Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-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 September 30, 2008**

 

**or**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from                     to                    **

 

**CommissionFile Number 001-33291**

 

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**OPTIMERPHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**10110Sorrento Valley Road, Suite CSan Diego, CA 92121**(Address of principal executive offices, including zip code)

 

**(858) 909-0736**(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days:

Yes x       No o

 

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

 

Large Accelerated Filer o      AcceleratedFiler o      Non-acceleratedFiler x      SmallerReporting Company o

 

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

Yes o       No x

 

The number of shares ofthe registrant’s Common Stock, no par value, outstanding as of October 31,2008 was 29,733,305 shares.

 

 

 

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**OPTIMERPHARMACEUTICALS, INC.FORM 10-QFor the Quarterly Period Ended September 30, 2008**

**TABLEOF CONTENTS**

 
| ** **                                                                                                         | **Page** |
|--------------------------------------------------------------------------------------------------------------------|----------|
| **PART I –  FINANCIAL INFORMATION**                                                                      |     |
|                                                                                                               |     |
| Item 1.  Financial Statements (unaudited)                                                                     |     |
|                                                                                                               |     |
| Consolidated  Balance Sheets – September 30, 2008 and December 31, 2007                             | 3        |
|                                                                                                               |     |
| Consolidated  Statements of Operations – Three months and nine months ended  September 30, 2008 and 2007 | 4        |
|                                                                                                               |     |
| Consolidated  Statements of Cash Flows – Nine months ended September 30, 2008 and 2007                   | 5        |
|                                                                                                               |     |
| Notes to Consolidated Financial Statements                                                                         | 6        |
|                                                                                                               |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations           | 17       |
|                                                                                                               |     |
| Item 3. Quantitative and Qualitative Disclosures  about Market Risk                                           | 24       |
|                                                                                                               |     |
| Item 4. Controls and Procedures                                                                               | 25       |
|                                                                                                               |     |
| **PART II – OTHER  INFORMATION**                                                                         |     |
|                                                                                                               |     |
| Item 1A. Risk Factors                                                                                         | 25       |
|                                                                                                               |     |
| Item 6.  Exhibits                                                                                             | 56       |
|                                                                                                               |     |
| SIGNATURE                                                                                                          |     |
| EXHIBIT 31.1                                                                                                       |     |
| EXHIBIT 31.2                                                                                                       |     |
| EXHIBIT 32                                                                                                         |     |

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**OptimerPharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                                | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                           |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                 |       | $                      | 24,102,746 |                  | $          | 3,191,814 |   |
| Short-term investments                                                                                                                                                                                    |       | 22,362,491             |       | 55,613,785            |       |
| Research grant and contract receivables                                                                                                                                                                   |       | 32,484                 |       | 95,184                |       |
| Prepaid expenses and other current assets                                                                                                                                                                 |       | 804,551                |       | 872,810               |       |
| Total current assets                                                                                                                                                                                      |       | 47,302,272             |       | 59,773,593            |       |
| Restricted cash                                                                                                                                                                                           |       | 170,000                |       | —                |       |
| Property and equipment, net                                                                                                                                                                               |       | 648,024                |       | 705,374               |       |
| Long-term investments                                                                                                                                                                                     |       | 1,150,000              |       | —                |       |
| Other assets                                                                                                                                                                                              |       | 332,787                |       | 306,573               |       |
| Total assets                                                                                                                                                                                              |       | $                      | 49,603,083 |                  | $          | 60,785,540 |   |
|                                                                                                                                                                                                      |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                             |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                                      |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                          |       | $                      | 3,127,941  |                  | $          | 2,602,152 |   |
| Accrued expenses                                                                                                                                                                                          |       | 2,614,186              |       | 4,998,025             |       |
| Total current liabilities                                                                                                                                                                                 |       | 5,742,127              |       | 7,600,177             |       |
| Deferred rent                                                                                                                                                                                             |       | 266,976                |       | 281,894               |       |
| Commitments and contingencies                                                                                                                                                                             |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                |       |                   |       |                  |       |
| Preferred stock, par value $0.001, 10,000,000 shares authorized, no  shares issued and outstanding at September 30, 2008 and  December 31, 2007                                                 |       | —                 |       | —                |       |
| Common stock, $0.001 par value, 75,000,000 shares authorized,  29,683,691 shares and 27,903,705 shares issued and outstanding at  September 30, 2008 and  December 31,  2007, respectively |       | 29,683                 |       | 27,904                |       |
| Treasury stock, at cost; 0 and 46,153 shares held at  September 30, 2008 and December 31, 2007, respectively                                                                                    |       | —                 |       | (100,000              | )          |
| Additional paid-in capital                                                                                                                                                                                |       | 166,908,624            |       | 150,681,519           |       |
| Accumulated other comprehensive loss                                                                                                                                                                      |       | (365,290               | )          | (8,396                | )          |
| Accumulated deficit                                                                                                                                                                                       |       | (122,979,037           | )          | (97,697,558           | )          |
| Total stockholders’ equity                                                                                                                                                                           |       | 43,593,980             |       | 52,903,469            |       |
|                                                                                                                                                                                                      |       |                   |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                           |       | $                      | 49,603,083 |                  | $          | 60,785,540 |   |

 

See accompanying notes.

 

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**OptimerPharmaceuticals, Inc**

**Consolidated Statements of Operations**

**(unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                  | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                   |       |                             |       |                            |       |   |   |   |   |
| Research grants                                             |       | $                                | 239,212    |                            | $          | 44,493 |   | $ | 844,675 |   | $ | 241,793 |   |
| Collaborative research agreements                           |       | —                           |       | 271,555                         |       | 50,000 |   | 431,555 |   |
| Total revenues                                              |       | 239,212                          |       | 316,048                         |       | 894,675 |   | 673,348 |   |
| Operating expenses:                                         |       |                             |       |                            |       |   |   |   |   |
| Research and development                                    |       | 7,877,906                        |       | 5,496,136                       |       | 21,003,764 |   | 35,964,496 |   |
| Marketing                                                   |       | 415,916                          |       | 387,424                         |       | 1,695,400 |   | 1,238,492 |   |
| General and administrative                                  |       | 1,544,925                        |       | 1,362,052                       |       | 4,803,422 |   | 3,969,695 |   |
| Total operating expenses                                    |       | 9,838,747                        |       | 7,245,612                       |       | 27,502,586 |   | 41,172,683 |   |
| Loss from operations                                        |       | (9,599,535                       | )          | (6,929,564                      | )          | (26,607,911 | ) | (40,499,335 | ) |
| Interest income and other, net                              |       | 411,352                          |       | 454,230                         |       | 1,426,386 |   | 1,391,731 |   |
| Net loss                                                    |       | $                                | (9,188,183 | )                               | $          | (6,475,334 | ) | $ | (25,181,525 | ) | $ | (39,107,604 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted net loss per share                        |       | $                                | (0.31      | )                               | $          | (0.28 | ) | $ | (0.89 | ) | $ | (1.94 | ) |
| Shares used to compute basic and diluted net loss per share |       | 29,253,693                       |       | 23,154,266                      |       | 28,377,733 |   | 20,143,478 |   |

 

See accompanying notes.

 

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**OptimerPharmaceuticals, Inc.**

**Consolidated Statements of Cash Flows**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2008**                                                | ** **  | **2007** | ** ** |
| ** **                                                                   | ** ** | ** **                                              | ** **  | ** ** | ** ** |
| **Operating activities**                                                     |       |                                                    |        |   |   |
| Net loss                                                                     |       | $                                                       | (25,181,525 | ) | $ | (39,107,604 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                                                    |        |   |   |
| Depreciation and amortization                                                |       | 168,109                                                 |        | 212,890 |   |
| Stock based compensation                                                     |       | 1,278,830                                               |        | 930,143 |   |
| Stock awards                                                                 |       | —                                                  |        | 148,226 |   |
| Deferred rent                                                                |       | (14,918                                                 | )           | (6,355 | ) |
| Changes in operating assets and liabilities:                                 |       |                                                    |        |   |   |
| Prepaid expenses and other current assets                                    |       | 68,259                                                  |        | 828,494 |   |
| Research grant and contract receivables                                      |       | 62,700                                                  |        | 101,866 |   |
| Restricted cash                                                              |       | (170,000                                                | )           | — |   |
| Other assets                                                                 |       | (26,214                                                 | )           | 13,074 |   |
| Accounts payable and accrued expenses                                        |       | (1,858,050                                              | )           | 2,737,890 |   |
| Net cash used in operating activities                                        |       | (25,672,809                                             | )           | (34,141,376 | ) |
|                                                                         |       |                                                    |        |   |   |
| **Investing activities**                                                     |       |                                                    |        |   |   |
| Purchases of short-term investments                                          |       | (22,886,304                                             | )           | (48,793,307 | ) |
| Sales or maturity of short-term investments                                  |       | 54,650,000                                              |        | 40,195,000 |   |
| Purchase of property and equipment                                           |       | (110,760                                                | )           | (198,511 | ) |
| Net cash provided by (used in) investing activities                          |       | 31,652,936                                              |        | (8,796,818 | ) |
|                                                                         |       |                                                    |        |   |   |
| **Financing activities**                                                     |       |                                                    |        |   |   |
| Proceeds from sale of common stock                                           |       | 14,950,101                                              |        | 43,735,465 |   |
| Proceeds from exercise of warrants                                           |       | —                                                  |        | 1,370,267 |   |
| Net cash provided by financing activities                                    |       | 14,950,101                                              |        | 45,105,732 |   |
| Effect of exchange rate changes on cash and cash equivalents                 |       | (19,296                                                 | )           | 31,626 |   |
| Net increase in cash and cash equivalents                                    |       | 20,910,932                                              |        | 2,199,164 |   |
| Cash and cash equivalents at beginning of period                             |       | 3,191,814                                               |        | 6,122,438 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                       | 24,102,746  |   | $ | 8,321,602 |   |
|                                                                         |       |                                                    |        |   |   |
| **Supplemental disclosure of cash flow  information:**                       |       |                                                    |        |   |   |
| Conversion of redeemable convertible preferred stock to common stock         |       | —                                                  |        | 65,461,166 |   |
| Retirement of treasury stock                                                 |       | 100,000                                                 |        | — |   |

 

See accompanying notes.

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

** **

**1.     Interim FinancialInformation**

** **

***Organizationand Business Activities***

** **

Optimer Pharmaceuticals, Inc. (“Optimer” or the “Company”)was incorporated in Delaware on November 18, 1998. The Company has onewholly owned subsidiary, Optimer Biotechnology, Inc., which isincorporated and located in Taiwan.

 

Optimer is a biopharmaceutical company focused ondiscovering, developing and commercializing anti-infective products.  The Company currently has two anti-infectiveproduct candidates, OPT-80 for the treatment of *Clostridium difficile*-infection, and Prulifloxacin, for thetreatment of infectious diarrhea in travelers. The Company is developingadditional product candidates using its proprietary technology, including itsOPopSTM drug discovery platform.

 

*Basis of Presentation*

* *

Theaccompanying unaudited 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 and ninemonths ended September 30, 2008 are not necessarily indicative of theresults that may be expected for the full year. These unaudited consolidatedfinancial statements should be read in conjunction with the audited financialstatements and related notes thereto included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2007, which wasfiled with the Securities and Exchange Commission (“SEC”) on March 26,2008.

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and accompanying notes. Actual resultscould differ materially from those estimates.

 

**2.     Summary of SignificantAccounting Policies**

 

*Cash,Cash Equivalents and Investments*

* *

Investmentswith original maturities of less than 90 days at the date of purchase areconsidered to be cash equivalents.  Allother investments are classified as current or noncurrent available-for-salesecurities and are reported at fair value with net unrealized gains or lossesreported within accumulated other comprehensive income (loss) in theconsolidated balance sheets.  Realizedgains and losses, and declines in value judged to be other than temporary, areincluded in investment income or interest expense. The cost of securities soldis computed using the specific identification method.  Auction rate preferred securities areclassified as noncurrent available-for-sale securities in the consolidatedbalance sheet because of the intent and ability to hold these securities untilthe market for auction rate preferred securities stabilizes or until the issuerrefinances the underlying security.

