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 THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2009**

 

**or**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 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)

 

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| **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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files):   Yes o  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 |   | Accelerated  Filer x         |
|---------------------------------|--------|------------------------------|
|                            |   |                         |
| Non-accelerated  Filer o   |   | Smaller  Reporting 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 July 31,2009 was 33,103,340 shares.

 

 

 

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**OPTIMERPHARMACEUTICALS, INC.FORM 10-QFor the Quarterly Period Ended June 30, 2009**

**TABLEOF CONTENTS**

 
| ** **                                                                                                  | **Page** |
|-------------------------------------------------------------------------------------------------------------|----------|
| **PART I – FINANCIAL INFORMATION**                                                                |     |
|                                                                                                        |     |
| Item 1. Financial Statements (unaudited)                                                               |     |
|                                                                                                        |     |
| Consolidated Balance Sheets –  June 30, 2009 and December 31, 2008                           | 3        |
|                                                                                                        |     |
| Consolidated Statements of  Operations – Three months and six months ended June 30, 2009 and 2008 | 4        |
|                                                                                                        |     |
| Consolidated Statements of  Cash Flows – Six months ended June 30, 2009 and 2008                  | 5        |
|                                                                                                        |     |
| Notes to  Consolidated Financial Statements                                                                 | 6        |
|                                                                                                        |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations   | 20       |
|                                                                                                        |     |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                    | 28       |
|                                                                                                        |     |
| Item 4.  Controls and Procedures                                                                       | 28       |
|                                                                                                        |     |
| **PART II – OTHER  INFORMATION**                                                                  |     |
|                                                                                                        |     |
| Item 1A. Risk Factors                                                                                  | 29       |
|                                                                                                        |     |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                | 59       |
|                                                                                                        |     |
| Item 6. Exhibits                                                                                       | 60       |
|                                                                                                        |     |
| SIGNATURE                                                                                                   |     |

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**Optimer Pharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                                                                                   |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                         |       | $                 | 26,217,128 |                  | $          | 16,778,880 |   |
| Short-term  investments                                                                                                                                                                            |       | 24,935,778        |       | 22,547,515            |       |
| Research  grant and contract receivables                                                                                                                                                           |       | 324,979           |       | 211,299               |       |
| Prepaid  expenses and other current assets                                                                                                                                                         |       | 485,577           |       | 533,371               |       |
| Total  current assets                                                                                                                                                                              |       | 51,963,462        |       | 40,071,065            |       |
| Property  and equipment, net                                                                                                                                                                       |       | 623,892           |       | 694,183               |       |
| Long-term  investments                                                                                                                                                                             |       | 882,000           |       | 1,032,000             |       |
| Other  assets                                                                                                                                                                                      |       | 498,171           |       | 498,250               |       |
| Total  assets                                                                                                                                                                                      |       | $                 | 53,967,525 |                  | $          | 42,295,498 |   |
|                                                                                                                                                                                               |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                                                              |       |              |       |                  |       |
| Accounts  payable                                                                                                                                                                                  |       | $                 | 4,091,178  |                  | $          | 3,767,831 |   |
| Accrued  expenses                                                                                                                                                                                  |       | 4,099,069         |       | 4,045,660             |       |
| Total  current liabilities                                                                                                                                                                         |       | 8,190,247         |       | 7,813,491             |       |
| Deferred  rent                                                                                                                                                                                     |       | 284,828           |       | 251,504               |       |
| Commitments  and contingencies                                                                                                                                                                     |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                        |       |              |       |                  |       |
| Preferred  stock, par value $0.001, 10,000,000 shares authorized, no shares issued and oustanding  at June 30, 2009 and December 31, 2008, respectively                                  |       | —            |       | —                |       |
| Common  stock, $0.001 par value, 75,000,000 shares authorized, 33,103,345 shares and  29,716,751 shares issued and outstanding at June 30, 2009 and  December 31, 2008 respectively |       | 33,103            |       | 29,717                |       |
| Additional  paid-in capital                                                                                                                                                                        |       | 202,044,280       |       | 167,544,806           |       |
| Accumulated  other comprehensive income                                                                                                                                                            |       | 46,567            |       | 38,088                |       |
| Accumulated  deficit                                                                                                                                                                               |       | (156,631,500      | )          | (133,382,108          | )          |
| Total  stockholders’ equity                                                                                                                                                                   |       | 45,492,450        |       | 34,230,503            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                   |       | $                 | 53,967,525 |                  | $          | 42,295,498 |   |

 

See accompanyingnotes.

 

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Operations**

**(unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|-------------|----------------------|------------|
| ** **                                                   | ** ** | **June 30,**      | ** **  | **June 30,**    | ** ** |
| ** **                                                   | ** ** | **2009**               | ** **  | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                   | ** ** | ** **             | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                    |       |                   |        |                 |       |   |   |   |   |
| Research grants                                              |       | $                      | 324,778     |                 | $          | 118,797 |   | $ | 407,790 |   | $ | 605,463 |   |
| Collaborative research agreements                            |       | 100,000                |        | 50,000               |       | 100,000 |   | 50,000 |   |
| Total revenues                                               |       | 424,778                |        | 168,797              |       | 507,790 |   | 655,463 |   |
| Operating expenses:                                          |       |                   |        |                 |       |   |   |   |   |
| Research and development                                     |       | 10,528,482             |        | 6,220,482            |       | 19,327,064 |   | 13,125,858 |   |
| Marketing                                                    |       | 475,062                |        | 913,916              |       | 785,348 |   | 1,279,484 |   |
| General and administrative                                   |       | 1,871,309              |        | 1,521,446            |       | 3,919,809 |   | 3,258,497 |   |
| Total operating expenses                                     |       | 12,874,853             |        | 8,655,844            |       | 24,032,221 |   | 17,663,839 |   |
| Loss from operations                                         |       | (12,450,075            | )           | (8,487,047           | )          | (23,524,431 | ) | (17,008,376 | ) |
| Interest income and other, net                               |       | 88,070                 |        | 433,750              |       | 275,038 |   | 1,015,034 |   |
| Net loss                                                     |       | $                      | (12,362,005 | )                    | $          | (8,053,297 | ) | $ | (23,249,393 | ) | $ | (15,993,342 | ) |
|                                                         |       |                   |        |                 |       |   |   |   |   |
| Basic and diluted net loss per share                         |       | $                      | (0.37       | )                    | $          | (0.29 | ) | $ | (0.73 | ) | $ | (0.57 | ) |
| Shares used to compute basic and diluted net loss  per share |       | 33,083,447             |        | 27,891,870           |       | 31,816,553 |   | 27,880,772 |   |

 

See accompanying notes.

 

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------|------------|------------------------------------|-------------|
| ** **                                                                   | ** ** | **2009**                           | ** **  | **2008** | ** ** |
| ** **                                                                   | ** ** | ** **                         | ** **  | ** ** | ** ** |
| **Operating activities**                                                     |       |                               |        |   |   |
| Net loss                                                                     |       | $                                  | (23,249,393 | ) | $ | (15,993,342 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                               |        |   |   |
| Depreciation and amortization                                                |       | 120,907                            |        | 110,304 |   |
| Stock based compensation                                                     |       | 1,343,348                          |        | 848,002 |   |
| Deferred rent                                                                |       | 33,324                             |        | (16,342 | ) |
| Changes in operating assets and liabilities:                                 |       |                               |        |   |   |
| Prepaids expenses and other current assets                                   |       | 47,794                             |        | 40,218 |   |
| Research grant and contract receivables                                      |       | (113,680                           | )           | (48,819 | ) |
| Other assets                                                                 |       | 79                                 |        | (2,370 | ) |
| Accounts payable and accrued expenses                                        |       | 376,756                            |        | 334,057 |   |
| Net cash used in operating activities                                        |       | (21,440,865                        | )           | (14,728,292 | ) |
|                                                                         |       |                               |        |   |   |
| **Investing activities**                                                     |       |                               |        |   |   |
| Purchases of short-term investments                                          |       | (22,681,668                        | )           | (17,040,787 | ) |
| Sales or maturity of short-term investments                                  |       | 20,453,000                         |        | 45,350,000 |   |
| Purchases of property and equipment                                          |       | (50,615                            | )           | (57,710 | ) |
| Net cash provided by (used in) investing  activities                         |       | (2,279,283                         | )           | 28,251,503 |   |
|                                                                         |       |                               |        |   |   |
| **Financing activities**                                                     |       |                               |        |   |   |
| Proceeds from sale of common stock                                           |       | 33,159,511                         |        | 181,922 |   |
| Net cash provided by financing activities                                    |       | 33,159,511                         |        | 181,922 |   |
| Effect of exchange rate changes on cash and cash  equivalents                |       | (1,115                             | )           | 8,891 |   |
| Net increase in cash and cash equivalents                                    |       | 9,438,248                          |        | 13,714,024 |   |
| Cash and cash equivalents at beginning of period                             |       | 16,778,880                         |        | 3,191,814 |   |
| Cash and cash equivalents at end of period                                   |       | $                                  | 26,217,128  |   | $ | 16,905,838 |   |

 

See accompanying notes.

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements**

**(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, fidaxomicin, for the treatment of *Clostridium difficile*-infection, andprulifloxacin, for the treatment of infectious diarrhea. The Company isdeveloping additional product candidates using its proprietary technology,including its OPopSTM drug discovery platform.

 

*Basis of Presentation*

* *

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financial informationand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments, consisting of normal recurring accruals, considered necessary fora fair presentation of the results of these interim periods have been included.The results of operations for the three and six months ended June 30, 2009are not necessarily indicative of the results that may be expected for the fullyear. These unaudited consolidated financial statements should be read inconjunction with the audited financial statements and related notes theretoincluded in the Company’s Annual Report on Form 10-K for the fiscal yearended December 31, 2008, which was filed with the Securities and ExchangeCommission (“SEC”) on March 12, 2009.

 

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*

* *

Investments with original maturities of less than 90days at the date of purchase are considered to be cash equivalents.  All other investments are classified asshort-term investments which are deemed by management to be available-for-saleand are reported at fair value with net unrealized gains or losses reportedwithin other comprehensive loss in the consolidated statement of stockholders’equity.  Realized gains and losses, anddeclines in value judged to be other than temporary, are included in investmentincome or interest expense.  The cost ofsecurities sold is computed using the specific identification method.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

Auctionrate preferred securities are classified as noncurrent available-for-salesecurities in the consolidated balance sheet because of the Company’s intentand ability to hold these securities until the market for auction ratepreferred securities returns or until the issuer refinances the underlyingsecurity.

 

*RevenueRecognition*

* *

TheCompany’s license and collaboration agreements contain multiple elements,including non-refundable upfront fees, payments for reimbursement ofthird-party research costs, payments for ongoing research, payments associatedwith achieving specific development milestones and royalties based on specifiedpercentages of net product sales, if any. The Company applies the revenue recognition criteria outlined in StaffAccounting 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 as whetherthe elements are separable, whether there are determinable fair values andwhether there is a unique earnings process associated with each element of acontract.

 

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 separateearnings process 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.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

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.

 

*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 No. 2”).  SFAS No. 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 availablefor sale, which, in the United States, generally occurs upon the approval ofthe 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 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, *Accounting for Non-Refundable Advance Payments forGoods or Services to be Used in Future Research and Development Activities*(“EITF07-3”)*.*In accordance with EITF07-3, these types of payments are deferred and capitalized. The capitalizedamounts are expensed when the related goods are delivered or the services areperformed.

 

*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 $12.4million and $8.2 million for the three months ended June 30, 2009 and2008, respectively. The Company’s comprehensive loss was $23.2 million and$16.0 million for the six months ended June 30, 2009 and 2008,respectively.

 

*NetLoss Per Share*

* *

TheCompany computes net loss per share in accordance with SFAS No. 128, *Earnings per Share*(“SFAS No.128”). Underthe provisions of SFAS No.128, basic net loss per common

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

shareis computed by dividing net loss by the weighted-average number of commonshares outstanding. Diluted net loss per common share is computed by dividingnet loss by the weighted-average number of common shares and dilutive commonshare equivalents then outstanding. Common equivalent shares consist of commonshares issuable upon the exercise of stock options and warrants. Since theCompany has a net loss for all periods presented, the effect of all potentiallydilutive securities is anti-dilutive. Accordingly, basic and diluted net lossper share is the same for all periods presented.

 

Forthe six months ended June 30, 2009 and 2008, common shares issuable uponthe exercise of stock options and warrants totaling 2,543,383 and 1,994,965shares, respectively, were excluded from the calculation, as their effect wouldhave been antidilutive.

 

*IncomeTaxes*

 

The Company adopted FASB issued FinancialInterpretation No. 48 (“FIN 48”), *Accounting for Uncertaintyin Income Taxes — An Interpretation of FASB Statement No. 109*onJanuary 1, 2007 which**clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with SFAS No. 109, *Accountingfor Income Taxes*, and prescribes a recognition threshold andmeasurement attributes for financial statement disclosure of tax positionstaken or expected to be taken on a tax return. The impact of an uncertainincome tax position on the income tax return must be recognized at the largestamount that is more-likely-than-not to be sustained upon audit by the relevanttaxing authority. An uncertain income tax position will not be recognized if ithas less than a 50% likelihood of being sustained. Additionally, FIN 48 providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition.

 

*Subsequent Events*

 

Effectivethis quarter, the Company implemented SFAS No. 165, *Subsequent Events*(“SFAS No. 165”).This standard establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued. The adoption of SFAS No. 165 did not impact the Company’sfinancial position or results of operations. The Company has evaluated events andtransactions that occurred after June 30, 2009 through August 7,2009, the date the Company issued these financial statements. During thisperiod the Company did not have any material recognizable subsequent events.

