprietary technology, including ourOPopS drug discovery platform.

We wereincorporated in November 1998.  Sinceinception, we have focused on hiring our management team and initial operatingemployees and on developing our product candidates, including OPT-80 andPrulifloxacin.  We have never beenprofitable and have incurred significant net losses since our inception.  As of March 31, 2007, we had an accumulateddeficit 

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of $76.1million.  These losses have resultedprincipally from costs incurred in connection with research and developmentactivities, including the costs of clinical trial activities associated withour current lead product candidates, license fees and general andadministrative expenses.  We expect tocontinue to incur operating losses for the next several years as we pursue theclinical development and commercialization of our product candidates, as wellas acquire or in-license additional products or product candidates,technologies or businesses that are complementary to our own.

**Critical Accounting Policies**

Our Management’sDiscussion and Analysis of our Financial Condition and Results of Operations isbased on our condensed consolidated financial statements, which have beenprepared in conformity with generally accepted accounting principles in theUnited States.  The preparation of thesecondensed consolidated financial statements requires us to make estimates andassumptions that affect the reported amounts of assets, liabilities, expensesand related disclosures.  Actual resultscould differ from those estimates. While our significant accounting policiesare described in more detail in Note 2 of the Notes to Consolidated FinancialStatements appearing elsewhere in this Form 10-Q, we believe the followingaccounting policies to be critical to the judgments and estimates used in thepreparation of our consolidated financial statements.

*Revenue Recognition*

Our collaborationagreements contain multiple elements, including non-refundable upfront fees,payments for reimbursement of third-party research costs, payments for ongoingresearch, payments associated with achieving specific development milestonesand royalties based on specified percentages of net product sales, if any.  We apply the revenue recognition criteriaoutlined in Staff Accounting Bulletin No. 104, *RevenueRecognition* and Emerging Issues Task Force, or EITF, Issue 00-21,*Revenue Arrangements with Multiple Deliverables*,or EITF 00-21.  In applyingthese revenue recognition criteria, we consider a variety of factors indetermining the appropriate method of revenue recognition under thesearrangements, such as whether the elements are separable, whether there aredeterminable fair values and whether there is a unique earnings processassociated with each element of a contract. Cash received in advance ofservices being performed is recorded as deferred revenue and recognized asrevenue as services are performed over the applicable term of the agreement.

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

In connection withcertain research collaboration agreements, revenues are recognized fromnon-refundable upfront fees, which we do not believe are specifically tied to aseparate earnings 

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process, ratablyover the term of the agreement or the period over which we have significantinvolvement or perform services. Research fees are recognized as revenue as the related researchactivities are performed.

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

None of thepayments that we have received from collaborators to date, whether recognizedas revenue or deferred, are refundable even if the related program is notsuccessful.

*Accrued Clinical Trial Costs*

A substantialportion of our on-going research and development activities are performedunder agreements we enter into with external service providers, including CROs,who conduct many of our research and development activities.  We accrue the costs incurred under thesecontracts based on factors such as estimates of work performed, milestonesachieved, patient enrollment and costs historically incurred for similarcontracts.  As actual costs become known,we adjust our accruals.  To date, ouraccruals have been within management’s estimates, and no material adjustmentsto research and development expenses have been recognized.  We expect to significantly expand the levelof research and development activity to be performed by external serviceproviders and our estimated accruals will be more material to our futureoperations.  Subsequent changes inestimates may result in a material change in our accruals, which could alsomaterially affect our results of operations.

*Stock-Based Compensation*

Effective January 1,2006, we adopted Statement of Financial Accounting Standards, or SFAS,No. 123(R), *Share-Based Payment*, whichrevises SFAS No. 123, *Accounting for Stock-BasedCompensation* and supersedes Accounting Principles Board, or APB,Opinion No. 25, *Accounting for StockIssued to Employees*.  SFASNo. 123(R) requires that share-based payment transactions with employeesbe recognized in the financial statements based on their fair value andrecognized as compensation expense over the vesting period.  Prior to SFAS No. 123(R), we disclosedthe pro forma effects of applying SFAS No. 123 under the Black-Scholesmethod.  We adopted SFAS No. 123(R)effective January 1, 2006, prospectively for new equity awards issuedsubsequent to December 31, 2005. Under SFAS No. 123(R), we calculatethe fair value of stock option grants using the Black-Scholes option-pricingmodel.  The assumptions used in theBlack-Scholes model were 6.1 years for the expected term, 65.8% for theexpected volatility, 4.8% for the risk free rate and 0.0% for dividend yieldfor the quarter ended March 31, 2007. Future expense amounts for any particular quarterly or annual periodcould be affected by changes in our assumptions.

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The weightedaverage expected option term for 2007 reflects the application of thesimplified method set out in SEC Staff Accounting Bulletin, or SAB,No. 107 which was issued in March 2005. The simplified method defines the life as the average of the contractualterm of the options and the weighted average vesting period for all optiontranches.

Estimatedvolatility for fiscal 2007 also reflects the application of SAB No. 107interpretive guidance and, accordingly, incorporates historical volatility ofsimilar public entities.

As ofMarch 31, 2007, we had approximately $3.5 million of unrecognizedstock-based compensation costs related to non-vested equity awards.  As of March 31, 2007, we had outstandingvested options to purchase 845,615 shares of our common stock and unvested optionsto purchase 784,792 shares of our common stock.

Equity instrumentsissued to non-employees are recorded at their fair value as determined inaccordance with SFAS No. 123(R) and Emerging Issues Task Force 96-18,*Accounting for Equity Instruments That are Issuedto Other Than Employees for Acquiring, or in Conjunction with Selling Goods andServices*, and are periodically revalued as the equity instrumentsvest and are recognized as expense over the related service period.

**Results of Operations**

***Three Months Ended March 31, 2007 and 2006***

*Collaborationand Grant Revenues*. Collaboration and grant revenues for the three months ended March 31,2007 and 2006 were $146,000 and $421,000, respectively.  The decrease of $275,000, or 65%, was due toa decrease in revenue from Small Business Innovation Research Program, or SBIRgrants and the conclusion of a development and license agreement.

*Researchand Development Expense*. Research and development expense for the three months ended March 31,2007 and 2006 were $23.4 million and $2.1 million, respectively.  The increase of $21.3 million is dueprimarily to the $20.0 million payment to Par to reacquire the North Americanrights to OPT-80.  Research anddevelopment expenses also increased due to progress on our OPT-80 and Prulifloxacinclinical trials.

*Marketing. *The Company incurred$552,000 of marketing expense in the three months ended March 31, 2007.  The expenses related to salaries, sponsoringa symposium at an international scientific conference and public relations services.

*Generaland Administrative Expense*. General and administrative expense for the three months ended March 31,2007 and 2006 were $1.1 million and $619,000, respectively.  The increase of $475,000 or 77% was due tohigher accounting fees, legal expenses, insurance and compensation expenses,including $84,000 of stock compensation expense.

*InterestIncome and Other, net*. Net interest income and other for the three months ended March 31, 2007and 2006 were $442,000 and $291,000, respectively.  The increase was primarily due to higher cashand short-term investment balances as a result of the initial public offeringwhich closed on February 14, 2007.

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**Liquidity and CapitalResources**

*Sources of Liquidity*

Since inception,our operations have been financed primarily through the sale of equity securities.  Through March 31, 2007, we received grossproceeds of approximately $118.9 million from the sale of shares of ourpreferred and common stock as follows:

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

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

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

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

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

Until required foroperations, we have invested a substantial portion of our available funds inmoney market funds, corporate debt securities, United States governmentinstruments and other readily marketable debt instruments, all of which areinvestment-grade quality.  We haveestablished guidelines relating to diversification and maturities of ourinvestments to preserve principal and maintain liquidity.

*Cash Flows*

As ofMarch 31, 2007, cash, cash equivalents and short-term investments totaledapproximately $43.2 million as compared to $21.3 million as ofDecember 31, 2006, an increase of approximately $21.9 million.  We raised $43.6 million in net proceeds fromour initial public offering which closed in February 14, 2007.  We paid Par $20.0 million of the net proceedsto reacquire the North American rights to OPT-80.

We cannot becertain if, when or to what extent we will receive cash inflows from thecommercialization of our product candidates. We expect our development expenses to be substantial and to increaseover the next few years as we advance the development of our productcandidates.

In April 2005, weentered into a collaboration agreement with Par pursuant to which we and Parexclusively collaborated to develop and commercialize OPT-80.  We had granted to Par an exclusiveroyalty-bearing license, with the right to sublicense, promote, market,distribute and sell OPT-80 in a territory composed of the United States, Canadaand Puerto Rico, with an option to extend the territory to include Israel.  We retained all other rights to OPT-80 in therest of the world.  In January 2007, weentered into a prospective buy-back agreement with Par which 

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provided us withan option to terminate the collaboration and repurchase the rights to developand commercialize OPT-80 in North America and Israel.

In February 2007,we elected to terminate the collaboration agreement pursuant to the prospectivebuy-back agreement with Par and we have repurchased the rights to develop andcommercialize OPT-80 in North America and Israel.  We now hold worldwide rights to OPT-80.  Under the terms of the prospective buy-backagreement, we paid Par a one-time $20.0 million termination fee and we are alsoobligated to pay Par a one-time $5.0 million milestone payment, a 5% royalty onnet sales by us or our affiliates of OPT-80 in North America and Israel, and a1.5% royalty on net sales by us or our affiliates of OPT-80 in the rest of theworld.  In addition, in the event welicense our right to market OPT-80 in the rest of the world, we will berequired to pay Par a 6.25% royalty on net revenues we receive related toOPT-80.  We are obligated to pay each ofthese royalties, if any, on a country-by-country basis for seven years commencingon the applicable commercial launch in each such country**.**

In connection withthe exercise of our rights under the prospective buy-back agreement, Parassigned to us a supply agreement with Biocon regarding the activepharmaceutical ingredient, or API, for OPT-80. Under this agreement, Biocon shall supply to us our requirements of APIfor certain markets.  We may be obligatedto pay to Biocon a $3.0 million prepayment for capital investments made byBiocon, which shall be subject to set-offs against future purchases by us ofthe API for OPT-80.  The supply agreementshall terminate upon the tenth anniversary of the commercial launch of OPT-80unless earlier terminated by mutual agreement or material default of eitherparty.