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

*RevenueRecognition*

* *

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

 

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

 

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

 

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

 

Revenuesderived from reimbursement of direct out-of-pocket expenses for research costsassociated with grants are recorded in compliance with EITF Issue 99-19, *Reporting Revenue Gross as a Principal Versus Net as an Agent*,and EITF Issue 01-14, *Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred*.  According to thecriteria established by these EITF Issues, in transactions where the Companyacts as a principal, with discretion to choose suppliers, bears credit risk andperforms part of the services required in the transaction, the Company recordsrevenue for the gross amount of the reimbursement.  The costs associated with thesereimbursements are reflected as a component of research and development expensein the consolidated statements of operations.

 

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

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

*Researchand Development Expenses*

* *

TheCompany accounts for research and development costs in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 2, *Accounting for Research and Development Costs* (“SFAS 2”).  SFAS 2 specifies that research anddevelopment costs should be charged to expense until technological feasibilityhas been established for the product. Once technological feasibility is established, all product costs shouldbe capitalized until the product is available for general release tocustomers.  The Company has determinedthat technological feasibility for its product candidates will be reached whenthe requisite regulatory approvals are obtained to make the product available forsale, or approval of the new drug application (“NDA”) for such product.  The Company’s research and developmentexpenses consist primarily of license fees, salaries and related employeebenefits, costs associated with clinical trials managed by the Company’scontract research organizations (“CROs”) and costs associated with non-clinicalactivities and regulatory approvals.  TheCompany uses external service providers and vendors to conduct clinical trials,to manufacture supplies of product candidates to be used in clinical trials andto provide various other research and development-related products andservices.

 

When nonrefundable payments for goods or services tobe received in the future for use in research and development activities aremade, the Company applies the criteria outlined in EITF Issue 07-3, (“EITF 07-3”)*Accounting for Non-Refundable AdvancePayments for Goods or Services to be Used in Future Research and DevelopmentActivities .*In accordance with EITF 07-3, these types of paymentsare deferred and capitalized. The capitalized amounts are expensed when therelated goods are delivered or the services are performed.

 

*ComprehensiveIncome (Loss)*

* *

TheCompany has applied SFAS No. 130, *Reporting ComprehensiveIncome*, which requires that all components of comprehensive income(loss), including net income (loss), be reported in the financial statements inthe period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during aperiod from transactions and other events and circumstances from non-ownersources.  Net income (loss) and othercomprehensive income (loss), including foreign currency translation adjustmentsand unrealized gains and losses on investments, is required to be reported, netof their related tax effect, to arrive at comprehensive income (loss).  The Company’s comprehensive loss was $9.6million and $6.5 million for the three months ended September 30, 2008 and2007, respectively.  The Company’scomprehensive loss was $25.5 million and $39.0 million for the nine monthsended September 30, 2008 and 2007, respectively.

 

*NetLoss Per Share*

* *

TheCompany computes net loss per share in accordance with SFAS No. 128 (“SFAS128”), *Earnings per Share*. Underthe provisions of SFAS 128, basic net loss per common share is computed bydividing net loss by the weighted-average number of common shares outstanding. 

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

Dilutednet loss per common share is computed by dividing net loss by theweighted-average number of common shares and dilutive common share equivalentsthen outstanding. Common equivalent shares consist of common shares issuableupon the exercise of stock options and warrants. Since the Company has a netloss for all periods presented, the effect of all potentially dilutivesecurities is anti-dilutive. Accordingly, basic and diluted net loss per shareis the same.

 

Forthe nine months ended September 30, 2008 and 2007, common shares issuableupon the exercise of stock options and warrants totaling 1,981,975 and1,638,612 shares, respectively, were excluded from the calculation as theireffect would have been antidilutive.

 

*IncomeTaxes*

 

On January 1, 2007 the Company adopted FASBissued Financial Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109*.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan entity’s financial statements in accordance with SFAS No. 109, *Accounting for Income Taxes*, and prescribes a recognitionthreshold and measurement attributes for financial statement disclosure of taxpositions taken or expected to be taken on a tax return. The impact of anuncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to be sustained upon audit bythe relevant taxing authority. An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained.Additionally, FIN 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. There were no unrecognized tax benefits as of the date of adoptionand there were no unrecognized tax benefits included in the Company’s balancesheet at September 30, 2008 that would, if recognized, would affect theCompany’s effective tax rate.

 

The Company’s policy is to recognize interest and/orpenalties related to income tax matters as income tax expense. The Company hadzero accrued for interest and penalties on the its balance sheet at September 30,2008 and had recognized zero in interest and/or penalties in its statement ofoperations for the three months ended September 30, 2008.

 

The Company is subject to taxation in the UnitedStates, California and various foreign jurisdictions. The Company’s tax yearsfor 1999 and forward are subject to examination by the Federal and Californiatax authorities due to the carryforward of unutilized net operating losses andresearch and development credits.

 

The Company is currently undergoing a Section 382/383analysis regarding the limitation of net operating loss and research anddevelopment credit carryforwards. When this analysis is finalized, the Companyplans to update its unrecognized tax benefits under FIN 48. The Company expectsthe Section 382/383 analysis to be completed within the nextfew months. Due to the existence of the valuation allowance, futurechanges in the Company’s unrecognized tax benefits will not impact the Company’seffective tax rate.

 

Pursuant to Sections 382 and 383 of the InternalRevenue Code, annual use of the Company’s net operating loss and creditcarryforwards may be limited in the event of a cumulative change in ownershipof more than 50% within a three-year period.

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

*Recently Issued AccountingPronouncements*

 

In November 2007, the EITF issued Issue No. 07-1(“EITF 07-1”), *Accounting for CollaborativeArrangements Related to the Development and Commercialization of IntellectualProperty*. Companies may enter into arrangements with other companiesto jointly develop, manufacture, distribute, and market a product. Often theactivities associated with these arrangements are conducted by thecollaborators without the creation of a separate legal entity (that is, thearrangement is operated as a “virtual joint venture”). The arrangementsgenerally provide that the collaborators will share, based on contractuallydefined calculations, the profits or losses from the associated activities.Periodically, the collaborators share financial information related to productrevenues generated (if any) and costs incurred that may trigger a sharingpayment for the combined profits or losses. EITF 07-1 requires collaborators insuch an arrangement to present the result of activities for which they act asthe principal on a gross basis and report any payments received from (made to)other collaborators based on other applicable GAAP or, in the absence of otherapplicable GAAP, based on analogy to authoritative accounting literature or areasonable, rational, and consistently applied accounting policy election. EITF07-1 is effective for collaborative arrangements in place at the beginning ofthe annual period beginning after December 15, 2008. The Company does notcurrently expect the adoption of EITF 07-1 to have a material impact onits consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160(“SFAS 160”),*Noncontrolling Interestsin Consolidated Financial Statements — An Amendment of ARB No. 51*.  SFAS 160 requires the recognition of anoncontrolling interest, sometimes called minority interest, as equity in theconsolidated financial statements and separate from the parent’s equity. Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement.SFAS 160 clarifies that changes in a parent’s ownership interest in asubsidiary that do not result in deconsolidation are equity transactions if theparent retains its controlling financial interest. In addition, this statementrequires that a parent recognize a gain or loss in net income when a subsidiaryis deconsolidated. Such gain or loss will be measured using the fair value ofthe noncontrolling equity investment on the deconsolidation date. SFAS 160also includes expanded disclosure requirements regarding the interests of theparent and its noncontrolling interest. SFAS 160 is effective for fiscalyears, and interim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. The Company has not determined the impact,if any, that adopting this standard may have on its financial position, cashflows, and results of operations.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133*.This new standard requires enhanced disclosures for derivative instruments,including those used in hedging activities. It is effective for fiscal yearsand interim periods beginning after November 15, 2008. The Company has not determined the impact,if any, that adopting this standard may have on its financial position, cashflows, and results of operations.

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

In April 2008, the FASBissued FASB Staff Position (“FSP”) FAS 142-3, *Determination of the Useful Life of Intangible Assets*. FSPFAS 142-3 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under FASB Statement No. 142, *Goodwill and Other Intangible Assets*. FSPFAS 142-3 is effective for fiscal years beginning after December 15,2008 and early adoption is prohibited. The Company does not currently expect the adoption ofFSP FAS 142-3 to have a material impact on its consolidated financialstatements.

 

In May 2008, the FASBissued SFAS No. 162 (“SFAS 162”), *TheHierarchy of Generally Accepted Accounting Principles*. This newstandard is intended to improve financial reporting by identifying a consistentframework, or hierarchy, for selecting accounting principles to be used inpreparing financial statements that are presented in conformity with U.S.generally accepted accounting principles for nongovernmental entities.SFAS 162 is effective beginning November 15, 2008. The Company does not currently expect theadoption of SFAS 162 to have a material impact on its consolidated financialstatements.

 

**2.   Restricted Cash**

 

In September 2008,the Company established a letter of credit as required under its lease relatedto a new office facility.  The letter ofcredit terminates 60 days after the lease expires (currently scheduled to occuron November 30, 2011) and is secured by a $170,000 certificate of deposit.

 

**3.   Fair Value of Financial Instruments**

 

The Companyadopted SFAS 157 effective January 1, 2008 for financial assets andliabilities measured on a recurring basis. SFAS 157 applies to all financialassets and financial liabilities that are being measured and reported on a fairvalue basis. As defined in SFAS 157, fair value is based on theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurementdate.  SFAS 157 requires disclosure that establishes aframework for measuring fair value and expands disclosure about fair valuemeasurements. The statement requires fair value measurement be classified anddisclosed in one of the following three categories:

 

Level 1:                Quoted prices in active markets foridentical assets and liabilities; or

Level 2:                Quoted prices for identical or similarassets and liabilities in markets that are not active, or observable inputsother than quoted prices in active markets for identical assets andliabilities; or

Level 3:                  Unobservable inputs.

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

The followingtable summarizes the Company’s assets measured at fair value on a recurringbasis subject to the disclosure requirements of SFAS 157 as of September 30,2008:

 
| ** **             | ** ** | **Quoted Prices in  Active Markets  (Level 1)** | ** ** | **Other  Observable  Inputs********(Level 2)** | ** ** | **Unobservable  Inputs********(Level 3)** | ** ** | **Total** | ** ** |
|------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Marketable  securities |       | $                                                                   | 22,362,491 |                                                | $          | —                                         |       | $         | 1,150,000  |   | $ | 23,512,491 |   |
|                        |            |                                                                     |            |                                                     |            |                                                |            |           |            |  |  |  |  |

 

Areconciliation of the beginning and ending balances of assets measured at fairvalue on a recurring basis using Level 3 inputs is as follows:

 
| ** **                                                                               | ** ** | **Auction Rate  Preferred Securities** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Beginning balance at January 1, 2008                                                |       | $                                                | —     |   |
| Total gains and losses                                                                   |       |                                             |       |
| Realized net income                                                                      |       | —                                           |       |
| Unrealized in accumulated other comprehensive income                                     |       | —                                           |       |
| Purchases, sales, issuances and settlements                                              |       | —                                           |       |
| Transfers in (out) of Level 3                                                            |       | 1,150,000                                        |       |
| Ending balance at September 30, 2008                                                |       | $                                                | 1,150,000  |   |
| Change in unrealized gains (losses) included in net income related to  assets still held |       | $                                                | —     |   |

 

Allof the Company’s investments in available-for-sale securities are recorded atfair value based on quoted market prices. At September 30, 2008, theCompany held two auction rate preferred securities valued at $1.2 million withperpetual maturity dates that reset every 28 days.  Since February 2008, the auctions forthese securities have failed.  The fairvalue of the auction rate preferred securities at September 30, 2008, isless than their par value, however, the Company has determined that theimpairment is immaterial.  The auctionrate preferred securities have been classified as long-term investments on theconsolidated balance sheets as the Company does not anticipate the need toliquidate the securities in the near term.

 

**4.     Short-Term Investments**

 

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

 
| ** **                | ** ** | **September 30, 2008** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **Gross  Amortized  Cost**       | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Market Value** | ** ** |
| Corporate debt securities |       | $                                | 21,222,614 |   | $ | — |   | $ | (373,722 | ) | $ | 20,848,892 |   |
| Foreign debt securities   |       | 1,510,020                        |       | 5,489 |   | (1,910 | ) | 1,513,599 |   |
|                      |       | $                                | 22,732,634 |   | $ | 5,489 |   | $ | (375,632 | ) | $ | 22,362,491 |   |

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

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

Investmentsin net unrealized loss positions as of September 30, 2008 are as follows:

 
| ** **                | ** ** | ** **                     | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|---------------------------|------------|--------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **Number of  Securities** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Corporate debt securities |       | 25                             |       | $                                                                         | 19,248,891 |                                                                         | $          | (373,722                             | )          | $ | — |   | $ | — |   | $ | 19,248,891 |   | $ | (373,722 | ) |
| Foreign Debt Securities   |       | 1                              |       | 502,250                                                                   |       | (1,910                                                                       | )          | —                               |       | — |   | 502,250 |   | (1,910 | ) |
|                      |       | 26                             |       | $                                                                         | 19,751,141 |                                                                         | $          | (375,632                             | )          | $ | — |   | $ | — |   | $ | 19,751,141 |   | $ | (375,632 | ) |

 

TheCompany considered a number of factors to determine whether the decline invalue in its investments is other than temporary, including the length of timeand the extent to which the market value has been less than cost, the financialcondition of the issuer and the Company’s intent to hold and ability to retainthe investment.  Based on these factors,the Company believes that the decline in values is temporary and primarilyrelated to the change in market interest rates since purchase.  The Company anticipates full recovery of itsamortized cost with respect to these securities at maturity or sooner in theevent of a positive change in the market interest rate environment.

