**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-Q**

 

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

 

**For the quarterly period endedSeptember 30, 2007**

 

**or**

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

 

**For the transition period from               to**

 

**Commission File Number 001-33291**

 

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**OPTIMER PHARMACEUTICALS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**10110 Sorrento 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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days:

 

Yes x       No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act:

 

LargeAccelerated Filer o       Accelerated Filer o        Non-accelerated Filer x

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act):

 

Yes o       No x

 

Thenumber of shares of the registrant’s Common Stock, no par value, outstanding asof November 1, 2007 was 27,851,197 shares.

 

 

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**OPTIMER PHARMACEUTICALS, INC.FORM 10-QFor the Quarterly Period Ended September 30, 2007**

**TABLE OF CONTENTS**

 
|                                                                                                                   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
| **PART I –FINANCIAL  INFORMATION**                                                                           |   |
|                                                                                                              |   |
| Item 1. Financial  Statements (unaudited)                                                                    |   |
|                                                                                                              |   |
| Consolidated Balance  Sheets –September 30, 2007 and December 31, 2006                                  |   |
|                                                                                                              |   |
| Consolidated  Statements of Operations –Three months and nine months ended  September 30, 2007 and 2006 |   |
|                                                                                                              |   |
| Consolidated  Statements of Cash Flows –Nine months ended September 30, 2007 and 2006                   |   |
|                                                                                                              |   |
| Notes to  Consolidated Financial Statements                                                                       |   |
|                                                                                                              |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations         |   |
|                                                                                                              |   |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                          |   |
|                                                                                                              |   |
| Item 4.  Controls and Procedures                                                                             |   |
|                                                                                                              |   |
| **PART II –OTHER  INFORMATION**                                                                              |   |
|                                                                                                              |   |
| Item 1A. Risk Factors                                                                                        |   |
|                                                                                                              |   |
| Item 6. Exhibits                                                                                             |   |
|                                                                                                              |   |
| SIGNATURE                                                                                                         |   |
| EXHIBIT 31.1                                                                                                      |   |
| EXHIBIT 31.2                                                                                                      |   |
| EXHIBIT 32                                                                                                        |   |

 

2

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**Optimer Pharmaceuticals, Inc.**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                                |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                      |       | $                      | 8,321,602  |                  | $          | 6,122,438 |   |
| Short-term investments                                                                                                                                                                                                                                                                                                                                                                         |       | 23,860,948             |       | 15,218,860            |       |
| Research grant and contract receivables                                                                                                                                                                                                                                                                                                                                                        |       | 61,636                 |       | 163,502               |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                      |       | 720,568                |       | 1,549,062             |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                                                           |       | 32,964,754             |       | 23,053,862            |       |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                                                    |       | 730,184                |       | 744,564               |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                   |       | 302,416                |       | 315,490               |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                   |       | $                      | 33,997,354 |                  | $          | 24,113,916 |   |
| **LIABILITIES, REDEEMABLE CONVERTIBLE  PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                                                                                               |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                           |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                                               |       | $                      | 2,042,495  |                  | $          | 1,753,394 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                                                               |       | 5,758,988              |       | 3,310,199             |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                      |       | 7,801,483              |       | 5,063,593             |       |
| Deferred rent                                                                                                                                                                                                                                                                                                                                                                                  |       | 286,029                |       | 292,384               |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                                                                                  |       |                   |       |                  |       |
| Redeemable preferred stock, $0.001 par  value:                                                                                                                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Series B redeemable convertible, no shares  and 6,461,439 shares authorized at September 30, 2007 and December 31, 2006,  respectively; no shares and 4,132,736 shares issued and outstanding at  September 30, 2007 and December 31, 2006, respectively                                                                                                                                       |       | —                 |       | 32,198,929            |       |
| Series C redeemable convertible, no shares  and 1,615,359 shares authorized at September 30, 2007 and December 31, 2006,  respectively; no shares and 1,538,437 shares outstanding at September 30,  2007 and December 31, 2006, respectively                                                                                                                                                  |       | —                 |       | 11,494,052            |       |
| Series D redeemable convertible, no shares  and 3,923,016 shares authorized at September 30, 2007 and December 31, 2006,  respectively; no shares and 2,861,277 shares issued and outstanding at  September 30, 2007 and December 31, 2006, respectively                                                                                                                                       |       | —                 |       | 21,766,662            |       |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                                                                                                                                           |       |                   |       |                  |       |
| Preferred stock, par value $0.001,  10,000,000 and no shares authorized at September 30, 2007 and December 31,  2006, respectively                                                                                                                                                                                                                                                             |       | —                 |       | —                |       |
| Series A convertible preferred stock, par  value $0.001, no shares and 2,307,656 shares authorized at September 30, 2007  and December 31, 2006, respectively; no shares and 1,523,051 shares issued  and outstanding at September 30, 2007 and December 31, 2006, respectively;  liquidation preference of $0 and $ 3,300,000 at September 30, 2007 and  December 31, 2006, respectively |       | —                 |       | 1,523                 |       |
| Common stock, $0.001 par value, 75,000,000  shares and 25,384,225 sharesauthorized  at September 30, 2007 and December 31, 2006, respectively; 23,226,709 and  2,704,476 shares issued and outstanding at September 30, 2007 and  December 31, 2006, respectively; 46,153 held in treasury                                                                                                |       | 23,227                 |       | 2,704                 |       |
| Treasury stock, at cost; 46,153 shares                                                                                                                                                                                                                                                                                                                                                         |       | (100,000               | )          | (100,000              | )          |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                     |       | 116,622,165            |       | 4,997,421             |       |
| Accumulated other comprehensive income  (loss)                                                                                                                                                                                                                                                                                                                                                 |       | 30,435                 |       | (44,971               | )          |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                            |       | (90,665,985            | )          | (51,558,381           | )          |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                                                                      |       | 25,909,842             |       | (46,701,704           | )          |
| Total liabilities, redeemable convertible  preferred stock and stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                             |       | $                      | 33,997,354 |                  | $          | 24,113,916 |   |

 

Seeaccompanying notes.

 

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**Optimer Pharmaceuticals, Inc**

**ConsolidatedStatements of Operations**

**(unaudited)**

 
| ** **                                                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                       | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                       | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                                        |       |                             |       |                            |       |   |   |   |   |
| Research grants                                                                                  |       | $                                | 44,493     |                            | $          | 209,017 |   | $ | 241,793 |   | $ | 591,189 |   |
| Collaborative research agreements                                                                |       | 271,555                          |       | —                          |       | 431,555 |   | 256,326 |   |
| Total revenues                                                                                   |       | 316,048                          |       | 209,017                         |       | 673,348 |   | 847,515 |   |
| Operating expenses:                                                                              |       |                             |       |                            |       |   |   |   |   |
| Research and development                                                                         |       | 5,496,136                        |       | 1,619,724                       |       | 35,964,496 |   | 7,343,410 |   |
| Marketing                                                                                        |       | 387,424                          |       | —                          |       | 1,238,492 |   | — |   |
| General and administrative                                                                       |       | 1,362,052                        |       | 1,028,541                       |       | 3,969,695 |   | 2,319,717 |   |
| Total operating expenses                                                                         |       | 7,245,612                        |       | 2,648,265                       |       | 41,172,683 |   | 9,663,127 |   |
| Loss from operations                                                                             |       | (6,929,564                       | )          | (2,439,248                      | )          | (40,499,335 | ) | (8,815,612 | ) |
| Interest income and other, net                                                                   |       | 454,230                          |       | 281,416                         |       | 1,391,731 |   | 930,691 |   |
| Net loss                                                                                         |       | (6,475,334                       | )          | (2,157,832                      | )          | (39,107,604 | ) | (7,884,921 | ) |
| Accretion to redemption amount of redeemable  convertible preferred stock                        |       | —                           |       | (82,302                         | )          | — |   | (246,906 | ) |
| Net loss allocable to common stockholders                                                        |       | $                                | (6,475,334 | )                               | $          | (2,240,134 | ) | $ | (39,107,604 | ) | $ | (8,131,827 | ) |
|                                                                                             |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted net loss per share attributable  to common stockholders                        |       | $                                | (0.28      | )                               | $          | (0.86 | ) | $ | (1.94 | ) | $ | (3.24 | ) |
| Shares used to compute basic and diluted  net loss per share attributable to common stockholders |       | 23,154,266                       |       | 2,572,822                       |       | 20,143,478 |   | 2,512,450 |   |

 

See accompanying notes.

 

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**Optimer Pharmaceuticals, Inc.**

**Consolidated Statements of CashFlows**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Nine Months Ended September30,** | ** **  |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                    | ** ** | **2007**                                          | ** **  | **2006** | ** ** |
| ** **                                                                    | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Operating activities**                                                      |       |                                              |        |   |   |
| Net loss                                                                      |       | $                                                 | (39,107,604 | ) | $ | (7,884,921 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:  |       |                                              |        |   |   |
| Depreciation and amortization                                                 |       | 212,890                                           |        | 389,754 |   |
| Stock based compensation                                                      |       | 930,143                                           |        | 503,333 |   |
| Stock awards                                                                  |       | 148,226                                           |        | — |   |
| Non-cash compensation related to  forgiveness of note receivable from officer |       | —                                            |        | 56,250 |   |
| Loss on disposal of assets                                                    |       | —                                            |        | 264 |   |
| Deferred rent                                                                 |       | (6,355                                            | )           | 11,189 |   |
| Changes in operating assets and  liabilities:                                 |       |                                              |        |   |   |
| Prepaids expenses and other current assets                                    |       | 828,494                                           |        | (211,775 | ) |
| Research grant and contract receivables                                       |       | 101,866                                           |        | 447,672 |   |
| Other assets                                                                  |       | 13,074                                            |        | 3,204 |   |
| Accounts payable and accrued expenses                                         |       | 2,737,890                                         |        | 603,558 |   |
| Net cash used in operating activities                                         |       | (34,141,376                                       | )           | (6,081,472 | ) |
|                                                                          |       |                                              |        |   |   |
| **Investing activities**                                                      |       |                                              |        |   |   |
| Purchases of short-term investments                                           |       | (48,793,307                                       | )           | (5,163,095 | ) |
| Sales or maturity of short-term investments                                   |       | 40,195,000                                        |        | — |   |
| Purchase of property and equipment                                            |       | (198,511                                          | )           | (61,901 | ) |
| Net cash used in investing activities                                         |       | (8,796,818                                        | )           | (5,224,996 | ) |
|                                                                          |       |                                              |        |   |   |
| **Financing activities**                                                      |       |                                              |        |   |   |
| Proceeds from sale of common stock                                            |       | 43,735,465                                        |        | 102,010 |   |
| Repurchase of common stock                                                    |       | —                                            |        | (100,000 | ) |
| Repurchase of Series A preferred stock                                        |       | —                                            |        | (100,000 | ) |
| Proceeds from exercise of warrants                                            |       | 1,370,267                                         |        | — |   |
| Net cash provided by financing activities                                     |       | 45,105,732                                        |        | (97,990 | ) |
| Effect of exchange rate changes on cash and  cash equivalents                 |       | 31,626                                            |        | 10,102 |   |
| Net increase (decrease) in cash and cash  equivalents                         |       | 2,199,164                                         |        | (11,394,356 | ) |
| Cash and cash equivalents at beginning of  period                             |       | 6,122,438                                         |        | 19,943,959 |   |
| Cash and cash equivalents at end of period                                    |       | $                                                 | 8,321,602   |   | $ | 8,549,603 |   |
|                                                                          |       |                                              |        |   |   |
| **Supplemental disclosure of cash flow  information:**                        |       |                                              |        |   |   |
| Conversion of redeemable convertible  preferred stock to common stock         |       | 65,461,166                                        |        | — |   |

 

See accompanying notes.