*Funding Requirements*

Our future capitaluses and requirements depend on numerous factors including, but not limited to,the following:

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

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

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

·                  the costs and timing ofregulatory approvals;

·                  the costs of establishingsales or distribution capabilities;

·                  the success of thecommercialization of our products; and

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

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We believe thatour existing cash and cash equivalents, along with the net proceeds from ourinitial public offering, will be sufficient to meet our capital requirementsfor at least the next 12 months.

Until we cangenerate significant cash from our operations, we expect to continue to fundour operations with existing cash resources that were primarily generated fromthe proceeds of offerings of our equity securities and collaborations andgovernment grants.  In addition, we mayfinance future cash needs through the sale of additional equity securities,strategic collaboration agreements and debt financing.  However, we may not be successful inobtaining additional collaboration agreements, in receiving milestone or royaltypayments under new or existing collaboration agreements, in obtaining newgovernment grants or in obtaining debt financing.  In addition, we cannot be sure that ourexisting cash and investment resources will be adequate, that financing will beavailable when needed or that, if available, financing will be obtained onterms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale-back oreliminate some or all of our development programs, relinquish some or even allof our rights to product candidates at an earlier stage of development orrenegotiate less favorable terms than we would otherwise choose.  Failure to obtain adequate financing also mayadversely affect our ability to operate as a going concern.  If we raise funds by issuing equity securities,substantial dilution to existing stockholders would likely result.  If we raise funds by incurring additionaldebt financing, the terms of the debt may involve significant cash paymentobligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

**Contractual Obligations**

The followingtable describes our long-term contractual obligations and commitments as ofMarch 31, 2007:
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-2 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| ** **                  | ** ** | **(in thousands)**                   | ** ** |
| Operating lease  obligation |       | $                                         | 3,258      |   | $ | 752 |   | $ | 1,367 |   | $ | 1,139 |   | $ | — |   |
|                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We have contractedwith a contract research organization, or CRO, for clinical research servicesfor the OPT-80 Phase 3 clinical trials and Prulifloxacin Phase 3clinical trials.  We have issued purchaseorders totaling $24.2 million for these services, $20.4 million of which wereissued in 2006.  We can terminate theservice agreement at any time upon 60 days’ written notice to the CRO.  We have not included any amounts related tothe CRO contract in the table above.

The contractualobligations table does not include (a) a potential future milestonepayment in the amount of $1.0 million to Nippon Shinyaku due upon filing ourfirst NDA in the United States for Prulifloxacin, (b) potential futuremilestone payments to Cempra in the amount of $1.0 million due upon theregulatory approval of each of the first two products we develop under ourlicensing agreement with Cempra in any country which is a member of theAssociation of Southeast Asian Nations, or ASEAN, (c) potential futuremilestone payments to SKI for each product licensed under the SKI agreement asfollows: (i) $500,000 upon the commencement of Phase 3 clinicalstudies, (ii) $750,000 upon the filing of the first NDA, (iii) $1.5million upon marketing approval in the United States and (iv) $1.0 millionupon marketing approval in each 

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and any of Japanand certain European countries, (d) potential future milestone payments ofup to $14.0 million to TSRI due upon achievement of certain clinicalmilestones, the filing of NDAs or their foreign equivalents and governmentmarketing and distribution approval, (e)  a future $5.0 million milestonepayment and a potential approximately $1.9 million payment for OPT-80 inventoryto Par or (f) a potential $3.0 million prepayment to Biocon, subject tofuture set-offs, from the assignment by Par to us of its supply agreement withBiocon.  We may also be required to payroyalties on any net sales of Prulifloxacin, OPT-80 and other licensed productcandidates.  The milestone and royaltypayments under our license agreements are not included in the table abovebecause we cannot, at this time, determine when or if the related milestoneswill be achieved or the events triggering the commencement of paymentobligations will occur.

**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

Our cash and cashequivalents and short-term investments as of March 31, 2007 consistedprimarily of money market funds, corporate debt securities, United Statesgovernment instruments and other readily marketable debt instruments.  Our primary exposure to market risk isinterest income sensitivity, which is affected by changes in the general levelof U.S. interest rates.  The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk.  Due tothe short-term duration of our investment portfolio and the low risk profile ofour investments, an immediate 10% change in interest rates would not have amaterial effect on the fair market value of our portfolio.  Accordingly, we would not expect ouroperating results or cash flows to be affected to any significant degree by theeffect of a sudden change in market interest rates on our securitiesportfolio.  In general, money marketfunds are not subject to market risk because the interest paid on such fundsfluctuates with the prevailing interest rate.

**Item4. Controls and Procedures**

As ofthe end of the period covered by this report, an evaluation was performed underthe supervision and with the participation of our management, including ourchief executive officer and chief financial officer (collectively, our “certifyingofficers”), of the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on their evaluation, our certifying officersconcluded that these disclosure controls and procedures are effective inproviding reasonable assurance that the information required to be disclosed byus in our periodic reports filed with the Securities and Exchange Commission,or SEC, is recorded, processed, summarized and reported within the time periodsspecified by the SEC’s rules and SEC reports.

Webelieve that a controls system, no matter how well designed and operated, isbased in part upon certain assumptions about the likelihood of future events,and therefore can only provide reasonable, not absolute, assurance that theobjectives of the controls system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within a company have been detected.

Inaddition, we have reviewed our internal controls over financial reporting andhave made no changes during the quarter ended March 31, 2007, that ourcertifying officers concluded materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II –OTHER INFORMATION**

**Item 1.LEGAL PROCEEDINGS**

None.

**Item 1A.RISK FACTORS**

**Risks Related to OurBusiness**

**We are acompany with limited sources of revenue, and we are largely dependent on thesuccess of our lead product candidate OPT-80 and, to a lesser degree, our otherlead product candidate Prulifloxacin.**

We are abiopharmaceutical company with no products approved for commercial sale and, todate, we have not generated any revenues from product sales.  Our ability to generate future revenuesdepends heavily on our success in:

·                  developing and securing U.S.and/or foreign regulatory approvals for OPT-80 and Prulifloxacin and, to alesser extent, other product candidates;

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

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

Our productcandidates will require extensive additional clinical study and evaluation,regulatory approval in multiple jurisdictions, substantial investment andsignificant marketing efforts before we generate any revenues from productsales.  We are not permitted to market orpromote our product candidates before we receive regulatory approval from theFDA or comparable foreign regulatory authorities.  We have not submitted an NDA, or receivedmarketing approval for either OPT-80 or Prulifloxacin, and we cannot be certainthat either of these product candidates will be successful in clinical trialsor receive regulatory approval.  If we donot receive regulatory approval for and successfully commercialize OPT-80 andPrulifloxacin, we will not generate any revenues from product sales for severalyears, if at all, and we may not be able to continue our operations.

We believe ourinitial success will be more dependent on OPT-80 than Prulifloxacin, because webelieve that our market for the treatment of *Clostridiumdifficile*-associated diarrhea, or CDAD, is larger than our marketfor the treatment of infectious diarrhea. Even if we successfully obtain regulatory approval to market OPT-80 orPrulifloxacin, our revenues for either drug candidate are dependent upon thesize of the markets in the territories for which we have commercialrights.  If the markets for the treatmentof CDAD or infectious diarrhea are not as significant as we estimate, ourbusiness and prospects will be harmed.

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

We haveexperienced significant operating losses since our inception in 1998.  As of March 31, 2007, we had an accumulateddeficit of approximately $76.1 million. We have generated no revenues from product sales to date.  We have funded our operations to date fromthe sale of approximately $118.9 million of our securities and through researchfunding pursuant to collaborations with partners or government grants.  We intend to use the net proceeds from ourinitial public offering for the clinical trials and other research anddevelopment activities of OPT-80 and Prulifloxacin; to fund commercializationactivities, including conducting pre-launch preparations;  to fund working capital and general corporatepurposes; and potential in-licenses and acquisitions of products or productcandidates.  We expect to continue toincur substantial additional operating losses for the next several years as weadvance our clinical trials and research and development initiatives and buildour marketing and sales capabilities. Because of the numerous risks and uncertainties associated withdeveloping and commercializing antibiotics, we are unable to predict the extentof any future losses.  We may neversuccessfully commercialize our product candidates and thus may never have anysignificant future revenues or achieve and sustain profitability.

**If we fail to obtainadditional financing, we may be unable to complete the development andcommercialization of OPT-80, Prulifloxacin and other product candidates, orcontinue our other research and development programs.**

Our operationshave consumed substantial amounts of cash since inception.  We expect to continue to spend substantialamounts to:

·                  complete the clinicaldevelopment of OPT-80 and Prulifloxacin;

·                  license or acquireadditional product candidates;

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

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

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

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·                  seek collaborators for oneor more of our current or future product candidates at an earlier stage thanotherwise would be desirable or on terms that are less favorable than mightotherwise be available; or

·                  relinquish or license on unfavorableterms our rights to technologies or product candidates that we otherwise wouldseek to develop or commercialize ourselves.

Any of the aboveevents could significantly harm our business and prospects and could cause ourstock price to decline.

**We do not currently have sufficient resources to developand commercialize OPT-80 on our own. If we are unable to find a collaborationpartner or are unable to effectively collaborate with one or more partners forthe development and commercialization of OPT-80, we will not generatesufficient revenues from sales of OPT-80 and our business will be materiallyharmed.**

We currently planto build our own marketing and sales force for OPT-80 and Prulifloxacin in theUnited States.  However, we may also seekone or more partners for the commercialization of OPT-80.  We cannot be certain that we would besuccessful in attracting any such partners, due to our continuing obligationsto pay royalties to Par, other terms of the prospective buy-back agreement orother factors.  If we were not able tofind appropriate partners for the continued development and commercializationof OPT-80, we would either have to delay these initiatives, or raisesignificant additional funds to develop clinical and commercializationcapabilities internally.  In either case,our business and prospects would be harmed.