 

**5.****             ****StockBased Compensation**

 

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 subjective assumptions,including the expected stock price volatility. The following table shows the assumptions used to compute stock-basedcompensation expense for the stock options granted during the three months andnine months ended September 30, 2008 and 2007, using the Black-Scholesoption pricing model:

 
| ** **                       | ** ** | **Three months ended****September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                               | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free interest rate          |       | 2.96                                                   | %          | 4.72                                                | %          | 2.96 | % | 4.72-4.80 | % |
| Dividend yield                   |       | 0.00                                                   | %          | 0.00                                                | %          | 0.00 | % | 0.00 | % |
| Expected life of options (years) |       | 6.08                                                   |       | 6.08                                                |       | 6.02-6.08 |   | 6.08 |   |
| Volatility                       |       | 64.95                                                  | %          | 60.92                                               | %          | 64.95 | % | 60.92-65.82 | % |

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

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

 

Basedon these assumptions, the weighted average grant-date fair values of stockoptions granted during the****three monthsand nine months ended September 30, 2008 was $8.33****pershare and $6.92 per share, respectively.

 

Asof September 30, 2008, the total unrecognized compensation expense relatedto unvested stock options was approximately $3,097,945 and the relatedweighted-average period over which it is expected to be recognized isapproximately 2.7 years.

 

Totalstock-based compensation expense, related to all of the Company’s stockoptions, stock awards and employee stock purchases, recognized for the threemonths and nine months ended September 30, 2008 and 2007 was comprised asfollows:

 
| ** **                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and development               |       | $                                                    | 134,157    |                                                | $          | 79,390 |   | $ | 364,664 |   | $ | 219,003 |   |
| Marketing                              |       | 75,605                                               |       | 81,411                                              |       | 228,901 |   | 191,555 |   |
| General and administrative             |       | 221,065                                              |       | 161,377                                             |       | 685,265 |   | 519,585 |   |
| Total stock-based compensation expense |       | $                                                    | 430,827    |                                                | $          | 322,178 |   | $ | 1,278,830 |   | $ | 930,143 |   |

** **

Taxbenefits recognized and related to stock-based compensation and related cashflow impacts were not material during the nine months ended September 30,2008.

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated Financial Statements (continued)**

**(unaudited)**

 

**6.     Stockholders’ Equity**

 

*Stock Option Plans*

 

InNovember 1998, the Company adopted the 1998 Stock Plan (“1998 Plan”).  The Company terminated and ceased grantingoptions under the 1998 Plan upon the effectiveness of the Company’s initialpublic offering in February 2007.

 

InDecember 2006, the Company’s board of directors approved the 2006 EquityIncentive Plan (“2006 Plan”).  The 2006Plan became effective upon the effectiveness of the Company’s initial publicoffering. A total of 2,000,000 shares of the Company’s common stock wereinitially made available for sale under the plan.  The 2006 Plan provides for annual increasesin the number of shares available for issuance thereunder on the first day ofeach fiscal year, beginning with the Company’s 2008 fiscal year, equal to thelesser of (i) 5% of the outstanding shares of the Company’s common stockon the last day of the immediately preceding fiscal year; (ii) 750,000shares; or (iii) such other amount as the board of directors maydetermine. Pursuantto this provision, 750,000 additional shares of the Company’s common stock werereserved for issuance under the 2006 Plan on January 1, 2008.

 

Optionsgranted under both the 1998 Plan and the 2006 Plan generally expire no laterthan ten years from the date of grant (five years for a 10% stockholder) andvest over a period of four years. The exercise price of options granted must atleast be equal to the fair market value of the Company’s common stock on thedate of grant.  The 2006 Plan isadministered by the Compensation Committee of the Company’s Board of Directors.

 

Followingis a summary of stock option activity for the nine months ended September 30,2008:

 
| ** **                            | ** ** | **Options** | ** ** | **Weighted-   Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|
| Balance as of December 31, 2007  |       | 1,615,317   |       | $                                                 | 2.65       |   |
| Granted                               |       | 435,750     |       | $                                                 | 6.92       |   |
| Exercised                             |       | (57,200     | )          | $                                                 | 0.98       |   |
| Canceled                              |       | (11,892     | )          | $                                                 | 7.63       |   |
| Balance as of September 30, 2008 |       | 1,981,975   |       | $                                                 | 3.61       |   |

 

Asof September 30, 2008, options were outstanding under the 1998 Plan andthe 2006 Plan as follows:

 
| ** **                | ** ** | **September 30, 2008** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **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 - $0.65             |       | 408,063                          |       | 3.09 |   | $ | 0.59 |   | 408,063 |   | $ | 0.59 |   |
| $1.08 - $1.08             |       | 520,683                          |       | 6.50 |   | $ | 1.08 |   | 452,861 |   | $ | 1.08 |   |
| $2.17 - $6.90             |       | 729,813                          |       | 8.59 |   | $ | 4.67 |   | 197,938 |   | $ | 2.40 |   |
| $7.10 - $10.00            |       | 323,416                          |       | 8.68 |   | $ | 9.07 |   | 105,061 |   | $ | 9.23 |   |
| $0.22 - $10.00            |       | 1,981,975                        |       | 6.92 |   | $ | 3.61 |   | 1,163,923 |   | $ | 1.87 |   |

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated Financial Statements (continued)**

**(unaudited)**

 

Ofthe options outstanding, options to purchase 1,163,923 shares were vested as ofSeptember 30, 2008, with a weighted average remaining contractual life of5.67 years and a weighted average exercise price of $1.87 per share, whileoptions to purchase 818,052 shares were unvested.

 

*EmployeeStock Purchase Plan*

* *

Concurrentwith the Company’s initial public offering in February 2007, the Company’sboard of directors adopted the employee stock purchase plan (“ESPP”) in December 2006,and the stockholders approved the plan in January 2007.  A total of 200,000 shares of the Company’scommon stock were initially made available for sale under the plan.  The ESPP provides for annual increases in thenumber of shares available for issuance on the first day of each fiscal year,beginning with the Company’s 2008 fiscal year, equal to the lesser of (i) 3%of the outstanding shares of the Company’s common stock on the last day of theimmediately preceding fiscal year; (ii) 300,000 shares; or (iii) suchother amount as may be determined by the Company’s board of directors. Pursuant to this provision, 300,000additional shares of the Company’s common stock were reserved for issuanceunder the ESPP on January 1, 2008.

 

At September 30, 2008, there were 48,226 shares of common stockissued and 451,774 shares were available for issuance under the ESPP.

 

Duringthe three and nine months ended September 30, 2008, the Company recordedstock-based compensation expense of approximately $23,296 and $72,983,respectively, related to the ESPP.

 

*Treasury Shares*

* *

TheCompany retired the 43,156 shares of common stock held in its treasury on September 3,2008.  The Company recorded theretirement of the treasury shares at cost and the retired treasury shares became part ofthe Company’s authorized but unissued shares of common stock.

 

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**Item****2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*Thefollowing discussion and analysis should be read in conjunction with ourconsolidated financial statements and accompanying notes appearing elsewhere inthis report.  This discussion and otherparts of this report may contain forward-looking statements based upon currentexpectations that involve risks and uncertainties.  Our actual results and the timing of selectedevents could differ materially from those anticipated in these forward-lookingstatements as a result of several factors, including those set forth under “RiskFactors” and elsewhere in this report.*

 

**Overview**

** **

We are a biopharmaceutical company focused ondiscovering, developing and commercializing innovative anti-infectiveproducts.  Our current developmentefforts are focused on products that treat gastrointestinal infections andrelated diseases where current therapies have limitations, including limitedefficacy, serious adverse side effects, drug-to-drug interactions, difficultpatient compliance and bacterial resistance.

 

We currently have two late-stage anti-infectiveproduct candidates, OPT-80 and Prulifloxacin.

 

OPT-80, our lead product candidate, is an antibioticcurrently in two Phase 3 registration trials for the treatment of *Clostridium difficile*-infection, or CDI,the most common nosocomial, or hospital acquired, diarrhea.  We have completed enrollment in the firsttrial and expect to report data in the fourth quarter of 2008. We anticipatecompleting enrollment and reporting data from the second trial in 2009.  In April 2005, we entered into acollaboration agreement with Par Pharmaceutical, Inc., or Par, pursuant towhich we and Par, exclusively collaborated in the clinical development andcommercialization of OPT-80.  In February 2007,we elected to terminate the collaboration agreement with Par, exercised ourright under a prospective buy-back agreement to repurchase Par’s rights todevelop and commercialize OPT-80 in North America and Israel and paid Par aone-time $20.0 million termination fee. As a result, we now hold worldwide rightsto OPT-80. The Food and Drug Administration, or FDA, has granted Fast Trackstatus for OPT-80 in the treatment of CDI. Fast Track designation indicates that OPT-80 has the potential to treatlife-threatening diseases with unmet medical needs.  The FDA also chose OPT-80 to be the onlyinvestigational 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 a prodrug in the fluoroquinoloneclass of antibiotics, a widely-used class of broad-spectrum antibiotics.  We are developing Prulifloxacin as a treatmentfor infectious diarrhea in travelers. In July 2008, we reported positive top-linedata from the first of two Phase 3 trials. The top-line analysis of data from this study showed that Prulifloxacinmet the primary endpoint of Time to Last Unformed Stool (TLUS) in both the mITT(modified intent- to-treat; n=187) and microbiologically evaluable (perprotocol; n=165) populations compared to placebo.  The median TLUS for patients treated withPrulifloxacin was approximately 24 hours; this was significantly different fromthe TLUS for placebo with a p-value of <0.0001.  Prulifloxacin was generally well toleratedand had a similar safety profile compared to placebo.  We anticipate completing enrollment andreporting data from the second trial in the next few months.  We intend to conduct a Phase 4 trial ofPrulifloxacin subsequent to the NDA submission to compare Prulifloxacin tociprofloxacin for the treatment of infectious diarrhea.  We plan to seek a label for Prulifloxacin andinitially plan to focus commercialization efforts on the treatment ofinfectious diarrhea in travelers.

 

We are developing additional product candidates usingour proprietary technology, including our OPopS drug discovery platform.  One of the advanced OPopS product candidatesis OPT-88, a disease-modifying intra-articular or within the cavity of a joint,therapy for osteoarthritis. We plan to file an Investigational New Drugapplication in the first half of 2009 and subsequently to, either ourselves orwith a partner, initiate a Phase 1 study to assess safety of repetitiveintra-articular injections in patients with knee osteoarthritis.

 

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We were incorporated in November 1998.  Since inception, we have focused ondeveloping our product candidates, including OPT-80 and Prulifloxacin.  We have never been profitable and haveincurred significant net losses since our inception.  As of September 30, 2008, we had anaccumulated deficit of $123.0 million. These losses have resulted principally from costs incurred in connectionwith research and development activities, including the costs of clinical trialactivities associated with our current lead product candidates, license feesand general and administrative expenses. We expect to continue to incur operating losses for the next severalyears as we pursue the clinical development and commercialization of ourproduct candidates, as well as acquire or in-license additional products orproduct candidates, technologies or businesses that are complementary to ourown.

 

**CriticalAccounting Policies**

** **

OurManagement’s Discussion and Analysis of our Financial Condition and Results ofOperations is based on our consolidated financial statements, which have beenprepared in conformity with generally accepted accounting principles in theUnited States.  The preparation of theseconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, expenses and relateddisclosures.  Actual results could differfrom those estimates. While our significant accounting policies are describedin more detail in Note 2 of the Notes to Consolidated Financial Statementsappearing elsewhere in this report, we believe the following accountingpolicies to be critical to the judgments and estimates used in the preparationof our consolidated financial statements.