 

*Recently Issued Accounting Pronouncements*

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued the following newaccounting standards:

 

SFASNo. 168, *The FASB Accounting Standards Codification**TM** and theHierarchy of Generally Accepted Accounting Principles, a replacement of FASBStatement No. 162*(“SFAS No. 168”)*.*SFAS No. 168identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements of nongovernmentalentities that are

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

presented in conformity withgenerally accepted accounting principles in the United States (“GAAP”). The *FASB Accounting Standards Codification*TM (the “Codification”) will become the source ofauthoritative GAAP recognized by the FASB to be applied by nongovernmentalentities. Rules and interpretive releases of the SEC under authority offederal securities laws are also sources of authoritative GAAP for SECregistrants. On the effective date of this statement, the Codification willsupersede all then-existing non-SEC accounting and reporting standards. Withlimited exceptions, non-SEC accounting literature not included in theCodification will become nonauthoritative. SFAS No. 168 is effective forfinancial statements issued for interim and annual periods ending after September 15,2009.

 

SFASNo. 167, **Amendments to FASB Interpretation No. 46(R) ****(“SFAS No. 167”)*.***This statement amendsInterpretation 46(R) to require an enterprise to perform an analysis todetermine whether the enterprise’s variable interest or interests give it acontrolling financial interest in a variable interest entity. **SFAS **No. **167will be effective as of the beginning of the Company’s first annual reportingperiod that begins after November 15, 2009, for interim periods withinthat first annual reporting period, and for interim and annual reportingperiods thereafter.  Earlier application is prohibited.

 

SFAS No. 166, *Accounting for Transfers of Financial Assets — an amendment of FASBStatement No. 140* (“SFAS **No. **166”)*. *SFAS **No. **166 improves the relevance,representational faithfulness, and comparability of the information that areporting entity provides in its financial statements about a transfer offinancial assets, the effects of a transfer on its financial position, financialperformance, and cash flows, and a transferor’s continuing involvement, if any,in transferred financial assets. Additionally, SFAS **No. **166removes the concept of a qualifying special-purpose entity from Statement 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,* and removes the exception fromapplying FASB Interpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities,*toqualifying special-purpose entities. SFAS **No. **166will be**effective at the start of the Company’sfirst fiscal year beginning after November 15, 2009, for interim andannual reporting periods thereafter.

 

The Company is currentlyevaluating the impact these standards will have on its financial position orresults of operations.

 

*Recently Adopted Accounting Pronouncements*

* *

Effective this quarter, the Company adopted thefollowing FASB accounting standards:

 

FASB Staff PositionFAS 157-4, *Determining Whether a MarketIs Not Active and a Transaction Is Not Distressed* (“FSPFAS 157-4”) provides guidelines for making fair value measurements moreconsistent with the principles presented in SFAS 157. FSP FAS 157-4provides additional authoritative guidance in determining whether a market isactive or inactive, and whether a transaction is distressed, is applicable toall assets and liabilities (i.e. financial and nonfinancial) and will requireenhanced disclosures.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

FASB Staff PositionsFAS 115-2, FAS 124-2, and EITF 99-20-2, *Recognition and Presentation of Other-Than-TemporaryImpairments* (“FSP FAS 115-2, FAS 124-2, andEITF 99-20-2”), provides additional guidance regarding the credit andnoncredit components of an other-than-temporary impairment event, and how tomore effectively communicate when an other-than-temporary impairment event hasoccurred. FSP FAS 115-2, FAS 124-2 and EITF 99-20-2 apply to debt securities.

 

FASB Staff PositionFAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments* (“FSPFAS 107-1 and APB 28-1”) amends FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*,to require disclosures about the fair value of financial instruments in interimas well as annual financial statements. FSP FAS 107-1 and APB 28-1 also amendAPB Opinion No. 28, *Interim FinancialReporting*, to require those disclosures in all interim financialstatements.

 

Theadoption of these standards did not have any material impact on the Company’sfinancial position or results of operations.

 

**3.   Fair Value of Financial Instruments**

 

The followingtable summarizes the Company’s assets measured at fair value on a recurringbasis subject to the disclosure requirements of SFAS 157 as of June 30,2009:

 
| ** **                 | ** ** | **Quoted Prices in  Active Markets  (Level 1)** | ** ** | **Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** | **Total**  | ** ** |
|----------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|------------|------------|
| Cash and cash  equivalents |       | $                                                              | 26,217,128 |                                          | $          | —                                   |       | $          | —     |   | $ | 26,217,128 |   |
| Marketable  securities     |       | 24,935,778                                                     |       | —                                        |       | —                                   |       | 24,935,778 |       |
| Auction rate  securities   |       | —                                                         |       | —                                        |       | 882,000                                  |       | 882,000    |       |
|                            |            |                                                                |            |                                               |            |                                          |            |            |            |  |  |  |  |

 
| Level 1: |   | Quoted prices in  active markets for identical assets and liabilities; or                                                                                                                                 |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                      |
| Level 2: |   | Quoted prices  for identical or similar assets and liabilities in markets that are not  active, or observable inputs other than quoted prices in active markets for  identical assets and liabilities; or |
|     |   |                                                                                                                                                                                                      |
| Level 3: |   | Unobservable  inputs.                                                                                                                                                                                     |

 

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

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 
| ** **                                                                                | ** ** | **Auction Rate  Preferred  Securities** |      |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|-----------|
| Beginning balance at January 1, 2009 .                                               |       | $                                       | 1,032,000 |   |
| Transfer  from level 3 into level 1                                                       |       | (100,000                                | )         |
| Total unrealized losses included in accumulated  other comprehensive income               |       | —                                  |      |
| Total realized losses included in interest income  and other, net                         |       | —                                  |      |
| Purchases,  sales, issuances and settlements                                              |       | (50,000                                 | )         |
| Ending  balance at June 30, 2009                                                     |       | $                                       | 882,000   |   |
| 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. As of June 30, 2009, the Companyheld two auction rate preferred securities (“ARPS”).  In July 2009, the Company received a$100,000 payment from one of the issuers of its ARPS redeeming the full amountof the ARPS.  Accordingly, the Companytransferred the $100,000, from level 3 to level 1. The Company also previouslyreceived a $50,000 payment from the same issuer in April 2009. As of June 30,2009, the value of the remaining ARPS held by the Company was $882,000 with aperpetual maturity date that resets every 28 days.  Although as of June 30, 2009, theremaining ARPS continued to pay interest according to its stated terms, themarket in such securities continues to be illiquid. Based on valuation modelson the individual securities, the Company has previously recognized in theconsolidated statement of operations an unrealized loss of approximately$118,000 in investment income since the Company had determined that the declinein value was other than temporary. The remaining ARPS has been classified as along-term investment on the consolidated balance sheets as the Company does notbelieve it could liquidate the security 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 as of the datespresented.

 
| ** **                | ** ** | **June 30, 2009**      | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **Gross  Amortized********Cost** | ** ** | **Gross  Unrealized********Gains** | ** ** | **Gross  Unrealized********Losses** | ** ** | **Market Value** | ** ** |
| Government  obligations   |       | $                                | 21,832,087 |   | $ | 9,257 |   | $ | (5,386 | ) | $ | 21,835,958 |   |
| Commercial  paper         |       | 2,498,855                        |       | — |   | — |   | 2,498,855 |   |
| Corporate  debt and other |       | 600,615                          |       | 350 |   | — |   | 600,965 |   |
| Total                     |       | $                                | 24,931,557 |   | $ | 9,607 |   | $ | (5,386 | ) | $ | 24,935,778 |   |

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 
| ** **                  | ** ** | **December 31, 2008**  | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **Gross  Amortized********Cost** | ** ** | **Gross  Unrealized********Gains** | ** ** | **Gross  Unrealized********Losses** | ** ** | **Market Value** | ** ** |
| Corporate  debt securities  |       | $                                | 13,464,268 |   | $ | 3,089 |   | $ | (49,257 | ) | $ | 13,418,100 |   |
| Foreign  debt securities    |       | 1,503,901                        |       | 5,824 |   | — |   | 1,509,725 |   |
| Government  debt securities |       | 7,584,720                        |       | 37,106 |   | (2,136 | ) | 7,619,690 |   |
| Total                       |       | $                                | 22,552,889 |   | $ | 46,019 |   | $ | (51,393 | ) | $ | 22,547,515 |   |

 

Investmentsin net unrealized loss positions as of June 30, 2009 are as follows:

 
| ** **             | ** ** | ** **                      | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **Number of  Investments** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Government obligations |       | 7                               |       | $                                                                         | 7,151,739  |                                                                         | $          | (5,386                               | )          | $ | — |   | $ | — |   | $ | 7,151,739 |   | $ | (5,386 | ) |
|                        |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortized cost and estimated fair value ofsecurities available-for-sale at June 30, 2009, by contractual maturity,are as follows:

 
| ** **                            | ** ** | **As of June 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                            | ** ** | **Amortized  Cost**                         | ** ** | **Estimated  Fair Value**                  | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| Due  in one year or less              |       | $                                           | 24,931,557 |                                            | $          | 24,935,778 |   | $ | 22,552,889 |   | $ | 22,547,515 |   |
| Due  after one year through two years |       | —                                      |       | —                                          |       | — |   | — |   |
| Total                                 |       | $                                           | 24,931,557 |                                            | $          | 24,935,778 |   | $ | 22,552,889 |   | $ | 22,547,515 |   |

 

The average maturity of our short-term investments asof June 30, 2009 and December 31, 2008, was five months and threemonths, respectively.

 

*Evaluating Investments for Other-than TemporaryImpairments*

 

Except for the ARPS which the Company recorded as another temporary impairment in 2008, the Company considered a number of factorsto determine whether the decline in value in its investments is other thantemporary, including the length of time and the extent to which the marketvalue has been less than cost, the financial condition of the issuer and theCompany’s intent to hold and ability to retain these short-terminvestments.  Based on these factors, theCompany believes that the decline in value is temporary and primarily relatedto the change in market interest rates since purchase.  The Company determined that it does notintend to sell its short-term investments and it is not more likely than notthat the Company will be required to sell its short-term investments beforerecovery of their amortized cost bases, which may not occur until maturity. TheCompany anticipates that it will fully recover the amortized cost with respectto these securities at maturity or sooner in the event of a change in themarket interest rate environment.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

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

 

TheBlack-Scholes option-pricing model was developed for use in estimating the fairvalue of traded options, which have no vesting restrictions and are fullytransferable.  In addition, theBlack-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected stock price volatility.  The following table shows the assumptionsused to compute stock-based compensation expense for the stock options grantedduring the three and six months ended June 30, 2009 and 2008, using theBlack-Scholes option pricing model:

 
| ** **                        | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                       | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free interest rate           |       | 2.00                                           | %          | 2.96                                          | %          | 2.00 | % | 2.96 | % |
| Dividend yield                    |       | 0.00                                           | %          | 0.00                                          | %          | 0.00 | % | 0.00 | % |
| Expected life of options  (years) |       | 6.08                                           |       | 6.08                                          |       | 5.27-6.08 |   | 6.02-6.08 |   |
| Volatility                        |       | 69.93                                          | %          | 64.95                                         | %          | 69.93 | % | 64.95 | % |

 

Therisk-free interest rate assumption was based on the United States Treasury’srates for U.S. Treasury zero-coupon bonds with maturities similar to those ofthe expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of notpaying dividends in the foreseeable future. The weighted-average expected life of options was calculated using thesimplified method as prescribed SAB No. 107, *Share-BasedPayment* (“SAB No. 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 No. 107,incorporating the historical volatility of comparable companies whose shareprices are publicly available. SAB No. 107, originally expired on Dec. 31,2007.  However, SAB No. 110 wasestablished to provide a limited extension so long as a company concludes thatits own historical stock option exercise experience does not provide areasonable basis for estimating expected option terms.

 

Asof June 30, 2009, the total unrecognized compensation expense related tounvested stock options was approximately $5,677,731 and the relatedweighted-average period over which it is expected to be recognized isapproximately 2.9 years.

 

Totalstock-based compensation expense, related to all of the Company’s stockoptions, stock awards and employee stock purchases, recognized for the threeand six months ended June 30, 2009 and 2008 was comprised as follows:

 
| ** **                        | ** ** | **Three months ended********June 30,** | ** ** | **Six months ended********June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                    | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Research  and development         |       | $                                           | 293,570    |                                      | $          | 119,960 |   | $ | 520,417 |   | $ | 230,506 |   |
| Marketing                         |       | 92,580                                      |       | 74,811                                    |       | 185,755 |   | 153,296 |   |
| General  and administrative       |       | 319,043                                     |       | 223,553                                   |       | 637,176 |   | 464,200 |   |
| Stock-based  compensation expense |       | $                                           | 705,193    |                                      | $          | 418,324 |   | $ | 1,343,348 |   | $ | 848,002 |   |

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

**6.     Stockholders’ Equity**

** **

*Stock Options*

* *

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. The Company initially reserved a total of 2,000,000 shares of itscommon stock for issuance pursuant to the 2006 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.  As of June 30, 2009, a total of 3,500,000 sharesof the Company’s common stock had been reserved for issuance under the 2006Plan.

 

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.In September 2008, the Company’s board of directors established a New HireStock Option Committee consisting of the Chief Executive Officer and the ChiefFinancial Officer, with authority to grant options to newly-hired non-executiveemployees within pre-determined limits.