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements**

**(unaudited)**

 

**1.    Interim Financial Information**

 

***Organizationand Business Activities***

 

Optimer Pharmaceuticals, Inc. (“Optimer” or the “Company”) wasincorporated in Delaware on November 18, 1998 and has three subsidiaries. OptimerBiotechnology, Inc. is a wholly owned subsidiary of the Company and isincorporated in Taiwan while Optimer Singapore PTE LTD and Optimer Asia PTE LTDare incorporated in Singapore and are wholly owned subsidiaries of OptimerBiotechnology, Inc. During the year ended December 31, 2006, the Company ceasedoperations of Optimer Asia PTE LTD and Optimer Singapore PTE LTD and neitherhad a material impact on the Company’s consolidated financial statements.

 

Optimer is a biopharmaceutical company focused on discovering,developing and commercializing innovative anti-infective products. The Companycurrently has two anti-infective product candidates, OPT-80, formerly known as “PAR-101”or “Difimicin”, for the treatment of *Clostridium difficile*-associateddiarrhea, or CDAD, and Prulifloxacin, for the treatment of infectious diarrhea,including travelers’ diarrhea.

 

Optimer is subject to risks common to companies in the biotechnologyindustry including, but not limited to, risks and uncertainties related to drugdiscovery, development and commercialization, obtaining regulatory approval ofany products it or its collaborators may develop, competition from otherbiotechnology and pharmaceutical companies, its effectiveness at managing itsfinancial resources, difficulties or delays in its clinical trials,difficulties or delays in manufacturing its clinical trial materials,implementation of its collaborations, the level of efforts that itscollaborative partners devote to development and commercialization of itsproduct candidates, its ability to successfully market and sell any products itdevelops, the scope and validity of patent protection for its products andproprietary technology, dependence on key personnel, product liability,litigation, its ability to comply with U.S. Food and Drug Administration,or  FDA, and other government regulationsand its ability to obtain additional funding to support its operations.

 

*Basis of Presentation*

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.In the opinion of management, all adjustments, consisting of normal recurringaccruals, considered necessary for a fair presentation of the results of theseinterim periods have been included. The results of operations for the threemonths and nine months ended September 30, 2007 are not necessarilyindicative of the results that may be expected for the full year. Theseunaudited consolidated financial statements should be read in conjunction withthe audited financial statements and related notes thereto included in theCompany’s Annual Report on Form 10-K 

 

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for the fiscal year ended December 31, 2006, which was filed withthe Securities and Exchange Commission, or SEC, on March 30, 2007.

 

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and accompanying notes.Actual results could differ materially from those estimates.

 

**2.    Summary of Significant Accounting Policies**

 

*Cash,Cash Equivalents and Short-Term Investments*

* *

Investments with original maturities of less than 90 days at the dateof purchase are considered to be cash equivalents. All other investments areclassified as short-term investments which are deemed by management to beavailable-for-sale and are reported at fair value with net unrealized gains orlosses reported within accumulated other comprehensive loss in the consolidatedbalance sheets. Realized gains and losses, and declines in value judged to beother than temporary, are included in investment income or interest expense.The cost of securities sold is computed using the specific identificationmethod.

 

*RevenueRecognition*

* *

The Company’s 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 revenuerecognition criteria outlined in Staff Accounting Bulletin, or SAB,No. 104, *Revenue Recognition* and EmergingIssues Task Force, or EITF, Issue 00-21, *RevenueArrangements with Multiple Deliverables*, or EITF 00-21. Inapplying these revenue recognition criteria, the Company considers a variety offactors in determining the appropriate method of revenue recognition underthese arrangements, such as whether the elements are separable, whether thereare determinable fair values and whether there is a unique earnings processassociated with each element of a contract.

 

Cash received in advance of services being performed is recorded asdeferred revenue and recognized as revenue as services are performed over theapplicable term of the agreement.

 

When a payment is specifically tied to a separate earnings process,revenues are recognized when the specific performance obligation associatedwith the payment is completed. Performance obligations typically consist ofsignificant and substantive milestones pursuant to the related agreement. Revenuesfrom milestone 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 areallowed to be recognized as revenue if and when the performance milestone isachieved if they represent a separate earnings process as described inEITF 00-21.

 

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In connection with certain research collaboration agreements, revenuesare recognized from non-refundable upfront fees, which the Company does notbelieve are specifically tied to a separate earnings process, ratably over theterm of the agreement. Research fees are recognized as revenue as the relatedresearch activities are performed.

 

Revenues derived from reimbursement of direct out-of-pocket expensesfor research costs associated with grants are recorded in compliance with EITFIssue 99-19, *Reporting Revenue Gross as a PrincipalVersus Net as an Agent*, and EITF Issue 01-14, *Income Statement Characterization of Reimbursements Received for “Out-of-Pocket”Expenses Incurred*. According to the criteria established by theseEITF Issues, in transactions where the Company acts as a principal, withdiscretion to choose suppliers, bears credit risk and performs part of theservices required in the transaction, the Company records revenue for the grossamount of the reimbursement. The costs associated with these reimbursements arereflected as a component of research and development expense in theconsolidated statements of operations.

 

None of the payments that the Company has received from collaboratorsto date, whether recognized as revenue or deferred, are refundable even if therelated program is not successful.

 

*Researchand Development Expenses*

* *

The Company accounts for research and development costs in accordancewith Statement of Financial Accounting Standards, or SFAS, No. 2, *Accounting for Research and Development Costs*, or SFAS 2. SFAS2 specifies that research and development costs should be charged to expenseuntil technological feasibility has been established for the product. Once technologicalfeasibility is established, all product costs should be capitalized until theproduct is available for general release to customers. The Company hasdetermined that technological feasibility for its product candidates will bereached when the requisite regulatory approvals are obtained to make theproduct available for sale, or approval of the new drug application, or NDA,for such product. The Company’s research and development expenses consistprimarily of license fees, salaries and related employee benefits, costsassociated with clinical trials managed by the Company’s contract researchorganizations, or CROs, and costs associated with non-clinical activities andregulatory approvals. The Company uses external service providers and vendors toconduct clinical trials, to manufacture supplies of product candidates to beused in clinical trials and to provide various other research anddevelopment-related products and services.

 

*ComprehensiveIncome (Loss)*

* *

The Company has applied SFAS No. 130, *ReportingComprehensive Income*, which requires that all components ofcomprehensive income (loss), including net income (loss), be reported in thefinancial statements in the period in which they are recognized. Comprehensiveincome (loss) is defined as the change in equity during a period fromtransactions and other events and circumstances from non-owner sources. Underthe SFAS 130, net income (loss) and other comprehensive income (loss),including foreign currency translation adjustments and unrealized gains andlosses on investments, shall be reported, net of their related tax effect, toarrive at comprehensive income (loss). The Company’s comprehensive loss was$6.5 million and $2.0 million for the three months ended September 30, 2007 and2006, respectively. The Company’s

 

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comprehensive loss was $39.0 million and $7.9 million for the ninemonths ended September 30, 2007 and 2006, respectively.

 

*NetLoss Per Share Attributable to Common Stockholders*

* *

The Company computes net loss per share in accordance with SFASNo. 128, *Earnings per Share*, or SFAS 128. Under the provisionsof SFAS 128, basic net loss per common share is computed by dividing net lossby the weighted-average number of common shares outstanding. Diluted net lossper common share is computed by dividing net loss by the weighted-averagenumber of common shares and dilutive common share equivalents then outstanding.Common equivalent shares consist of the incremental common shares issuable uponthe conversion of preferred stock, and common shares issuable upon the exerciseof stock options and warrants. Since the Company has a net loss for all periodspresented, the effect of all potentially dilutive securities is anti-dilutive.Accordingly, basic and diluted net loss per share is the same.

 

*IncomeTaxes*

* *

In July 2006, the Financial Accounting Standards Board, or FASB, issuedInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109, Accounting forIncome Taxes*, or**FIN 48. FIN 48creates a single model to address accounting for uncertainty in income taxpositions. FIN 48 prescribes a minimum threshold that an income tax position isrequired to meet before being recognized in the financial statements. Theinterpretation also provides guidance on derecognition and measurement criteriain addition to classification, interest and penalties and interim periodaccounting, and it significantly expands disclosure provisions for uncertaintax positions that have been or are expected to be taken in a company’s taxreturn. FIN 48 was effective for fiscal years beginning after December 15, 2006and the Company, accordingly, adopted this statement as of January 1, 2007.

 

As a result of the adoption of FIN 48, the Company has not recorded anychange to accumulated deficit at January 1, 2007. At September 30, 2007 theCompany had no unrecognized tax benefits or liabilities that, if recognized,would affect the Company’s effective income tax rate in future periods. TheCompany’s continuing practice is to recognize interest and/or penalties relatedto income tax matters in income tax expense. The Company had no accruedinterest or penalties at January 1, 2007 and no accrued interest or penaltiesat September 30, 2007.