 

*RevenueRecognition*

* *

Ourcollaboration agreements contain multiple elements, including non-refundableupfront fees, payments for reimbursement of third-party research costs,payments for ongoing research, payments associated with achieving specificdevelopment milestones and royalties based on specified percentages of netproduct sales, if any.  We apply therevenue recognition criteria outlined in Staff Accounting Bulletin, or SAB, No. 104,*Revenue Recognition* and Emerging IssuesTask Force, or EITF, Issue 00-21, *Revenue Arrangements withMultiple Deliverables*, or EITF 00-21.  In applying these revenue recognitioncriteria, we consider a variety of factors in determining the appropriatemethod of revenue recognition under these arrangements, such as whether theelements are separable, whether there are determinable fair values and whetherthere is a unique earnings process associated with each element of a contract.

 

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

 

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

 

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Inconnection with certain research collaboration agreements, revenues are recognizedfrom non-refundable upfront fees, which we do not believe are specifically tiedto a separate earnings process, ratably over the term of the agreement or theperiod over which we have significant involvement or perform services.  Research fees are recognized as revenue asthe related research activities are performed.

 

Revenuesderived from reimbursement of direct out-of-pocket expenses for research costsassociated with grants are recorded in compliance with EITF Issue 99-19, *Reporting Revenue Gross as a Principal Versus Net as an Agent*,and EITF Issue 01-14, *Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred*.  According to thecriteria established by these EITF Issues, in transactions where we act as a principal,with discretion to choose suppliers, bear credit risk and perform part of theservices required in the transaction, we record revenue for the gross amount ofthe reimbursement.  The costs associatedwith these reimbursements are reflected as a component of research anddevelopment expense in the consolidated statements of operations.

 

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

 

*Research and Development*

 

Research and development costs are expensed asincurred and consist primarily of costs associated with clinical trials,compensation, including stock-based compensation, and other expenses related toresearch and development, including personnel costs, facilities costs anddepreciation.

 

When nonrefundable payments for goods or services tobe received in the future for use in research and development activities aremade, we apply the criteria outlined in EITF Issue 07-3, or EITF 07-3,  *Accountingfor Non-Refundable Advance Payments for Goods or Services to be Used in FutureResearch and Development Activities .*In accordance with EITF 07-3,these types of payments are deferred and capitalized. The capitalized amountsare expensed when the related goods are delivered or the services areperformed.

 

*AccruedClinical Trial Costs*

* *

Asubstantial portion of our on-going research and development activities areperformed under agreements we enter into with external service providers,including clinical research organizations, or CROs, who conduct many of ourresearch and development activities.  Weaccrue the costs incurred under these contracts based on factors such asestimates of work performed, milestones achieved, patient enrollment and costshistorically incurred for similar contracts. As actual costs become known, we adjust our accruals.  Historically, our accruals have been withinmanagement’s estimates, and no material adjustments to research and developmentexpenses have been recognized. Subsequent changes in estimates may result in a material change in ouraccruals, which could also materially affect our results of operations.

 

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*Stock-BasedCompensation*

* *

Effective January 1, 2006, we adopted Statementof Financial Accounting Standards, or SFAS, No. 123(R), *Share-Based Payment*, which revises SFAS No. 123,*Accounting for Stock-Based Compensation*and supersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS No. 123(R) requires thatshare-based payment transactions with employees be recognized in the financialstatements based on their fair value and recognized as compensation expenseover the vesting period.  We used themodified prospective method when we adopted SFAS No. 123(R) andaccordingly we did not restate the results of operations for prior periods.Compensation expense of approximately $431,000 and $322,000 was recognized inthe three months ended September 30, 2008 and 2007, respectively.  Compensation expense of approximately$1,279,000 and $930,000 was recognized in the nine months ended September 30,2008 and 2007, respectively.

 

Stock-based compensation expense is estimated as ofthe grant date based on the fair value of the award and is recognized asexpense over the requisite service period, which generally represents thevesting period. We estimate the fair value of our stock options using theBlack-Scholes option-pricing model and the fair value of our stock awards basedon the quoted market price of our common stock.

 

Estimating the fair value for stock options requiresjudgment, including estimating stock-price volatility, expected term, expecteddividends and risk-free interest rates. The expected volatility rates are basedon the historical fluctuation in the stock price since inception. The averageexpected term is calculated using SAB No. 107, “*Simplified Method for Estimating the Expected Term*.”  Expected dividends are estimated based on ourdividend history as well as our current projections. The risk-free interestrate for periods approximating the expected terms of the options is based onthe U.S. Treasury yield curve in effect at the time of grant. Theseassumptions are updated on an annual basis or sooner if there is a significantchange in circumstances that could affect these assumptions.

 

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

 

**Resultsof Operations**

** **

***Comparison of***Three Months Ended September 30,2008 and 2007

*** ***

*Collaborationand Grant Revenues*. Collaboration and grant revenues for the three months ended September 30,2008 and 2007 were $239,000 and $316,000, respectively.  The decrease of $77,000, or 24%, wasprimarily due to the completion of a collaborative agreement with a natural healthcare company in 2007.

 

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*Researchand Development Expense*. Research and development expense for the three months ended September 30,2008 and 2007 was $7,878,000 and $5,496,000, respectively, an increase of$2,382,000 or 43%.   The increase wasprimarily due to an increase in expenses related to our OPT-80 andPrulifloxacin Phase 3 clinical trials in the current year.

 

*MarketingExpense*. * * Marketing expense of $416,000 for the threemonths ended September 30, 2008 was relatively consistent with the$387,000 for the three months ended September 30, 2007.

 

*Generaland Administrative Expense*.  General and administrative expense for thethree months ended September 30, 2008 and 2007 was $1,545,000 and$1,362,000, respectively. The increase of $183,000, or 13%, was due to highercompensation expenses, including $221,000 of stock compensation expense, anincrease of $60,000 over the same period in the prior year.

 

*InterestIncome and Other, Net*.  Netinterest income and other of $411,000 for the three months ended September 30,2008 was relatively consistent with the $454,000 for the three months ended September 30,2007.

 

***Comparison of***Nine Months Ended September 30,2008 and 2007

*** ***

*Collaborationand Grant Revenues*. Collaboration and grant revenues for the nine months ended September 30,2008 and 2007 were $895,000 and $673,000, respectively. The increase of$222,000, or 33%, was primarily due to revenue from a National Institutes of Health grant in 2008.

 

*Researchand Development Expense*. Research and development expense for the nine months ended September 30,2008 and 2007 was $21,004,000 and $35,964,000, respectively, a decrease of$14,960,000 or 42%.   The decrease wasprimarily due to a one-time $20.0 million payment to Par to regain the NorthAmerican rights to OPT-80 and the purchase of $1.9 million of clinical supplyand active pharmaceutical ingredient in 2007. The decrease was partially offsetby an increase in expenses related to our OPT-80 and Prulifloxacin Phase 3clinical trials in the current year.

 

*MarketingExpense*. * *Marketingexpense for the nine months ended September 30, 2008 and 2007 was$1,695,000 and $1,238,000, respectively. The increase of $457,000, or 37%, was primarilydue to an increase in medical education and pre-launch marketing effortsrelated to OPT-80.

 

*Generaland Administrative Expense*.  General and administrative expense for thenine months ended September 30, 2008 and 2007 was $4,803,000 and $3,970,000,respectively.  The increase of $833,000,or 21%, was due to higher compensation expenses, including $685,000 of stockcompensation expense, an increase of $165,000 over the same period in the prioryear.

 

*InterestIncome and Other, Net*.  Netinterest income and other of $1,426,000 for the nine months ended September 30,2008 was relatively consistent with the $1,392,000 for the nine months ended September 30,2007.

 

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**Liquidityand Capital Resources**

 

*Sourcesof Liquidity*

* *

Sinceinception, our operations have been financed primarily through the sale ofequity securities.  Through September 30,2008, we received gross proceeds of approximately $169.6 million from the saleof shares of our preferred and common stock as follows:

 

·                  in May 2000,we sold a total of 1.6 million shares of Series A preferred stock forproceeds of $3.4 million;

 

·                  from March 2001to December 2001, we sold a total of 4.1 million shares of Series Bpreferred stock for proceeds of $32.2 million;

 

·                  in April 2005,we sold a total of 1.5 million shares of Series C preferred stock forproceeds of $12.0 million;

 

·                  from April 2005to November 2005, we sold a total of 2.9 million shares of Series Dpreferred stock for proceeds of $22.3 million; and

 

·                  in February 2007,we sold a total of 7.0 million shares of our common stock in connection withour initial public offering for proceeds of $49.0 million.

 

·                  in October 2007, wesold a total of 4.6 million shares of our common stock in connection with aprivate placement offering for proceeds of $35.9 million.

 

·                  in July 2008, we sold atotal of 1.7 million shares of our common stock in a registered direct offeringfor proceeds of $14.8 million.

 

Untilrequired for operations, we have invested a substantial portion of ouravailable funds in money market funds, corporate debt securities, United Statesgovernment instruments and other readily marketable debt instruments (includingrestricted cash), all of which are investment-grade quality.  We have established guidelines relating todiversification and maturities of our investments to preserve principal andmaintain liquidity.

 

*CashFlows*

* *

Asof September 30, 2008, cash, cash equivalents and short-term investmentstotaled approximately $46.5 million as compared to $58.8 million as of December 31,2007, a decrease of approximately $12.3 million.  The decrease in our cash, cash equivalentsand short-term investments was primarily due to day-to-day operating expensesand the reclassification of $1.2 million of auction rate securities tolong-term investments offset by the $14.8 million proceeds from the registereddirect offering in July 2008.

 

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

 

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In February 2007, we repurchased the rights todevelop and commercialize OPT-80 in North America and Israel under theprospective buy-back agreement. Under the term of the prospective buy-backagreement, we are obligated to pay Par a one-time $5.0 million milestonepayment, a 5% royalty on net sales by us or our affiliates of OPT-80 in NorthAmerica and Israel, and a 1.5% royalty on net sales by us or our affiliates ofOPT-80 in the rest of the world.  Inaddition, in the event we license our right to market OPT-80 in the rest of theworld, we will be required to pay Par a 6.25% royalty on net revenues we receiverelated to OPT-80.  We are obligated topay each of these royalties, if any, on a country-by-country basis for sevenyears commencing on the applicable commercial launch in each such country.

 

In June 2004, we entered into a license agreementwith Nippon Shinyaku Co., Ltd. to which we acquired the non-exclusive right toimport and purchase Prulifloxacin, and the exclusive right (with the right tosublicense), within the United States, to develop, make, use, offer to sell,sell and license products suitable for consumption by humans containingPrulifloxacin.  Additionally, we acquiredrights within the United States to a key patent which covers the compound andthe treatment of bacterial infections in humans and animals.  Under the terms of the agreement, we will berequired to pay Nippon Shinyaku a milestone payment in the amount of $1.0million upon the filing, if any, of a new drug application for Prulifloxacin inthe United States. We also agreed to exclusively purchase Prulifloxacin fromNippon Shinyaku and to purchase a certain amount of Prulifloxacin annually thatis to be mutually agreed upon by us and Nippon Shinyaku, commencing in the yearof the first commercial sale of Prulifloxacin in the United States.  Additionally, we will owe Nippon Shinyakucertain royalties based on the amount of net sales of Prulifloxacin less theamount we pay to Nippon Shinyaku for supplies of Prulifloxacin.

 

*FundingRequirements*

* *

Ourfuture capital uses and requirements depend on numerous factors including, butnot limited to, the following:

 

·                  the progress ofour clinical trials, including expenses to support the trials and the milestonepayments that may become payable to Par and Nippon Shinyaku;

 

·                  our ability toestablish and maintain strategic collaborations, including licensing and otherarrangements;

 

·                  the costsinvolved in enforcing or defending patent claims or other intellectual propertyrights;

 

·                  the costs andtiming of regulatory approvals;

 

·                  the costs ofestablishing sales or distribution capabilities;

 

·                  the success ofthe commercialization of our products; and

 

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

 

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Webelieve that our existing cash and cash equivalents will be sufficient to meetour capital requirements for at least the next 12 months.