 

Followingis a summary of stock option activity for the six months ended June 30,2009:

 
| ** **                           | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|--------------------------------------|------------|-------------|------------|---------------------------------------------|------------|
| Balance as of December 31, 2008 |       | 1,979,660   |       | $                                           | 3.64       |   |
| Granted                              |       | 598,250     |       | $                                           | 11.09      |   |
| Exercised                            |       | (111,153    | )          | $                                           | 1.11       |   |
| Canceled                             |       | (14,907     | )          | $                                           | 8.45       |   |
| Balance as of June 30, 2009     |       | 2,451,850   |       | $                                           | 5.54       |   |

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

Asof June 30, 2009, options were outstanding under the 1998 Plan and the2006 Plan as follows:

 
| ** **          | ** ** | **June 30, 2009**       | ** ** |
|---------------------|------------|------------------------------|------------|
| ** **          | ** ** | **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 - $1.08       |       | 832,906                      |       | 4.46 |   | $ | 0.90 |   | 826,412 |   | $ | 0.90 |   |
| $2.17 - $9.70       |       | 1,025,194                    |       | 7.95 |   | $ | 6.10 |   | 512,190 |   | $ | 5.51 |   |
| $10.00 - $13.68     |       | 593,750                      |       | 9.60 |   | $ | 11.09 |   | 12,792 |   | $ | 10.69 |   |
| $0.22 - $13.68      |       | 2,451,850                    |       | 7.16 |   | $ | 5.54 |   | 1,351,394 |   | $ | 2.74 |   |

 

Ofthe options outstanding, options to purchase 1,351,394 shares were vested as ofJune 30, 2009, with a weighted-average remaining contractual life of 5.7years and a weighted-average exercise price of $2.74 per share, while optionsto purchase 1,100,456 shares were unvested.

 

*Employee Stock 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. As of June 30, 2009, a total of500,000 shares of the Company’s common stock had been reserved for issuanceunder the ESPP.

 

Offering periods under the ESPP commence on the first trading day on orafter May 15 and November 15 of each year. As of June 30,2009, 93,484 shares of Company’s common stock had been issued and 406,516shares were available for issuance under the ESPP.

 

During the three and six months ended June 30,2009, the Company recorded stock-based compensation expense of approximately$38,129 and $81,104, respectively, related to the ESPP.

 

*Warrants*

 

Inconnection with a registered direct offering which occurred in March 2009,the Company sold a total of 3.3 million shares of its common stock and warrantsto purchase up to an aggregate of 91,533 shares of its common stock. Thewarrants are exercisable at an exercise price of $10.93 per share beginning sixmonths after March 9, 2009, the date of issuance, and will expire on March 9,2014.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

**7.     Revenue and OtherCollaborative Agreements**

 

*Revenuesfrom Research Grants*

 

The Company has received several research grants fromU.S. government agencies since 2003, all of which except for one were completedon or prior to June 30, 2009. The active grant was awarded from NationalInstitute of Allergy and Infectious Diseases (“NIAID”) in September 2007.This grant is renewable for $1 million each year until August 2010, up toa maximum of $3 million. The award is being used to conduct supplementarystudies to the ongoing fidaxomicin trials to confirm narrow spectrum activityand potency of fidaxomicin against hypervirulent epidemic strains, to supportadditional toxicology and microbiological studies to demonstrate the safety andefficacy of the fidaxomicin compound and its major metabolite in CDI patientsand to support a surveillance study of *C.difficile* isolates across North America to compare activity offidaxomicin with existing CDI treatments. For the three months ended June 30, 2009 and 2008, the Companyrecognized revenues related to research grants of $324,778 and $118,797,respectively. For the six months ended June 30, 2009 and 2008, the Companyrecognized revenues related to research grants of $407,790 and $605,463,respectively.

 

*Other Collaborative Agreements*

 

The Company holds worldwide rights tofidaxomicin.  In February 2007, theCompany repurchased the rights to develop and commercialize fidaxomicin inNorth America and Israel from Par Pharmaceuticals, Inc. (“Par”) under aprospective buy-back agreement.  TheCompany is also obligated to pay Par a one-time $5.0 million milestone payment,a 5% royalty on net sales by the Company, its affiliates or its licensees offidaxomicin in North America and Israel, and a 1.5% royalty on net sales by theCompany or its affiliates of fidaxomicin in the rest of the world. The one-time$5.0 million milestone payment is required to be paid after the earliest tooccur of (i) the successful completion by the Company of its secondpivotal Phase 3 trial for fidaxomicin, (ii) the Company’s grant to athird party of the rights to fidaxomicin or (iii) the submission to theFDA of an NDA for fidaxomicin.  Inaddition, in the event the Company licenses its right to market fidaxomicin inthe rest of the world, the Company will be required to pay Par a 6.25% royaltyon net revenues received by it related to fidaxomicin.  The Company is obligated to pay each of theseroyalties, if any, on a country-by-country basis for seven years commencing onthe applicable commercial launch in each such country.

 

In March 2006, the Company entered into acollaborative research and development and license agreement with CempraPharmaceuticals, Inc. (“Cempra”). The Company granted to Cempra an exclusive worldwide license, except inAssociation of Southeast Asian Nations (“ASEAN”) countries, with the right tosublicense, the Company’s patent and know-how related to the Company’smacrolide and ketolide antibacterial program. As partial consideration for granting Cempra the licenses, the Companyobtained equity of Cempra and the Company assigned no value to suchequity.  The Company may receivemilestone payments as product candidates are developed and/or co-developed byCempra, in addition to milestone payments based on certain sublicenserevenue.  The aggregate potential amountof such milestone payments is not capped and, based in part on the number ofproducts developed under the agreement, may exceed $24.5 million.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

The Company will also receive royalty payments basedon a percentage of net sales of licensed products.  The milestone payments will be triggered uponthe completion of certain clinical development milestones and in certaininstances, regulatory approval of products. In consideration of the foregoing, Cempra may receive milestone paymentsfrom the Company in the amount of $1.0 million for each of the first twoproducts the Company develops which receive regulatory approval in ASEANcountries, as well as royalty payments on the net sales of such products.  The research term of the agreement wascompleted in March 2008.  Subject tocertain exceptions, on a country-by-country basis, the general terms of thisagreement continue until the later of: (i) the expiration of the last toexpire patent rights of a covered product in the applicable country or (ii) tenyears from the first commercial sale of a covered product in the applicablecountry.  Either party may terminate theagreement in the event of a material breach by the other party, subject toprior notice and the opportunity to cure. Either party may also terminate the agreement for any reason upon 30days’ prior written notice provided that all licenses granted by theterminating party to the non-terminating party will survive upon the expresselection of the non-terminating party.

 

In June 2004, the Company entered into a licenseagreement with Nippon Shinyaku, Co., Ltd. (“Nippon Shinyaku”).  Under the terms of the agreement, the Companyacquired the non-exclusive right to import and purchase prulifloxacin, and theexclusive right (with the right to sublicense), within the United States, todevelop, make, use, offer to sell, sell and license products suitable forconsumption by humans containing prulifloxacin. Under this agreement, the Company paid Nippon Shinyaku an up-front feein the amount of $1.0 million and will be required to make one future milestonepayment in the amount of $1.0 million upon filing, if any, its first NDA forprulifloxacin in the United States. Under the agreement, the Company pays Nippon Shinyaku for certainmaterials.  If Nippon Shinyaku is unableto supply the Company with the contracted amount of prulifloxacin, then NipponShinyaku is obligated to grant the Company a non-exclusive, worldwide licenseto make or have made prulifloxacin, in which event the Company will owe NipponShinyaku a royalty based on the amount of net sales of prulifloxacin generatedby the Company and the Company’s subsidiary. Additionally, the Company will owe Nippon Shinyaku certain royaltiesbased on the amount of net sales of prulifloxacin less the amount ofprulifloxacin the Company buys from Nippon Shinyaku.  Either party may terminate the agreement 60days after giving notice of a material breach which remains uncured 60 daysafter written notice.  If not terminatedearlier, the agreement will terminate upon the later of ten years from the dateof the first commercial sale of prulifloxacin in the United States or the dateon which the last valid patent claim relating to prulifloxacin expires in theUnited States.

 

In July 2002, the Company entered into a licenseagreement with Sloan-Kettering Institute (“SKI”) to acquire, together withcertain nonexclusive licenses, exclusive, worldwide licensing and sublicensingrights to certain patented and patent-pending carbohydrate-based cancerimmunotherapies.  As partialconsideration for the licensing rights, the Company paid to SKI a one-time feeconsisting of both cash and 55,383 shares of its common stock.  Under the agreement, which was amended in June 2005,the Company owes SKI milestone payments in the following amounts for eachlicensed product: (i) $500,000 upon the commencement of Phase 3clinical studies, (ii) $750,000 upon the filing of the first NDA, (iii) $1.5million upon obtaining 

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

marketing approval in the United States and (iv) $1.0million upon obtaining marketing approval in each and any of Japan and certainEuropean countries, but only to the extent that the Company, and not asublicensee, achieves such milestones. The Company may also owe SKI royalties based on net sales generated fromthe licensed products and income the Company receives from its sublicensingactivities, which royalty payments are credited against a minimum annualroyalty payment the Company may owe to SKI during the term of theagreement.  The term of the agreementcontinues until the later of July 31, 2017, or the expiration of the lastto expire of the patents licensed under this agreement, unless the agreement isearlier terminated.  The agreement can beterminated by SKI for a variety of reasons, including (i) upon 60 days’notice in the event the Company fails to meet a development milestone specifiedin the agreement or (ii) upon 30 days’ notice, in the event the Companyfails to pay any licensing fees, royalties or patent expenses due under theagreement within 30 days of the due date and thereafter fails to pay suchdeficit in-full within the 30-day notice period.

 

In July 1999, the Company acquired exclusive,worldwide rights to its OPopS technology from the Scripps Research Institute (“TSRI”).  This agreement includes the license to theCompany of patents, patent applications and copyrights related to OPopStechnology.  The Company also acquired,pursuant to three separate license agreements with TSRI, exclusive, worldwiderights to over 20 TSRI patents and patent applications related to otherpotential drug compounds and technologies, including HIV/FIV proteaseinhibitors, aminoglycoside antibiotics, polysialytransferase, selectininhibitors, nucleic acid binders, carbohydrate mimetics and osteoarthritis.  Under the four agreements, the Company paidTSRI license fees consisting of an aggregate of 239,996 shares of its commonstock with a deemed aggregate fair market value of $46,400, as determined onthe dates of each such payment.  Additionally,under each agreement, the Company may owe TSRI royalties based on net sales bythe Company, its affiliates and sublicensees of the covered products androyalties based on revenue the Company generates from sublicenses grantedpursuant to the agreements.  For thefirst licensed product under each of the four agreements, the Company will alsoowe TSRI payments upon achievement of certain milestones.  In three of the four TSRI agreements, themilestones are the initiation of a Phase 2 trial or its foreignequivalent, the filing of an NDA or its foreign equivalent and governmentmarketing and distribution approval.  Inthe remaining TSRI agreement, the milestones are the successful completion of aPhase 3 trial or its foreign equivalent, the filing of an NDA or itsforeign equivalent and government marketing and distribution approval.  The aggregate potential amount of milestonepayments the Company may be required to pay TSRI under all four TSRI agreementsis approximately $14.0 million.  EachTSRI agreement terminates in part as follows: (i) with respect to eachproduct which utilizes patent rights licensed under the agreement, on acountry-by-country basis concurrently with the expiration of the last to expireof the applicable patent rights, (ii) with respect to each product whichutilizes technology licensed under the agreement but which does not utilizepatent rights also licensed thereunder, 15 years after the date of the firstcommercial sale of the product in each country and (iii) with respect tosoftware licensed under the 1999 OPopS agreement, 75 years after the date theapplicable copyright is filed in the United States.

 

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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, as well as the audited financial statements and accompanying notesincluded in our annual report on Form 10-K for the fiscal year ended December 31,2008, as filed with the Securities and Exchange Commission, or SEC.  This discussion and other parts of thisreport may contain forward-looking statements based upon current expectationsthat involve risks and uncertainties. Our actual results and the timing of selected events could differmaterially from those anticipated in these forward-looking statements as aresult of several factors, including those set forth under “Risk Factors” andelsewhere in this report.*

 

**Overview**

** **

We are a biopharmaceutical company focused ondiscovering, developing and commercializing innovative anti-infective products.Our current development efforts are focused on products that treatgastrointestinal 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, fidaxomicin and prulifloxacin.

 

Fidaxomicin, our lead product candidate, is anantibiotic currently in its second Phase 3 registration trial for the treatmentof *Clostridium difficile*-infection,or CDI, the most common nosocomial, or hospital acquired, diarrhea. In November 2008,we reported positive data from the first fidaxomicin Phase 3 trial, the largestsingle comparative study ever conducted against Vancocin. The top-line analysisof data from this trial showed that fidaxomicin achieved the primary endpointof clinical cure and demonstrated a significantly lower recurrence ratecompared to Vancocin, the only FDA-approved antibiotic for the treatment ofCDI.  Fidaxomicin was also well-toleratedin the trial.  The second fidaxomicinPhase 3 trial is on-going and we anticipate completing enrollment and reportingdata from this trial in 2009.  Wecurrently hold worldwide rights to fidaxomicin and intend to seek one or morepartners for the commercialization of fidaxomicin outside of North America.

 

Prulifloxacin is a prodrug in the fluoroquinoloneclass of antibiotics, a widely-used class of broad-spectrum antibiotics. We aredeveloping prulifloxacin as a treatment for infectious diarrhea intravelers.  In July 2008, wereported positive top-line data from the first Phase 3 trial conducted inMexico and Peru and in February 2009, we reported positive top-line datafrom the second Phase 3 trial conducted in India, Guatemala and Mexico.  The top-line analysis of data from thesestudies showed that prulifloxacin met the primary endpoint of time to lastunformed stool, or TLUS, compared to placebo. We intend to conduct aPhase 4 trial of prulifloxacin subsequent to the NDA submission to compareprulifloxacin to ciprofloxacin for the treatment of infectious diarrhea.  We plan to initially seek approval forprulifloxacin for the treatment of infectious diarrhea in travelers.