 

The Companyhas completed a preliminary analysis to assess whether a change in control hasoccurred and whether there have been multiple changes of control since theCompany’s formation. It was determined that a greater than 50% change inownership occurred on May 9, 2001, which might limit the future utilization ofthe Company’s net operating loss, or NOL, and research and development, orR&D, credits incurred prior to that date. No subsequent change in ownershiphas occurred. If the Company experienced a greater than 50 percentage pointchange or shift in ownership over a 3-year time frame since its formation,utilization of its NOL or R&D credit carryforwards would be subject to anannual limitation under Sections 382 and 383 of the Internal Revenue Code of1986. The annual limitation generally is determined by multiplying the value ofthe Company’s stock at the time of the ownership change (subject to certainadjustments) by the applicable long-term tax-exempt rate. Any limitation mayresult in

 

9

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expiration ofa portion of the NOL or R&D credit carryforwards before utilization. TheCompany has not done a formal calculation of the limitation related to the May9, 2001 ownership change. As such, no amounts are being presented as anuncertain tax position under FIN 48.

 

*RecentAccounting Pronouncements*

* *

In September 2006, the FASB issued FASB Statement No. 157, “*Fair Value Measurements*”, or SFAS 157, which definesfair value, establishes a framework for measuring fair value under generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS 157 applies to other accounting pronouncements thatrequire or permit fair value measurements. The new guidance is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and for interim periods within those fiscal years. The Company iscurrently evaluating the impact of SFAS 157, if any, on its consolidatedfinancial statements.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andLiabilities*, or SFAS 159*.* SFAS 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue. SFAS 159 will be effective for the Company’s fiscal year beginning afterNovember 15, 2007. Early adoption is permitted. The Company has not determinedthe impact, if any, that adopting this standard may have on its financialposition, cash flows, and results of operations.

 

InJuly 2007, FASB released Emerging Issues Task Force Issue 07-3, “Accounting forNonrefundable Advance Payments for Goods or Services to be used in FutureResearch and Development Activities”, or EITF 07-3. In accordance with EITF07-3, nonrefundable advance payments for goods or services to be received inthe future for use in research and development activities should be deferredand capitalized. The capitalized amounts should be expensed as the relatedgoods are delivered or the services are performed. EITF 07-3 is effective fornew contracts entered into during fiscal years beginning afterDecember 15, 2007, including interim periods within those fiscal years.The Company’s current accounting treatment is consistent with EITF 07-3 and assuch this EITF is not expected to have an impact on its financial position,cash flows, and results of operations.

 

***3.    ReverseStock Split***

* *

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

 

10

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**4.*    *Initial PublicOffering**

 

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

* *

**5.*    *Short-TermInvestments**

 

The following is a summary of the Company’s investment securities, allof which are classified as available-for-sale and all of which are due withinone year by contractual maturity with the exception of the other securitieswhich are taxable auction rate securities. Determination of estimated fairvalue is based upon quoted market prices.

 
| ** **                                        | ** ** | **September 30, 2007** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Gross  Amortized Cost**   | ** ** | **Gross  Unrealized Gains** | ** ** | **Gross  Unrealized Losses** | ** ** | **Market Value** | ** ** |
| Certificates of deposits                          |       | $                                | 2,001,482  |   | $ | 777 |   | $ | — |   | $ | 2,002,259 |   |
| Commercial paper                                  |       | 998,666                          |       | — |   | (5,236 | ) | 993,430 |   |
| Corporate debt securities                         |       | 7,973,528                        |       | 4,130 |   | (3,137 | ) | 7,974,521 |   |
| Foreign debt securities                           |       | 2,296,411                        |       | 262 |   | (1,834 | ) | 2,294,839 |   |
| U.S. securities and other government  obligations |       | 3,501,482                        |       | 4,417 |   | — |   | 3,505,899 |   |
| Other securities                                  |       | 7,090,000                        |       | — |   | — |   | 7,090,000 |   |
|                                              |       | $                                | 23,861,569 |   | $ | 9,586 |   | $ | (10,207 | ) | $ | 23,860,948 |   |

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

 

Investments in net unrealized loss positions as of September 30, 2007are 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** | ** ** |
| Commercial paper          |       | 1                               |       | 993,430                                                                   |       | (5,236                                                                       | )          | —                               |       | — |   | 993,430 |   | (5,236 | ) |
| Corporate debt securities |       | 6                               |       | 3,985,119                                                                 |       | (3,137                                                                       | )          | —                               |       | — |   | 3,985,119 |   | (3,137 | ) |
| Foreign debt securities   |       | 2                               |       | 1,792,140                                                                 |       | (1,834                                                                       | )          | —                               |       | — |   | 1,792,140 |   | (1,834 | ) |
|                      |       | 9                               |       | $                                                                         | 6,770,689  |                                                                         | $          | (10,207                              | )          | $ | — |   | $ | — |   | $ | 6,770,689 |   | $ | (10,207 | ) |
|                           |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company believes that the decline in value is temporary andprimarily related to the change in market interest rates since purchase. TheCompany anticipates full recovery of amortized cost with respect to thesesecurities at maturity or sooner in the event of a change in the marketinterest rate environment.

 

11

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**6.*    *StockBased Compensation**

 

Effective January 1, 2006, the Company adopted the provisions ofSFAS No. 123(R), *Share-Based Payment*,or FAS 123(R). SFAS 123(R) supersedes Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued to Employees,*or**APB Opinion 25, and related interpretations, and revisesguidance in SFAS No. 123, *Accounting for Stock-BasedCompensation*, or SFAS 123. The compensation costs related toall equity instruments granted prior to, but not yet vested as of, the adoptiondate of SFAS 123(R) are recognized based on the grant-date fair valuewhich is estimated in accordance with the original provisions of SFAS 123.Compensation costs related to all equity instruments granted afterJanuary 1, 2006 are recognized at the grant-date fair value of the awardsin accordance with the provisions of SFAS 123(R). Additionally, under theprovisions of SFAS 123(R), the Company is required to include an estimateof the value of the awards that will be forfeited in calculating compensationcosts, which is recognized over the requisite service period of the awards on astraight-line basis.

 

The Black-Scholes option-pricing model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable. In addition, the Black-Scholes option-pricing modelrequires the input of subjective assumptions, including the expected stockprice volatility. The following table shows the assumptions used to computestock-based compensation expense for the stock options granted during the ninemonths ended September 30, 2007 and 2006, using the Black-Scholes optionpricing model:

 
| ** **                       | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Risk-free interest rate          |       | 4.72-4.80                                           | %          | 4.80 | % |
| Dividend yield                   |       | 0.00                                                | %          | 0.00 | % |
| Expected life of options (years) |       | 6.08                                                |       | 6.08 |   |
| Volatility                       |       | 60.92-65.82                                         | %          | 65.82 | % |

 

The risk-free interest rate assumption was based on the United StatesTreasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar tothose of the expected term of the award being valued. The assumed dividendyield was based on the Company’s expectation of not paying dividends in theforeseeable future. The weighted average expected life of options wascalculated using the simplified method as prescribed SAB No. 107, *Share-Based Payment*, or SAB 107. This decision wasbased on the lack of relevant historical data due to the Company’s limitedhistory. In addition, due to the Company’s limited historical data, theestimated volatility also reflects the application of SAB 107,incorporating the historical volatility of comparable companies whose shareprices are publicly available.

 

Based on these assumptions, the per share weighted-average grant-datefair values of stock options granted during the****threemonths and nine months ended September 30, 2007 was $8.88****pershare and $9.18 per share, respectively.

 

At September 30, 2007, the total unrecognized compensation expenserelated to non-vested stock options was approximately $2,690,323 and therelated weighted-average period over which it is expected to be recognized isapproximately 2.8 years.

 

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Total stock-based compensation expense, related to all of the Company’sstock options granted, recognized for the three months and nine months endedSeptember 30, 2007 and 2006 was comprised as follows:

 
| ** **                       | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and development         |       | $                                                    | 79,390     |                                                | $          | 72,552 |   | $ | 219,003 |   | $ | 214,583 |   |
| Marketing                        |       | 81,411                                               |       | —                                              |       | 191,555 |   | — |   |
| General and administrative       |       | 161,377                                              |       | 263,911                                             |       | 519,585 |   | 288,750 |   |
| Stock-based compensation expense |       | $                                                    | 322,178    |                                                | $          | 336,463 |   | $ | 930,143 |   | $ | 503,333 |   |

 

No related tax benefits of the stock-based compensation expense havebeen recognized since the inception of the Company.

 

**7.***    *Collaboration Agreement

** **

In January 2007, the Company entered into a prospective buy-backagreement with Par Pharmaceutical, Inc., or Par, which provided the Companywith an option to terminate a collaboration agreement entered in April 2005. Thecollaboration agreement provided that Par would develop and commercializeOPT-80 and granted Par an exclusive royalty bearing license, with the right tosublicense, promote, market, distribute and sell OPT-80 in a territory composedof the United States, Canada and Puerto Rico, with an option to extend theterritory to include Israel. The Company retained all other rights to OPT-80 inthe rest of the world (i.e. outside North America).

 

In February 2007, the Company elected to terminate the collaborationagreement with Par, and exercised the rights under the prospective buy-backagreement to repurchase Par’s right to develop and commercialize OPT-80 inNorth America and Israel. The Company paid Par a one-time $20.0 milliontermination fee and recorded the payment as research and development expense. TheCompany now holds worldwide rights to OPT-80. The Company is also obligated topay Par a one-time $5.0 million milestone payment, an accrued expense for apayment due to Par of approximately $1.5 million for OPT-80 clinical supplymaterial and active pharmaceutical ingredient, a 5% royalty on net sales by theCompany, its affiliates or its licensees of OPT-80 in North America and Israel,and a 1.5% royalty on net sales by the Company or its affiliates of OPT-80 inthe rest of the world. In addition, the Company assumed Par’s obligation tomake a potential prepayment to Biocon Limited, or Biocon, subject to future setoffs as a result of such assumption and assignment, pursuant to Par’s agreementwith Biocon. The one-time $5.0 million milestone payment must be paid after theearliest to occur of (i) the successful completion by the Company of itspivotal Phase 3 trial for OPT-80, (ii) the Company’s grant to a thirdparty of the rights to OPT-80 or (iii) the submission to the FDA of an NDAfor OPT-80. In addition, in the event the Company licenses its right to marketOPT-80 in the rest of the world, the Company will be required to pay Par a6.25% royalty on net revenues received by it related to OPT-80. The Company isobligated to pay each of these royalties, if any, on a country-by-country

 

13

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 basis for seven years commencingon the applicable commercial launch in each such country.