 

Untilwe can generate significant cash from our operations, we expect to continue tofund our operations with existing cash resources that were primarily generatedfrom the proceeds of offerings of our equity securities and collaborations andgovernment grants.  In addition, we mayfinance future cash needs through the sale of additional equity securities,strategic collaboration agreements and debt financing.  However, we may not be successful incompleting future equity financings, in entering into additional collaborationagreements, in receiving milestone or royalty payments under new or existingcollaboration agreements, in obtaining new government grants or in obtainingdebt financing.  In addition, we cannotbe sure that our existing cash and investment resources will be adequate, thatfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or our stockholders.  Recently, the credit markets and thefinancial services industry have been experiencing a period of unprecedentedturmoil and upheaval characterized by the bankruptcy, failure, collapse or saleof various financial institutions.  Theseevents have generally made equity and debt financing more difficult to obtain,and may negatively impact our ability to complete financing transactions.

 

Havinginsufficient funds may require us to delay, scale-back or eliminate some or allof our development programs, relinquish some or even all of our rights toproduct candidates at an earlier stage of development or renegotiate lessfavorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect ourability to operate as a going concern. If we raise funds by issuing equity securities, substantial dilution toexisting stockholders would likely result. If we raise funds by incurring additional debt financing, the terms ofthe debt may involve significant cash payment obligations as well as covenantsand specific financial ratios that may restrict our ability to operate ourbusiness.

 

**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

 

Ourcash and cash equivalents and short-term investments as of September 30,2008 consisted primarily of money market funds, corporate debt securities,United States government instruments and other readily marketable debtinstruments.  Our primary exposure tomarket risk is interest income sensitivity, which is affected by changes in thegeneral level of U.S. interest rates. The primary objective of our investment activities is to preserveprincipal while at the same time maximizing the income we receive from ourinvestments without significantly increasing risk.  A hypothetical ten percent change ininterest rates during the quarter ended September 30, 2008 would haveresulted in approximately a $46,000 change in net loss. Accordingly, we donot expect our operating results or cash flows to be affected to anysignificant degree by the effect of a sudden change in market interest ratesapplicable to our securities portfolio. In general, money market funds are not subject to interest rate riskbecause the interest paid on such funds fluctuates with the prevailing interestrate.

 

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** **

**Item 4.Controls and Procedures**

 

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

 

We believe that a controls system, no matter howwell designed and operated, is based in part upon certain assumptions about thelikelihood of future events, and therefore can only provide reasonable, notabsolute, assurance that the objectives of the controls system are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected.

 

In addition, we have reviewed our internal controlsover financial reporting and have made no changes during the quarter ended September 30,2008, that our certifying officers concluded materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 1A. Risk Factors**

 

Therisk factors set forth below with an asterisk (*) next to the title are newrisk factors or risk factors containing changes, including any materialchanges, from the risk factors previously disclosed in Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2007, as filedwith the SEC.

 

**RisksRelated to Our Business**

** **

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

 

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

 

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

 

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

 

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

 

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Our product candidates will require extensive clinicalstudy and evaluation, regulatory approval in multiple jurisdictions,substantial investment and significant marketing efforts before we generate anyrevenues from product sales.  We are notpermitted to market or promote our product candidates before we receiveregulatory approval from the FDA or comparable foreign regulatoryauthorities.  We have not submitted anNDA, or received marketing approval for either OPT-80 or Prulifloxacin, and wecannot be certain that either of these product candidates will be successful inclinical trials or receive regulatory approval. If we do not receive regulatory approval for and successfullycommercialize OPT-80 and Prulifloxacin, we will not generate any revenues fromproduct sales for several years, if at all, and we may not be able to continueour operations.

 

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

 

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

 

We have experienced significant operating losses sinceour inception in 1998.  As of September 30,2008, we had an accumulated deficit of approximately $123.0 million.  We have generated no revenues from productsales to date.  We have funded ouroperations through September 30, 2008 from the sale of approximately$169.6 million of our securities and through research funding pursuant tocollaborations with partners or government grants.  We expect to continue to incur substantialadditional operating losses for the next several years as we advance ourclinical trials and research and development initiatives and build ourmarketing and sales capabilities. Because of the numerous risks and uncertainties associated with developingand commercializing our product candidates, we are unable to predict the extentof any future losses.  We may neversuccessfully commercialize our product candidates and thus may never have anysignificant future revenues or achieve and sustain profitability.

 

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

 

We will requireadditional capital to commercialize our current lead product candidates OPT-80and Prulifloxacin.  We cannot be certainthat additional funding will be available on acceptable terms, or at all. Recently, thecredit markets and the financial services industry have been experiencing aperiod of unprecedented turmoil and upheaval characterized by the bankruptcy,failure, collapse or sale of various financial institutions.  These events have generally made 

 

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equityand debt financing more difficult to obtain, and may negatively impact ourability to complete financing transactions. To the extent that we raise additional funds byissuing equity securities, our stockholders may experience significantdilution.  Any debt financing, ifavailable, may require us to pledge our assets as collateral or involve restrictivecovenants, such as limitations on our ability to incur additional indebtedness,limitations on our ability to acquire or license intellectual property rightsand other operating restrictions that could negatively impact our ability toconduct our business.  If we are unableto raise additional capital when required or on acceptable terms, we may haveto significantly delay, scale back or discontinue the development orcommercialization of one or more of our product candidates or one or more ofour other research and development initiatives. We also could be required to:

 

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

 

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

 

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

 

We do not currently have sufficient resources tocommercialize OPT-80 and Prulifloxacin on our own. If we are unable to raiseadditional capital or are unable to effectively collaborate with one or morepartners for the commercialization of OPT-80 or Prulifloxacin, we will notgenerate significant revenues from sales of these product candidates and ourbusiness will be materially harmed.

 

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

 

We currently plan tobuild our own marketing and sales force for OPT-80 in North America andPrulifloxacin in the United States, and we intend to seek one or more partnersfor the commercialization of OPT-80 outside of North America.  With respect to our OPT-88and OPT 822/821 product candidates, we currently plan to conduct a limitedamount of additional research and development before seeking a partner toadvance these product candidates.  We cannot be certain that we would besuccessful in attracting any such partners. If we were not able to find appropriate partners for the continueddevelopment and commercialization of OPT-80 or our other product candidates, wewould either have to delay further development and commercializationinitiatives, which would harm our business and prospects, or raise significantadditional funds to develop additional clinical and commercializationcapabilities internally.

 

We are subject to a number of additional risksassociated with our dependence on collaborations with third parties.** **Conflictsmay arise between us and collaborators, such as conflicts concerning theinterpretation of clinical data, the achievement of milestones, theinterpretation of financial provisions or the ownership of intellectualproperty developed during the collaboration. If any such conflicts arise, a collaborator could act in its ownself-interest, which may be adverse 

 

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to our best interests. Any such disagreement between us and a collaborator could result in oneor more of the following, each of which could delay or prevent the developmentor commercialization of OPT-80 and our other product candidates, and in turnprevent us from generating sufficient revenues to achieve or maintainprofitability:

 

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

 

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

 

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

 

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

 

Inaddition, a collaborator may not have or devote sufficient resources to developand commercialize our product candidates, may elect to underfund, discontinueor may not properly perform pre-clinical studies or clinical trials, or maydivert resources to other programs that are potentially competitive with ourproduct candidates.

 

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

 

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

 

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

 

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The FDA has substantialdiscretion in the approval process and may either refuse to consider ourapplication for substantive review or may form the opinion after review of ourdata that our application is insufficient to allow approval of our productcandidates.  If the FDA does not consideror approve an application that we submit, 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.  For example, an NDA for Prulifloxacin will requireus to obtain certain legacy data from a third party.  If we are unable to obtain this data in atimely manner or the FDA deems this data to be insufficient, it may delay ourfiling of an NDA for Prulifloxacin and could require us to complete additionalclinical trials.  It is also possible that additionalstudies, if performed and completed, may not be successful or consideredsufficient by the FDA for approval or even to make our applicationsapprovable.  If any of these outcomes occur,we may be forced to abandon one or more of our future applications forapproval, which might significantly harm our business and prospects.

 

It is possible that none of our existing productcandidates or any product candidates we may seek to develop in the future will everobtain the appropriate regulatory approvals necessary for us or ourcollaborators to commence product sales. Moreover, recent events, including complications arising fromFDA-approved drugs such as Vioxx and Ketek, have raised questions about the safetyof marketed drugs and may result in increased cautiousness by the FDA andcomparable foreign regulatory authorities in reviewing new drugs based onsafety, efficacy or other regulatory approvals. This increased scrutiny by regulatory authorities may result insignificant delays in obtaining regulatory approvals, as well as more stringentproduct labeling and post-marketing testing requirements.

 

Although the FDA has granted Fast Track status toOPT-80 and selected it for participation in a CMA Pilot 2 Program, wecannot be certain that we will receive any benefits from these designations orthat the designations will expedite regulatory review or approval ofOPT-80.  Participation in these programswill not eliminate any phase of clinical development.  Moreover, our participation in the CMAPilot 2 Program will involve frequent scientific discussions and otherinteractions with the staff of the FDA during the investigational new drugphase of our development of 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.

 

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

 

Clinical testing is expensive and can take many yearsto complete, and its outcome is uncertain. Failure can occur at any time during the clinical trial process.  The results of pre-clinical studies and earlyclinical trials of our product candidates may not be predictive of the resultsof later-stage clinical trials.

 

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For example, results from the first PrulifloxacinPhase 3 trial, while positive, may not predict results from the secondtrial.   Product candidates in laterstages of clinical trials may fail to show the desired safety and efficacytraits despite having progressed through pre-clinical studies and initialclinical testing.  In addition, the typeand amount of clinical data necessary to gain regulatory approval for ourproduct candidates may change.

 

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

 

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

 

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

 

·                  the results of our clinical trials maynot demonstrate that a product candidate’s clinical and other benefits outweighits safety risks;

 

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

 

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

 

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

 

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

 

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

 

We may experience delays in clinical trials of ourproduct candidates.  OPT-80 is currentlyin two Phase 3 clinical trials for the treatment of CDI.  We recently completed enrollment in the firsttrial and expect to report data in the fourth quarter of 2008. We anticipatecompleting enrollment and reporting data from the second trial in 2009. If bothtrials are successful, we intend to file an NDA as soon as practicablethereafter. In addition, we are planning to conduct a registration study forother formulations and proof-of-concept clinical trials for other indicationsof OPT-80.  We reported top-line datafrom the first of two Phase 3 trials evaluating Prulifloxacin for the treatmentof infectious diarrhea in travelers. We recentlycompleted 

 

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enrollment in the second Phase 3 trial and expect toreport data in the next few months.  Weintend to conduct a Phase 4 trial of Prulifloxacin subsequent to the NDAsubmission to compare Prulifloxacin to ciprofloxacin for the treatment ofinfectious diarrhea.  We do not knowwhether planned clinical trials will begin on time, will need to be redesignedor will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, includingdelays in obtaining regulatory approval to commence a trial, in reachingagreement on acceptable terms with prospective clinical research organizations,or CROs, and clinical trial sites, in obtaining institutional review board approvalat each site, in recruiting suitable patients to participate in a trial, inhaving patients complete a trial or return for post-treatment follow-up, inadding new sites or in obtaining sufficient supplies of clinical trialmaterials.  Many factors affect patientenrollment, including the size and nature of the patient population, theproximity of patients to clinical sites, the eligibility criteria for thetrial, the design of the clinical trial, competing clinical trials, clinicians’and patients’ perceptions as to the potential advantages of the drug beingstudied in relation to other available therapies, including any new drugs thatmay be approved for the indications we are investigating and whether theclinical trial design involves comparison to placebo.  Several of our principal investigators havestated that the enrollment rate in the clinical trials for OPT-80 has oftenbeen less than projected.  Our originalprojections were based on enrollment rates for our Phase 2a trial ofOPT-80.  If we continue to experiencelower than expected enrollment in the second trial, this trial may not becompleted as currently scheduled and we may incur delays in obtainingregulatory approval as well as additional significant expenses.  Furthermore, with respect to the clinicaltrials conducted by third parties, we will have no control over their timing orsuccess.

 

We could encounter delays if prescribing physiciansencounter unresolved ethical issues associated with enrolling patients inclinical trials of our product candidates in lieu of prescribing existingantibiotics that have established safety and efficacy profiles or withadministering placebo to patients in our placebo-controlled trials.  Further, a clinical trial may be suspended orterminated by us, our collaborators, the FDA or other regulatory authoritiesdue to a number of factors, including failure to conduct the clinical trial inaccordance with regulatory requirements or our clinical protocols, inspectionof the clinical trial operations or trial site by the FDA or other regulatoryauthorities resulting in the imposition of a clinical hold, unforeseen safetyissues or adverse side effects, failure to demonstrate a benefit from using adrug, changes in governmental regulations or administrative actions or lack ofadequate funding to continue the clinical trial.  If we experience delays in the completion of,or termination of, any clinical trial of our product candidates, the commercialprospects of our product candidates will be harmed, and our ability to generateproduct revenues from any of these product candidates will be delayed.  In addition, any delays in completing ourclinical trials will increase our costs, slow down our product development andapproval process and jeopardize our ability to commence product sales andgenerate revenues.  Any of theseoccurrences may significantly harm our business, financial condition andprospects.