We are subject toa number of additional risks associated with our dependence on collaborationswith third parties.** **Conflicts may arise between us andcollaborators, such as conflicts concerning the interpretation of clinicaldata, the achievement of milestones, the interpretation of financial provisionsor the ownership of intellectual property developed during thecollaboration.  If any such conflictsarise, a collaborator could act in its own self-interest, which may be adverseto our best interests.  Any suchdisagreement between us and a collaborator could result in one or more of thefollowing, each of which could delay or prevent the development orcommercialization of OPT-80, and in turn prevent us from generating sufficientrevenues to achieve or maintain profitability:

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

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

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

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

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In addition, acollaborator may shift its research, development, manufacturing andcommercialization resources to other product opportunities including those thatmight be competitive with OPT-80.

We or a futurecollaborator could also fail to manage effectively the manufacturingrelationship with Biocon.  Biocon, is themanufacturer and the supplier of API for OPT-80 and is located in India. Assuch, Biocon will be subject to ongoing periodic unannounced inspections by theFDA and other agencies for compliance with current good manufacturing practicesregulations, or cGMP, and similar foreign standards.  We or a future collaborator could fail tomonitor Biocon’s compliance with these regulations and standards and Biocon’sfailure to comply could result in a temporary or permanent shutdown of Biocon’smanufacturing operations, which would interrupt clinical and/or commercialsupplies of OPT-80.  In such event, we orour collaborator would be required to find and qualify an alternative supply ofOPT-80, which might not be available in the necessary quantities or on suitableterms for our clinical or commercial needs. Any alternative manufacturer would be required to be approved by the FDAand other regulatory authorities.  Inaddition, the search for an alternative supply of OPT-80 could be timeconsuming, causing distraction on the part of our management team and potentialdelay of clinical trials, regulatory approvals or subsequent commercial salesof OPT-80.

If we cannotcommercialize OPT-80, we will have to rely solely on Prulifloxacin and earlierstage product candidates for any future revenues, and our ability to achieveand sustain profitability will be materially and adversely harmed.  If either we or Par do not perform or devotesufficient resources to our respective obligations under the buy-backagreement, or if we and Par do not work effectively together, OPT-80 may not besuccessfully approved and commercialized. For example, Par provided technical support and transferred technologyto us for regulatory filings, manufacturing, and commercialization of OPT-80through the transition period which ended on April 30, 2007.  We may request Par to provide further supportin areas such as manufacturing, regulatory and patent filings.  We may need to establish an alternativecollaboration and we may not be able to do so on acceptable terms or at all.

**If we are unable to obtainFDA approval of our product candidates, we will not be able to commercializethem in the United States.**

We need FDAapproval prior to marketing our product candidates in the United States.  If we fail to obtain FDA approval to marketour product candidates, we will be unable to sell our product candidates in theUnited States, which will significantly impair our ability to generate anyrevenues.

This regulatoryreview and approval process, which includes evaluation of pre-clinical studiesand clinical trials of our product candidates as well as the evaluation of ourmanufacturing processes and our third-party contract manufacturers’ facilities,is lengthy, expensive and uncertain.  Toreceive approval, we must, among other things, demonstrate with substantialevidence from well-controlled clinical trials that the product candidate isboth safe and effective for each indication for which approval is sought.  Satisfaction of the approval requirementstypically takes several years and the time needed to satisfy them may varysubstantially, based on the type, complexity and novelty of the pharmaceuticalproduct.  We cannot predict if or when wemight receive regulatory approvals for any of our product candidates currentlyunder 

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development.  Moreover, any approvals that we obtain maynot cover all of the clinical indications for which we are seeking approval, orcould contain significant limitations in the form of narrow indications,warnings, precautions or contra-indications with respect to conditions ofuse.  In such event, our ability togenerate revenues from such products would be greatly reduced and our businesswould be harmed.

The FDA hassubstantial discretion in the approval process and may either refuse toconsider our application for substantive review or may form the opinion afterreview of our data that our application is insufficient to allow approval ofour product candidates.  If the FDA doesnot consider or approve our application, it may require that we conductadditional clinical, pre-clinical or manufacturing validation studies andsubmit that data before it will reconsider our application.  Depending on the extent of these or any otherstudies, approval of any applications that we submit may be delayed by severalyears, or may require us to expend more resources than we have available.  It is also possible that additional studies,if performed and completed, may not be successful or considered sufficient bythe FDA for approval or even to make our applications approvable.  If any of these outcomes occur, we may beforced to abandon one or more of our applications for approval, which mightsignificantly harm our business and prospects.

Even if we doreceive regulatory approval to market a product candidate, any such approvalmay be subject to limitations on the indicated uses for which we may market theproduct.  It is possible that none of ourexisting product candidates or any product candidates we may seek to develop inthe future will ever obtain the appropriate regulatory approvals necessary forus or our collaborators to commence product sales.  Moreover, recent events, includingcomplications arising from FDA-approved drugs such as Vioxx and Ketek, haveraised questions about the safety of marketed drugs and may result in increasedcautiousness by the FDA and comparable foreign regulatory authorities inreviewing new drugs based on safety, efficacy or other regulatoryapprovals.  This increased scrutiny byregulatory authorities may result in significant delays in obtaining regulatoryapprovals, as well as more stringent product labeling and post-marketingtesting requirements.  Any delay inobtaining, or an inability to obtain, applicable regulatory approvals wouldprevent us from commercializing our product candidates, generating revenues andachieving and sustaining profitability.

Although the FDAhas granted Fast Track status to OPT-80 and selected it for participation in aCMA Pilot 2 Program, we cannot be certain that we will receive anybenefits from these designations or that the designations will expediteregulatory review or approval of OPT-80. Participation in these programs will not eliminate any phase of clinicaldevelopment.  Moreover, our participationin the CMA Pilot 2 Program will involve frequent scientific discussionsand other interactions with the staff of the FDA during the investigational newdrug phase of our development of OPT-80. These frequent discussions could subject OPT-80 to a greater level ofscrutiny than it might otherwise have received or require us to make morefrequent submissions and endure other burdens that would have been avoided ifwe had not participated in the program. Therefore, despite any potential benefits of OPT-80’s Fast Track and CMAPilot 2 Program designations, significant uncertainty remains regardingthe clinical development and regulatory approval process for OPT-80.

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**Clinical trials involve alengthy and expensive process with an uncertain outcome, and results of earlierstudies and trials may not be predictive of future trial results.**

Clinical testingis expensive and can take many years to complete, and its outcome is uncertain.  Failure can occur at any time during theclinical trial process.  The results ofpre-clinical studies and early clinical trials of our product candidates maynot be predictive of the results of later-stage clinical trials.  Product candidates in later stages ofclinical trials may fail to show the desired safety and efficacy traits despitehaving progressed through pre-clinical studies and initial clinicaltesting.  The time required to obtainapproval by the FDA and similar foreign authorities is unpredictable buttypically takes many years following the commencement of clinical trials,depending upon numerous factors.  Inaddition, approval policies, regulations, or the type and amount of clinicaldata necessary to gain approval may change. We have not obtained regulatory approval for any product candidate.

Our productcandidates could fail to receive regulatory approval for many reasons,including the following:

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

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

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

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

·                  we may be unable todemonstrate that a product candidate presents an advantage over existingtherapies, or over placebo in any indications for which the FDA requires aplacebo-controlled trial;

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

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

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

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

**Delays in clinical trialsare common and have many causes, and any such delays could result in increasedcosts to us and jeopardize or delay our ability to achieve regulatory approvaland commence product sales as currently contemplated.**

We may experiencedelays in clinical trials of our product candidates.  OPT-80 is currently in a Phase 3clinical trial for the treatment of CDAD. We initiated a second Phase 3 pivotal trial of the same design inthe second quarter of 2007.  Weanticipate completing both of these trials in 2008.  If both trials are successful, we intend tofile an NDA as soon as practical thereafter. In addition, we are planning toconduct clinical and proof of concept clinical trials for other indications ofOPT-80.  Prulifloxacin is in twoPhase 3 trials for the treatment of travelers’ diarrhea.  We intend to conduct a Phase 4 trial ofPrulifloxacin subsequent to NDA submission to compare Prulifloxacin tociprofloxacin.  We do not know whetherplanned clinical trials will begin on time, will need to be redesigned or willbe completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, includingdelays in obtaining regulatory approval to commence a trial, in reachingagreement on acceptable terms with prospective contract research organizations,or CROs, and clinical trial sites, in obtaining institutional review boardapproval at each site, in recruiting suitable patients to participate in atrial, in having patients complete a trial or return for post-treatment follow-up,in clinical sites dropping out of a trial, in adding new sites or in obtainingsufficient supplies of clinical trial materials.  Many factors affect patient enrollment,including the size and nature of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, the designof the clinical trial, competing clinical trials, clinicians’ and patients’perceptions as to the potential advantages of the drug being studied inrelation to other available therapies, including any new drugs that may beapproved for the indications we are investigating and whether the clinicaltrial design involves comparison to placebo. Several of our principal investigators have stated that the enrollmentrate in the clinical trials for OPT-80 has been less than projected.  Our original projections were based onenrollment rates for our Phase 2a trial of OPT-80.  The enrollment rate for our Phase 2b trial ofOPT-80 was approximately half of our original projections.  We have now added additional sites and expectto be able to continue to add additional sites in order to enroll theappropriate number of patients for these trials.  As a result of the lower than expectedenrollment rates, we transitioned our Phase 2b trial into the Phase 3 portion ofthe trial in the first quarter of 2007 as opposed to the fourth quarter of 2006as was originally scheduled. If we continue to experience lower than expectedenrollment in the trials, the trials may not be completed as currentlyscheduled and we will incur delays in obtaining regulatory approval as well asadditional significant expenses. Furthermore, with respect to the clinical trials conducted by thirdparties, we will have no control over their timing or success.