 

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

** **

*Stock Options*

* *

In November 1998, the Company adopted the 1998 Stock Plan, or the 1998Plan. Upon the completion of the Company’s initial public offering in February2007, the 1998 Plan was terminated and no additional grants will be issued fromthis plan. In December 2006, the Company’s board of directors approved the 2006Equity Incentive Plan, or the 2006 Plan. The 2006 Plan provides for the grantof incentive stock options, within the meaning of Section 422 of theInternal Revenue Code of 1986, as amended, to the Company’s employees and anyparent and subsidiary corporations’ employees, and for the grant ofnonstatutory stock options, restricted stock, restricted stock units, stockappreciation rights, performance units and performance shares to the Company’semployees, directors and consultants and any parent and subsidiary corporations’employees and consultants. The Company has reserved a total of 2,000,000 sharesof its common stock for issuance pursuant to the 2006 Plan. In addition, the2006 Plan provides for annual increases in the number of shares available forissuance thereunder on the first day of each fiscal year, beginning with theCompany’s 2008 fiscal year, equal to the lesser of (i) 5% of the outstandingshares of the Company’s common stock on the last day of the immediatelypreceding fiscal year; (ii) 750,000 shares; or (iii) such other amount as theboard of directors may determine. Under the 2006 Plan, the exercise price ofoptions granted must at least be equal to the fair market value of the Company’scommon stock on the date of grant. The term of an incentive stock option maynot exceed ten years from the date of grant (five years for a 10% stockholder).Options generally vest over a period of four years. The 2006 Plan isadministered by the compensation committee of the Company’s board of directors.

 

Following is a summary of stock option activity for the nine monthsended September 30, 2007:

 
| ** **                           | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|--------------------------------------|------------|-------------|------------|---------------------------------------------|------------|
| Balance as of December 31, 2006 |       | 1,496,945   |       | $                                           | 1.17       |   |
| Granted                              |       | 259,353     |       | $                                           | 9.18       |   |
| Exercised                            |       | (128,142    | )          | $                                           | 0.89       |   |
| Canceled                             |       | (3,389      | )          | $                                           | 4.65       |   |
| Balance as of September 30, 2007     |       | 1,624,767   |       | $                                           | 2.46       |   |

 

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As of September 30, 2007, options were outstanding under the 1998 Planand the 2006 Plan as follows:

 
| ** **           | ** ** | **September 30, 2007** | ** ** |
|----------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **Options Outstanding**     | ** ** | **Options Exercisable** | ** ** |
| **Exercise  Price**  | ** ** | **Number  Outstanding**          | ** ** | **Weighted Average  Remaining  Contractual  Life (in years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $ 0.22 - $0.22  |       | 67,217                           |       | 3.07 |   | $ | 0.22 |   | 67,217 |   | $ | 0.22 |   |
| $ 0.65 - $0.65  |       | 393,905                          |       | 4.06 |   | $ | 0.65 |   | 393,905 |   | $ | 0.65 |   |
| $ 1.08 - $1.08  |       | 559,861                          |       | 7.29 |   | $ | 1.08 |   | 382,252 |   | $ | 1.08 |   |
| $ 2.17 - $2.17  |       | 361,784                          |       | 8.50 |   | $ | 2.17 |   | 106,445 |   | $ | 2.17 |   |
| $ 8.06 - $10.00 |       | 242,000                          |       | 9.52 |   | $ | 9.64 |   | — |   | $ | — |   |
| $ 0.22 - $10.00 |       | 1,624,767                        |       | 6.93 |   | $ | 2.46 |   | 949,819 |   | $ | 0.96 |   |

 

Of the options outstanding, options to purchase 949,819 shares werevested as of September 30, 2007, with a weighted average remaining contractuallife of 6.0 years and a weighted average exercise price of $0.96 per share,while options to purchase 674,948 shares were unvested.

 

*StockAwards*

 

On September 12, 2007, the Company issued stock awards for 17,500fully-vested shares of the Company’s common stock to its directors under theCompany’s 2006 Plan. The grant date fair value of the stock awards were $8.47per share.

 

*EmployeeStock Purchase Plan*

* *

Concurrent with the Company’s initial public offering in February 2007,it established the employee stock purchase plan. The Company’s board ofdirectors adopted the employee stock purchase plan in December 2006, and thestockholders approved the plan in January 2007. A total of 200,000 shares ofthe Company’s common stock were initially made available for sale under theplan. In addition, the employee stock purchase plan provides for annualincreases in the number of shares available for issuance under the purchaseplan on the first day of each fiscal year, beginning with the Company’s 2008fiscal year, equal to the lesser of (i) 3% of the outstanding shares of theCompany’s common stock on the last day of the immediately preceding fiscalyear; (ii) 300,000 shares; or (iii) such other amount as may be determined bythe Company’s board of directors.

 

The offering date of the purchase plan was February 15, 2007 and thefirst purchase is scheduled to occur on November 15, 2007. During the quarterended September 30, 2007, there were no shares of common stock issued and200,000 shares remained available for issuance under the purchase plan.

 

During the nine months ended September 30, 2007, the Company recordedstock-based compensation expense of approximately $52,482 related to thepurchase plan.

 

15

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*Warrants*

* *

In connection with the Company’s building lease agreement signed in2000, the Company issued a warrant to purchase 13,845 shares of common stock ata purchase price of $10.83 per share, which expires in June 2010. The estimatedfair value of the warrant at the date of grant was not material using theBlack-Scholes valuation model. As of September 30, 2007, no shares have beenissued pursuant to this warrant.

 

**9. Subsequent event**

 

OnOctober 30, 2007, the Company completed a private placement in which it raisedgross proceeds of approximately $35.9 million through the sale, at a price of$7.80 per share, of 4,600,000 shares of its common stock. Pursuant to aregistration rights agreement dated October 23, 2007, the Company agreedto file a registration statement on Form S-1 with the SEC, within 30 days ofthe closing of the private placement, to register the resale of the shares. TheCompany agreed to use commercially reasonable efforts to have the registrationstatement declared effective within 90 days after the closing of theprivate placement if the registration statement receives no SEC review or120 days after the closing of the private placement if the registrationstatement receives SEC review.

 

Ifthe registration statement is not filed or is not declared effective by therequired dates, then the Company has agreed to pay each purchaser liquidateddamages pursuant to the registration rights agreement at a rate equal to 1.0%of the aggregate purchase price of the shares purchased by such purchaser forany private placement shares then held by such purchaser each month theregistration statement is not filed or declared effective, as applicable. Themaximum aggregate liquidated damages payable to any purchaser is 18% of theaggregate purchase price paid by such purchaser. If the Company fails to payany partial liquidated damages in full within 5 business days after the datepayable, the Company will pay interest thereon at a rate of 1.5% per month (orsuch lesser maximum amount that is permitted to be paid by applicable law). Inthe event that the Company registers some but not all of the private placementshares, the 1.0% of liquidated damages referred to above for any monthly periodwill be reduced on a pro rata basis.

 

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*The following discussion and analysis should be read in conjunctionwith our consolidated financial statements and accompanying notes appearingelsewhere in this report. This discussion and other parts of this report maycontain forward-looking statements based upon current expectations that involverisks and uncertainties. Our actual results and the timing of selected eventscould differ materially from those anticipated in these forward-lookingstatements as a result of several factors, including those set forth under “RiskFactors” and elsewhere in this report.*

 

**Overview**

 

We are a biopharmaceutical company focused on discovering, developingand commercializing innovative anti-infective products. Our initial developmentefforts address products that treat gastrointestinal infections and relateddiseases where current therapies have limitations, including diminishedefficacy, serious adverse side effects, drug-to-drug interactions, difficultpatient compliance and bacterial resistance.

 

We currently have two late-stage anti-infective product candidates,OPT-80 and Prulifloxacin. OPT-80, our lead product candidate, is an antibioticcurrently in a Phase 3 registration trial for the treatment of *Clostridium difficile*-associated diarrhea, or CDAD, the mostcommon nosocomial diarrhea. In April 2005, we entered into a collaborationagreement with Par Pharmaceutical, Inc., or Par, pursuant to which we and Par,exclusively collaborated in the clinical development and commercialization ofOPT-80. In February 2007, we elected to terminate the collaboration agreementwith Par, exercised our right under a prospective buy-back agreement torepurchase Par’s rights to develop and commercialize OPT-80 in North Americaand Israel and paid Par a one-time $20.0 million termination fee. As a result,we now hold worldwide rights to OPT-80. The Food and Drug Administration, orFDA, has granted Fast Track status for OPT-80 in the treatment of CDAD. FastTrack designation indicates that OPT-80 has the potential to treatlife-threatening diseases with unmet medical needs. OPT-80 was also chosen tobe the only investigational new drug in the Continuous Marketing Applications,or CMA, Pilot 2 Program in the Division of Anti-Infective andOphthalmology Products. The CMA designation offers several potential benefits,including a program of continuous FDA feedback designed to streamline thedevelopment process. Participation in these programs will not eliminate anyphase of clinical development. Prulifloxacin is an antibiotic currently in twoPhase 3 trials for the treatment of infectious diarrhea, includingtravelers’ diarrhea, a community-acquired infection which can be caused by abroad range of bacteria. We will seek a label for Prulifloxacin for thetreatment of infectious diarrhea and initially plan to focus commercializationefforts on the treatment of travelers’ diarrhea. Prulifloxacin is a prodrug inthe fluoroquinolone class of antibiotics, a widely-used class of broad-spectrumantibiotics. We are developing additional product candidates using ourproprietary technology, including our OPopS drug discovery platform.

 

We were incorporated in November 1998. Since inception, we have focusedon hiring our management team and initial operating employees and on developingour product candidates, including OPT-80 and Prulifloxacin. We have never beenprofitable and have incurred

 

17

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significant net losses since our inception. As of September 30, 2007,we had an accumulated deficit of $90.7 million. These losses have resultedprincipally from costs incurred in connection with research and developmentactivities, including the costs of clinical trial activities associated withour current lead product candidates, license fees and general andadministrative expenses. We expect to continue to incur operating losses forthe next several years as we pursue the clinical development andcommercialization of our product candidates, as well as acquire or in-licenseadditional products or product candidates, technologies or businesses that arecomplementary to our own.