 

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

 

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Our clinical trials may be suspended at any time for anumber of reasons.  We may voluntarilysuspend or terminate our clinical trials if at any time we believe that theypresent an unacceptable risk to participants. In addition, regulatory agencies may order the temporary or permanent discontinuationof our clinical trials at any time if they believe that the clinical trials arenot being conducted in accordance with applicable regulatory requirements orthat they 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.  If adverse, drug-related events areencountered or suspected, our trials could be interrupted, delayed or haltedand the FDA or comparable foreign regulatory authorities could order us tocease further development of or deny approval of our product candidates for anyor all targeted indications.  Even if webelieve our product candidates are safe, our data is subject to review by theFDA, which may disagree with our conclusions and delay or deny approval of ourproduct candidates which would significantly harm the commercial prospects ofsuch product candidates.  Moreover, wecould be subject to significant liability if any volunteer or patient suffers,or appears to suffer, adverse side effects as a result of participating in ourclinical trials.  Any of theseoccurrences may significantly harm our business and prospects.

 

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

 

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

 

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

 

Typically, the CROs conducting clinical trials of ourproduct candidates have the right to terminate their agreements with us or ourcollaborators upon notice in the event of an uncured material breach.  In addition, some CROs have an ability toterminate their respective agreements with us if we fail to perform our obligations,if it can be reasonably demonstrated that the safety of the subjectsparticipating in our clinical trials warrants such termination, if we make ageneral 

 

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assignment for the benefit of our creditors or if weare liquidated.  INC Research has beenheavily involved in the clinical development and regulatory approval processfor our lead product candidates and possesses significant experience with theregulatory process.  We substantiallyrely on INC Research to conduct the clinical trials for OPT-80 andPrulifloxacin.  INC Research has alsosubcontracted with other third-party CROs for various aspects of the clinicaltrials.  If any relationships with INCResearch or these other third-party CROs terminate, we or our collaborators maynot be able to enter into arrangements with alternative CROs or we may enterinto arrangements with alternative CROs that do not have the expertise orrelationships that INC Research has with government agencies.

 

In addition, these third-party CROs are not ouremployees, and we cannot control whether or not they devote sufficient time andresources to our on-going clinical programs. These CROs may also have relationships with other commercial entities,including our competitors, for whom they may also be conducting clinicalstudies or other drug development activities, which could harm our competitiveposition.  If CROs do not successfullycarry out their contractual duties or obligations or meet expected deadlines,if they need to be replaced, or if the quality or accuracy of the clinical datathey obtain is compromised due to the failure to adhere to our clinicalprotocols, regulatory requirements, or for other reasons, our clinical trialsmay be extended, delayed or terminated, and we may not be able to obtainregulatory approval for or successfully commercialize our productcandidates.  As a result, our financialresults and the commercial prospects for our product candidates would beharmed, our costs could increase and our ability to generate revenues could bedelayed.

 

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

 

Sales of our product candidates outside of the UnitedStates will be subject to foreign regulatory requirements governing clinicaltrials and marketing approval.  Even ifthe FDA grants marketing approval for a product candidate, comparableregulatory authorities of foreign countries must also approve the manufacturingand marketing of the product candidate in those countries.  This is important for the commercialization ofOPT-80 for which we currently have exclusive worldwide marketing rights.  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 are 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.

 

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**We currently have no salesorganization and have no experience in marketing drug products as acompany.  If we are unable to expand ourmarketing capabilities and establish sales capabilities or enter intoagreements with third parties to market and sell our product candidates, we maynot be able to generate product revenues.**

 

We currently have a limited marketing organization anddo not 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 inNorth America and will seek third-party partners outside North America.  We own exclusive rights to commercializePrulifloxacin in the United States, and we contemplate establishing our own salesforce or seeking third-party partners to sell Prulifloxacin in the UnitedStates.  The establishment anddevelopment of our own sales force to market any products we may develop willbe expensive and time consuming and could delay any product launch, and wecannot be certain that we will be able to successfully develop thiscapability.  We will also have to competewith other pharmaceutical and biotechnology companies to recruit, hire, trainand retain marketing and sales personnel. To the extent we rely on third parties to commercialize our products, ifany, we may receive less revenues than if we commercialized these productsourselves.  In addition, we may havelittle or no control over the sales efforts of any third parties involved incommercializing our products.  In theevent we are unable to develop and expand our own marketing and sales force orcollaborate with a third-party marketing and sales organization, we would notbe able to commercialize our product candidates which would negatively impactour ability to generate product revenues.

 

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

 

If appropriate regulatory approvals are obtained, weintend to commercialize OPT-80 outside of North America through collaborationarrangements with third parties.  We maybe unable to enter into collaboration arrangements in international markets.  In addition, there can be no guarantee thatif we enter into these collaboration arrangements with other parties that theywill be successful or result in more revenues than we could obtain by marketingOPT-80 on our own. If we are unable to enter into collaboration arrangementsfor our products or develop an effective international sales force, our abilityto generate product revenues would be limited, which would adversely affect ourbusiness, financial condition, results of operations and prospects. If we areunable to enter into such collaboration arrangements, we may need to developour own marketing and sales force to market OPT-80 in a number of countries inEurope and Latin America to hospital-based and long-term care physicians.  These efforts may not be successful as wehave no relationships among such hospital-based and long-term carephysicians.  There is no guarantee thatwe will be able to develop an effective international sales force tosuccessfully commercialize our products in these international markets.  If we cannot commercialize OPT-80, we willhave to rely solely on Prulifloxacin and earlier stage product candidates forany future revenues, and our ability to achieve and sustain profitability willbe materially and adversely harmed.

 

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**If ourproduct candidates are unable to compete effectively with branded and genericantibiotics, our commercial opportunity would be reduced or eliminated. (*)**

 

If approved, our lead product candidates will competeagainst both branded antibiotic therapies, such as Vancocin Pulvules withrespect to OPT-80 and Xifaxan®/rifaximin with respect to Prulifloxacin, andgeneric antibiotics such as metronidazole and vancomycin with respect to OPT-80and ciprofloxacin with respect to Prulifloxacin.  In addition, we anticipate that OPT-80 willcompete with other antibiotic and anti-infective product candidates currentlyin development for the treatment of CDI, such as Xifaxan®/rifaximin and AliniaTM/nitazoxanide.  Many of these products have been or will bedeveloped and marketed by major pharmaceutical companies, who havesignificantly greater financial resources and expertise in research anddevelopment, pre-clinical testing, conducting clinical trials, obtainingregulatory approvals, manufacturing and marketing approved products than wedo.  As a result, these companies mayobtain regulatory approval more rapidly than we are able to and may be moreeffective in selling and marketing their products as well.  Smaller or early-stage companies may alsoprove to be significant competitors, particularly through collaborativearrangements with large, established companies.

 

We anticipate that, if approved, OPT-80 andPrulifloxacin will face increasing competition in the form of generic versionsof branded products of competitors that will lose their patentexclusivity.  For example, OPT-80, ifapproved, will immediately face steep competition from an inexpensive genericform of metronidazole.  OPT-80 wouldcurrently face generic oral vancomycin competition in Europe and may facecompetition from generic oral vancomycin in the United States in thefuture.  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 ata relatively low price, we believe it will be difficult to sell OPT-80 as afirst-line therapy for the treatment of CDI. 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, and will in thefuture continue to depend, on third parties to manufacture our productcandidates, including OPT-80 and Prulifloxacin. If these manufacturers fail to provide us and our collaborators withadequate supplies of clinical trial materials and commercial product or fail tocomply with the requirements of regulatory authorities, we may be unable todevelop or commercialize our products. (*)**

 

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We outsource all manufacturing of clinical trialsupplies of our product candidates to third parties.  We seek to establish long-term supplyarrangements with third-party contract manufacturers.  We intend to continue outsourcing the manufactureof our product candidates to third parties for any future clinical trials andlarge-scale commercialization of any product candidates that receive regulatoryapproval and become commercial drugs.

 

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

 

In addition, we, our collaborators and otherthird-party manufacturers of our products must comply with current strictlyenforced cGMP requirements enforced by the FDA through its facilitiesinspection program.  These requirementsinclude quality control, quality assurance and the maintenance of records anddocumentation.  We rely on Biocon tomanufacture OPT-80 API and rely on Patheon, Inc. to manufacture the drugproduct supplies.  As such, Biocon andPatheon will be subject to ongoing periodic unannounced inspections by the FDAand other agencies for compliance with current cGMP, and similar foreign standards.We also rely on Nippon Shinyaku, which contracts with Juzen, and Angelini andPatheon to manufacture Prulifloxacin drug supplies.  The manufacturing facilities of Biocon, Juzenand Patheon have been inspected by the FDA for other companies’ drug products;however, none of Biocon’s, Juzen’s nor Patheon’s facilities have yet beeninspected by the FDA 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 cGMPrequirements and with other FDA, state, local and foreign regulatoryrequirements.  We and our collaboratorshave little control over third-party manufacturers’ compliance with theseregulations and standards.  A failure to complywith these requirements by our third-party manufacturers, including Biocon,Juzen, Angelini, and Patheon could result in the issuance of untitled lettersand/or warning letters from authorities, as well as sanctions being imposed onus, including fines and civil penalties, suspension of production, suspensionor delay in product approval, product seizure or recall or withdrawal ofproduct approval.  In addition, we haveno 

 

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control over these manufacturers’ ability to maintainadequate quality control, quality assurance and qualified personnel.  If the safety of any quantities supplied bythird parties is compromised due to their failure to adhere to applicable lawsor for other reasons, we may not be able to obtain or maintain regulatoryapproval for or successfully commercialize one or more of our productcandidates, which would significantly harm our business and prospects.

 

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

 

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

 

·                  the clinical indications for which theproduct candidate is approved;

 

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

 

·                  perceived advantages over alternativetreatments;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  relative convenience and ease ofadministration; and

 

·                  prevalence and severity of adverse sideeffects.

 

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

 

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

 

In addition, in July 2008 the FDA notified makersof fluoroquinolone antimicrobial drugs for systemic use that a boxed warning isnecessary for those products due to the risk of tendonitis and tendonrupture.  As Prulifloxacin is afluoroquinolone antibiotic it may be required to carry a black boxwarning.  Although these risks have beendescribed for years on the product label of many fluoroquinolones the increasedawareness of this risk may impact the market potential for the fluoroquinoloneclass of antibiotics, including Prulifloxacin. Furthermore, because Prulifloxacin has already been marketed by othercompanies to treat a wide range of bacterial infections, including infectiousdiarrhea, urinary tract infections and respiratory tract infections, patientsmay be able to obtain Prulifloxacin from these other companies, and not fromus, if Prulifloxacin is approved in the market where the patient is located.  We have rights to Prulifloxacin only in theUnited States.  These patients may obtainPrulifloxacin in these other markets from other companies even if thesepatients are from the United States.

 

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

 

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

 

Any product candidate we identify may requireadditional development efforts prior to commercial sale, including pre-clinicalstudies, extensive clinical testing and approval by the FDA and applicableforeign regulatory authorities.  Allproduct candidates are prone to the risks of failure that are inherent inpharmaceutical product development, including the possibility that the productcandidate will not be shown to be sufficiently safe and/or effective forapproval by regulatory authorities.  Inaddition, we cannot assure you that any such products that are approved will bemanufactured or produced economically, successfully commercialized or widelyaccepted in the marketplace or be more effective than other commerciallyavailable alternatives.

 

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

 

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

 

Our focus on drug discovery and development using ourtechnology platform, including our patented proprietary OPopS drug discoveryplatform, is novel and unique.  As aresult, we cannot be certain that our product candidates will producecommercially viable drugs that safely and effectively treat infectious diseasesor other diseases.  To date, ourtechnology platform has yielded only a small number of anti-infective productcandidates.  In addition, we do not havesignificant clinical data with respect to any of these potential productcandidates.  Even if we are successful incompleting clinical development and receiving regulatory approval for onecommercially viable drug for the treatment of one disease using our technologyplatform and carbohydrate chemistry focus, we cannot be certain that we willalso be able to develop and receive regulatory approval for other drug candidatesfor the treatment 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 significantly beharmed.