 

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We are developingadditional product candidates using our proprietary technology, including ourOptimer One-Pot Synthesis, or OPopSTM drug discovery platform. OPopS is acomputer-aided technology that enables the rapid and low-cost synthesis of awide array of carbohydrate-based compounds. Two components of the OPopS technology that allow us to synthesize newcompounds are GlycoOptimization and De Novo Glycosylation.  These technologies are capable of rapidlygenerating drug candidates for broad therapeutic application.  One of the more advanced OPopS productcandidates is OPT-88, a disease-modifying intra-articular, or within the cavityof a joint, therapy for osteoarthritis.  We plan tosubmit an Investigational New Drug application in 2009 and subsequently to,either by ourselves or in a collaboration with a partner, initiate a Phase 1study to assess safety of repetitive intra-articular injections of OPT-88 inpatients with knee osteoarthritis.

 

Wealso acquired exclusive rights from Memorial Sloan-Kettering Cancer Center todevelop and commercialize OPT-822, a novel carbohydrate-based cancerimmunotherapy. We plan to seek to collaborate with a partner and initiate Phase2/3 clinical trials for OPT-822 for the treatment of metastatic breast cancerin Asia in 2009.

 

We were incorporated in November 1998.  Since inception, we have focused ondeveloping our product candidates, including fidaxomicin andprulifloxacin.  We have never beenprofitable and have incurred significant net losses since our inception.  As of June 30, 2009, we had anaccumulated deficit of $156.6 million. These losses have resulted principally from costs incurred in connectionwith research and development activities, including the costs of clinical trialactivities associated with our current lead product candidates, license feesand general and administrative expenses. We expect to continue to incur operating losses for the next severalyears as we pursue the clinical development and commercialization of ourproduct candidates, as well as acquire or in-license additional products orproduct candidates, technologies or businesses that are complementary to ourown.

 

**Critical Accounting 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.

 

*Revenue Recognition*

* *

Ourlicense and 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.  We apply therevenue recognition criteria outlined in Staff Accounting Bulletin, or SAB, No. 104,*Revenue Recognition* and

 

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EmergingIssues Task Force, or EITF, Issue 00-21, *RevenueArrangements with Multiple Deliverables*, or EITF 00-21.  In applying these revenue recognitioncriteria, we consider a variety of factors in determining the appropriatemethod of revenue recognition 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 earlystages of development.  Accordingly,these milestone payments are allowed to be recognized as revenue if and whenthe performance milestone is achieved if they represent a substantive earningsprocess as described in EITF 00-21.

 

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

 

Revenuesderived from reimbursement of direct out-of-pocket expenses for research costsassociated with grants are recorded in compliance with EITF Issue 99-19, *Reporting Revenue Gross as a Principal Versus 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 aprincipal, with discretion to choose suppliers, bear credit risk and performpart of the services required in the transaction, we record revenue for thegross amount of the reimbursement.  Thecosts associated with these reimbursements are reflected as a component ofresearch and development 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, *Accounting for Non-Refundable Advance Payments forGoods or Services to be*

 

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*Used in Future Research andDevelopment Activities .*In accordance with EITF 07-3, these types of payments are deferred andcapitalized. The capitalized amounts are expensed when the related goods aredelivered or the services are performed.

 

*Accrued Clinical 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.  To date, our accruals have been withinmanagement’s estimates, and no material adjustments to research and developmentexpenses have been recognized.  We expectto expand the level of research and development activity to be performed byexternal service providers and as a result, we expect our estimates of accrualswill become more significant to our future operations.  Subsequent changes in estimates may result ina material change in our accruals, which could also materially affect ourresults of operations.

 

*Stock-Based Compensation*

* *

We apply Statement of Financial Accounting Standards,or SFAS, No. 123(R), *Share-BasedPayment*, which revises SFAS No. 123, *Accounting for Stock-Based Compensation* and supersedesAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*to recognize share-based compensationexpenses.  SFAS No. 123(R) requiresthat share-based payment transactions with employees be recognized in thefinancial statements based on their fair value and recognized as compensationexpense over the vesting period.  We usedthe modified prospective method when we adopted SFAS No. 123(R) andaccordingly we did not restate the results of operations for the prior periods.Compensation expense of $705,000 and $418,000 was recognized in the threemonths ended June 30, 2009 and 2008, respectively.  Compensation expense of $1,343,000 and$848,000 was recognized in the six months ended June 30, 2009 and 2008,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 valuefor stock options requires judgment, including estimating stock-pricevolatility, expected term, expected dividends and risk-free interest rates. Theexpected volatility rates are based on the historical fluctuation in the stockprice since inception. The average expected term is calculated using SAB No. 107,*Simplified Method for Estimating theExpected Term*.  Expecteddividends are estimated based on our dividend history as well as our currentprojections. The risk-free interest rate for periods approximating the expectedterms of the options is based on the U.S. Treasury yield curve in effectat the time of grant. These assumptions are updated on an annual basis orsooner if there is a significant change in

 

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circumstances that couldaffect these assumptions. SAB No. 107, originally expired on Dec. 31,2007. However, SAB No. 110 was established to provide a limited extensionso long as a company concludes that its own historical share option exerciseexperience does not provide a reasonable basis for estimating expected term.

 

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.

 

**Results of Operations**

** **

***Comparison of***Three Months Ended June 30,2009 and 2008

*** ***

*Total Revenues*.  Total revenues for the three months ended June 30,2009 and 2008 were $425,000 and $169,000, respectively. The increase of$256,000, or 152%, was primarily due to revenue received from a NationalInstitute of Health grant in the three months ended June 30, 2009.

 

*Researchand Development Expense*. Research and development expense for the three months ended June 30,2009 and 2008 was $10.5 million and $6.2 million, respectively, an increase of$4.3 million, or 69%.   The increase wasprimarily due to manufacturing scale-up expenses and expenses to prepare theregulatory filings related to our fidaxomicin and prulifloxacin programs.

 

*MarketingExpense*. * *Marketingexpense for the three months ended June 30, 2009 and 2008 was $475,000 and$914,000, respectively.  The decrease of$439,000, or 48%, was primarily due to lower medical education and consultingexpenses.

 

*Generaland Administrative Expense*.  General and administrative expense for thethree months ended June 30, 2009 and 2008 was $1.9 million and $1.5million, respectively.  The increase of$350,000, or 23%, was due to higher compensation expenses, including $319,000of stock compensation expense, an increase of $95,000 over the same period inthe prior year, as well as higher consulting expenses.

 

*InterestIncome and Other, Net*.  Netinterest income and other for the three months ended June 30, 2009 and2008 was $88,000 and $434,000, respectively. The decrease was primarily due to lower interest rates on cash, cashequivalents and investments.

 

***Comparison of*** Six Months EndedJune 30, 2009 and 2008

*** ***

*Total Revenues*.  Total revenues for the six months ended June 30,2009 and 2008 were $508,000 and $655,000, respectively. The decrease of$147,000, or 23%, was primarily due to the conclusion of one of two National Institutes of Health grants.

 

*Researchand Development Expense*. Research and development expense for the six months ended June 30,2009 and 2008 was $19.3 million and $13.1 million, respectively, an increase of$6.2 million, or 47%.   The increase wasprimarily due to an increase in development,

 

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manufacturingscale-up expenses and expenses to prepare the regulatory filings related to ourfidaxomicin and prulifloxacin programs.

 

*MarketingExpense*. * *Marketingexpense for the six months ended June 30, 2009 and 2008 was $785,000 and$1.3 million, respectively.  The decreaseof $494,000, or 39%, was primarily due to lower medical education andconsulting expenses.

 

*Generaland Administrative Expense*.  General and administrative expense for thesix months ended June 30, 2009 and 2008 was $3.9 million and $3.3 million,respectively.  The increase of $661,000,or 20%, was due to higher compensation expenses, including $637,000 of stockcompensation expense, an increase of $173,000 over the same period in the prioryear, as well as higher consulting expenses.

 

*InterestIncome and Other, Net*.  Netinterest income and other for the six months ended June 30, 2009 and 2008was $275,000 and $1.0 million, respectively. The decrease was primarily due to lower interest rates on cash, cashequivalents and investments.

 

**Liquidity and CapitalResources**

** **

*Sources of Liquidity*

* *

Since inception, our operations have been financed primarily throughthe sale of equity securities.  Through June 30,2009, we received gross proceeds of approximately $202.4 million from the saleof shares of our preferred and common stock as follows:

 

·                  in May 2000, we sold atotal of 1.6 million shares of Series A preferred stock for proceeds 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;

 

·                  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,we sold 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 a total of 1.7 million shares of our common stock in a registereddirect offering for proceeds of $14.7 million; and

 

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·                  in March 2009,we sold a total of 3.3 million shares of our common stock and warrants topurchase up to an aggregate of 91,533 shares of our common stock in a registereddirect offering for proceeds of $32.9 million.

 

Untilrequired for operations, we invest a substantial portion of our available fundsin money market funds, corporate debt securities, United States governmentinstruments and other readily marketable debt instruments, all of which areinvestment-grade quality.  We haveestablished guidelines relating to diversification and maturities of ourinvestments to preserve principal and maintain liquidity.

 

*Cash Flows*

* *

Asof June 30, 2009, cash, cash equivalents and short-term investmentstotaled approximately $51.2 million as compared to $39.3 million as of December 31,2008, an increase of approximately $11.9 million.  The increase in our cash, cash equivalentsand short-term investments was primarily due to the $32.9 million raised in aregistered direct offering of our common stock in March 2009 offset by theuse of cash for our operating expenses.

 

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

 

In February 2007, we regained worldwide rights tofidaxomicin from Par under a prospective buy-back agreement.  We are obligated to pay Par a one-time $5.0million milestone payment, a 5% royalty on net sales by us or our affiliates offidaxomicin in North America and Israel, and a 1.5% royalty on net sales by usor our affiliates of fidaxomicin in the rest of the world.  In addition, in the event we license ourright to market fidaxomicin in the rest of the world, we will be required topay Par a 6.25% royalty on net revenues we receive related to fidaxomicin.  We are obligated to pay each of theseroyalties, if any, on a country-by-country basis for seven years commencing onthe applicable commercial launch in each such country.   In connection with theexercise of our rights under the prospective buy-back agreement, Par assignedto us a supply agreement with Biocon. Under this agreement, Biocon is obligatedto supply to us our requirements of the fidaxomicin active pharmaceuticalingredients for certain markets. In June 2004, we entered into a licenseagreement with Nippon Shinyaku Co., Ltd. to which we acquired the non-exclusiveright to import and purchase prulifloxacin , and the exclusive right (with theright to sublicense), within the United States, to develop, make, use, offer tosell, sell and license products suitable for consumption by humans containingprulifloxacin.  Under the terms of theagreement, we will be required to pay Nippon Shinyaku a milestone payment inthe amount of $1.0 million upon the filing, if any, of a new drug applicationfor prulifloxacin in the United States.

 

In October 2008, ourCompensation Committee adopted a Severance Benefit Plan covering certaineligible employees of the Company, including executive officers.  Pursuant to the plan, upon an involuntarytermination other than for cause, an eligible employee may be entitled toreceive specified severance benefits. The benefits may include cash severancepayments and acceleration of stock award vesting.  The level of benefits provided under the plandepends upon

 

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an eligible employee’sposition and years of service, and whether the termination is related to achange in control.

 

*Funding Requirements*

* *

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

 

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

 

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

 

·                  the costsinvolved in prosecuting, enforcing or defending patent claims or otherintellectual property rights;

 

·                  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.

 

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 government take-over, bankruptcy,failure, collapse or sale of various financial institutions.  These events have generally made equity anddebt financing more difficult to obtain, and may negatively impact our abilityto complete financing transactions. Having insufficient funds may require us to delay, scale-back oreliminate some or all of our development programs, relinquish some or even allof our rights to product candidates at an earlier stage of development or renegotiateless favorable terms than we would otherwise choose.  Failure to obtain adequate financing also mayadversely affect our 

 

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abilityto operate as a going concern.  If weraise funds by issuing equity securities, substantial dilution to existingstockholders would likely result.  If weraise funds by incurring additional debt financing, the terms of the debt mayinvolve significant cash payment obligations as well as covenants and specificfinancial ratios that may restrict our ability to operate our business.

 

**Item 3. Quantitative andQualitative Disclosures about Market Risk**

 

Ourcash and cash equivalents and short-term investments as of June 30, 2009consisted primarily of money market funds and United States governmentinstruments and other readily marketable debt instruments.  Our primary exposure to market risk isinterest income sensitivity, which is affected by changes in the general levelof U.S. interest rates.  The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk.  Ahypothetical ten percent change in interest rates during the quarter endedJune 30, 2009 would have resulted in approximately a $8,700 change in netloss. Accordingly, we would not expect our operating results or cash flowsto be affected to any significant degree by a sudden change in market interestrates applicable to our securities portfolio. In general, money market funds are not subject to market risk becausethe interest paid on such funds fluctuates with the prevailing interest rate.

 

**Item 4. Controlsand Procedures**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our reports under the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, and the rules andregulations thereunder, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms and that suchinformation is accumulated and communicated to our management, including ourchief executive officer and chief financial officer, as appropriate, to allowfor timely decisions regarding required disclosure. In designing and evaluatingthe disclosure controls and procedures, management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

*Evaluation of disclosure controls and procedures.*As required byExchange Act Rule 13a-15(b), we carried out an evaluation, under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this report. Based on the foregoing, our chief executiveofficer and chief financial officer concluded that our disclosure controls andprocedures were effective at the reasonable assurance level.

 

*Changes in internal control over financial reporting.* There was nochange in our internal control over financial reporting that occurred duringthe period covered by this report that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**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, 2008, as filedwith the SEC.