 

**CriticalAccounting Policies**

** **

Our Management’s Discussion and Analysis of our Financial Condition andResults of Operations is based on our consolidated financial statements, whichhave been prepared in conformity with generally accepted accounting principlesin the United States. The preparation of these consolidated financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets, liabilities, expenses and related disclosures. Actualresults could differ from those estimates. While our significant accountingpolicies are described in more detail in Note 2 of the Notes to ConsolidatedFinancial Statements appearing elsewhere in this report, we believe thefollowing accounting policies to be critical to the judgments and estimatesused in the preparation of our consolidated financial statements.

 

*RevenueRecognition*

* *

Our 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 the revenue recognition criteria outlinedin Staff Accounting Bulletin, or SAB, No. 104, *RevenueRecognition* and Emerging Issues Task Force, or EITF, Issue 00-21,*Revenue Arrangements with Multiple Deliverables*,or EITF 00-21. In applying these revenue recognition criteria, we considera variety of factors in determining the appropriate method of revenuerecognition under these arrangements, such as whether the elements areseparable, whether there are determinable fair values and whether there is aunique 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.

 

When a payment is specifically tied to a separate earnings process,revenues are recognized when the specific performance obligation associatedwith the payment is completed. Performance obligations typically consist ofsignificant 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 berecognized as revenue if and when the performance milestone is achieved if theyrepresent a substantive earnings process as described in EITF 00-21.

 

In connection with certain research collaboration agreements, revenuesare recognized from non-refundable upfront fees, which we do not believe arespecifically tied to a separate earnings

 

18

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process, ratably over the term of the agreement or the period overwhich we have significant involvement or perform services. Research fees arerecognized as revenue as the related research activities are performed.

 

Revenues derived from reimbursement of direct out-of-pocket expensesfor research costs associated with grants are recorded in compliance with EITFIssue 99-19, *Reporting Revenue Gross as a PrincipalVersus Net as an Agent*, and EITF Issue 01-14, *Income Statement Characterization of Reimbursements Received for “Out-of-Pocket”Expenses Incurred*. According to the criteria established by theseEITF Issues, in transactions where we act as a principal, with discretion tochoose suppliers, bear credit risk and perform part of the services required inthe transaction, we record revenue for the gross amount of the reimbursement. Thecosts associated with these reimbursements are reflected as a component ofresearch and development expense in the consolidated statements of operations.

 

None of the payments that we have received from collaborators to date,whether recognized as revenue or deferred, are refundable even if the relatedprogram is not successful.

 

*AccruedClinical Trial Costs*

* *

A substantial portion of our on-going research and development activitiesare performed under agreements we enter into with external service providers,including clinical research organizations, or CROs, who conduct many of ourresearch and development activities. We accrue the costs incurred under thesecontracts based on factors such as estimates of work performed, milestonesachieved, patient enrollment and costs historically incurred for similarcontracts. As actual costs become known, we adjust our accruals. To date, ouraccruals have been within management’s estimates, and no material adjustmentsto research and development expenses have been recognized. We expect tosignificantly expand the level of research and development activity to beperformed by external service providers and our estimated accruals will be morematerial to our future operations. Subsequent changes in estimates may resultin a material change in our accruals, which could also materially affect ourresults of operations.

 

*Stock-BasedCompensation*

* *

Effective January 1, 2006, we adopted Statement of FinancialAccounting Standards, or SFAS, No. 123(R), *Share-Based Payment*,or SFAS 123(R) which revises SFAS 123, *Accounting for Stock-BasedCompensation*, or SFAS 123, and supersedes Accounting PrinciplesBoard, or APB, Opinion 25, *Accounting for StockIssued to Employees*. SFAS 123(R) requires that share-based paymenttransactions with employees be recognized in the financial statements based ontheir fair value and recognized as compensation expense over the vesting period.Prior to SFAS 123(R), we disclosed the pro forma effects of applying SFAS 123under the Black-Scholes method. We adopted SFAS 123(R) prospectively for newequity awards issued subsequent to December 31, 2005. Under SFAS 123(R),we calculate the fair value of stock option grants using the Black-Scholesoption-pricing model. The assumptions used in the Black-Scholes model were 6.1years for the expected term, 60.9%-65.8% for the expected volatility, 4.7%-4.8%for the risk free rate and 0.0% for dividend yield for the nine months endedSeptember 30, 2007. Future expense amounts for any particular quarterly orannual period could be affected by changes in our assumptions.

 

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The weighted average expected option term for 2007 reflects theapplication of the simplified method set out in SAB No. 107 which wasissued in March 2005. The simplified method defines the life as the average ofthe contractual term of the options and the weighted average vesting period forall option tranches.

 

Estimated volatility for the 2007 fiscal year also reflects theapplication of SAB No. 107 interpretive guidance and, accordingly,incorporates historical volatility of similar public entities.

 

As of September 30, 2007, we had approximately $2.7 million ofunrecognized stock-based compensation costs related to non-vested equity awards.As of September 30, 2007, we had outstanding vested options to purchase 949,819shares of our common stock and unvested options to purchase 674,948 shares ofour common stock.

 

Equity instruments issued to non-employees are recorded at their fairvalue as determined in accordance with SFAS 123(R) and EITF 96-18, *Accounting for Equity Instruments That are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling Goods and Services*,and are periodically revalued as the equity instruments vest and are recognizedas expense over the related service period.

 

**Resultsof Operations**

** **

***Three Months Ended September30, 2007 and 2006***

*** ***

*Collaboration and Grant Revenues*. Collaborationand grant revenues for the three months ended September 30, 2007 and 2006 was$316,000 and $209,000, respectively. The increase of $107,000, or 51%, wasprimarily due to our development collaboration with a natural healthcarecompany which generated $240,000 during the three months ended September 30,2007, offset by a decrease in revenue from a National Institute of Healthgrant.

 

*Research and Development Expense*. Research anddevelopment expense for the three months ended September 30, 2007 and 2006 was$5.5 million and $1.6 million, respectively. The increase of $3.9 million, or239%, is primarily due to the progress on our OPT-80 and Prulifloxacin clinicaltrials.

 

*Marketing.*The Company incurred $387,000 ofmarketing expense in the three months ended September 30, 2007 and no suchexpense in the three months ended September 30, 2006. The expenses in threemonths ended September 30, 2007 were related to salaries and pre-launchactivities which include medical education, scientific conferences and publicrelations services.

 

*General and Administrative Expense*. Generaland administrative expense for the three months ended September 30, 2007 and2006 was $1.4 million and $1.0 million, respectively. The increase of $334,000,or 32%, was due to higher legal expenses, patents services, insurance andcompensation expenses, including $148,000 of stock compensation expense forstock awards granted to our directors.

 

*Interest Income and Other, net*. Net interestincome and other for the three months ended September 30, 2007 and 2006 was$454,000 and $281,000, respectively. The increase was

 

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primarily due to higher cash and short-term investment balances as aresult of the initial public offering which closed on February 14, 2007.

 

***Nine Months Ended September30, 2007 and 2006***

*** ***

*Collaboration and Grant Revenues*. Collaborationand grant revenues for the nine months ended September 30, 2007 and 2006 were$673,000 and $848,000, respectively. The decrease of $175,000, or 21%, was dueto a decrease in revenue from a National Institute of Health grant and theconclusion of a development and license agreement, partially offset by anincrease of $400,000 related to a collaboration with a natural healthcarecompany.

 

*Research and Development Expense*. Research anddevelopment expense for the nine months ended September 30, 2007 and 2006 was$36.0 million and $7.3 million, respectively. The increase of $28.7 million, or390% was due primarily to the $20.0 million payment to Par to reacquire theNorth American rights to OPT-80, the advancement of our OPT-80 andPrulifloxacin clinical trials, including the May 2007 initiation of the secondpivotal Phase 3 trial for OPT-80, and the purchase of $1.9 million of OPT-80clinical supply material and active pharmaceutical ingredient for the OPT-80clinical study.

 

*Marketing.*We incurred $1.2 million ofmarketing expense in the nine months ended September 30, 2007 and no suchexpense in the nine months ended September 30, 2006. The expenses in the ninemonths ended September 30, 2007 were related to salaries and pre-launchactivities which include medical education, scientific conferences, and publicrelations services.

 

*General and Administrative Expense*. Generaland administrative expense for the nine months ended September 30, 2007 and2006 was $4.0 million and $2.3 million, respectively. The increase of $1.7million, or 71%, was due to higher legal expenses, insurance and compensationexpenses, including a $668,000 increase in stock compensation expense.

 

*Interest Income and Other, net*. Net interestincome and other for the nine months ended September 30, 2007 and 2006 were$1.4 million and $931,000, respectively. The increase was primarily due tohigher cash and short-term investment balances as a result of the initialpublic offering which closed on February 14, 2007.

 

**Liquidityand Capital Resources**

** **

*Sourcesof Liquidity*

* *

Since inception, our operations have been financed primarily throughthe sale of equity securities. Through September 30, 2007, we received grossproceeds of approximately $118.9 million from the sale of shares of ourpreferred and common stock as follows:

 

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

 

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

 

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

 

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

 

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

 

OnOctober 30, 2007, we completed a private placement in which we raised grossproceeds of approximately $35.9 million through the sale, at a price of $7.80per share, of 4,600,000 shares of our common stock.

 

Until required for operations, we have invested a substantial portionof our available funds in money market funds, corporate debt securities, UnitedStates government instruments and other readily marketable debt instruments, allof which are investment-grade quality. We have established guidelines relatingto diversification and maturities of our investments to preserve principal andmaintain liquidity.

 

*CashFlows*

* *

As of September 30, 2007, cash, cash equivalents and short-terminvestments totaled approximately $32.2 million as compared to $21.3 million asof December 31, 2006, an increase of approximately $10.9 million. Weraised $43.6 million in net proceeds from our initial public offering whichclosed on February 14, 2007. We paid Par $20.0 million of the net proceeds toreacquire the North American rights to OPT-80.

 

We cannot be certain if, when or to what extent we will receive cashinflows from the commercialization of our product candidates. We expect ourdevelopment expenses to be substantial and to increase over the next few yearsas we advance the development of our product candidates.