We could encounterdelays if prescribing physicians encounter unresolved ethical issues associatedwith enrolling patients in clinical trials of our product candidates in lieu ofprescribing existing antibiotics that have established safety and efficacyprofiles or with administering placebo to patients in our placebo-controlledtrials.  Further, a clinical trial may besuspended or terminated by us, our collaborators, the FDA or other regulatoryauthorities due to a number of factors, including failure to conduct theclinical trial in accordance with regulatory requirements 

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or our clinicalprotocols, inspection of the clinical trial operations or trial site by the FDAor other regulatory authorities resulting in the imposition of a clinical hold,unforeseen safety issues or adverse side effects, failure to demonstrate abenefit from using a drug, changes in governmental regulations oradministrative actions or lack of adequate funding to continue the clinicaltrial.  In addition, our Prulifloxacinproduct candidate treats bacterial infections which tend to peak during hightravel seasons.  As a result, duringcertain times of the year, it is more difficult to enroll patients in ourtrials for Prulifloxacin.  If we experiencedelays in the completion of, or termination of, any clinical trial of ourproduct candidates, the commercial prospects of our product candidates will beharmed, and our ability to generate product revenues from any of these productcandidates will be delayed.  In addition,any delays in completing our clinical trials will increase our costs, slow downour product development and approval process and jeopardize our ability tocommence product sales and generate revenues. Any of these occurrences may harm our business, financial condition andprospects significantly.

**We may be required tosuspend or discontinue clinical trials due to adverse events, adverse sideeffects or other safety risks that could preclude approval of our productcandidates.**

Our clinicaltrials may be suspended at any time for a number of reasons.  We may voluntarily suspend or terminate ourclinical trials if at any time we believe that they present an unacceptablerisk to participants.  In addition,regulatory agencies may order the temporary or permanent discontinuation of ourclinical trials at any time if they believe that the clinical trials are notbeing conducted in accordance with applicable regulatory requirements or thatthey present an unacceptable safety risk to participants.  In previous clinical trials of OPT-80,certain patients experienced non-drug related adverse events.  Patients treated with Prulifloxacin haveexperienced drug-related side effects including abdominal pain, diarrhea,nausea, renal toxicities, cardiac arrhythmias, photosensitivity, rash,excessive flushing of the skin and central nervous system effects, such asseizures.  The FDA recommended that weconduct a study to determine the effect, if any, of Prulifloxacin on theprolongation of the QT interval, a condition that is associated withpotentially life-threatening cardiac arrhythmias.  Our future clinical trials will involvetesting in larger patient populations, which could reveal a high prevalence ofthese or other side effects.  In suchevent, our trials would be interrupted, delayed or halted and the FDA orcomparable foreign regulatory authorities could order us to cease furtherdevelopment of or deny approval of our product candidates for any or alltargeted indications.  Even if we believeour product candidates are safe, our data is subject to review by the FDA, whichmay disagree with our conclusions and delay or deny approval of our productcandidates which would significantly harm the commercial prospects of suchproduct candidates.  Moreover, we couldbe subject to significant liability if any volunteer or patient suffers, orappears to suffer, adverse side effects as a result of participating in ourclinical trials.  Any of theseoccurrences may harm our business and prospects significantly.

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**We rely on third parties toconduct our clinical trials.  If thesethird parties do not successfully carry out their contractual duties or meetexpected deadlines, we and our collaborators may not be able to obtain regulatoryapproval for or commercialize our product candidates.**

We have enteredinto agreements with third-party CROs, such as INC Research, formerly known as “AdvancedBiologics, LLC”, to provide monitors for and to manage data for our on-goingclinical programs.

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

Typically, theCROs conducting clinical trials of our product candidates have the right toterminate their agreements with us or our collaborators upon notice in theevent of an uncured material breach.  Inaddition, some CROs have an ability to terminate their respective agreementswith us if we fail to perform our obligations, if it can be reasonablydemonstrated that the safety of the subjects participating in our clinicaltrials warrants such termination, if we make a general assignment for thebenefit of our creditors or if we are liquidated.  INC Research has been heavily involved in theclinical development and regulatory approval process for our lead productcandidates and possesses significant experience with the regulatoryprocess.  We substantially rely on INCResearch to conduct the clinical trials for OPT-80 and Prulifloxacin.  INC Research has also subcontracted withother third-party CRO’s for various aspects of the clinical trials.  If any relationships with INC Research orthese other third-party CROs terminate, we or our collaborators may not be ableto enter into arrangements with alternative CROs or we may enter intoarrangements with alternative CROs that do not have the expertise orrelationships that INC Research has with government agencies.  In addition, these third-party CROs are notour employees, and we cannot control whether or not they devote sufficient timeand resources to our on-going clinical programs.  These CROs may also have relationships withother commercial entities, including our competitors, for whom they may also beconducting clinical studies or other drug development activities, which couldharm our competitive position.  If CROsdo not successfully carry out their contractual duties or obligations or meetexpected deadlines, if they need to be replaced, or if the quality or accuracyof the clinical data they obtain is compromised due to the failure to adhere toour clinical protocols, regulatory requirements, or for other reasons, ourclinical trials may be extended, delayed or terminated, and we may not be ableto obtain regulatory approval for or successfully commercialize our productcandidates.  As a result, our financialresults and the commercial prospects for our product candidates would beharmed, our costs could increase and our ability to generate revenues could bedelayed.

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**If we fail to gain andmaintain approval from regulatory authorities in international markets forOPT-80 and any future product candidates for which we have rights ininternational markets, our market opportunities will be limited.**

Sales of ourproduct candidates outside of the United States will be subject to foreignregulatory requirements governing clinical trials and marketing approval.  Even if the FDA grants marketing approval fora product candidate, comparable regulatory authorities of foreign countriesmust also approve the manufacturing and marketing of the product candidate inthose countries.  This is important forthe commercialization of OPT-80 for which we currently have exclusive worldwidemarketing rights.  Approval in onejurisdiction does not ensure approval in any other jurisdictions.  Obtaining foreign regulatory approvals couldresult in significant delays, difficulties and costs for us and requireadditional pre-clinical studies or clinical trials which would be costly andtime consuming.  Regulatory requirementscan vary widely from country to country and could delay the introduction of ourproducts in those countries.  Clinicaltrials conducted in one country may not be accepted by regulatory authoritiesin other countries, and regulatory approval in one country does not mean thatregulatory approval will be obtained in any other country.  In addition, our failure to obtain regulatoryapproval in any country may delay or have negative effects on the process forregulatory approval in others.  Otherthan Prulifloxacin, which is sold by other parties in Japan, Italy and certainother European countries, none of our product candidates is approved for salein any international market for which we have rights, and we do not haveexperience in obtaining regulatory approval in international markets.  If we fail to comply with regulatoryrequirements in our international markets or to obtain and maintain requiredapprovals, our target market will be reduced and our ability to generaterevenues will be diminished, which would significantly harm our business,results of operations and prospects.

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

We currently donot have a sales organization for the marketing, sales and distribution ofpharmaceutical products.  In order tocommercialize any products, we must build our marketing, sales, distribution,managerial and other non-technical capabilities or make arrangements with thirdparties to perform these services.  Weplan to build our own marketing and sales force to commercialize OPT-80 in ourcore markets and will seek third-party partners in our non-core markets.  We own exclusive rights to commercializePrulifloxacin in the United States, and we contemplate establishing our ownsales force or seeking third-party partners to sell Prulifloxacin in the UnitedStates.  The establishment and developmentof our own sales force to market any products we may develop will be expensiveand time consuming and could delay any product launch, and we cannot be certainthat we will be able to successfully develop this capability.  We will also have to compete with otherpharmaceutical and biotechnology companies to recruit, hire, train and retainmarketing and sales personnel.  To theextent we rely on third parties to commercialize our products, if any, we willreceive less revenues than if we commercialized these products ourselves.  In addition, we may have little or no controlover the sales efforts of any third parties involved in commercializing ourproducts.  In the event we are unable todevelop our own marketing and sales force or collaborate with a third-partymarketing and sales 

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organization, wewould not be able to commercialize our product candidates which wouldnegatively impact our ability to generate product revenues.

**We may not be able toadequately build our own marketing and sales capabilities or enter intoacceptable agreements to market and commercialize OPT-80 successfully ininternational markets.**

If appropriateregulatory approvals are obtained, we intend to commercialize OPT-80 ininternational markets by building our own marketing and sales force and throughcollaboration arrangements with third parties. We may be unable to enter into collaboration arrangements ininternational markets.  In addition,there can be no guarantee that if we enter into these collaborationarrangements with other parties that they will be successful or result in morerevenues than we could obtain by marketing OPT-80 on our own.  We also plan to develop our own marketing andsales force.  We anticipate marketingOPT-80 in a number of countries in Europe and Latin America to hospital-basedand long-term care physicians, including gastroenterologists, infectiousdisease specialists and internists. These efforts may not be successful as we have no relationships amongsuch hospital-based and long-term care physicians.  There is no guarantee that we will be able todevelop an effective international sales force to successfully commercializeour products in these international markets. If we are unable to develop an effective international sales force andfail to enter into collaboration arrangements for our products, our ability togenerate product revenues would be limited, which would adversely affect ourbusiness, financial condition, results of operations and prospects.

**If our product candidatesare unable to compete effectively with branded and generic antibiotics, ourcommercial opportunity would be reduced or eliminated.**

If approved, ourlead product candidates will compete against both branded antibiotic therapies,such as Vancocin Pulvules with respect to OPT-80 and Xifaxan® with respect to Prulifloxacin,and generic antibiotics such as metronidazole and vancomycin with respect toOPT-80 and ciprofloxacin with respect to Prulifloxacin.  In addition, we anticipate that OPT-80 willcompete with other antibiotic and anti-infective product candidates currentlyin development for the treatment of CDAD, such as TolevamerTM, a toxin absorberbeing developed by Genzyme Corporation, and Xifaxan®, an antibiotic beingdeveloped by Salix Pharmaceuticals, Ltd. Many of these products have been or will be developed and marketed bymajor pharmaceutical companies, who have significantly greater financialresources and expertise in research and development, pre-clinical testing,conducting clinical trials, obtaining regulatory approvals, manufacturing andmarketing approved products than we do. As a result, these companies may obtain regulatory approval more rapidlythan we are able to and may be more effective in selling and marketing theirproducts as well.  Smaller or early-stagecompanies may also prove to be significant competitors, particularly throughcollaborative arrangements with large, established companies.