 

**RisksRelated to Our Business**

** **

**We are acompany with limited sources of revenue, and we are largely dependent on thesuccess of our lead product candidate****fidaxomicin****and, to a lesser degree, our other lead product candidate prulifloxacin.**

 

We are a biopharmaceuticalcompany with no products approved for commercial sale and, to date, we have notgenerated any revenues from product sales. Our ability to generate future revenues depends heavily on our successin:

 

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

 

·                  commercializing, alone orwith a partner, any product candidates for which we receive approval from theFDA; and/or comparable foreign regulatory authorities; and

 

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

 

Our product candidates willgenerally require extensive clinical study and evaluation, regulatory approvalin multiple jurisdictions, substantial investment and significant marketingefforts before we generate any revenues from product sales.  We are not permitted to market or promote ourproduct candidates before we receive regulatory approval from the FDA orcomparable foreign regulatory authorities. We have not submitted an NDA, or received marketing approval for eitherfidaxomicin or prulifloxacin, and we cannot be certain that either of theseproduct candidates will be successful in on-going or future clinical trials orreceive regulatory approval.  If we donot receive regulatory approval for and successfully commercialize fidaxomicinand prulifloxacin, we will not generate any revenues from product sales forseveral years, if at all, and we may not be able to continue our operations.

 

We believe our initialsuccess will be more dependent on fidaxomicin than prulifloxacin, because webelieve that the market for the treatment of CDI is larger than the market forthe treatment of infectious diarrhea. Even if we successfully obtain regulatory approval to market fidaxomicinor prulifloxacin, our revenues for either drug candidate will be dependent uponthe size of the markets in the territories for which we have commercialrights.  If the markets for the treatmentof CDI or infectious diarrhea are not as significant as we estimate, ourbusiness and prospects will be harmed.

 

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

 

We have experienced significant operating losses since our inception in1998.  As of June 30, 2009, we hadan accumulated deficit of approximately $156.6 million.  We have generated no revenues from productsales to date.  We have funded ouroperations through June 30, 2009 from the sale of approximately $202.4million 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, prepare submissionsfor regulatory approval of our lead product candidates and build our marketingand sales capabilities.  Because of thenumerous risks and uncertainties associated with developing, obtainingregulatory approval for and commercializing our product candidates, we areunable to predict the extent of any future losses.  We may never successfully commercialize ourproduct candidates and thus may never have any significant future revenues orachieve and sustain profitability.

 

**If we failto obtain additional financing, we may be unable to commercialize****fidaxomicin****and prulifloxacin or develop and commercialize our other productcandidates, or continue our other research and development programs.**

 

We will require additionalcapital to commercialize our current lead product candidates, fidaxomicin andprulifloxacin.  We cannot be certain thatadditional funding will be available on acceptable terms, or at all.  Recently, the credit markets and thefinancial services industry have been experiencing a period of unprecedentedturmoil and upheaval characterized by the government take-over, bankruptcy,failure, collapse or sale of various financial institutions.  These events have generally made equity anddebt financing more difficult to obtain, and may negatively impact our abilityto complete financing transactions.  Tothe extent that we raise additional funds by issuing equity securities, ourstockholders may experience significant dilution.  Any debt financing, if available, may requireus to pledge our assets as collateral or involve restrictive covenants, such aslimitations on our ability to incur additional indebtedness, limitations on ourability to acquire or license intellectual property rights and other operatingrestrictions that could negatively impact our ability to conduct ourbusiness.  If we are unable to raiseadditional capital when required or on acceptable terms, we may have tosignificantly delay, scale back or discontinue the development or commercializationof one or more of our product candidates or one or more of our other researchand development initiatives.  We alsocould be required to:

 

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

 

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

 

Any of the above eventscould significantly harm our business and prospects and could cause our stockprice to decline.

 

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We do not currently havesufficient resources to commercialize fidaxomicin and prulifloxacin on our own.If we are unable to raise additional capital or are unable to effectivelycollaborate with one or more partners for the commercialization of fidaxomicinor prulifloxacin, we will not generate significant revenues from sales of theseproducts and our business will be materially harmed.

 

**We are dependent on third party collaborators and wemay be unable to enter into future collaboration agreements or we may havedisagreements with these collaborators.**

 

We currently plan to buildour own marketing and sales force for fidaxomicin in North America andprulifloxacin in the United States, and we intend to seek one or more partnersfor the commercialization of fidaxomicin outside of North America.  With respect to our OPT-88 andOPT-822/OPT-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 fidaxomicin, or our other productcandidates, we would either have to delay further development andcommercialization initiatives, which would harm our business and prospects, orraise significant additional funds to develop clinical and commercializationcapabilities internally.

 

We are subject to a numberof additional risks associated with our dependence on collaborations with thirdparties.** **Conflicts may arise between us and collaborators, such as conflictsconcerning the interpretation of clinical data, the achievement of milestones,the interpretation 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 to our best interests.  Any such disagreement between us and acollaborator could result in one or more of the following, each of which coulddelay or prevent the development or commercialization of fidaxomicin, and ourother product candidates, and in turn prevent us from generating sufficientrevenues to achieve or maintain profitability:

 

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

 

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

 

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

 

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

 

In addition, a collaboratormay not have or devote sufficient resources to develop and

 

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commercialize our productcandidates, may elect to underfund, discontinue or may not properly performpre-clinical studies or clinical trials, or may divert resources to otherprograms that are potentially competitive with our product candidates.

 

**If we areunable to obtain FDA approval of our product candidates, we will not be able tocommercialize them in the United States.**

 

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

 

This regulatory review andapproval process, which includes evaluation of pre-clinical studies andclinical trials of our product candidates as well as the evaluation of ourmanufacturing processes and our third-party contract manufacturers’ facilities,is lengthy, expensive and uncertain.  Toreceive approval for a product candidate, we must, among other things,demonstrate with substantial evidence from well-controlled clinical trials thatthe product candidate is both safe and effective for each indication for whichapproval is sought.  Satisfaction of theapproval requirements typically takes several years and the time needed tosatisfy them may vary substantially, based on the type, complexity and noveltyof the pharmaceutical product.  We cannotpredict if or when we might receive regulatory approvals for any of our productcandidates currently under development. Moreover, any approvals that we obtain may not cover all of the clinicalindications for which we are seeking approval, or could contain significantlimitations in the form of narrow indications, warnings, precautions orcontra-indications with respect to conditions of use.  In such an event, our ability to generaterevenues from such products would be greatly reduced and our business would beharmed.

 

TheFDA has substantial discretion in the approval process and may either refuse toconsider our applications for substantive review or may form the opinion afterreview of our data that our applications are insufficient to allow approval ofour product candidates.  If the FDA doesnot consider or approve an application that we submit, it may require that weconduct additional clinical, pre-clinical or manufacturing validation studiesand submit 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, we intend to rely in part oncertain legacy data from a third party to support an NDA for prulifloxacin. Ifwe are unable to obtain this data in a timely manner or the FDA deems this datato insufficient, it may delay our filing of a NDA for prulifloxacin and couldrequire us to complete additional studies. It is also possible that additional studies, if performed and completed,may not be successful or considered sufficient by the FDA for approval or evento make our applications approvable.  Ifany of these outcomes occur, we may be forced to abandon one or more of ourfuture applications for approval, which might significantly harm our businessand prospects.

 

It is possible that none ofour existing product candidates or any product candidates we may seek todevelop in the future will ever obtain the appropriate regulatory approvalsnecessary for us or our collaborators to commence product sales.  Increased scrutiny by regulatory authoritiesmay result in significant delays in obtaining regulatory approvals, as well asmore stringent product labeling and post-marketing testing requirements.

 

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Although the FDA has granted Fast Track status to fidaxomicin andselected it for participation in a CMA Pilot 2 Program, we cannot becertain that we will receive any benefits from these designations or that thedesignations will expedite regulatory review or approval of fidaxomicin.  Participation in these programs will noteliminate any phase of clinical development. Moreover, our participation in the CMA Pilot 2 Program will involvefrequent scientific discussions and other interactions with the staff of theFDA during the investigational new drug phase of our development of fidaxomicin.  These frequent discussions could subjectfidaxomicin to a greater level of scrutiny than it might otherwise havereceived or require us to make more frequent submissions and endure otherburdens that would have been avoided if we had not participated in theprogram.  Therefore, despite anypotential benefits of fidaxomicin’s Fast Track and CMA Pilot 2 Programdesignations, significant uncertainty remains regarding the clinicaldevelopment and regulatory approval process for fidaxomicin.

 

**Clinicaltrials involve a lengthy and expensive process with an uncertain outcome, andresults of earlier studies and trials may not be predictive of future trialresults.***

 

Clinical testing isexpensive and can take many years to complete, and its outcome is uncertain.  Failure can occur at any time during theclinical trial process. The results of pre-clinical studies and early clinicaltrials of our product candidates may not be predictive of the results oflater-stage clinical trials. For example, results from the first fidaxomicinPhase 3 trial, while positive, may not predict results from the second Phase 3trial which is on-going.  Productcandidates in later stages of clinical trials may fail to show the desiredsafety and efficacy traits despite having progressed through pre-clinicalstudies and initial clinical testing.  Inaddition, the type and amount of clinical data necessary to gain regulatoryapproval for our product candidates may change or we may inaccurately characterizesuch requirements.  For example, weintend to prepare a Marketing Authorization Application, or MAA, for submissionto the European Medicines Agency, or EMEA, for fidaxomacin based on the resultsfrom our first Phase 3 trial.  Althoughwe currently believe that the EMEA will accept an MAA for fidaxomicin based ononly one completed Phase 3 trial, we may be incorrect in this belief and may berequired to resubmit our filing following the completion of our second Phase 3trial.  Such a resubmission would involveadditional delay and expense related to any approval of fidaxomicin in Europe.

 

Even after we complete ourplanned clinical trials, our product candidates could fail to receiveregulatory approval for many reasons, including the following:

 

·                  the results of our clinicaltrials may not demonstrate to the satisfaction of or meet the level ofstatistical significance required by the FDA or comparable foreign regulatoryauthorities that a product candidate is safe and effective for any indication;

 

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

 

·                  the results of our clinicaltrials may not demonstrate that a product candidate’s clinical and otherbenefits outweigh its safety risks;

 

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·                  the results of our clinicaltrials may not demonstrate that a product candidate presents an advantage overexisting therapies, or over placebo in any indications for which the FDArequires a placebo-controlled trial;

 

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

 

·                  the data collected fromclinical trials of our product candidates may not be sufficient to support thesubmission of an NDA or other submission or to obtain regulatory approval inthe United States or elsewhere; and

 

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

 

**Delays inclinical trials are common and have many causes, and any such delays couldresult in increased costs to us and jeopardize or delay our ability to achieveregulatory approval and commence product sales as currently contemplated.***

 

We may experience delays inclinical trials of our product candidates. We reported positive top-line data from the first of two Phase 3 trialsevaluating fidaxomicin for the treatment of CDI. We anticipate completingenrollment and reporting data from the second trial in 2009. If the secondtrial is also 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 fidaxomicin.  We reported positivetop-line data from the two Phase 3 trials evaluating prulifloxacin for thetreatment of infectious diarrhea in travelers. We intend to conduct aPhase 4 trial of prulifloxacin subsequent to NDA submission to compareprulifloxacin to ciprofloxacin for the treatment of infectious diarrhea. We donot know whether planned clinical trials will begin on time, will need to beredesigned or will be completed on schedule, if at all.  Clinical trials can be delayed for a varietyof reasons, including delays in obtaining regulatory approval to commence atrial, in reaching agreement on acceptable terms with prospective CROs andclinical trial sites, in obtaining institutional review board approval at eachsite, in recruiting suitable patients to participate in a trial, in havingpatients complete a trial or return for post-treatment follow-up, in adding newsites or in obtaining sufficient supplies of clinical trial materials.  Many factors affect patient enrollment,including the size and nature of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, the designof the clinical trial, competing clinical trials, clinicians’ and patients’perceptions as to the potential advantages of the drug being studied inrelation to other available therapies, including any new drugs that may beapproved for the indications we are investigating and whether the clinicaltrial design involves comparison to placebo.

 

We could encounter delays ifprescribing physicians encounter unresolved ethical issues associated withenrolling patients in clinical trials of our product candidates in lieu ofprescribing existing antibiotics that have established safety and efficacy profilesor with administering

 

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placebo to patients in ourplacebo-controlled trials.  Further, aclinical trial may be suspended or terminated by us, our collaborators, the FDAor other regulatory authorities due to a number of factors, including failureto conduct the clinical trial in accordance with regulatory requirements or ourclinical protocols, inspection of the clinical trial operations or trial siteby the FDA or other regulatory authorities resulting in the imposition of aclinical hold, unforeseen safety issues or adverse side effects, failure todemonstrate a benefit from using a drug, changes in governmental regulations oradministrative actions or lack of adequate funding to continue the clinicaltrial.  If we experience delays in thecompletion of, or termination of, any clinical trial of our product candidates,the commercial prospects of our product candidates will be harmed, and ourability to generate product revenues from any of these product candidates willbe delayed.  In addition, any delays incompleting our clinical trials will increase our costs, slow down our productdevelopment and approval process and jeopardize our ability to commence productsales and generate revenues.  Any ofthese occurrences may significantly harm our business, financial condition andprospects.