 

In April 2005, we entered into a collaboration agreement with Parpursuant to which we and Par exclusively collaborated to develop andcommercialize OPT-80. We had granted to Par an exclusive royalty-bearinglicense, with the right to sublicense, promote, market, distribute and sellOPT-80 in a territory composed of the United States, Canada and Puerto Rico,with an option to extend the territory to include Israel. We retained all otherrights to OPT-80 in the rest of the world. In January 2007, we entered into aprospective buy-back agreement with Par which provided us with an option toterminate the collaboration and repurchase the rights to develop andcommercialize OPT-80 in North America and Israel.

 

In February 2007, we elected to terminate the collaboration agreementpursuant to the prospective buy-back agreement with Par and we repurchased therights to develop and commercialize OPT-80 in North America and Israel. We nowhold worldwide rights to OPT-80. Under the terms of the prospective buy-backagreement, we paid Par a one-time $20.0 million termination fee and we are alsoobligated to pay Par a one-time $5.0 million milestone payment, a 5% royalty onnet sales by us or our affiliates of OPT-80 in North America and Israel, and a

 

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1.5% royalty on net sales by us or our affiliates of OPT-80 in the restof the world. In addition, in the event we license our right to market OPT-80in the rest of the world, we will be required to pay Par a 6.25% royalty on netrevenues we receive related to OPT-80. 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 the exercise of our rights under the prospectivebuy-back agreement, Par assigned to us a supply agreement with Biocon Limited,or Biocon, regarding the active pharmaceutical ingredient, or API, for OPT-80. Underthis agreement, Biocon shall supply to us our requirements of the OPT-80 APIfor certain markets. We may elect to pay to Biocon a $3.0 million prepaymentfor capital investments made by Biocon, which would be subject to set-offsagainst future purchases by us of the API for OPT-80. The supply agreement willterminate upon the tenth anniversary of the commercial launch of OPT-80 unlessearlier terminated by mutual agreement or material default of either party.

 

*FundingRequirements*

* *

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 payment thatmay become payable to Par and Nippon Shinyaku Co., Ltd.;

 

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

 

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

 

•      the costs and timing ofregulatory approvals;

 

•      the costs of establishingsales or distribution capabilities;

 

•      the success of thecommercialization of our products; and

 

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

 

We believe that our existing cash and cash equivalents will besufficient to meet our capital requirements for at least the next 18 months.

 

Until we can generate significant cash from our operations, we expectto continue to fund our operations with existing cash resources that wereprimarily generated from the proceeds of offerings of our equity securities andcollaborations and government grants. In addition, we may finance future cashneeds through the sale of additional equity securities, strategic collaborationagreements and debt financing. However, we may not be successful in enteringinto additional collaboration agreements, in receiving milestone or royaltypayments under new or existing collaboration agreements, in obtaining newgovernment grants or in obtaining debt financing. In

 

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addition, we cannot be sure that our existing cash and investmentresources will be adequate, that financing will be available when needed orthat, if available, financing will be obtained on terms favorable to us or ourstockholders. Having insufficient funds may require us to delay, scale-back oreliminate some or all of our development programs, relinquish some or even allof our rights to product candidates at an earlier stage of development orrenegotiate less favorable terms than we would otherwise choose. Failure toobtain adequate financing also may adversely affect our ability to operate as agoing concern. If we raise funds by issuing equity securities, substantialdilution to existing stockholders would likely result. If we raise funds byincurring additional debt financing, the terms of the debt may involvesignificant cash payment obligations as well as covenants and specificfinancial ratios that may restrict our ability to operate our business.

 

**Item 3. Quantitativeand Qualitative Disclosures about Market Risk**

 

Our cash and cash equivalents and short-term investments as ofSeptember 30, 2007 consisted primarily of money market funds, corporate debtsecurities, United States government instruments and other readily marketabledebt instruments. Our primary exposure to market risk is interest incomesensitivity, which is affected by changes in the general level of U.S. interestrates. The primary objective of our investment activities is to preserveprincipal while at the same time maximizing the income we receive from ourinvestments without significantly increasing risk. A hypotheticalten percent change in interest rates during the quarter ended September30, 2007 would have resulted in approximately a $46,000 change in netloss. Accordingly, we would not expect our operating results or cash flowsto be affected to any significant degree by the effect of a sudden change inmarket interest rates applicable to our securities portfolio. In general, moneymarket funds are not subject to market risk because the interest paid on suchfunds fluctuates with the prevailing interest rate.

 

**Item 4. Controls andProcedures**

 

As of the end of the period covered by this report, an evaluation wasperformed under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, whom werefer to as our certifying officers, of the effectiveness of the design andoperation of our disclosure controls and procedures. Based on their evaluation,our certifying officers concluded that as of the end of the period covered bythis report these disclosure controls and procedures are effective in providingreasonable assurance that the information required to be disclosed by us in ourperiodic reports filed with the Securities and Exchange Commission, or SEC, isrecorded, processed, summarized and reported within the time periods specifiedby the SEC’s rules and SEC reports.

 

We believe that a controls system, no matter how well designed andoperated, is based in part upon certain assumptions about the likelihood offuture events, and therefore can only provide reasonable, not absolute,assurance that the objectives of the controls system are met, and no evaluationof controls can provide absolute assurance that all control issues andinstances of fraud, if any, within a company have been detected.

 

In addition, we have reviewed our internal controls over financialreporting and have made no changes during the three months ended September 30,2007, that our certifying officers concluded materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II – OTHER INFORMATION**

 

**Item 1A. Risk Factors**

 

**RisksRelated to Our Business**

** **

**We are a company with limited sources of revenue, and we are largelydependent on the success of our lead product candidate OPT-80 and, to a lesserdegree, our other lead product candidate Prulifloxacin.**

 

We are a biopharmaceutical company with no products approved forcommercial sale and, to date, we have not generated any revenues from productsales. Our ability to generate future revenues depends heavily on our successin:

 

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

 

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

 

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

 

Our product candidates will require extensive additional clinical studyand evaluation, regulatory approval in multiple jurisdictions, substantialinvestment and significant marketing efforts before we generate any revenuesfrom product sales. We are not permitted to market or promote our productcandidates before we receive regulatory approval from the FDA or comparableforeign regulatory authorities. We have not submitted an NDA, or receivedmarketing approval for either OPT-80 or Prulifloxacin, and we cannot be certainthat either of these product candidates will be successful in clinical trialsor receive regulatory approval. If we do not receive regulatory approval forand successfully commercialize OPT-80 and Prulifloxacin, we will not generateany revenues from product sales for several years, if at all, and we may not beable to continue our operations.

 

We believe our initial success will be more dependent on OPT-80 thanPrulifloxacin, because we believe that our market for the treatment of CDAD islarger than our market for the treatment of infectious diarrhea. Even if wesuccessfully obtain regulatory approval to market OPT-80 or Prulifloxacin, ourrevenues for either drug candidate will be dependent upon the size of themarkets in the territories for which we have commercial rights. If the marketsfor the treatment of CDAD or infectious diarrhea are not as significant as weestimate, our business and prospects will be harmed.

 

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**Wehave incurred significant operating losses since inception and anticipate thatwe will incur continued losses for the foreseeable future.**

** **

We have experienced significant operating losses since our inception in1998. As of September 30, 2007, we had an accumulated deficit of approximately$90.7 million. We have generated no revenues from product sales to date. Wehave funded our operations to date from the sale of approximately $154.8million of our securities and through research funding pursuant tocollaborations with partners or government grants. We expect to continue toincur substantial additional operating losses for the next several years as weadvance our clinical trials and research and development initiatives and buildour marketing and sales capabilities. Because of the numerous risks anduncertainties associated with developing and commercializing antibiotics, weare unable to predict the extent of any future losses. We may neversuccessfully commercialize our product candidates and thus may never have anysignificant future revenues or achieve and sustain profitability.

 

**Ifwe fail to obtain additional financing, we may be unable to commercializeOPT-80 and Prulifloxacin or develop and commercialize our other productcandidates, or continue our other research and development programs.**

** **

We will require additional capital to commercialize our current leadproduct candidates OPT-80 and Prulifloxacin. We cannot be certain thatadditional funding will be available on acceptable terms, or at all. To theextent that we raise additional funds by issuing equity securities, ourstockholders may experience significant dilution. Any debt financing, ifavailable, may require us to pledge our assets as collateral or involverestrictive covenants, such as limitations on our ability to incur additionalindebtedness, limitations on our ability to acquire or license intellectualproperty rights and other operating restrictions that could negatively impactour ability to conduct our business. If we are unable to raise additionalcapital when required or on acceptable terms, we may have to significantly delay,scale back or discontinue the development or commercialization of one or moreof our product candidates or one or more of our other research and developmentinitiatives. We also could be required to:

 
| • |   | seek  collaborators for one or more of our current or future product candidates at  an earlier stage than otherwise would be desirable or on terms that are less  favorable than might otherwise be available; or |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                              |
| • |   | relinquish  or license on unfavorable terms our rights to technologies or product candidates  that we otherwise would seek to develop or commercialize ourselves.                                                 |

 

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

 

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**We do not currently havesufficient resources to commercialize OPT-80 on our own. If we are unable toraise additional capital or we are unable to find a collaboration partner orare unable to effectively collaborate with one or more partners for thecommercialization of OPT-80 or Prulifloxacin, we will not generate revenuesfrom sales of OPT-80 and our business will be materially harmed.**

** **

**We are dependent on third party collaborators and we may be unable toenter into future collaboration agreements or we may have disagreements withthese collaborators.**

 

We currently plan to build our own marketing and sales force for OPT-80in North America and Prulifloxacin in the United States. However, we may alsoseek one or more partners for the commercialization of OPT-80 outside of NorthAmerica. We cannot be certain that we would be successful in attracting anysuch partners. If we were not able to find appropriate partners for thecontinued development and commercialization of OPT-80, we would either have todelay these initiatives which would harm our business and prospects, or raisesignificant additional funds to develop clinical and commercializationcapabilities internally.