We anticipatethat, if approved, OPT-80 and Prulifloxacin will face increasing competition inthe form of generic versions of branded products of competitors that will losetheir patent exclusivity.  For example,OPT-80, if approved, will immediately face steep competition from aninexpensive generic form of metronidazole. OPT-80 currently faces generic oral vancomycin competition in Europe andmay face competition from generic oral vancomycin in the United 

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States in2008.  Generic antibiotic therapiestypically are sold at lower prices than branded antibiotics and are generallypreferred by managed care providers of health services.  For example, because metronidazole is sold atsuch a low price, we believe it will be difficult to sell OPT-80 as afirst-line therapy for the treatment of CDAD. If we are unable to demonstrate to physicians and patients that, basedon experience, clinical data, side-effect profiles and other factors, ourproducts are preferable to these generic antibiotic therapies, we may nevergenerate meaningful product revenues.  Inaddition, many antibiotics experience bacterial resistance over time because oftheir continued use.  There can be noguarantee that bacteria would not develop resistance to OPT-80, Prulifloxacinor any of our other product candidates. Our commercial opportunity would also be reduced or eliminated if ourcompetitors develop and commercialize generic or branded antibiotics that aresafer, more effective, have fewer side effects or are less expensive than ourproduct candidates.

**We currently depend, andwill in the future continue to depend, on third parties to manufacture ourproduct candidates, including OPT-80 and Prulifloxacin.  If these manufacturers fail to provide us andour collaborators with adequate supplies of clinical trial materials andcommercial product or neglect to comply with the requirements of regulatoryauthorities, we may be unable to develop or commercialize our products.**

We outsource allmanufacturing of clinical trial supplies of our product candidates to thirdparties.  We seek to establish long-termsupply arrangements with third-party contract manufacturers.  We intend to continue outsourcing themanufacture of our product candidates to third parties for any future clinicaltrials and large-scale commercialization of any product candidates that receiveregulatory approval and become commercial drugs.

Our ability todevelop and commercialize OPT-80 and Prulifloxacin and any other productcandidates depends in part on our ability to arrange for collaborators or otherthird parties to manufacture our products at a competitive cost, in accordancewith strictly enforced regulatory requirements and in sufficient quantities forclinical testing and eventual commercialization.  We have not yet manufactured commercialbatches of OPT-80, Prulifloxacin or any of our other product candidates.  Collaborators or third-party manufacturersthat we select to manufacture our product candidates for clinical testing or ona commercial scale may encounter difficulties with the small- and large-scaleformulation and manufacturing processes required for such manufacture.  Such difficulties could result in delays inclinical trials, regulatory submissions, or commercialization of our productcandidates.  The inability of us or ourcollaborators to enter into and maintain agreements with third-partymanufacturers on acceptable terms, would cause shortages of clinical trialsupplies of our product candidates, thereby delaying or preventing regulatoryapproval and/or commercialization of the affected product candidate, andadversely affecting our ability to generate revenues.  Once a product candidate is approved andbeing marketed, such difficulties could also result in the later recall orwithdrawal of the product from the market. Further, development of large-scale manufacturing processes will requireadditional validation studies, which the FDA must review and approve.  Even if we are able to establish additionalor replacement manufacturers, identifying these sources and entering intodefinitive supply agreements and obtaining regulatory approvals may take asubstantial amount of time and cost and such supply arrangements may not beavailable on acceptable economic terms.

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In addition, we,our collaborators and other third-party manufacturers of our products mustcomply with current strictly enforced cGMP requirements enforced by the FDAthrough its facilities inspection program. These requirements include quality control, quality assurance and themaintenance of records and documentation. We rely on Biocon to manufacture OPT-80 drug supplies, and we rely onNippon Shinyaku, which contracts with Juzen Chemical Corporation, or Juzen, andAngelini ACRAF/SpA, or Angelini, to manufacture Prulifloxacin drugsupplies.  The manufacturing facilitiesof Biocon and Juzen have been inspected and approved by the FDA for other companies’drug products; however, neither Biocon’s nor Juzen’s facilities have yet beenapproved for the manufacture of our drug supplies.  Angelini’s facilities have not been inspectedor approved by the FDA.  We or otherthird-party manufacturers of our products may be unable to comply with cGMP requirementsand with other FDA, state, local and foreign regulatory requirements.  We and our collaborators have little controlover third-party manufacturers’ compliance with these regulations andstandards.  A failure to comply withthese requirements by our third-party manufacturers, including Biocon, Juzenand Angelini, could result in the issuance of untitled letters and/or warningletters from authorities, as well as sanctions being imposed on us, includingfines and civil penalties, suspension of production, suspension or delay inproduct approval, product seizure or recall or withdrawal of productapproval.  In addition, we have nocontrol over these manufacturers’ ability to maintain adequate quality control,quality assurance and qualified personnel. If the safety of any quantities supplied by third parties is compromiseddue to their failure to adhere to applicable laws or for other reasons, we maynot be able to obtain or maintain regulatory approval for or successfullycommercialize one or more of our product candidates, which would harm ourbusiness and prospects significantly.

**The commercial success ofour product candidates will depend upon attaining significant market acceptanceof these product candidates among physicians, patients, healthcare payors andthe medical community.**

None of ourproduct candidates has been commercialized for any indication in territoriesfor which we have rights.  Even if ourproduct candidates are approved by the appropriate regulatory authorities formarketing and sale, physicians may not prescribe our product candidates, whichwould prevent us from generating revenues or becoming profitable.  Market acceptance of OPT-80, Prulifloxacinand any of our future product candidates by physicians, patients and healthcarepayors will depend on a number of factors, many of which are beyond ourcontrol, including:

·                  the clinical indications forwhich the product candidate is approved;

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

·                  perceived advantages overalternative treatments;

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

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

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

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

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

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

·                  relative convenience andease of administration; and

·                  prevalence and severity ofadverse side effects.

Because OPT-80 isa differentiated antibiotic for the treatment of CDAD, it may encounteradditional hurdles to market acceptance by physicians, who may be skepticalabout its clinical benefits or healthcare payors who may resist reimbursing apremium-priced therapeutic particularly in light of the availability of genericalternatives.

We plan to targetour marketing of Prulifloxacin primarily to high-prescribing physicians ofantibiotics for travelers’ diarrhea, including those at travel clinics.  Because of the number of these physicians inthe United States, we will be required to expend significant time and resourcesto obtain broad market acceptance of Prulifloxacin among these physicians.  We do not have experience in marketing tothis population of physicians and do not currently have the resources to beable to conduct such marketing efforts on our own.  As such, we may not be successful in any ofthese marketing efforts which would limit the commercial success ofPrulifloxacin.  In addition, becausePrulifloxacin has already been marketed by other companies to treat a widerange of bacterial infections, including infectious diarrhea, urinary tractinfections, or UTIs and RTIs, patients may be able to obtain Prulifloxacin fromthese other companies, and not from us, if Prulifloxacin is approved in themarket where the patient is located.  Wehave rights to Prulifloxacin only in the United States.  These patients may obtain Prulifloxacin inthese other markets from other companies even if these patients are from theUnited States.

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

A key element ofour strategy is to commercialize a portfolio of new anti-infective products inaddition to OPT-80 and Prulifloxacin.  Asa significant part of our growth strategy, we intend to develop and commercializeadditional products and product candidates through our discovery researchprogram using our proprietary technology, including OPopS.  The success of this strategy depends upon ourability to identify, select and acquire pharmaceutical product candidates andproducts that fit into our development plans on terms that are acceptable tous.

Any productcandidate we identify may require additional development efforts prior tocommercial sale, including pre-clinical studies, extensive clinical testing andapproval by the FDA and applicable foreign regulatory authorities.  All product candidates are prone to the risks

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of failure thatare inherent in pharmaceutical product development, including the possibilitythat the product candidate will not be shown to be sufficiently safe and/oreffective for approval by regulatory authorities.  In addition, we cannot assure you that anysuch products that are approved will be manufactured or produced economically,successfully commercialized or widely accepted in the marketplace or be moreeffective than other commercially available alternatives.

A significantportion of the research that we are conducting involves new and unproventechnologies.  Research programs toidentify new disease targets and product candidates require substantialtechnical, financial and human resources whether or not we ultimately identifyany candidates.  Our research programsmay initially show promise in identifying potential product candidates, yetfail to yield product candidates for clinical development.

If we are unableto develop suitable potential product candidates through internal researchprograms or by obtaining rights to novel therapeutics from third parties, ourbusiness and prospects will suffer.

Our focus on drugdiscovery and development using our technology platform, including our patentedproprietary OPopS drug discovery platform, is novel and unique.  As a result, we cannot be certain that ourproduct candidates will produce commercially viable drugs that safely andeffectively treat infectious diseases or other diseases.  To date, our technology platform has yieldedonly a small number of anti-infective product candidates.  In addition, we do not have significantclinical data with respect to any of these potential product candidates.  Even if we are successful in completingclinical development and receiving regulatory approval for one commerciallyviable drug for the treatment of one disease using our technology platform andcarbohydrate chemistry focus, we cannot be certain that we will also be able todevelop and receive regulatory approval for other drug candidates for thetreatment of other forms of that disease or other diseases.  If we fail to develop and commercializeviable drugs using our platform and specialized focus, we will not besuccessful in developing a pipeline of potential product candidates to followOPT-80 and Prulifloxacin, and our business prospects would be harmedsignificantly.

**Our future growth depends onour ability to identify and acquire or in-license products.  If we do not successfully identify andacquire or in-license related product candidates or integrate them intoour operations, we may have limited growth opportunities.**

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

·                  exposure to unknownliabilities;

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

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

·                  higher than expectedacquisition and integration costs;

·                  increased amortizationexpenses;

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

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

·                  inability to retain keyemployees of any acquired businesses.

We have limitedresources to identify and execute the acquisition or in-licensing ofthird-party products, businesses and technologies and integrate them into ourcurrent infrastructure.  In particular,we may compete with larger pharmaceutical companies and other competitors inour efforts to establish new collaborations and in-licensingopportunities.  These competitors likelywill have access to greater financial resources than us and may have greaterexpertise in identifying and evaluating new opportunities.  Moreover, we may devote resources topotential acquisitions or in-licensing opportunities that are nevercompleted, or we may fail to realize the anticipated benefits of such efforts.

**If we do not findcollaborators for our future product candidates, we may be required to reduceor delay our rate of product development and commercialization and/or increaseour expenditures.**

Our strategy todevelop and commercialize our product candidates in pre-clinical studies orearly clinical trials includes entering into relationships with pharmaceuticalor biotechnology companies to advance our programs.  We may not be able to negotiatecollaborations with these partners on acceptable terms.  If we are not able to establish collaborativearrangements, we may be required to reduce or delay further development of someof our programs and/or increase our expenditures and undertake the developmentactivities at our own expense.