 

**We may berequired to suspend or discontinue clinical trials due to adverse events,adverse side effects or other safety risks that could preclude approval of ourproduct candidates.***

 

Our clinical trials may besuspended at any time for a number of reasons. We may voluntarily suspend or terminate our clinical trials if at anytime we believe that they present an unacceptable risk to participants.  In addition, regulatory agencies may orderthe temporary or permanent discontinuation of our clinical trials at any timeif they believe that the clinical trials are not being conducted in accordancewith applicable regulatory requirements or that they present an unacceptablesafety risk to participants.  In thefirst Phase 3 clinical trial of fidaxomicin, the most common drug-related sideeffects reported were nausea, vomiting, constipation, anorexia, headache anddizziness.  Patients treated withprulifloxacin have experienced drug-related side effects including abdominalpain, diarrhea, nausea, renal toxicities, cardiac arrhythmias, photosensitivity,rash, excessive flushing of the skin and central nervous system effects, suchas seizures.  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.  In response to the FDA’s recommendation, wehave completed a QT interval study of prulifloxacin and we expect to reportdata from such QT interval study to the FDA in the second half of 2009.  If adverse, drug-related events are encounteredor suspected, our trials would be interrupted, delayed or halted and the FDA orcomparable foreign regulatory authorities could order us to cease furtherdevelopment of or deny approval of our product candidates for any or alltargeted indications.  Even if we believeour product candidates are safe, our data is subject to review by the FDA,which may disagree with our conclusions and delay or deny approval of ourproduct candidates which would significantly harm the commercial prospects ofsuch product candidates.  Moreover, wecould be subject to significant liability if any volunteer or patient suffers,or appears to suffer, adverse side effects as a result of participating in ourclinical trials.  Any of theseoccurrences may significantly harm our business and prospects.

 

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**We relyon third parties to conduct our clinical trials.  If these third parties do not successfullycarry out their contractual duties or meet expected deadlines, we and ourcollaborators may not be able to obtain regulatory approval for orcommercialize our product candidates.**

 

We have entered into agreements with third-party CROs, such as INCResearch, to provide monitors for and to manage data for our on-going clinicalprograms.

 

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

 

Typically, the CROsconducting clinical trials of our product candidates have the right toterminate their agreements with us or our collaborators upon notice in theevent of an uncured material breach.  Inaddition, some CROs have an ability to terminate their respective agreementswith us if we fail to perform our obligations, if it can be reasonably demonstratedthat the safety of the subjects participating in our clinical trials warrantssuch termination, if we make a general assignment for the benefit of ourcreditors or if we are liquidated.  Wehave relied substantially on INC Research to conduct the clinical trials forfidaxomicin and prulifloxacin.  INCResearch has also subcontracted with other third-party CROs for various aspectsof the clinical trials.  If anyrelationships with INC Research or these other third-party CROs terminate, weor our collaborators may not be able to enter into arrangements withalternative CROs or we may enter into arrangements with alternative CROs thatdo not have the expertise or relationships that INC Research has withgovernment agencies.

 

In addition, thesethird-party CROs are not our employees, and we cannot control whether or notthey devote sufficient time and resources to our on-going clinicalprograms.  These CROs may also haverelationships with other commercial entities, including our competitors, forwhom they may also be conducting clinical studies or other drug developmentactivities, which could harm our competitive position.  If CROs do not successfully carry out theircontractual duties or obligations or meet expected deadlines, if they need tobe replaced, or if the quality or accuracy of the clinical data they obtain iscompromised due to the failure to adhere to our clinical protocols, regulatoryrequirements, or for other reasons, our clinical trials may be extended,delayed or terminated, and we may not be able to obtain regulatory approval foror successfully commercialize our product candidates.  As a result, our financial results and thecommercial prospects for our product candidates would be harmed, our costscould increase and our ability to generate revenues could be delayed.

 

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**If we failto gain and/or maintain marketing approvals from regulatory authorities ininternational markets for****fidaxomicin****and any future product candidates for which we have rights ininternational markets, our market opportunities will be limited.**

 

Sales of our productcandidates outside of the United States will be subject to foreign regulatoryrequirements governing clinical trials and marketing approval.  Even if the FDA grants marketing approval fora product candidate, comparable regulatory authorities of foreign countriesmust also approve the marketing of the product candidate in thosecountries.  This is important for thecommercialization of fidaxomicin for which we currently have exclusiveworldwide marketing rights.  Obtainingforeign regulatory approvals could result in significant delays, difficultiesand costs for us and require additional pre-clinical studies or clinical trialswhich would be costly and time consuming. Regulatory requirements can vary widely from country to country andcould delay the introduction of our products in those countries.  Clinical trials conducted in one country maynot be accepted by regulatory authorities in other countries, and regulatoryapproval in one country does not guarantee regulatory approval will be obtainedin any other country.  In addition, ourfailure to obtain regulatory approval in any country may delay or have negativeeffects on the process for regulatory approval in others.  For example, if our planned MAA forfidaxomicin is rejected or unanticipated concerns are raised by the EMEA duringits review, a subsequent NDA submission for fidaxomicin could be negativelyimpacted. Other than prulifloxacin, which is sold by other parties in Japan,Italy and certain other European countries, none of our product candidates isapproved for sale in any international market for which we have rights. If wefail to comply with regulatory requirements in our international markets or toobtain and maintain required approvals, our target market will be reduced andour ability to generate revenues will be diminished, which would significantlyharm our business, results of operations and prospects.

 

**We currently have no sales organization and have noexperience as a company in marketing drug products.  If we are unable to expand our marketingcapabilities and establish sales capabilities or enter into agreements withthird parties to market and sell our product candidates, we may not be able togenerate product revenues.**

 

We currently have a limitedmarketing organization and do not have a sales organization for marketing,sales and distribution of pharmaceutical products. In order to commercializeany products, we must build our marketing, sales, distribution, managerial andother non-technical capabilities or make arrangements with third parties toperform these services. We plan to build our own marketing and sales force to commercializefidaxomicin in North America and will seek third-party partners outside NorthAmerica. We own exclusive rights to commercialize prulifloxacin in the UnitedStates, and we contemplate establishing our own sales force or seekingthird-party partners to sell prulifloxacin in the United States. Theestablishment and development of our own sales force to market any products wemay develop will be expensive and time consuming and could delay any productlaunch, and we cannot be certain that we will be able to successfully developthis capability. We do not currently have sufficient funds to develop a salesforce and other resources that we believe would be necessary to adequatelymarket fidaxomicin and prulifloxacin in the United States. We will also have tocompete with other pharmaceutical and biotechnology companies to recruit, hire,train and retain marketing and sales personnel. To the extent we rely on thirdparties to commercialize our products, if any, 

 

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we may receive less revenuesthan if we commercialized these products ourselves. In addition, we may havelittle or no control over the sales efforts of any third parties involved incommercializing our products. In the event we are unable to develop our ownmarketing and sales force or collaborate with a third-party marketing and salesorganization, we would not be able to commercialize our product candidateswhich would negatively impact our ability to generate product revenues.

 

**We may notbe able to enter into acceptable agreements to market and commercialize****fidaxomicin****outside of North America or if, needed, adequately build our ownmarketing and sales capabilities.***

 

If appropriate regulatoryapprovals are obtained, we intend to commercialize fidaxomicin outside of NorthAmerica through collaboration arrangements with third parties.  We may be unable to enter into collaborationarrangements in international markets. In addition, there can be no guarantee that if we enter into thesecollaboration arrangements with other parties that they will be successful orresult in more revenues than we could obtain by marketing fidaxomicin on ourown. If we are unable to enter into collaboration arrangements for our productsor develop an effective international sales force, our ability to generateproduct revenues would be limited, which would adversely affect our business,financial condition, results of operations and prospects. If we are unable toenter into such collaboration arrangements, we may need to develop our ownmarketing and sales force to market fidaxomicin 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 care physiciansand do not currently have sufficient funds to develop an adequate sales forcein these regions.  There is no guaranteethat we will be able to develop an effective international sales force tosuccessfully commercialize our products in these international markets.  If we cannot commercialize fidaxomicin, wewill have to rely solely on prulifloxacin and earlier stage product candidatesfor any future revenues, and our ability to achieve and sustain profitabilitywill be materially and adversely harmed.

 

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

 

If approved, our leadproduct candidates will compete against both branded antibiotic therapies, suchas Vancocin Pulvules with respect to fidaxomicin and Xifaxan®/rifaxamin with respect toprulifloxacin, and generic antibiotics such as metronidazole and oralvancomycin with respect to fidaxomicin and ciprofloxacin with respect toprulifloxacin.  In addition, weanticipate that fidaxomicin will compete with other antibiotic andanti-infective product candidates currently in development for the treatment ofCDI, such as Xifaxan®/rifaxamin.Many of these products have been or will be developed and marketed by majorpharmaceutical companies, who have significantly greater financial resourcesand expertise in research and development, pre-clinical testing, conductingclinical trials, obtaining regulatory approvals, manufacturing and marketingapproved products than we do.  As aresult, these companies may obtain regulatory approval more rapidly than we areable to and may be more effective in selling and marketing their products aswell.  Smaller or early-stage companiesmay also prove to be significant competitors, particularly throughcollaborative arrangements with large, established companies.

 

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We anticipate that, ifapproved, fidaxomicin and prulifloxacin will face increasing competition in theform of generic versions of branded products of competitors that will losetheir patent exclusivity.  For example,fidaxomicin, if approved, will immediately face steep competition from aninexpensive generic form of metronidazole. Fidaxomicin would currently face generic oral vancomycin competition inEurope and in the future may face competition from generic oral vancomycin inthe United States as well.  Genericantibiotic therapies typically are sold at lower prices than brandedantibiotics and are generally preferred by managed care providers of healthservices.  For example, becausemetronidazole is sold at such a low price, we believe it will be difficult tosell fidaxomicin as a first-line therapy for the treatment of CDI.  If we are unable to demonstrate to physiciansand patients that, based on experience, clinical data, side-effect profiles andother factors, our products are preferable to these generic antibiotictherapies, we may never generate meaningful product revenues.  In addition, many antibiotics experiencebacterial resistance over time because of their continued use.  There can be no guarantee that bacteria wouldnot develop resistance to fidaxomicin, prulifloxacin or any of our otherproduct candidates.  Our commercialopportunity would also be reduced or eliminated if our competitors develop andcommercialize generic or branded antibiotics that are safer, more effective,have fewer side effects or are less expensive than our product candidates.

 

**Wecurrently depend, and will in the future continue to depend, on third partiesto manufacture our product candidates, including****fidaxomicin****and prulifloxacin.  If thesemanufacturers fail to provide us and our collaborators with adequate suppliesof clinical trial materials and commercial product or fail to comply with therequirements of regulatory authorities, we may be unable to develop orcommercialize our products.***

 

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

 

Our ability to develop andcommercialize fidaxomicin and prulifloxacin and any other product candidatesdepends in part on our ability to arrange for collaborators or other thirdparties to manufacture our products at a competitive cost, in accordance withstrictly enforced regulatory requirements and in sufficient quantities forclinical testing and eventual commercialization.  We have not yet manufactured commercialbatches of fidaxomicin, prulifloxacin or any of our other product candidates.  Collaborators or third-party manufacturersthat we select to manufacture our product candidates for clinical testing or ona commercial scale may encounter difficulties with the small- and large-scaleformulation and manufacturing processes required for such manufacture.  Such difficulties could result in delays inclinical trials, regulatory submissions and approvals, or commercialization ofour product candidates.  The inability ofus or our collaborators to enter into and maintain agreements with third-partymanufacturers on acceptable terms would cause shortages of clinical trialsupplies of our product candidates, thereby delaying or preventing regulatoryapproval and/or commercialization of the affected product candidate, andadversely affecting our ability to generate revenues.  Further, development of large-scalemanufacturing processes will require additional validation studies, which theFDA must review and approve, and the time it will take us or a third partymanufacturer to develop such large-scale processes and capabilities may delayany product launch following regulatory approval.  Even if 

 

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we are able to establishadditional or replacement manufacturers, identifying these sources and enteringinto definitive supply agreements and obtaining regulatory approvals mayinvolve a substantial amount of time and cost and such supply arrangements maynot be available on acceptable economic terms.

 

In addition, we, ourcollaborators and other third-party manufacturers of our products must complywith strictly enforced current good manufacturing practices, or cGMP,requirements enforced by the FDA through its facilities inspectionprogram.  These requirements includequality control, quality assurance and the maintenance of records anddocumentation.  We currently rely onBiocon to manufacture fidaxomicin active pharmaceutical ingredient and rely onPatheon, Inc. to manufacture the drug product supplies.  As such, Biocon and Patheon will be subjectto ongoing periodic unannounced inspections by the FDA and other agencies forcompliance with current cGMP, and similar foreign standards. We also rely onNippon Shinyaku, which contracts with Juzen, as well as Angelini and Patheon,to manufacture prulifloxacin drug supplies. The manufacturing facilities of Biocon, Juzen and Patheon have beeninspected and approved by the FDA for other companies’ drug products; however,none of Biocon’s, Juzen’s nor Patheon’s facilities have yet been inspected bythe 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 tocomply with these requirements by our third-party manufacturers, includingBiocon, Juzen, Angelini, and Patheon could result in the issuance of untitledletters and/or warning letters from authorities, as well as sanctions beingimposed on us, including fines and civil penalties, suspension of production,suspension or delay in product approval, product seizure or recall orwithdrawal of product approval.  Inaddition, we have no 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.

 

**Thecommercial success of our product candidates will depend upon attainingsignificant market acceptance of these product candidates among physicians,patients, healthcare payors and the medical community.***

 

Even if our productcandidates are approved by the appropriate regulatory authorities for marketingand sale, physicians may not prescribe our product candidates, which wouldprevent us from generating revenues or becoming profitable.  Market acceptance of fidaxomicin,prulifloxacin and any of our future product candidates by physicians, patientsand healthcare payors will depend on a number of factors, many of which are beyondour control, including:

 

·                  the clinical indications forwhich the product candidate is approved;

 

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

 

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·                  perceived advantages overalternative treatments;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  relative convenience andease of administration; and

 

·                  prevalence and severity ofadverse side effects.