 

We are subject to a number of additional risks associated with ourdependence on collaborations with third parties. Conflicts may arise between usand collaborators, such as conflicts concerning the interpretation of clinicaldata, the achievement of milestones, the interpretation of financial provisionsor the ownership of intellectual property developed during the collaboration. Ifany such conflicts arise, a collaborator could act in its own self-interest,which may be adverse to our best interests. Any such disagreement between usand a collaborator could result in one or more of the following, each of whichcould delay or prevent the development or commercialization of OPT-80, and inturn prevent us from generating sufficient revenues to achieve or maintainprofitability:

 
| • |   | reductions  in the payment of royalties or other payments we believe are due pursuant to  the applicable collaboration arrangement or agreement;                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                 |
| • |   | uncertainties  regarding ownership of intellectual property rights arising from our  collaborative activities, which could prevent us from entering into  additional collaborations and commercializing such rights; |
|   |   |                                                                                                                                                                                                                 |
| • |   | actions  taken by a collaborator inside or outside our collaboration which could  negatively impact our rights or benefits under our collaboration; or                                                               |
|   |   |                                                                                                                                                                                                                 |
| • |   | unwillingness  on the part of a collaborator to keep us informed regarding the progress of  its development and commercialization activities or to permit public  disclosure of the results of those activities.     |

 

In addition, a collaborator may shift its research, development,manufacturing and commercialization resources to other product opportunitiesincluding those that might be competitive with OPT-80.

 

If we cannot commercialize OPT-80, we will have to rely solely onPrulifloxacin and earlier stage product candidates for any future revenues, andour ability to achieve and sustain profitability will be materially andadversely harmed.

 

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**Ifwe are unable to obtain FDA approval of our product candidates, we will not beable to commercialize them in the United States.**

** **

We need FDA approval prior to marketing our product candidates in theUnited States. If we fail to obtain FDA approval to market our productcandidates, we will be unable to sell our product candidates in the UnitedStates, which will significantly impair our ability to generate any revenues.

 

This regulatory review and approval process, which includes evaluationof pre-clinical studies and clinical trials of our product candidates as wellas the evaluation of our manufacturing processes and our third-party contractmanufacturers’ facilities, is lengthy, expensive and uncertain. To receiveapproval for a product candidate, we must, among other things, demonstrate withsubstantial evidence from well-controlled clinical trials that the productcandidate is both safe and effective for each indication for which approval issought. Satisfaction of the approval requirements typically takes several yearsand the time needed to satisfy them may vary substantially, based on the type,complexity and novelty of the pharmaceutical product. We cannot predict if orwhen we might receive regulatory approvals for any of our product candidatescurrently under development. Moreover, any approvals that we obtain may notcover all of the clinical indications for which we are seeking approval, orcould contain significant limitations in the form of narrow indications,warnings, precautions or contra-indications with respect to conditions of use. Insuch an event, our ability to generate revenues from such products would begreatly reduced and our business would be harmed.

 

The FDA has substantial discretion in the approval process and mayeither refuse to consider our application for substantive review or may formthe opinion after review of our data that our application is insufficient toallow approval of our product candidates. If the FDA does not consider orapprove an application that we may submit, it may require that we conductadditional clinical, pre-clinical or manufacturing validation studies andsubmit that data before it will reconsider our application. Depending on theextent of these or any other studies, approval of any applications that wesubmit may be delayed by several years, or may require us to expend moreresources than we have available. It is also possible that additional studies,if performed and completed, may not be successful or considered sufficient bythe FDA for approval or even to make our applications approvable. If any ofthese outcomes occur, we may be forced to abandon one or more applications forapproval that we may submit, which might significantly harm our business andprospects.

 

It is possible that none of our existing product candidates or anyproduct candidates we may seek to develop in the future will ever obtain theappropriate regulatory approvals necessary for us or our collaborators tocommence product sales. Moreover, recent events, including complicationsarising from FDA-approved drugs such as Vioxx and Ketek, have raised questionsabout the safety of marketed drugs and may result in increased cautiousness bythe FDA and comparable foreign regulatory authorities in reviewing new drugsbased on safety, efficacy or other regulatory approvals. This increasedscrutiny by regulatory authorities may result in significant delays inobtaining regulatory approvals, as well as more stringent product labeling andpost-marketing testing requirements.

 

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Although the FDA has granted Fast Track status to OPT-80 and selectedit for participation in a CMA Pilot 2 Program, we cannot be certain thatwe will receive any benefits from these designations or that the designationswill expedite regulatory review or approval of OPT-80. Participation in theseprograms will not eliminate any phase of clinical development. Moreover, ourparticipation in the CMA Pilot 2 Program will involve frequent scientificdiscussions and other interactions with the staff of the FDA during theinvestigational new drug phase of our development of OPT-80. These frequentdiscussions could subject OPT-80 to a greater level of scrutiny than it mightotherwise have received or require us to make more frequent submissions andendure other burdens that would have been avoided if we had not participated inthe program. Therefore, despite any potential benefits of OPT-80’s Fast Trackand CMA Pilot 2 Program designations, significant uncertainty remainsregarding the clinical development and regulatory approval process for OPT-80.

 

**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 is expensive and can take many years to complete, andits outcome is uncertain. Failure can occur at any time during the clinicaltrial process. The results of pre-clinical studies and early clinical trials ofour product candidates may not be predictive of the results of later-stageclinical trials. Product candidates in later stages of clinical trials may failto show the desired safety and efficacy traits despite having progressedthrough pre-clinical studies and initial clinical testing. In addition, thetype and amount of clinical data necessary to gain regulatory approval for ourproduct candidates may change. We have not obtained regulatory approval for anyproduct candidate.

 

Even after we complete our planned clinical trials, our productcandidates could fail to receive regulatory 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;

 

•                  to the results of ourclinical trials may not demonstrate that a product candidate’s clinical andother benefits outweigh its safety risks;

 

•                  to the results of ourclinical trials may not demonstrate that a product candidate presents anadvantage over existing therapies, or over placebo in any indications for whichthe FDA requires a placebo-controlled trial;

 

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

 

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•                  the data collected fromclinical trials of our product candidates may not be sufficient to support thesubmission of a new drug application or other submission or to obtainregulatory approval in the 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.

 

**Delaysin clinical 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 in clinical trials of our product candidates. OPT-80is currently in a Phase 3 clinical trial for the treatment of CDAD. Weinitiated a second Phase 3 pivotal trial of the same design in the secondquarter of 2007. We anticipate completing both of these trials in 2008. If bothtrials are successful, we intend to file an NDA as soon as practicalthereafter. In addition, we are planning to conduct clinical and proof ofconcept clinical trials for other indications of OPT-80. Prulifloxacin is intwo Phase 3 trials for the treatment of travelers’ diarrhea. We intend toconduct a Phase 4 trial of Prulifloxacin subsequent to NDA submission tocompare Prulifloxacin to ciprofloxacin. We do not know whether planned clinicaltrials will begin on time, will need to be redesigned or will be completed onschedule, if at all. Clinical trials can be delayed for a variety of reasons,including delays in obtaining regulatory approval to commence a trial, inreaching agreement on acceptable terms with prospective CROs and clinical trialsites, in obtaining institutional review board approval at each site, inrecruiting suitable patients to participate in a trial, in having patientscomplete a trial or return for post-treatment follow-up, in adding new sites orin obtaining sufficient supplies of clinical trial materials. Many factorsaffect patient enrollment, including the size and nature of the patientpopulation, the proximity of patients to clinical sites, the eligibilitycriteria for the trial, the design of the clinical trial, competing clinicaltrials, clinicians’ and patients’ perceptions as to the potential advantages ofthe drug being studied in relation to other available therapies, including anynew drugs that may be approved for the indications we are investigating andwhether the clinical trial design involves comparison to placebo. Several ofour principal investigators have stated that the enrollment rate in theclinical trials for OPT-80 has been less than projected. Our originalprojections were based on enrollment rates for our Phase 2a trial ofOPT-80. We continue to experience lower than expected enrollment in the trialsand as a result, the trials may not be completed as currently scheduled and wemay incur delays in obtaining regulatory approval as well as additionalsignificant expenses. Furthermore, with respect to the clinical trialsconducted by third parties, we will have no control over their timing orsuccess.

 

We could encounter delays if prescribing physicians encounterunresolved ethical issues associated with enrolling patients in clinical trialsof our product candidates in lieu of prescribing existing antibiotics that haveestablished safety and efficacy profiles or with administering placebo topatients in our placebo-controlled trials. Further, a clinical trial may besuspended or terminated by us, our collaborators, the FDA or other regulatoryauthorities due to a number of factors, including failure to conduct theclinical trial in accordance with regulatory requirements or our clinicalprotocols, inspection of the clinical trial operations or trial site by the FDAor other regulatory authorities resulting in the imposition of a clinical hold,unforeseen safety issues

 

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or adverse side effects, failure to demonstrate a benefit from using adrug, changes in governmental regulations or administrative actions or lack ofadequate funding to continue the clinical trial. In addition, our Prulifloxacinproduct candidate treats bacterial infections which tend to peak during hightravel seasons. As a result, during certain times of the year, it is moredifficult to enroll patients in our trials for Prulifloxacin. If we experiencedelays in the completion of, or termination of, any clinical trial of ourproduct candidates, the commercial prospects of our product candidates will beharmed, and our ability to generate product revenues from any of these productcandidates will be delayed. In addition, any delays in completing our clinicaltrials will increase our costs, slow down our product development and approvalprocess and jeopardize our ability to commence product sales and generaterevenues. Any of these occurrences may significantly harm our business,financial condition and prospects.

 

**Wemay be required to suspend or discontinue clinical trials due to adverseevents, adverse side effects or other safety risks that could preclude approvalof our product candidates.**

** **

Our clinical trials may be suspended at any time for a number ofreasons. We may voluntarily suspend or terminate our clinical trials if at anytime we believe that they present an unacceptable risk to participants. Inaddition, regulatory agencies may order the temporary or permanentdiscontinuation of our clinical trials at any time if they believe that theclinical trials are not being conducted in accordance with applicableregulatory requirements or that they present an unacceptable safety risk toparticipants. In previous clinical trials of OPT-80, certain patientsexperienced non-drug related adverse events. 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 we conduct a study to determine theeffect, if any, of Prulifloxacin on the prolongation of the QT interval, acondition that is associated with potentially life-threatening cardiacarrhythmias. Our future clinical trials will involve testing in larger patientpopulations, which could reveal a high prevalence of these or other sideeffects. In such event, our trials would be interrupted, delayed or halted andthe FDA or comparable foreign regulatory authorities could order us to ceasefurther development of or deny approval of our product candidates for any orall targeted indications. Even if we believe our product candidates are safe, ourdata is subject to review by the FDA, which may disagree with our conclusionsand delay or deny approval of our product candidates which would significantlyharm the commercial prospects of such product candidates. Moreover, we could besubject to significant liability if any volunteer or patient suffers, orappears to suffer, adverse side effects as a result of participating in ourclinical trials. Any of these occurrences may significantly harm our businessand prospects.