If we are able toidentify and reach agreement with collaborators for our product candidates,those relationships will also be subject to a number of risks, including:

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

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

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

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

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

**Our ability to pursue thedevelopment and commercialization of Prulifloxacin, our other productcandidates and our future product candidates depends upon the continuation ofour licenses from third parties.**

Our licenseagreement with Nippon Shinyaku provides us with an exclusive license to developand commercialize Prulifloxacin for any indication in the United States, with aright to sublicense to third parties.  Inthe event Nippon Shinyaku is not able to supply us with Prulifloxacin, thelicense agreement provides us with a non-exclusive, worldwide right and licenseto manufacture or have Prulifloxacin manufactured for us.  Either we or Nippon Shinyaku may terminatethe license agreement immediately upon the bankruptcy or dissolution of theother party or upon a breach of any material provision of the agreement if thebreach is not cured within 60 days following written notice.  In addition, we are entitled to terminate theagreement in the event that the FDA compels us to cease sales of Prulifloxacinin the United States.  If our licenseagreement with Nippon Shinyaku terminates, we will lose our rights to develop,manufacture and commercialize Prulifloxacin and our potential revenues would belimited.  Similarly, if our agreementwith The Scripps Research Institute, or TSRI, for the license of our OPopStechnology is terminated, we will not be able to further develop future productcandidates using our OPopS technology.

**If product liabilitylawsuits are successfully brought against us, we may incur substantialliabilities and may be required to limit commercialization of our productcandidates.**

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

·                  decreased demand for ourproduct candidates;

·                  injury to our reputation;

·                  termination of clinicaltrial sites or entire clinical trial programs;

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·                  withdrawal of clinical trialparticipants;

·                  significant litigationcosts;

·                  substantial monetary awardsto or costly settlement with patients;

·                  product recalls;

·                  loss of revenues; and

·                  the inability tocommercialize our product candidates.

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

We have globalclinical trial liability insurance that covers our clinical trials up to a $6.0million annual aggregate limit.  Ourcurrent or future insurance coverage may prove insufficient to cover anyliability claims brought against us.  Weintend to expand our insurance coverage to include the sale of commercialproducts if marketing approval is obtained for our product candidates, whichwould increase our insurance premiums. Because of the increasing costs of insurance coverage, we may not beable to maintain insurance coverage at a reasonable cost or obtain insurance coveragethat will be adequate to satisfy any liability that may arise.

**Even if we receiveregulatory approval for our product candidates, we will be subject to ongoingsignificant regulatory obligations and oversight.**

Even if we receiveregulatory approval to sell our product candidates, the FDA and foreignregulatory authorities will likely impose significant restrictions on theindicated uses or marketing of such products, or impose ongoing requirementsfor potentially costly post-approval studies. In addition, following any regulatory approval of our productcandidates, we and our collaborators will be subject to continuing regulatoryobligations, such as requirements for storage, recordkeeping and safetyreporting, and additional post-marketing obligations, including regulatoryoversight of the labeling, packaging, promotion and marketing of ourproducts.  If we or our collaboratorsbecome aware of previously unknown problems with any of our product candidateshere or overseas or at our third-party manufacturers’ facilities, a regulatoryagency may impose restrictions on our products, our third-party manufacturersor on us, including requiring us to reformulate our products, conductadditional clinical trials, make changes in the labeling of our products, implementchanges to, or obtain re-approvals of, our third-party manufacturers’facilities, or withdraw the product from the market.  In addition, we or our collaborators mayexperience a significant drop in the sales of the affected products and ourproduct revenues will be reduced, our reputation in the marketplace may sufferand we may

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become the targetof lawsuits, including class action suits. Moreover, if we or our collaborators or third-party manufacturers failto comply with applicable regulatory requirements, we may be subject to civilor criminal fines, suspension or withdrawal of regulatory approvals, productrecalls, seizure of products, operating restrictions, costly new manufacturingrequirements and criminal prosecution. Any of these events could harm or prevent sales of the affected productsand reduce our related revenues or could substantially increase the costs andexpenses of commercializing and marketing these products, which wouldsignificantly harm our business, financial condition and prospects.

**If we fail to attract andretain senior management and key scientific personnel, we may be unable tosuccessfully develop our product candidates, conduct our clinical trials andcommercialize our product candidates.**

Our successdepends in part on our continued ability to attract, retain and motivate highlyqualified management, clinical and scientific personnel and on our ability todevelop and maintain important relationships with leading academicinstitutions, clinicians and scientists. We are highly dependent upon our senior management and scientific staff,particularly Michael N. Chang, Ph.D., our President and Chief ExecutiveOfficer, Tessie M. Che, Ph.D., our Senior Vice President, CorporateAffairs, Youe-Kong Shue, Ph.D., our Vice President, Clinical Development,and Kevin P. Poulos, our Vice President, Marketing and Sales.  The loss of services of any ofDr. Chang, Dr. Che, Dr. Shue or Mr. Poulos or one or moreof our other members of senior management could delay or prevent the successfulcompletion of our planned clinical trials or the commercialization of ourproduct candidates.  Replacing keyemployees may be difficult and costly and may take an extended period of timebecause of the limited number of individuals in our industry with the breadthof skills and experience required to develop and commercialize products successfully.  We do not maintain “key person” insurancepolicies on the lives of these individuals or the lives of any of our otheremployees.  We employ these individualson an at-will basis and their employment can be terminated by us or themat any time, for any reason and with or without notice.

We will need tohire additional personnel as we expand our clinical development and commercialactivities.  We may not be able toattract or retain qualified management and scientific personnel on acceptableterms in the future due to the intense competition for qualified personnelamong biotechnology, pharmaceutical and other businesses, particularly in theSan Diego, California area.  If we arenot able to attract and retain the necessary personnel to accomplish ourbusiness objectives, we may experience constraints that will impedesignificantly the achievement of our research and development objectives, ourability to raise additional capital and our ability to implement our businessstrategy.  In particular, if we lose anymembers of our senior management team, we may not be able to find suitablereplacements, and our business and prospects may be harmed as a result.

**We will need to increase thesize of our organization, and we may experience difficulties in managinggrowth.**

We are a smallcompany with 42 employees as of May 1, 2007. To continue our clinical trials and commercialize our productcandidates, we will need to expand our employee base for managerial,operational, marketing, sales, financial and other resources.  Future growth will 

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impose significantadded responsibilities on members of management, including the need toidentify, recruit, maintain and integrate additional employees and may taketime away from running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performance and our ability to commercialize ourproduct candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively.  To that end, we must be able to:

·                  manage our developmentefforts effectively;

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

·                  integrate additionalmanagement, administrative and manufacturing personnel;

·                  build a marketing and salesorganization; and

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

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

**Third-party payor coverageand reimbursement may be insufficient or unavailable altogether for our productcandidates, which could diminish our sales or affect our ability to sell ourproducts profitably.**

Market acceptanceand sales of our product candidates will depend on reimbursement policies andmay be affected by future healthcare reform measures.  Government third-party payors, such as theMedicare and Medicaid programs, and private payors, including healthmaintenance organizations, decide which drugs they will pay for and establishreimbursement levels for these drugs. Because third-party payors increasingly are challenging prices chargedand the cost-effectiveness of medical products, significant uncertainty existsas to the ability of our product candidates to receive adequate coverage andreimbursement.  We cannot be sure thatthird-party payors will place our product candidates on approved formularies orthat reimbursement will be available in whole or in part for any of our productcandidates.  Also, we cannot be sure thatinsufficient reimbursement amounts will not reduce the demand for, or the priceof, our products.

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

We have notcommenced efforts to have our product candidates reimbursed by government orthird-party payors.  If reimbursement isnot available or is available only to limited levels, we may not be able tocommercialize our products successfully or at all, which would harm ourbusiness and prospects.

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**Recent proposed legislationmay permit re-importation of drugs from foreign countries into the UnitedStates, including foreign countries where the drugs are sold at lower pricesthan in the United States, which could materially adversely affect ouroperating results and our overall financial condition.**

We may facecompetition for our products from lower priced products from foreign countriesthat have placed price controls on pharmaceutical products.  The Medicare Modernization Act of 2003, orMMA, contains provisions that may change U.S. importation laws and expandconsumers’ ability to import lower priced versions of our and competingproducts from Canada, where there are government price controls.  These changes to U.S. importation laws willnot take effect unless and until the Secretary of Health and Human Servicescertifies that the changes will lead to substantial savings for consumers andwill not create a public health safety issue. The Secretary of Health and Human Services has not yet announced anyplans to make the required certification. Even if the changes do not takeeffect, and other changes are not enacted, imports from Canada and elsewheremay continue to increase due to market and political forces, and the limitedenforcement resources of the FDA, the U.S. Customs Service, and othergovernment agencies.  For example,Pub. L. No. 109-295, which was signed into law onOctober 4, 2006 and provides appropriations for the Department of HomelandSecurity for fiscal year 2007, expressly prohibits the U.S. Customs Servicefrom using funds to prevent individuals from importing from Canada less than a90-day supply of a prescription drug for personal use, when the drugotherwise complies with the Federal Food, Drug and Cosmetic Act.  Further, several states and local governmentshave implemented importation schemes for their citizens, and, in the absence offederal action to curtail such activities, we expect other states and localgovernments to launch importation efforts. The importation of foreign products that compete with our own productcandidates could negatively impact our business and prospects.

**Current healthcare laws andregulations and future legislative or regulatory reforms to the healthcaresystem may affect our ability to sell our product candidates profitably.**

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

The MMA alsochanged the formula for determining payment for certain drugs, which includedrugs provided in physician offices and other outpatient settings.  Further, with respect to the Medicaidprogram, the Deficit Reduction Act of 2005 made changes to certain formulasused to calculate pharmacy reimbursement under Medicaid, the health insuranceprogram in the United States generally for individuals and families with lowincomes and resources, which became effective on January 1, 2007. Thesechanges could lead to reduced payments to pharmacies.  Many states have also created preferred druglists and include drugs on those lists only when the 

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manufacturersagree to pay a supplemental rebate.  IfOPT-80 and Prulifloxacin or other current or future drug candidates are notincluded on these preferred drug lists, physicians may not be inclined toprescribe them to their Medicaid patients, thereby diminishing the potentialmarket for our products.