 

Because fidaxomicin is adifferentiated antibiotic for the treatment of CDI, it may encounter additionalhurdles to market acceptance by physicians, who may be skeptical about itsclinical benefits, or healthcare payors, who may resist reimbursing apremium-priced therapeutic particularly in light of the availability of genericalternatives.

 

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

 

In addition, in July 2008the FDA notified makers of fluoroquinolone antimicrobial drugs for systemic usethat a boxed warning is necessary for those products due to the risk oftendonitis and tendon rapture.  Asprulifloxacin is a fluoroquinolone antibiotic it may be required to carry a blackbox warning.  Although these risks havebeen described for years on the product label of many fluoroquinolones theincreased awareness of this risk may impact the market potential for thefluoroquinolone class of antibiotics, including prulifloxacin.  Furthermore, because prulifloxacin hasalready been marketed by other companies outside the United States to treat awide range of bacterial infections, including infectious diarrhea, urinarytract infections and 

 

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respiratory tractinfections, patients may be able to obtain prulifloxacin from these othercompanies, and not from us, if prulifloxacin is approved in the market wherethe patient is located.  We have rightsto prulifloxacin only in the United States. These patients may obtain prulifloxacin in these other markets fromother companies even if these patients are from the United States.

 

**If we fail to develop and commercialize other productsor product candidates, we may be unable to grow our business. ***

 

A key element of our strategy is to commercialize a portfolio of newanti-infective products in addition to fidaxomicin and prulifloxacin.  As a significant part of our growth strategy,we intend to develop and commercialize additional products and productcandidates through our discovery research program using our proprietarytechnology, including OPopS.  The successof this strategy depends upon our ability to identify, select and acquirepharmaceutical product candidates and products that fit into our developmentplans on terms that are acceptable to us. To supplement this strategy, we mayalso obtain rights to additional product candidates from third parties throughacquisition or in-licensing transactions.

 

Any product candidate weidentify or to which we acquire rights will likely require additionaldevelopment efforts prior to commercial sale, including pre-clinical studies,extensive clinical testing and approval by the FDA and applicable foreignregulatory authorities.  All productcandidates 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.

 

A significant portion of theresearch that we are conducting 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 developsuitable potential product candidates through internal research programs or byobtaining rights to novel therapeutics from third parties, our business andprospects will suffer.

 

Our focus on drug discoveryand development using our technology platform, including our patentedproprietary OPopS drug discovery platform, is novel and unique.  As a result, we cannot be certain that ourproduct candidates will produce commercially viable drugs that safely and effectivelytreat infectious diseases or other diseases. To date, our technology platform has yielded only a small number ofanti-infective product candidates.  Inaddition, we do not have significant clinical data with respect to any of thesepotential product candidates.  Even if weare successful in completing clinical development and receiving regulatoryapproval for one commercially viable drug for the treatment of one diseaseusing our technology platform and 

 

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carbohydrate chemistryfocus, we cannot be certain that we will also be able to develop and receiveregulatory approval for other drug candidates for the treatment of other formsof that disease or other diseases.  If wefail to develop and commercialize viable drugs using our platform andspecialized focus, we will not be successful in developing a pipeline of potentialproduct candidates to follow fidaxomicin and prulifloxacin, and our businessprospects would be significantly harmed.

 

**Our futuregrowth depends on our ability to identify and acquire or in-licenseproducts.  If we do not successfullyidentify and acquire or in-license related product candidates or integrate theminto our operations, we may have limited growth opportunities.**

 

We in-licensed the U.S.rights to prulifloxacin from Nippon Shinyaku who, along with Meiji-Seika KaishaLtd., conducted the initial development of this product candidate.  An important part of our business strategy isto continue to develop a pipeline of product candidates by acquiring orin-licensing products, businesses or technologies that we believe are astrategic fit for our business.  Futurein-licenses or acquisitions, however, may entail numerous operational andfinancial risks, including:

 

·                  exposure to unknownliabilities;

 

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

 

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

 

·                  higher than expectedacquisition and integration costs;

 

·                  increased amortizationexpenses;

 

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

 

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

 

·                  inability to retain keyemployees of any acquired businesses.

 

We have limited resources toidentify and execute the acquisition or in-licensing of third-party products,businesses and technologies and integrate them into our currentinfrastructure.  In particular, we maycompete with larger pharmaceutical companies and other competitors in ourefforts to establish new collaborations and in-licensing opportunities.  These competitors likely will have access togreater financial resources than us and may have greater expertise in identifyingand evaluating new opportunities. Moreover, we may devote resources to potential acquisitions orin-licensing opportunities that are never completed, or we may fail to realizethe anticipated benefits of such efforts.

 

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**Our abilityto pursue the development and commercialization of prulifloxacin, our otherproduct candidates and our future product candidates depends upon thecontinuation of our licenses from third parties.**

 

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

 

**If productliability lawsuits are brought against us, we may incur substantial liabilitiesand may be required to limit commercialization of our product candidates.**

 

We face an inherent risk ofproduct liability lawsuits related to the testing of our product candidates,and will face an even greater risk if product candidates are introducedcommercially.  An individual may bring aliability claim against us if one of our product candidates causes, or merelyappears to have caused, an injury.  If wecannot successfully defend ourselves against the product liability claim, wemay incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

·                  decreased demand for ourproduct candidates;

 

·                  injury to our reputation;

 

·                  termination of clinicaltrial sites or entire clinical trial programs;

 

·                  withdrawal of clinical trialparticipants;

 

·                  significant litigationcosts;

 

·                  substantial monetary awardsto or costly settlement with patients;

 

·                  product recalls;

 

·                  loss of revenues; and

 

·                  the inability tocommercialize our product candidates.

 

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

 

We have global clinicaltrial liability insurance that covers our clinical trials up to a $10.0 millionannual aggregate limit.  Our current orfuture insurance coverage may prove insufficient to cover any liability claimsbrought against us.  We intend to expandour insurance coverage to include the sale of commercial products if marketingapproval is obtained for our product candidates, which would increase ourinsurance premiums.  Because of theincreasing costs of insurance coverage, we may not be able to maintain insurancecoverage at a reasonable cost or obtain insurance coverage that will beadequate to satisfy any liability that may arise.

 

**Even if wereceive regulatory approval for our product candidates, we will be subject toongoing significant regulatory obligations and oversight.**

 

Even if we receiveregulatory approval to sell our product candidates, the FDA and foreignregulatory authorities will likely impose significant restrictions on theindicated uses or marketing of such products, or impose ongoing requirementsfor potentially costly post-approval studies. In addition, following any regulatory approval of our productcandidates, we and our collaborators will be subject to continuing regulatoryobligations, such as requirements for storage, recordkeeping and safetyreporting, and additional post-marketing obligations, including regulatoryoversight of the labeling, packaging, promotion and marketing of ourproducts.  If we or our collaboratorsbecome aware of previously unknown problems with any of our product candidatesin the United States or overseas or at our third-party manufacturers’facilities, a regulatory agency may impose restrictions on our products, ourthird-party manufacturers or on us, including requiring us to reformulate 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.

 

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

 

Our success depends in parton our continued ability to attract, retain and motivate highly qualifiedmanagement, clinical and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, cliniciansand scientists.  We are highly dependenton our chief executive officer, and the other principal members of ourexecutive and scientific teams. The unexpected loss of the service of any ofthese persons may significantly delay or prevent the achievement of research,development, commercialization and other business objectives.  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 pharmaceutical 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 hireadditional personnel as we expand our clinical development and commercialactivities.  We may not be able toattract or retain qualified management and scientific personnel on acceptableterms in the future due to the intense competition for qualified personnelamong biotechnology, pharmaceutical and other businesses, particularly in theSan Diego, California area.  If we arenot able to attract and retain the necessary personnel to accomplish ourbusiness objectives, we may experience constraints that will impede significantlythe achievement of our research and development objectives, our ability toraise additional capital and our ability to implement our businessstrategy.  In particular, if we lose anymembers of our senior management team, we may not be able to find suitablereplacements, and our business and prospects may be harmed as a result.

 

**We willneed to increase the size of our organization, and we may experiencedifficulties in managing growth.***

 

We are a small company with69 employees as of July 31, 2009. To continue our clinical trials and commercialize our productcandidates, we will need to expand our employee base for managerial,operational, marketing, sales, financial and other resources.  Future growth will impose significant addedresponsibilities on members of management, including the need to identify,recruit, maintain and integrate additional employees and may take time awayfrom running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performance and our ability to commercialize ourproduct candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively.  To that end, we must be able to:

 

·                  manage our developmentefforts effectively;

 

·                  manage our current clinicaltrials effectively;

 

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·                  integrate additionalmanagement, administrative and manufacturing personnel;

 

·                  build a marketing and salesorganization; and

 

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

 

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

 

**Third-partypayor coverage and reimbursement may be insufficient or unavailable altogetherfor our product candidates, which could diminish our sales or affect ourability to sell our products profitably.**

 

Market acceptance and salesof our product candidates will depend on reimbursement policies and may beaffected by future healthcare reform measures. Government third-party payors, such as the Medicare and Medicaidprograms, and private payors, including health maintenance organizations,decide which drugs they will pay for and establish reimbursement levels forthese drugs. Because third-party payors increasingly are challenging pricescharged and the cost-effectiveness of medical products, significant uncertaintyexists as to the ability of our product candidates to receive adequate coverageand reimbursement.  We cannot be surethat third-party payors will place our product candidates on approvedformularies or that reimbursement will be available in whole or in part for anyof our product candidates.  Also, wecannot be sure that insufficient reimbursement amounts will not reduce thedemand for, or the price of, our products, if approved.

 

Many healthcare providers,such as hospitals, receive a fixed reimbursement amount per procedure or othertreatment therapy, and these amounts are not necessarily based on the actualcosts incurred.  As a result, thesehealthcare providers may choose only the least expensive therapies regardlessof efficacy.  We cannot guarantee thatour product candidates will be the least expensive alternative and thusproviders may decide not to use them or buy them for treatment.

 

We have not commencedefforts to have our product candidates reimbursed by government or third-partypayors.  If reimbursement is notavailable or is available only to limited levels, we may not be able tocommercialize our products successfully or at all, which would harm ourbusiness and prospects.

 

**Recentproposed legislation may permit re-importation of drugs from foreign countriesinto the United States, including foreign countries where the drugs are sold atlower prices than in the United States, which could materially adversely affectour operating results and our overall financial condition.**

 

We may face competition forour products from lower priced products from foreign countries that have placedprice controls on pharmaceutical products. Imports from Canada and elsewhere 

 

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may continue to increase dueto market and political forces, and the limited enforcement resources of theFDA, the U.S. Customs Service, and other government agencies.  For example, U.S. Customs Service generallydoes not prevent individuals from importing from Canada less than a 90-daysupply 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.

 

**Currenthealthcare laws and regulations and future legislative or regulatory reforms tothe healthcare system may affect our ability to sell our product candidatesprofitably.**

 

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.  We cannot be certain thatfidaxomicin and prulifloxacin or other current or future drug candidates willsuccessfully be placed on the list of drugs covered by particular health planformularies, nor can we predict the negotiated price for our drug candidates,which will be determined by market factors. Many states have also createdpreferred drug lists and include drugs on those lists only when themanufacturers agree to pay a supplemental rebate.  If fidaxomicin and prulifloxacin or othercurrent or future drug candidates are not included on these preferred druglists, physicians may not be inclined to prescribe them to their Medicaidpatients, thereby diminishing the potential market for our products.

 

As a result of legislativeproposals and the trend towards cost-effectiveness criteria and managedhealthcare in the United States, third-party payors are increasingly attemptingto contain healthcare costs by limiting both coverage and the level ofreimbursement of new drugs.  They mayalso refuse to provide any coverage of uses of approved products for medicalindications other than those for which the FDA has granted market approvals.  As a result, significant uncertainty existsas to whether and how much third-party payors will reimburse for newly-approveddrugs, which in turn will put pressure on the pricing of drugs.  Further, we do not have experience inensuring approval by applicable third-party payors outside of the United Statesfor reimbursement of our products.  Theavailability of numerous generic antibiotics at lower prices than brandedantibiotics can also be expected to substantially reduce the likelihood of reimbursementfor fidaxomicin and prulifloxacin.  Wealso anticipate pricing pressures in connection with the sale of our productsdue to the trend toward managed healthcare, the increasing influence of healthmaintenance organizations 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.**

 

We are subject to variousfederal and state laws pertaining to healthcare fraud and abuse, includinganti-kickback laws, the False Claims Act, the Foreign Corrupt Practices Act andstate laws requiring reporting and certification under comprehensive complianceprograms governing 

 

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our financial relationshipswith healthcare providers.  Violations ofthese laws are punishable by criminal and civil sanctions, including, in someinstances, exclusion from participation in federal and state healthcareprograms, including Medicare and Medicaid, and the curtailment or restructuringof operations.  We believe that our operationsare in material compliance with such laws and we are aware of the need toincrease our compliance resources if we begin marketing products.  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-partymanufacturers’ activities and, to a lesser extent, our own activities involvethe controlled storage, use and disposal of hazardous materials, including thecomponents of our product candidates and other hazardous compounds.  We and our manufacturers are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of these hazardous materials.  Although we believe that the safetyprocedures for handling and disposing of these materials comply with thestandards prescribed by these laws and regulations, we cannot eliminate therisk of accidental contamination or injury from these materials.  We currently have insurance coverage in theamount of approximately $250,000 for damage claims arising from contaminationon our property.  These amounts may notbe sufficient to adequately protect us from liability for damage claimsrelating to contamination.  If we aresubject to liability exceeding our insurance coverage amounts, our business andprospects would be harmed.  In the eventof an accident, 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 fidaxomicin or prulifloxacin, which is maintained by our third-partyCRO, could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data.  To the extent that any disruption or securitybreach results in a loss or damage to our data or applications, orinappropriate disclosure of confidential or proprietary information, we mayincur liability and the further development of our product candidates may bedelayed.