 

**Our future growth depends on ourability to identify and acquire or in-license products.  If we do not successfully identify andacquire or in-license related product candidates or integrate them into ouroperations, we may have limited growth opportunities.**

 

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

 

·                  exposure to unknown liabilities;

 

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

 

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

 

·                  higher than expected acquisition and integrationcosts;

 

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·                  increased amortization expenses;

 

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

 

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

 

·                  inability to retain key employees of any acquiredbusinesses.

 

We have limited resources to identify and execute theacquisition or in-licensing of third-party products, businesses andtechnologies and integrate them into our current infrastructure.  In particular, we may compete with largerpharmaceutical companies and other competitors in our efforts to establish newcollaborations and in-licensing opportunities. These competitors likely will have access to greater financial resourcesthan us and may have greater expertise in identifying and evaluating newopportunities.  Moreover, we may devoteresources to potential acquisitions or in-licensing opportunities that arenever completed, or we may fail to realize the anticipated benefits of suchefforts.

 

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

 

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

 

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

 

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

 

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product liability claim, we may incur substantialliabilities.  Regardless of merit oreventual outcome, liability claims may result in:

 

·                  decreased demand for our product candidates;

 

·                  injury to our reputation;

 

·                  termination of clinical trial sites or entire clinicaltrial programs;

 

·                  withdrawal of clinical trial participants;

 

·                  significant litigation costs;

 

·                  substantial monetary awards to or costly settlementwith patients;

 

·                  product recalls;

 

·                  loss of revenues; and

 

·                  the inability to commercialize our product candidates.

 

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

 

We have global clinical trial liability insurance thatcovers our clinical trials up to a $10.0 million annual aggregate limit.  Our current or future insurance coverage mayprove insufficient to cover any liability claims brought against us.  We intend to expand our insurance coverage toinclude the sale of commercial products if marketing approval is obtained forour product candidates, which would increase our insurance premiums.  Because of the increasing costs of insurancecoverage, we may not be able to maintain insurance coverage at a reasonablecost or obtain insurance coverage that will be adequate to satisfy any liabilitythat may arise.

 

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

 

Even if we receive regulatory approval to sell ourproduct candidates, the FDA and foreign regulatory authorities will likely imposesignificant restrictions on the indicated uses or marketing of such products,or impose ongoing requirements for potentially costly post-approvalstudies.  In addition, following anyregulatory approval of our product candidates, we and our collaborators will besubject to continuing regulatory obligations, such as requirements for 

 

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storage, recordkeeping and safety reporting, andadditional post-marketing obligations, including regulatory oversight of thelabeling, packaging, promotion and marketing of our products.  If we or our collaborators become aware ofpreviously unknown problems with any of our product candidates in the UnitedStates or overseas or at our third-party manufacturers’ facilities, aregulatory agency may impose restrictions on our products, our third-partymanufacturers or on us, including requiring us to reformulate our products,conduct additional clinical trials, make changes in the labeling of ourproducts, implement changes to, or obtain re-approvals of, our third-partymanufacturers’ 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 become the target of lawsuits, including class action suits.  Moreover, if we or our collaborators orthird-party manufacturers fail to comply with applicable regulatoryrequirements, we may be subject to civil or criminal fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions, costly new manufacturing requirements and criminalprosecution.  Any of these events couldharm or prevent sales of the affected products and reduce our related revenuesor could substantially increase the costs and expenses of commercializing andmarketing these products, which would significantly harm our business,financial condition and prospects.

 

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

 

Our success depends in part on our continued abilityto attract, retain and motivate highly qualified management, clinical andscientific personnel and on our ability to develop and maintain importantrelationships with leading academic institutions, clinicians andscientists.  We are highly dependent uponour senior management and scientific staff, particularly Michael N. Chang,Ph.D., our President and Chief Executive Officer, Tessie M. Che, Ph.D.,our Senior Vice President and Chief Operating Officer, Youe-Kong Shue, Ph.D.,our Vice President, Clinical Development, Sherwood L. Gorbach, MD, our VicePresident of Medical Affairs and Chief Medical Officer, and Kevin P.Poulos, our Chief Commercial Officer.  Theloss of services of any of Dr. Chang, Dr. Che, Dr. Shue, Dr. Gorbachor Mr. Poulos or one or more of our other members of senior managementcould delay or prevent the successful completion of our planned clinical trialsor the commercialization of our product candidates.  Replacing key employees may be difficult andcostly and may take an extended period of time because of the limited number ofindividuals in our industry with the breadth of skills and experience requiredto develop and commercialize products successfully.  We do not maintain “key person” insurancepolicies on the lives of these individuals or the lives of any of our otheremployees.  We employ these individualson an at-will basis and their employment can be terminated by us or them at anytime, for any reason and with or without notice.

 

We will need to hire additional personnel as we expandour clinical development and commercial activities.  We may not be able to attract or retainqualified management and scientific personnel on acceptable terms in the futuredue to the intense competition for qualified personnel among biotechnology,pharmaceutical and other businesses, particularly in the San Diego, Californiaarea.  If we are not able to attract andretain the necessary personnel to 

 

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accomplish our business objectives, we may experienceconstraints that will impede significantly the achievement of our research anddevelopment objectives, our ability to raise additional capital and our abilityto implement our business strategy.  Inparticular, if we lose any members of our senior management team, we may not beable to find suitable replacements, and our business and prospects may beharmed as a result.

 

**We will need to increase the size ofour organization, and we may experience difficulties in managing growth. (*)**

 

We are a small company with 49 employees as of October 31,2008.  To continue our clinical trialsand commercialize our product candidates, we will need to expand our employeebase for managerial, operational, marketing, sales, financial and otherresources.  Future growth will imposesignificant added responsibilities on members of management, including the needto identify, recruit, maintain and integrate additional employees and may taketime away from running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performance and our ability to commercialize ourproduct candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively.  To that end, we must be able to:

 

·                  manage our development efforts effectively;

 

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

 

·                  integrate additional management, administrative andmanufacturing personnel;

 

·                  build a marketing and sales organization; and

 

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

 

We may not be able to accomplish these tasks, andaccordingly, may not achieve our research, development and commercializationgoals.  Our failure to accomplish any ofthese goals could harm our financial results and prospects.

 

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

 

Market acceptance and sales of our product candidateswill depend on reimbursement policies and may be affected by future healthcarereform measures.  Government third-partypayors, such as the Medicare and Medicaid programs, and private payors,including health maintenance organizations, decide which drugs they will payfor and establish reimbursement levels for these drugs.  Because third-party payors increasingly arechallenging prices charged and the cost-effectiveness of medical products,significant uncertainty exists as to the ability of our product candidates toreceive adequate coverage and reimbursement. We cannot be sure that third-party payors will place our productcandidates on approved formularies or that reimbursement will be 

 

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available in whole or in part for any of our productcandidates.  For example, the DeficitReduction Act of 2005 requires an adjustment in Medicare payments forreimbursement of certain-hospital acquired conditions.  The Centers for Medicare and Medicaid Services,or CMS, is likely to expand its list of non-payment for preventable hospitalacquired infections.  Both CDI and MRSAinfections have been discussed but CMS has determined that further analysis isrequired before considering these conditions for non-reimbursement.  Also, we cannot be sure that insufficientreimbursement amounts will not reduce the demand for, or require us to reducethe price of our products, if approved.

 

Many healthcare providers, such as hospitals, receivea fixed reimbursement amount per procedure or other treatment therapy, andthese amounts are not necessarily based on the actual costs incurred.  As a result, these healthcare providers maychoose only the least expensive therapies regardless of efficacy.  We cannot guarantee that our productcandidates will be the least expensive alternative and thus providers maydecide not to use them or buy them for treatment.

 

We have not commenced efforts to have our productcandidates reimbursed by government or third-party payors.  If reimbursement is not available or isavailable only to limited levels, we may not be able to commercialize ourproducts successfully or at all, which would harm our business and prospects.

 

**Recent proposed legislation maypermit re-importation of drugs from foreign countries into the United States,including foreign countries where the drugs are sold at lower prices than inthe United States, which could materially adversely affect our operatingresults and our overall financial condition. (*)**

 

We may face competition for our products from lowerpriced products from foreign countries that have placed price controls onpharmaceutical products.  The MedicareModernization Act of 2003, or MMA, contains provisions that may change U.S.importation laws and expand consumers’ ability to import lower priced versionsof our and competing products from Canada, where there are government pricecontrols.  These changes to U.S.importation laws will not take effect unless and until the Secretary of Healthand Human Services certifies that the changes will lead to substantial savingsfor consumers and will not create a public health safety issue.  The Secretary of Health and Human Serviceshas not yet announced any plans to make the required certification.  Even if the changes do not take effect, andother changes are not enacted, imports from Canada and elsewhere may continueto increase due to market and political forces, and the limited enforcementresources of the FDA, the U.S. Customs Service, and other government agencies.  For example, the U.S. Customs Servicegenerally does not prevent individuals from importing from Canada less than a90-day supply of a prescription drug for personal use, when the drug otherwisecomplies 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.

 

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**Current healthcare laws and regulations and future legislative orregulatory reforms to the healthcare system may affect our ability to sell ourproduct candidates profitably.**

 

In both the United Statesand certain foreign jurisdictions, there have been, and we anticipate therewill continue to be, a number of legislative and regulatory changes to thehealthcare system that could impact our ability to sell our productsprofitably.  In particular, the MMA addedan outpatient prescription drug benefit to Medicare, the 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 also changed theformula for determining payment for certain drugs, which include drugs providedin physician offices and other outpatient settings.  Further, with respect to the Medicaidprogram, the Deficit Reduction Act of 2005 made changes to certain formulasused to calculate pharmacy reimbursement under Medicaid, the health insuranceprogram in the United States generally for individuals and families with lowincomes and resources, which became effective on January 1, 2007.  These changes could lead to reduced paymentsto pharmacies.  Many states have alsocreated preferred drug lists and include drugs on those lists only when themanufacturers agree to pay a supplemental rebate.  If OPT-80 and Prulifloxacin or other currentor future drug candidates are not included on these preferred drug lists,physicians may not be inclined to prescribe them to their Medicaid patients,thereby diminishing the potential market for our products.

 

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

 

**We mustcomply with federal and state “fraud and abuse” laws, and, if we are unable tofully comply with such laws, we could face substantial penalties, which mayadversely affect our business, financial condition and results of operations.**

 

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We are subject to variousfederal and state laws pertaining to healthcare fraud and abuse, including anti-kickbacklaws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions,including, in some instances, exclusion from participation in federal and statehealthcare programs, including Medicare and Medicaid, and the curtailment orrestructuring of operations.  We believethat our operations are in material compliance with such laws.  However, because of the far-reaching natureof these laws, there can be no assurance that we would not be required to alterone or more of our practices to be in compliance with these laws.  In addition, there can be no assurance thatthe occurrence of one or more violations of these laws or regulations would notresult in a material adverse effect on our financial condition and results ofoperations.

 

**Ourbusiness involves the use of hazardous materials and we and our third-partymanufacturers must comply with environmental laws and regulations, which can beexpensive and restrict how we do business.**

 

Our third-party manufacturers’activities and, to a lesser extent, our own activities involve the controlledstorage, use and disposal of hazardous materials, including the components ofour product candidates and other hazardous compounds.  We and our manufacturers are subject to federal,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 contamination onour property.  These amounts may not besufficient to adequately protect us from liability for damage claims relatingto contamination.  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.

 

**Ourbusiness and operations would suffer in the event of computer,telecommunications or other system failure.**

 

Despite the implementationof security measures, our internal computer systems are vulnerable to damagefrom computer viruses, unauthorized access, natural disasters, terrorism, warand telecommunication and electrical failures. Any system failure, accident or security breach that causesinterruptions in our operations could result in a material disruption of ourdrug development programs.  For example,the loss of clinical trial information from completed or ongoing clinicaltrials for OPT-80 or Prulifloxacin, which is maintained by our third-party CRO,could result in delays in our regulatory approval efforts and significantlyincrease 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 Our Intellectual Property**

 

**It isdifficult and costly to protect our intellectual property and our proprietarytechnologies, and we may not be able to ensure their protection. (*)**

 

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

 

The patent positions ofpharmaceutical and biotechnology companies can be highly uncertain and involvecomplex legal and factual questions for which important legal principles remainunresolved.  No consistent policyregarding the breadth of claims allowed in biotechnology patents has emerged todate in the United States.  Thebiotechnology patent situation outside the United States is even moreuncertain.  Changes in either the patentlaws or in interpretations of patent 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 of futureprotection for our proprietary rights is uncertain, because legal means affordonly limited protection and may not adequately protect our rights or permit usto gain or keep our competitive advantage. For example:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We have filed 8 patentapplications related to OPT-80, one of which has resulted in the issuance of apolymorph patent from the United States Patent and Trademark Office orPTO.  We do not currently have any otherissued patents related to OPT-80.