As a result oflegislative proposals and the trend towards managed healthcare in the UnitedStates, third-party payors are increasingly attempting to contain healthcarecosts by limiting both coverage and the level of reimbursement of newdrugs.  They may also refuse to provideany coverage of uses of approved products for medical indications other thanthose for which the FDA has granted market approvals.  As a result, significant uncertainty existsas to whether and how much third-party payors will reimburse for newly-approveddrugs, which in turn will put pressure on the pricing of drugs.  Further, we do not have experience inensuring approval by applicable third-party payors outside of the United Statesfor reimbursement of our products.  Theavailability of numerous generic antibiotics at lower prices than brandedantibiotics can also be expected to substantially reduce the likelihood ofreimbursement for OPT-80 and Prulifloxacin. We also anticipate pricing pressures in connection with the sale of ourproducts due to the trend toward managed healthcare, the increasing influenceof health maintenance organizations and additional legislative proposals.

**We must comply with federaland state “fraud and abuse” laws, and, if we are unable to fully comply withsuch laws, we could face substantial penalties, which may adversely affect ourbusiness, financial condition and results of operations.**

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

**Our business involves theuse of hazardous materials and we and our third-party manufacturers must complywith environmental laws and regulations, which can be expensive and restricthow we do business.**

Our third-partymanufacturers’ activities and, to a lesser extent, our own activities involvethe controlled storage, use and disposal of hazardous materials, including thecomponents of our product candidates and other hazardous compounds.  We and our manufacturers are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of these hazardous materials.  Although we believe that the safetyprocedures for handling and disposing of these materials comply with thestandards prescribed by these laws and regulations, we cannot eliminate therisk of accidental contamination or injury from these materials.  We currently have insurance coverage in theamount of approximately $250,000 for damage claims arising from contaminationon our property.  These amounts may notbe 

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sufficient toadequately protect us from liability for damage claims relating tocontamination.  If we are subject toliability exceeding our insurance coverage amounts, our business and prospectswould be harmed.  In the event of anaccident, state or federal authorities may also curtail our use of thesematerials and interrupt our business operations.

**Our business and operationswould suffer in the event of computer, telecommunications or other systemfailure.**

Despite theimplementation of security measures, our internal computer systems arevulnerable to damage from computer viruses, unauthorized access, natural disasters,terrorism, war and telecommunication and electrical failures.  Any system failure, accident or securitybreach that causes interruptions in our operations could result in a materialdisruption of our drug development programs. For example, the loss of clinical trial information from completed orongoing clinical trials for OPT-80 or Prulifloxacin, which is maintained by ourthird-party CRO, could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data.  To the extent that any disruption or securitybreach results in a loss or damage to our data or applications, orinappropriate disclosure of confidential or proprietary information, we mayincur liability and the further development of our product candidates may bedelayed.

**Risks Related to OurIntellectual Property**

**It is difficult and costlyto protect our intellectual property and our proprietary technologies, and wemay not be able to ensure their protection.**

Our commercialsuccess will depend in part on obtaining and maintaining patent protection andtrade secret protection of the use, formulation and structure of our productcandidates, and the methods used to manufacture them, as well as successfullydefending these patents against third-party challenges, including those fromgeneric drug manufacturers.  Our abilityto protect our product candidates from unauthorized making, using, selling,offering to sell or importing by third parties is dependent upon the extent towhich we have rights under valid and enforceable patents or trade secrets thatcover these activities.

The patentpositions of pharmaceutical and biotechnology companies can be highly uncertainand involve complex legal and factual questions for which important legal principlesremain unresolved.  No consistent policyregarding the breadth of claims allowed in biotechnology patents has emerged todate in the United States.  Thebiotechnology patent situation outside the United States is even moreuncertain.  Changes in either the patentlaws or in interpretations of patent laws in the United States and othercountries may diminish the value of our intellectual property.  Accordingly, we cannot predict the breadth ofclaims that may be allowed or enforced in our licensed patents, our patents orin third-party patents.

The degree offuture protection for our proprietary rights is uncertain, because legal meansafford only limited protection and may not adequately protect our rights orpermit us to gain or keep our competitive advantage.  For example:

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

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

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

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

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

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

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

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

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

In addition, tothe extent we are unable to obtain and maintain patent protection for one ofour lead product candidates or in the event such patent protection expires, itmay no longer be cost effective to extend our portfolio by pursuing additionaldevelopment of a product candidate for follow-on indications.  While we have filed patent applications forOPT-80 with respect to composition of matter, use and manufacturing processes,we do not yet have any issued patents for OPT-80.  Even if these process patent applicationsbecome issued patents, our competitors, including generic drug companies, maybe able to design around our manufacturing processes for OPT-80.  As a result, our competitors may be able todevelop competing products more effectively or less expensively.

In addition,assuming our clinical trials are successful and completed in a timely manner,we plan to launch Prulifloxacin for the treatment of infectious diarrhea noearlier than late 2008.  However, thepatent covering Prulifloxacin is scheduled to expire in February 2009, and dueto this short remaining patent life we may be forced to abandon plans to pursuedevelopment and approval of Prulifloxacin for any indications, includinginfectious diarrhea. Although we also currently plan to apply for an extensionof this patent term until 2014, we cannot assure you that 

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the PTO will grantthe extension for the full additional five years, or at all.  In either event, our business and prospectswould be harmed significantly.

We depend, inpart, on our licensors and collaborators to protect a portion of ourproprietary rights.  In such cases, ourlicensors and collaborators may be primarily or wholly responsible for themaintenance of patents and prosecution of patent applications relating toimportant areas of our business.  Forexample, Nippon Shinyaku, SKI, TSRI and Cempra are responsible for themaintenance of patents and prosecution of patent applications relating toPrulifloxacin, OPT-822/OPT-821 combination therapy, our OPopStechnology, and OPT-1068 and OPT-1273, respectively.  We are also dependent on Par to providetechnical support for patent applications relating to OPT-80. If any of theseparties fail to adequately protect these product candidates with issued patents,our business and prospects would be harmed significantly.

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

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

If we or ourlicensors fail to obtain or maintain patent protection or trade secretprotection for our product candidates or our technologies, third parties coulduse our proprietary information, which could impair our ability to compete inthe market and adversely affect our ability to generate revenues and attainprofitability.

**We may incur substantialcosts as a result of litigation or other proceedings relating to our patent,trademark and other intellectual property rights, and we may be unable toprotect our rights to, or use, our technology.**

If we choose to goto court to stop someone else from using our inventions, that individual orcompany has the right to ask the court to rule that the underlying patents areinvalid and/or should not be enforced against that third party.  These lawsuits are expensive and would 

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consume time andother resources even if we were successful in stopping the infringement ofthese patents.  There is also the riskthat, even if the validity of these patents is upheld, the court will refuse tostop the other party on the ground that such other party’s activities do notinfringe our rights to these patents.

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

Although we haveconducted searches of third-party patents with respect to OPT-80 andPrulifloxacin, these searches may not have identified all third-party patentsrelevant to those products and we have not conducted an extensive search ofpatents issued to third parties with respect to our other productcandidates.  Consequently, no assurancecan be given that third-party patents containing claims covering our products,technology or methods do not exist, have not been filed, or could not be filedor issued.  Because of the number ofpatents issued and patent applications filed in our technical areas or fields,we believe there is a significant risk that third parties may allege they havepatent rights encompassing our products, technology or methods.  In addition, we have not conducted anextensive search of third-party trademarks, so no assurance can be given thatsuch third-party trademarks do not exist, have not been filed, could not befiled or issued, or could not exist under common trademark law.  While we have filed a trademark applicationfor the names “Optimer” and “Optimer Pharmaceuticals,” we are aware that thename “Optimer” has been registered as a trademark with the PTO by more than onethird party, including one in the biotechnology space.  As such, we believe there is a significantrisk that third parties may allege they have trademark rights encompassing thenames for which we have applied for protection.

Because somepatent applications in the United States may be maintained in secrecy until thepatents are issued, because patent applications in the United States and manyforeign jurisdictions are typically not published until eighteen months afterfiling, and because publications in the scientific literature often lag behindactual discoveries, we cannot be certain that others have not filed patentapplications for technology covered by our licensors’ issued patents or ourpending applications or our licensors’ pending applications, or that we or our 

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licensors were thefirst to invent the technology.  Ourcompetitors may have filed, and may in the future file, patent applicationscovering technology similar to ours.  Anysuch patent application may have priority over our or our licensors’ patentapplications and could further require us to obtain rights to issued patentscovering such technologies.  If anotherparty has filed a U.S. patent application on inventions similar to ours, we mayhave to participate in an interference proceeding declared by the PTO, todetermine priority of invention in the United States.  The costs of these proceedings could besubstantial, and it is possible that such efforts would be unsuccessful,resulting in a loss of our U.S. patent position with respect to suchinventions.

Some of ourcompetitors may be able to sustain the costs of complex patent litigation moreeffectively than we can because they have substantially greater resources.  In addition, any uncertainties resulting fromthe initiation and continuation of any litigation could have a material adverseeffect on our ability to raise the funds necessary to continue our operations.

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

**The market price of ourcommon stock may be highly volatile.**

Before our initialpublic offering in February 2007, there has not been a public market for ourcommon stock.  We cannot assure you thatan active trading market will exist for our common stock**.**You may not be able to sell your shares quickly or at the market price iftrading in our common stock is not active

The trading priceof our common stock is likely to be highly volatile and could be subject towide fluctuations in price in response to various factors, many of which arebeyond our control, including:

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

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

·                  changes in laws or regulationsapplicable to our products, including but not limited to clinical trialrequirements for approvals;

·                  the success of ourdevelopment efforts and clinical trials, particularly with respect to OPT-80and Prulifloxacin;

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

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

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

·                  actual or anticipatedvariations in our quarterly operating results;

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

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

·                  third-party coverage orreimbursement policies;

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

·                  conditions or trends in thebiotechnology and biopharmaceutical industries;

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

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

·                  changes in the marketvaluations of similar companies;

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

·                  additions or departures ofkey scientific or management personnel;

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

·                  trading volume of our commonstock.