 

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**RisksRelated 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.***

 

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

 

·                  others may be able to makecompeting pharmaceutical formulations containing our product candidates orcomponents of our product formulations that are either not covered by theclaims of our licensed patents, not licensed to us under our license agreementsor are subject to patents that expire;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In addition, to the extentwe are unable to obtain and maintain patent protection for our productcandidates or in the event such patent protection expires, it may no longer becost effective to extend our portfolio by pursuing additional development of aproduct candidate for follow-on indications.

 

We have filed 9 patentapplications related to fidaxomicin, one of which has resulted in the issuanceof a polymorph patent and one of which has resulted in a manufacturing patent,from the United States Patent and Trademark Office, or U. S. PTO, and seven ofwhich are pending.

 

These patent applicationsrelated to fidaxomicin encompass various topics relating to:

 

·                  composition of matter forfidaxomicin (issued in Taiwan);

 

·                  composition of matter forfidaxomicin related substances and use for CDI;

 

·                  polymorphic forms (issued inU.S.);

 

·                  additional polymorphic form;

 

·                  composition comprising apolymorphic form;

 

·                  manufacturing processes(issued in U.S. and in Australia);

 

·                  treatment of diseases;

 

·                  formulation; and

 

·                  fidaxomicin related compounds,including metabolites.

 

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 fidaxomicin.  Furthermore,even though the manufacturing process patent has issued, and even if theformulation patent application results in an issued patent, our competitors,including generic drug companies, may be able to design around ourmanufacturing processes or formulation for fidaxomicin.  As a result, our competitors may be able todevelop competing products.

 

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In addition, we currentlyplan to submit an NDA for prulifloxacin for the treatment of infectiousdiarrhea in travelers in 2009.  Thecomposition of matter patent covering prulifloxacin expired in February 2009.Although in some cases the U.S. PTO will grant an extension of a patent termwhere the related product is subject to FDA approval, this extension wasunavailable to us with respect to the prulifloxacin composition of matterpatent because we did not submit an NDA for prulifloxacin prior to theexpiration of this patent.  There arecurrently no other active issued patents which would prevent third parties frompotentially marketing prulifloxacin in the United States.  Therefore, we will likely rely on one or moreregulatory marketing exclusivities 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. This exclusivity period is available to the firstapplicant to gain approval of an NDA for a new chemical entity, or NCE, thathas not previously been approved as an active ingredient under Section 505(b) ofthe Food Drug and Cosmetic Act, or FDCA. While we expect that the NCE exclusivity period will be available forprulifloxacin, if we or Nippon Shinyaku are unsuccessful in obtainingadditional patents related to prulifloxacin, we may face generic competition inthe United States five years after our NDA for prulifloxacin is approved by theFDA.  If we are unable to obtainmarketing exclusivity beyond five years from the approval of our NDA, ourpotential revenues from prulifloxacin sales in the U.S. will be limited.

 

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 OP-1068 alsoknown as CEM-101, respectively.  We mayalso be dependent on Par to provide technical support for patent applicationsrelating to fidaxomicin.  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 

 

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disclose our information tocompetitors.  Enforcing a claim that athird-party entity illegally obtained and is using any of our trade secrets isexpensive and time consuming, and the outcome is unpredictable.  In addition, courts outside the United Statesare sometimes less willing to protect trade secrets.  Moreover, our competitors may independentlydevelop 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.**

 

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 the infringementof these patents.  There is also the riskthat, even if the validity of these patents is upheld, the court will refuse tostop the other party on the ground that such other party’s activities do notinfringe our rights to these patents.

 

Furthermore, 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, including making,using or selling our product candidates. These lawsuits are costly and could affect our results of operations anddivert the attention of managerial and technical personnel.  There is a risk that a court would decidethat we or our commercialization partners are infringing the third party’spatents and would order us or our partners to stop the activities covered bythe patents.  In addition, there is arisk that a court will order us or our partners to pay the other party damagesfor having violated the other party’s patents. We have indemnified our commercial partners against patent infringementclaims and thus would be responsible for any of their costs associated withsuch claims and actions.  Thebiotechnology industry has produced a proliferation of patents, and it is notalways clear to industry participants, including us, which patents covervarious types of products or methods of use. The coverage of patents is subject to interpretation by the courts and theinterpretation is not always uniform.  Ifwe are sued for patent infringement, we would need to demonstrate that ourproducts or methods of use either do not infringe the patent claims of therelevant patent and/or that the patent claims are invalid, and we may not beable to do this.  Proving invalidity, inparticular, is difficult since it requires a showing of clear and convincingevidence to overcome the presumption of validity enjoyed by issued patents.

 

Although we have conductedsearches of third-party patents with respect to fidaxomicin and prulifloxacin,these searches may not have identified all third-party patents relevant tothose products and we have not conducted an extensive search of patents issuedto third parties with respect to our other product candidates.  Consequently, no assurance can be given thatthird-party 

 

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patents containing claimscovering our products, technology or methods do not exist, have not been filed,or could not be filed or issued.  Becauseof the number of patents issued and patent applications filed in our technicalareas or fields, we believe there is a risk that third parties may allege theyhave patent rights encompassing our products, technology or methods.  In addition, we have not conducted anextensive search of third-party trademarks, so no assurance can be given thatsuch third-party trademarks do not exist, have not been filed, could not befiled or issued, or could not exist under common trademark law.  While we have filed a trademark applicationfor the names “Optimer” and “Optimer Pharmaceuticals,” we are aware that thename “Optimer” has been registered as a trademark with the U.S. PTO by morethan one third party, including one in the biotechnology space.  As such, we believe there is a significantrisk that third parties may allege they have trademark rights encompassing thenames for which we have applied for protection.

 

Because some patent applicationsin the United States may be maintained in secrecy until the patents are issued,because patent applications in the United States and many foreign jurisdictionsare typically not published until eighteen months after filing, and becausepublications in the scientific literature often lag behind actual discoveries,we cannot be certain that others have not filed patent applications fortechnology covered by our licensors’ issued patents or our pending applicationsor our licensors’ pending applications, or that we or our licensors were thefirst to invent the technology.  Ourcompetitors may have filed, and may in the future file, patent applicationscovering technology similar to ours.  Anysuch patent application may have priority over our or our licensors’ patentapplications and could further require us to obtain rights to issued patentscovering such technologies.  If anotherparty has filed a U.S. patent application on inventions similar to ours, we mayhave to participate in an interference proceeding declared by the U.S. PTO, todetermine priority of invention in the United States.  The costs of these proceedings could besubstantial, and it is possible that such efforts would be unsuccessful,resulting in a loss of our U.S. patent position with respect to suchinventions.

 

Some of 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 anactive trading market will exist for our common stock**.** You may not be able to sell your shares quickly or at themarket price if trading in our common stock is not active.

 

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:

 

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·                  general economic and marketconditions and other factors that may be unrelated to our operating performanceor the operating performance of our competitors, including the current turmoilin the credit market and financial services industry;

 

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

 

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

 

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

 

·                  the success of ourdevelopment efforts and clinical trials, particularly with respect tofidaxomicin and prulifloxacin;

 

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

 

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

 

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

 

·                  actual or anticipatedvariations in our quarterly operating results;

 

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

 

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

 

·                  third-party coverage orreimbursement policies;

 

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

 

·                  conditions or trends in thebiotechnology and biopharmaceutical industries;

 

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

 

·                  general economic and marketconditions and other factors that may be unrelated to

 

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

 

**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 in registrationstatements 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.

 

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

 

Our investment securitiesconsist of high-grade auction rate securities, money market funds, corporatedebt securities and government agency securities. As of June 30, 2009, weheld two auction rate preferred securities valued at $1.0 million withperpetual maturity dates that reset every 28 days.  In July 2009, we received a $100,000payment from one of the issuers of our auction rate preferred securitiesredeeming the full amount of its auction rate preferred security.  The negative conditions in the global creditmarkets have prevented some investors from liquidating their holdings,including their holdings of auction rate securities.  There was insufficient demand at auction forour remaining auction rate preferred security. As a result, such security is currently not liquid, and we could berequired to hold it until it is redeemed by the issuer or to maturity.  In the event we need to access the funds thatare in an illiquid state, we will not be able to do so without a loss ofprincipal, until a future auction on this investment is successful, thesecurity is redeemed by the issuer or it matures. We have reduced the carryingvalue of our remaining $1.0 million auction rate security by $118,000 toreflect an estimated change in fair market value due primarily to a lack ofliquidity. Although the auction rate security continues to pay interestaccording to its stated terms, based on valuation models, we have recorded anunrealized loss for an other-than-temporary change in valuation of$118,000.  If the credit ratings of thesecurity issuer deteriorates or if uncertainties in these markets continue andany decline in market value is determined to be other-than-temporary, we wouldbe required to adjust the carrying value of the investment through animpairment charge, which could negatively affect our financial condition, cashflow and reported earnings.

 

**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 Act of2002 requires, among other things, that we maintain effective internal controlsfor financial reporting and disclosure controls and procedures. As a result, asof December 31, 2008, we were required to perform an evaluation of ourinternal controls over financial reporting to allow management to report on theeffectiveness of those controls, as required by Section 404 of theSarbanes-Oxley Act. Additionally, our independent auditors were required toperform a similar evaluation and report on the effectiveness of our internalcontrols over financial reporting. At December 31, 2008, management andour independent auditors did not identify any material weaknesses in ourinternal controls over financial reporting. Our efforts 

 

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to comply with Section 404and related regulations has required, and continues to require, the commitmentof significant financial and managerial resources. While we anticipatemaintaining the integrity of our internal controls over financial reporting andall other aspects of Section 404, we cannot be certain that a materialweakness will not be identified when we test the effectiveness of our controlsystems in the future. If a material weakness is identified, we could besubject to sanctions or investigations by Nasdaq, the SEC or other regulatoryauthorities, which would require additional financial and management resources,costly litigation or a loss of public confidence in our internal controls, whichcould have an adverse effect on the market price of our stock.

 

**Someprovisions of our charter documents and Delaware law may have anti-takeovereffects that could discourage an acquisition of us by others, even if anacquisition would be beneficial to our stockholders and may prevent attempts byour stockholders to replace or remove our current management.**

 

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 ofdirectors divided into three classes serving staggered three-year terms, suchthat not all members of the board will be elected at one time;

 

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

 

·                  limiting theremoval of directors by the stockholders;

 

·                  prohibitingstockholder action by written consent, thereby requiring all stockholderactions to be taken at a meeting of our stockholders;

 

·                  a requirementof approval of not less than 66 2/3% 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 theability of stockholders to call a special meeting of stockholders; and

 

·                  establishingadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted upon at stockholdermeetings.

 

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 

 

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period of three yearsfollowing the date on which the stockholder became an interested stockholder,unless such transactions are approved by our board of directors.  This provision could have the effect ofdelaying or preventing a change of control, whether or not it is desired by orbeneficial to our stockholders.  Such adelay or prevention of a change of control transaction could cause the marketprice of our stock to decline.

 

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

 

Atour annual meeting of stockholders held on May 6, 2009, our stockholdersvoted on two items, the outcomes of which are set forth below:

 

1. Our stockholders re-elected Alain B. Schreiber, M.D. and Peter E. Grebow, Ph.D.as directors of the Company, each to continue as directors until the 2012annual meeting of stockholders and until their respective successors have beenduly elected and qualified. The following votes were tabulated with respect tothe election of directors:

 
| **Director Elected** | ** ** | **Number of Shares  Voted For** | ** ** | **Number of Shares Voted  Against or Withheld** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Alain B. Schreiber, M.D.  |       | 24,528,119                                     |       | 192,198                                                                  |       |
| Peter E. Grebow, Ph.D.    |       | 24,530,771                                     |       | 189,546                                                                  |       |

 

Inaddition, following the annual meeting of stockholders, the terms of thedirectorships of Mark Auerbach, Joseph Y. Chang, and Michael N. Changcontinued.

 

2.  Ourstockholders ratified the selection of Ernst & Young, LLP as ourindependent auditors for the fiscal year ending December 31, 2009. Thefollowing votes were tabulated with respect to the ratification:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 24,689,095 |       | 31,054      |       | 167         |       |

 

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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              | (3)        | Bylaws of Optimer Pharmaceuticals, Inc., as  amended.                                                                                                                                                                                                               |
| 4.1              | (2)        | 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              | (4)        | Registration Rights  Agreement, dated October 23, 2007, by and between Optimer  Pharmaceuticals, Inc. and the purchasers listed on the signature pages thereto.                                                                                           |
| 4.4              | (5)        | Form of  Warrant to Purchase Common Stock issued on March 9, 2009.                                                                                                                                                                                             |
| 10.1             |       | Amendment  to Employment Agreement between Optimer Pharmaceuticals, Inc. and  Michael N. Chang dated June 17, 2009.                                                                                                                                            |
| 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. 3 to Registration Statement on Form S-1  November 9, 2006.    |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Filed with Registrant’s  Amendment No. 4 to Registration Statement on Form S-1 on  February 5, 2007. |
| (3) |   | Filed with Registrant’s  Current Report on Form 8-K on September 18, 2007.                                |
| (4) |   | Filed with Registrant’s  Current Report on Form 8-K on October 29, 2007.                                  |
| (5) |   | Filed with Registrant’s  Current Report on Form 8-K on March 5, 2009.                                     |

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| ** **                  | ** **   | ** **   | **OPTIMER  PHARMACEUTICALS, INC.** |
|-----------------------------|--------------|--------------|------------------------------------|
|                        |         |         |                               |   |
| Dated:  August 7, 2009 |         |         | 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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