 

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

 

·                 composition of matter for OPT-80;

 

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

 

·                 polymorphic forms;

 

·                 composition comprising a polymorphicform;

 

·                 manufacturing processes;

 

·                 treatment of diseases;

 

·                 formulation; and

 

·                 OPT-80 related compound, includingmetabolites, e.g. OP-1118.

 

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

 

In addition, assuming ouron-going clinical trials are successful and completed in a timely manner, wecurrently plan to file a NDA for Prulifloxacin for the treatment of infectiousdiarrhea in 2009.  However, the compositionof matter patent covering Prulifloxacin is scheduled to expire in February 2009.Although in some cases the U.S. Patent and Trademark Office will grant anextension of a patent term where the related product is subject to FDA approval,this extension will likely be unavailable to us with respect to thePrulifloxaxin composition of matter patent because we do not currently expectto file a NDA for Prulifloxacin prior to the expiration of this patent.  There are currently no other active issuedpatents which would prevent third parties from potentially marketingPrulifloxacin in the United States. Therefore, we will likely rely on one or more regulatory marketingexclusivities for Prulifloxacin in the United States.  Specifically, if our NDA for Prulifloxacin isapproved, we expect to receive a five-year period of marketing exclusivityunder the Hatch-Waxman Act.  Thisexclusivity period is available to the first applicant to gain approval of aNDA for a new chemical entity, or NCE, that has not previously been approved asan active ingredient under Section 505(b) of the Food Drug and Cosmetic Act, orFDCA.  While we expect that the NCEexclusivity period will be available for Prulifloxacin, if we or NipponShinyaku are unsuccessful in obtaining additional patents related toPrulifloxacin, we may face generic competition in the United States five yearsafter our NDA for Prulifloxacin is approved by the FDA.  If we are unable to obtain marketing exclusivitybeyond five years from the approval of a NDA, our potential revenues fromPrulifloxacin sales in the U.S. will be limited.

 

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

 

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

 

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

 

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

 

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

 

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If we choose to go to courtto stop someone else from using our inventions, that individual or company hasthe right to ask the court to rule that the underlying patents are invalidand/or should not be enforced against that third party.  These lawsuits are expensive and wouldconsume time and other resources even if we were successful in stopping theinfringement of these patents.  There isalso the risk that, even if the validity of these patents is upheld, the courtwill refuse to stop the other party on the ground that such other party’sactivities do not infringe our rights to these patents.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                 actual or anticipated variations in ourquarterly operating results;

 

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

 

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

 

·                 third-party coverage or reimbursementpolicies;

 

·                 actual or anticipated changes in earningsestimates or recommendations by securities analysts;

 

·                 conditions or trends in the biotechnology andbiopharmaceutical industries;

 

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

 

·                 general economic and market conditions andother factors that may be unrelated to our operating performance or theoperating performance of our competitors, including the recent turmoil on thecredit markets and financial services industry;

 

·                 changes in the market valuations of similarcompanies;

 

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

 

·                 additions or departures of key scientific ormanagement personnel;

 

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

 

·                 trading volume of our common stock.

 

In addition, the stockmarket in general and the market for biotechnology and biopharmaceuticalcompanies in particular have been experiencing extreme price and volumefluctuations that have often been unrelated and/or disproportionate to theoperating performance of those companies.

 

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These broad market andindustry factors may significantly harm the market price of our common stock,regardless of our operating performance. In the past, following periods of volatility in the market, securitiesclass-action litigation has often been instituted against companies.  Such litigation, if instituted against us,could result in substantial costs and diversion of management’s attention andresources, which could significantly harm our business, financial condition andprospects.

 

**Futuresales of our common stock in the public market could cause our stock price todecline. (*)**

 

Persons who were ourstockholders prior to our initial public offering continue to hold asubstantial number of shares of our common stock. Many of these stockholdersare able to sell their shares in the public market. Significant portions ofthese shares are held by a small number of stockholders. Sales by suchstockholders of a substantial number of shares, or the expectation that suchsales may occur, could significantly reduce the market price of our commonstock.  Moreover, the holders of asubstantial number of shares of our common stock have rights, subject tocertain conditions, to require us to file registration statements to permit theresale of their shares in the public market or to include their shares inregistration statements that we may file for ourselves or other stockholders.

 

We have also registered allcommon stock that we have issued under our employee benefits plans. As aresult, these shares can be freely sold in the public market upon issuance,subject to any applicable restrictions under the securities laws. In addition,our directors and executive officers may in the future establish programmedselling plans under Rule 10b5-1 of the Securities Exchange Act for thepurpose of effecting sales of our common stock. If any of these events cause alarge number of our shares to be sold in the public market, the sales couldreduce the trading price of our common stock and impede our ability to raisefuture capital.

 

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

 

Ourinvestment securities consist of high-grade auction rate securities, moneymarket funds, corporate debt securities and government agency securities. AtSeptember 30, 2008, we held two auction rate preferred securities valuedat $1.2 million with perpetual maturity dates that reset every 28 days. The recent negative conditions in the globalcredit markets have prevented some investors from liquidating their holdings,including their holdings of auction rate securities. There has beeninsufficient demand at auction for these two auction rate preferred securities.As a result, these affected securities are currently not liquid, and we couldbe required to hold them until they are redeemed by the issuer or tomaturity.  In the event we need to accessthe funds that are in an illiquid state, we will not be able to do so without aloss of principal, until a future auction on these investments is successful,the securities are redeemed by the issuer or they mature. The fair valueof the auction rate preferred securities at September 30, 2008, is lessthan their par value, however, we have determined that the impairment isimmaterial.  The auction rate preferredsecurities have been classified as long-term investments on our consolidatedbalance sheets as we do not anticipate the need to liquidate the securities inthe near term.

 

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**We willcontinue to incur significant costs as a result of operating as a publiccompany, and our management will be required to devote substantial time to newcompliance initiatives. (*)**

 

As a public company, we willcontinue to incur significant legal, accounting and other expenses.  In addition, the Sarbanes-Oxley Act, as wellas rules subsequently implemented by the SEC and the Nasdaq Global Market,or Nasdaq, impose various requirements on public companies, including requiringestablishment and maintenance of effective disclosure and financial controlsand changes in corporate governance practices. Our management and other personnel need to devote a substantial amountof time to these 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, these rules andregulations make it more difficult and more expensive for us to maintaindirector and officer liability insurance, and we may be required to incursubstantial costs in the future to maintain the same or similar coverage.

 

The Sarbanes-Oxley Actrequires, among other things, that we maintain effective internal controls forfinancial reporting and disclosure controls and procedures.  We will be required, this year, to perform asystem and process evaluation and testing of our internal controls overfinancial reporting to allow management and our independent registered publicaccounting firm to report on the effectiveness of our internal controls overfinancial reporting, as required by Section 404 of the Sarbanes-OxleyAct.  Our testing, or the subsequenttesting by our independent registered public accounting firm, may revealdeficiencies in our internal controls over financial reporting that are deemedto be material weaknesses.  Our compliancewith Section 404 will require that we incur substantial accounting expenseand expend significant management efforts. We currently do not have an internal audit group, and we may need tohire additional accounting and financial staff with appropriate public companyexperience and technical accounting knowledge. We currently have five****employeesdedicated full-time to accounting and finance matters.  In the future we will hire full-timeemployees in the accounting and finance department, as necessary, to ensure wehave effective internal controls over financial reporting and disclosurecontrols and procedures.  We also hireconsultants from time to time to address these matters.  If we are unable to hire adequate accountingand finance personnel, we may not be able to meet our public company reportingand governance obligations, including those set forth under the Sarbanes-OxleyAct.  Moreover, if we are not able tocomply with the requirements of Section 404 in a timely manner, or if weor our independent registered public accounting firm identifies deficiencies inour internal controls over financial reporting that are deemed to be materialweaknesses, the market price of our stock could decline and we could be subjectto sanctions or investigations by Nasdaq, the SEC or other regulatoryauthorities, which would require additional financial and management resources.

 

**Some provisions of our charter documents and Delaware law may haveanti-takeover effects that could discourage an acquisition of us by others,even if an acquisition would be beneficial to our stockholders and may preventattempts by our stockholders to replace or remove our current management.**

 

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

 

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

 

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

 

·                 limiting the removal of directors by thestockholders;

 

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

 

·                 a requirement of approval of not less than 662/3% of all outstanding shares of our capitalstock entitled to vote to amend any bylaws by stockholder action, or to amendspecific provisions of our certificate of incorporation;

 

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

 

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

 

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

 

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**Item 6. Exhibits**

 
| Exhibit  No. | ** ** | **Description of Document**                                                                                                                                                                                                                                   |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1          | (2)        | Certificate of Incorporation of Optimer  Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                           |
| 3.2          | (4)        | Bylaws of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                         |
| 4.1          | (3)        | Common Stock Certificate of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                          |
| 4.2          | (1)        | Investors’  Rights Agreement by and among Optimer Pharmaceuticals, Inc. and certain  stockholders of Optimer Pharmaceuticals, Inc. dated November 30,  2005, as amended and restated.                                                               |
| 4.3          | (5)        | Registration  Rights Agreement, dated October 23, 2007, by and between Optimer  Pharmaceuticals, Inc. and the purchasers listed on the signature pages thereto.                                                                                          |
| 10.1         | (6)        | Common  Stock Purchase Agreement, dated July 18, 2008, by and between Optimer  Pharmaceuticals, Inc. and the purchasers named therein.                                                                                                                        |
| 10.2         | (7)        | Common  Stock Purchase Agreement, dated July 24, 2008, by and between Optimer  Pharmaceuticals, Inc. and the purchaser named therein.                                                                                                                         |
| 10.3         | (8)        | Office  Lease, dated August 18, 2008, by and between Optimer Pharmaceuticals, Inc.  and Trizec Sorrento Towers, LLC.                                                                                                                                          |
| 10.4         | (9)        | Optimer Pharmaceuticals, Inc. Severance Benefit  Plan.                                                                                                                                                                                                             |
| 10.5         | (9)        | Amendment dated October 2, 2008 to Employment  Agreement between Optimer Pharmaceuticals, Inc. and Michael N. Chang.                                                                                                                                          |
| 10.6         | (9)        | Amendment dated October 2, 2008 to Offer Letter  between Optimer Pharmaceuticals, Inc. and Kevin Poulos.                                                                                                                                                      |
| 10.7         | (9)        | Amendment dated October 2, 2008 to Offer Letter  between Optimer Pharmaceuticals, Inc. and John D. Prunty.                                                                                                                                                    |
| 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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(1)                                 Filed with Registrant’s Amendment No. 3to Registration Statement on Form S-1 November 9, 2006.

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

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

(4)                                 Filed with Registrant’s Current Report on Form 8-Kon September 18, 2007.

(5)                                 Filed with Registrant’s Current Report on Form 8-Kon October 29, 2007.

(6)                                 Filed with Registrant’s Current Report on Form 8-Kon July 21, 2008.

(7)                                 Filed with Registrant’s Current Report on Form 8-Kon July 25, 2008.

(8)                                 Filed with Registrant’s Current Report on Form 8-Kon August 21, 2008.

(9)                                 Filed with Registrant’s Current Report on Form 8-Kon October 8, 2008.

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                              |         | **OPTIMER PHARMACEUTICALS, INC.** |
|------------------------------|--------------|-----------------------------------|
|                         |         |                              |
| Dated: November 5, 2008 |         | By:                               | /s/ John D.  Prunty |
| ** **                   | ** **   | **Name:**                         | **John D.  Prunty** |
| ** **                   | ** **   | **Title:**                        | ***Chief  Financial Officer*** |
| *** ***                 | *** *** | *** ***                      | ***(Duly  Authorized Officer and Principal Financial*** |
| *** ***                 | *** *** | *** ***                      | ***and  Accounting Officer)*** |
|                              |              |                                   |  |  |

 

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