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

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

Persons who wereour stockholders prior to the sale of shares in our initial public offeringcontinue to hold a substantial number of shares of our common stock that theywill be able to sell in the public market following the expiration of the180-day lock-up agreements entered into in connection with our recent initialpublic offering. Significant portions of these shares are held by a smallnumber of stockholders. Sales by our current stockholders of a substantialnumber of shares, or the expectation that such sales may occur, couldsignificantly reduce the market price of our common stock.  Moreover, the holders of a substantial numberof shares of our common stock have rights, subject to certain conditions, torequire us to file registration statements to permit the resale of their sharesin the public market or to include their shares in registration statements thatwe may file for ourselves or other stockholders.

We have alsoregistered all common stock that we may issue under our employee benefitsplans. As a result, these shares can be freely sold in the public market uponissuance, subject to restrictions under the securities laws and any applicablelock-up agreement. In addition, our directors and executive officers may in thefuture establish programmed selling plans under Rule 10b5-1 of theSecurities Exchange Act for the purpose of effecting sales of our common stock.If any of these events cause a large number of our shares to be sold in thepublic market, the sales could reduce the trading price of our common stock andimpede our ability to raise future capital.

**Our principal stockholdersand management own a significant percentage of our stock and will be able toexercise significant influence over matters subject to stockholder approval.**

Our executiveofficers, directors and principal stockholders, together with their respectiveaffiliates, currently beneficially own approximately 24.1% of our commonstock.  Accordingly, these stockholderswill likely be able to influence the composition of our board of directors,influence the approval of all matters requiring stockholder approval andcontinue to have significant influence over our operations.  This concentration of ownership could havethe effect of delaying or preventing a change in our control or otherwisediscouraging a potential acquirer from attempting to obtain control of us,which in turn could cause the market value of our common stock to decline.

**We will incur significantincreased costs as a result of operating as a public company, and ourmanagement will be required to devote substantial time to new complianceinitiatives.**

As a publiccompany, we will incur significant legal, accounting and other expenses that wedid not incur as a private company.  Untilwe are able to implement comprehensive accounting policies and procedures, wemay not be able to prepare and disclose, in a timely manner, our financialstatements and other required disclosures or comply with existing or newreporting requirements.  In addition, theSarbanes-Oxley Act, as well as rules subsequently implemented by the Securitiesand Exchange Commission, or SEC, and the Nasdaq Global Market, or Nasdaq, haveimposed various new requirements on public companies, including requiringestablishment and maintenance of effective disclosure and financial controlsand changes in corporate governance practices. Our management and other personnel will need to devote a substantial 

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amount of time tothese new compliance initiatives. Moreover, these rules and regulations will increase our legal andfinancial compliance costs and will make some activities more time-consumingand costly.  For example, we expect theserules and regulations to make it more difficult and more expensive for us tomaintain director and officer liability insurance, and we may be required toincur substantial costs to maintain the same or similar coverage.

The Sarbanes-OxleyAct requires, among other things, that we maintain effective internal controlsfor financial reporting and disclosure controls and procedures.  In particular, commencing in fiscal 2008, wemust perform system and process evaluation and testing of our internal controlsover financial reporting to allow management and our independent registeredpublic accounting firm to report on the effectiveness of our internal controlsover financial reporting, as required by Section 404 of the Sarbanes-OxleyAct.  Our testing, or the subsequenttesting by our independent registered public accounting firm, may revealdeficiencies in our internal controls over financial reporting that are deemedto be material weaknesses.  Ourcompliance with Section 404 will require that we incur substantialaccounting expense and expend significant management efforts.  We currently do not have an internal auditgroup, and we will need to hire additional accounting and financial staff withappropriate public company experience and technical accounting knowledge.  We currently have three****employeesdedicated full-time and one employee dedicated part-time to accounting andfinance matters.  We currentlycontemplate hiring at least one more full-time employee in the accounting andfinance department to assist in ensuring we have effective internal controls overfinancial reporting and disclosure controls and procedures.  We also hire consultants from time to time toaddress these matters.  If we are unableto hire adequate accounting and finance personnel, we may not be able to meetour public company reporting and governance obligations, including those setforth under the Sarbanes-Oxley Act. Moreover, if we are not able to comply with the requirements ofSection 404 in a timely manner, or if we or our independent registeredpublic accounting firm identifies deficiencies in our internal controls overfinancial reporting that are deemed to be material weaknesses, the market priceof our stock could decline and we could be subject to sanctions orinvestigations by Nasdaq, the SEC or other regulatory authorities, which wouldrequire additional financial and management resources.

**Some provisions of ourcharter documents and Delaware law may have anti-takeover effects that coulddiscourage an acquisition of us by others, even if an acquisition would bebeneficial to our stockholders and may prevent attempts by our stockholders toreplace or remove our current management.**

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

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

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

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·                  limiting the removal ofdirectors by the stockholders;

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

·                  a requirement of approval ofnot less than 662/3%of all outstanding shares of our capital stock entitled to vote to amend anybylaws by stockholder action, or to amend specific provisions of ourcertificate of incorporation;

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

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

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

**Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

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

On February 8, 2007, our registration statement on Form S-1 (RegistrationNo. 333-138555) was declared effective for our initial public offering.  On February 14, 2007, we sold 7,000,000shares of our common stock at $7.00 per share in connection with the closing ofour initial public offering for a total of $49.0 million in grossproceeds.  Piper Jaffray & Co. andJefferies & Company, Inc. acted as joint book-running managers.  JMP Securities LLC and Rodman & Renshaw,LLC acted as co-managers for the offering.

In connection with the initial public offering, we incurred approximately$3.4 million in underwriting discounts and expenses and approximately $2.0million for all other costs and expenses payable by us in connection with thesale of our common stock pursuant to our initial public offering.

We initially invested the approximately $43.6 million in net proceeds wereceived pursuant to our initial public offering in short-terminterest-bearing, investment grade instruments, money market funds,certificates of deposit or direct or guaranteed obligations of the UnitedStates government.  On February 26, 2007,we used $20.0 million of the proceeds to repurchase Par’s 

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rights to develop and commercialize OPT-80.  We intend to use the remaining approximately$23.6 million of net proceeds from our initial public offering for the clinicaltrials and other research and development activities of OPT-80 andPrulifloxacin; to fund commercialization activities, including conductingpre-launch preparations;  to fund workingcapital and general corporate purposes; and potential in-licenses andacquisitions of products or product candidates, all as more fully described inthe “Use of Proceeds” section of the final prospectus for our initial publicoffering.  There has been no materialchange in the planned use of proceeds described in our final prospectus for ourinitial public offering.

On February 20, 2007, the underwriters exercised in full theirover-allotment option and purchased an additional 1,050,000 shares of ourcommon stock from a selling stockholder.

**Item 3.  DEFAULTS UPONSENIOR SECURITIES**

None.

**Item 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS.**

** **On January 19, 2007, our stockholders acted by written consent to takethe following actions in connection with the initial public offering of ourcommon stock:

(1)     appointment of Ernst &Young LLP as our independent public auditors for fiscal year ending December31, 2006;

(2)       approval and adoption of an amendment to our Amended andRestated Certificate of Incorporation (Reverse Stock Split);

(3)       approval and adoption of an amendment to our Amended andRestated Certificate of Incorporation (Post IPO);

(4)       approval and adoption of an amendment to our Amended andRestated Bylaws (Post IPO);

(5)       approval of the designation of classes of the Board ofDirectors;

(6)       approval of the 2006 Equity Incentive Plan;

(7)       approval of the Employee Stock Purchase Plan;

(8)       approval of the increase in shares authorized under the 1998Stock Plan;

(9)       approval of the conversion of the Preferred Stock.

All of the above actions were effected pursuant toactions by written consent of our stockholders in compliance with Section 228of the Delaware General Corporation Law.

**Item 5.  OTHERINFORMATION**

None.

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**Item 6.  EXHIBITS**
| Exhibit   No. | ** ** | **Description  of Document**                                                                                                                                                                                                                                   |
|---------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1           | (3)        | Amended and  Restated Certificate of Incorporation of the registrant.                                                                                                                                                                                          |
| 3.2           | (2)        | Form of Bylaws  of the registrant.                                                                                                                                                                                                                             |
| 4.1           | (4)        | Form of Common  Stock Certificate of the registrant.                                                                                                                                                                                                           |
| 4.2           | (1)        | Warrant  Agreement between the registrant and Pacific Sorrento Technology Park dated  June 1, 2000.                                                                                                                                                       |
| 4.3           | (1)        | Amended and  Restated Investors’ Rights Agreement by and among the registrant and certain  stockholders of the registrant dated November 30, 2005.                                                                                                        |
| 10.1          | (3)        | Prospective  Buy-Back agreement between the registrant and Par Pharmaceuticals, Inc. dated  January 19, 2007.                                                                                                                                                  |
| 10.2          | (5)*       | Supply Agreement  with Biocon Limited dated August 29, 2005, as amended on July 6, 2006 by the  Agreement to Amend Supply Agreement dated August 29, 2005  (Amendment 1).                                                                            |
| 10.3          | (5)*       | Assignment  letter between Par Pharmaceutical, Inc. and Biocon Limited dated January 16,  2007.                                                                                                                                                                |
| 31.1          |       | Certification of  principal executive officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                         |
| 31.2          |       | Certification of  principal financial officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                         |
| 32            |       | Certification by  the Chief Executive Officer and the Chief Financial Officer of the  Registrant, as required by Rule 13a-14(b) or 15d-14(b) and  Section 1350 of Chapter 63 of Title 18 of the United States  Code (18 U.S.C. 1350). |

 

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

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

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

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

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

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

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|                     | **OPTIMER  PHARMACEUTICALS** |
|---------------------|------------------------------|
|                |                         |
| Dated: May 10, 2007 | By:                          |   | /s/ John D. Prunty |
|                | **Name:**                    | **John D. Prunty** |
|                | **Title:**                   | ***Chief Financial Officer*** |
|                | *** ***                 | ***(Principal Financial and  Accounting Officer)*** |

 

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