 

**Werely on third parties to conduct our clinical trials. If these third parties donot successfully carry out their contractual duties or meet expected deadlines,we and our collaborators 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, Inc. formerly known as Advanced Biologics, LLC, to provide monitorsand manage data for our on-going clinical programs.

 

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We and the CROs conducting clinical trials for our product candidatesare required to comply with current good clinical practices, or GCPs,regulations and guidelines enforced by the FDA for all of our products inclinical development. The FDA enforces GCPs through periodic inspections oftrial sponsors, principal investigators and trial sites. If we or the CROsconducting clinical trials of our product candidates fail to comply withapplicable GCPs, the clinical data generated in the clinical trials may bedeemed unreliable and the FDA may require additional clinical trials beforeapproving any marketing applications. We cannot assure you that, uponinspection, the FDA will determine that any clinical trials of our productcandidates comply with GCPs. In addition, our clinical trials must be conductedwith product produced under good manufacturing practices regulations, or cGMP,and will require a large number of test subjects. Our failure to comply withthese regulations may require us to repeat clinical trials, which would becostly and delay the regulatory approval process and commercialization of ourproduct candidates.

 

Typically, the CROs conducting clinical trials of our productcandidates have the right to terminate their agreements with us or our collaboratorsupon notice in the event of an uncured material breach. In addition, some CROshave an ability to terminate their respective agreements with us if we fail toperform our obligations, if it can be reasonably demonstrated that the safetyof the subjects participating in our clinical trials warrants such termination,if we make a general assignment for the benefit of our creditors or if we areliquidated. INC Research has been heavily involved in the clinical developmentand regulatory approval process for our lead product candidates and possessessignificant experience with the regulatory process. We substantially rely onINC Research to conduct the clinical trials for OPT-80 and Prulifloxacin. INCResearch has also subcontracted with other third-party CROs for various aspectsof the clinical trials. If any relationships with INC Research or these otherthird-party CROs terminate, we or our collaborators may not be able to enterinto arrangements with alternative CROs or we may enter into arrangements withalternative CROs that do not have the expertise or relationships that INCResearch has with government agencies. In addition, these third-party CROs arenot our employees, and we cannot control whether or not they devote sufficienttime and resources to our on-going clinical programs. 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 notsuccessfully carry out their contractual duties or obligations or meet expecteddeadlines, if they need to be replaced, or if the quality or accuracy of theclinical data they obtain is compromised due to the failure to adhere to ourclinical protocols, regulatory requirements, or for other reasons, our clinicaltrials may be extended, delayed or terminated, and we may not be able to obtainregulatory approval for or successfully commercialize our product candidates. Asa result, our financial results and the commercial prospects for our productcandidates would be harmed, our costs could increase and our ability togenerate revenues could be delayed.

 

**Ifwe fail to gain and maintain approval from regulatory authorities in internationalmarkets for OPT-80 and any future product candidates for which we have rightsin international markets, our market opportunities will be limited.**

** **

Sales of our product candidates outside of the United States will besubject to foreign regulatory requirements governing clinical trials andmarketing approval. Even if the FDA grants marketing approval for a productcandidate, comparable regulatory authorities of foreign

 

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countries must also approve the manufacturing and marketing of theproduct candidate in those countries. This is important for thecommercialization of OPT-80 for which we currently have exclusive worldwidemarketing rights. Obtaining foreign regulatory approvals could result in significantdelays, difficulties and costs for us and require additional pre-clinicalstudies or clinical trials which would be costly and time consuming. Regulatoryrequirements can vary widely from country to country and could delay theintroduction of our products in those countries. Clinical trials conducted inone country may not be accepted by regulatory authorities in other countries,and regulatory approval in one country does not mean that regulatory approvalwill be obtained in any other country. In addition, our failure to obtainregulatory approval in any country may delay or have negative effects on theprocess for regulatory approval in others. Other than Prulifloxacin, which issold by other parties in Japan, Italy and certain other European countries,none of our product candidates is approved for sale in any international marketfor which we have rights, and we do not have experience in obtaining regulatoryapproval in international markets. If we fail to comply with regulatoryrequirements in our international markets or to obtain and maintain requiredapprovals, our target market will be reduced and our ability to generaterevenues will be diminished, which would significantly harm our business,results of operations and prospects.

 

**Wecurrently have no marketing and sales organization and have no experience inmarketing drug products. If we are unable to establish marketing and salescapabilities or enter into agreements with third parties to market and sell ourproduct candidates, we may not be able to generate product revenues.**

** **

We currently do not have a sales organization for the marketing, salesand distribution of pharmaceutical products. In order to commercialize anyproducts, 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 tocommercialize OPT-80 in North America and will seek third-party partnersoutside of North America. We own exclusive rights to commercializePrulifloxacin in the United States, and we contemplate establishing our ownsales force or seeking third-party partners to sell Prulifloxacin in the UnitedStates. The establishment and development of our own sales force to market anyproducts we may develop will be expensive and time consuming and could delayany product launch, and we cannot be certain that we will be able tosuccessfully develop this capability. We will also have to compete with otherpharmaceutical and biotechnology companies to recruit, hire, train and retainmarketing and sales personnel. To the extent we rely on third parties tocommercialize our products, if any, we may receive less revenues than if wecommercialized these products ourselves. In addition, we may have little or nocontrol over the sales efforts of any third parties involved in commercializingour products. In the event we are unable to develop our own marketing and salesforce or collaborate with a third-party marketing and sales organization, wewould not be able to commercialize our product candidates which wouldnegatively impact our ability to generate product revenues.

 

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**Wemay not be able to enter into acceptable agreements to market and commercializeOPT-80 outside of North America or if, needed, adequately build our ownmarketing and sales capabilities.**

** **

If appropriate regulatory approvals are obtained, we intend tocommercialize OPT-80 outside of North America through collaborationarrangements with third parties. We may be unable to enter into collaborationarrangements in international markets. In addition, there can be no guaranteethat if we enter into these collaboration arrangements with other parties thatthey will be successful or result in more revenues than we could obtain bymarketing OPT-80 on our own. If we are unable to enter into collaborationarrangements for our products or develop an effective international salesforce, our ability to generate product revenues would be limited, which wouldadversely affect our business, financial condition, results of operations andprospects. If we are unable to enter into such collaboration arrangements, wemay need to develop our own marketing and sales force to market OPT-80 in anumber of countries in Europe and Latin America to hospital-based and long-termcare physicians. These efforts may not be successful as we have norelationships among such hospital-based and long-term care physicians. There isno guarantee that we will be able to develop an effective international salesforce to successfully commercialize our products in these internationalmarkets.

 

**Ifour product candidates are unable to compete effectively with branded andgeneric antibiotics, our commercial opportunity would be reduced or eliminated.**

** **

If approved, our lead product candidates will compete against bothbranded antibiotic therapies, such as Vancocin Pulvules with respect to OPT-80and Xifaxan® with respect to Prulifloxacin, and generic antibiotics such asmetronidazole and vancomycin with respect to OPT-80 and ciprofloxacin withrespect to Prulifloxacin. In addition, we anticipate that OPT-80 will competewith other antibiotic and anti-infective product candidates currently indevelopment for the treatment of CDAD, such as Xifaxan®, an antibiotic beingdeveloped by Salix Pharmaceuticals, Ltd. Many of these products have been orwill be developed and marketed by major pharmaceutical companies, who havesignificantly greater financial resources and expertise in research anddevelopment, pre-clinical testing, conducting clinical trials, obtainingregulatory approvals, manufacturing and marketing approved products than we do.As a result, these companies may obtain regulatory approval more rapidly thanwe are able to and may be more effective in selling and marketing theirproducts as well. Smaller or early-stage companies may also prove to besignificant competitors, particularly through collaborative arrangements withlarge, established companies.

 

We anticipate that, if approved, OPT-80 and Prulifloxacin will faceincreasing competition in the form of generic versions of branded products ofcompetitors that will lose their patent exclusivity. For example, OPT-80, ifapproved, will immediately face steep competition from an inexpensive genericform of metronidazole. OPT-80 currently faces generic oral vancomycincompetition in Europe and may face competition from generic oral vancomycin inthe United States in 2008. Generic antibiotic therapies typically are sold atlower prices than branded antibiotics and are generally preferred by managedcare providers of health services. For example, because metronidazole is soldat such a low price, we believe it will be difficult to sell OPT-80 as afirst-line therapy for the treatment of CDAD. If we are unable to demonstrateto physicians and patients that, based on experience, clinical data,side-effect profiles and other

 

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factors, our products are preferable to these generic antibiotictherapies, we may never generate meaningful product revenues. In addition, manyantibiotics experience bacterial resistance over time because of theircontinued use. There can be no guarantee that bacteria would not develop resistanceto OPT-80, Prulifloxacin or any of our other product 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 OPT-80 and Prulifloxacin. Ifthese manufacturers fail to provide us and our collaborators with adequatesupplies of clinical trial materials and commercial product or fail to complywith the requirements of regulatory authorities, we may be unable to develop orcommercialize our products.**

** **

We outsource all manufacturing of clinical trial supplies of ourproduct candidates to third parties. We seek to establish long-term supplyarrangements with third-party contract manufacturers. We intend to continueoutsourcing the manufacture of our product candidates to third parties for anyfuture clinical trials and large-scale commercialization of any productcandidates that receive regulatory approval and become commercial drugs.

 

Our ability to develop and commercialize OPT-80 and Prulifloxacin andany other product candidates depends in part on our ability to arrange forcollaborators or other third parties to manufacture our products at acompetitive cost, in accordance with strictly enforced regulatory requirementsand in sufficient quantities for clinical testing and eventualcommercialization. We have not yet manufactured commercial batches of OPT-80,Prulifloxacin or any of our other product candidates. Collaborators orthird-party manufacturers that we select to manufacture our product candidatesfor clinical testing or on a commercial scale may encounter difficulties withthe small- and large-scale formulation and manufacturing processes required forsuch manufacture. Such difficulties could result in delays in clinical trials,regulatory submissions, or commercialization of our product candidates. Theinability of us or our collaborators to enter into and maintain agreements withthird-party manufacturers on acceptable terms would cause shortages of clinicaltrial supplies of our product candidates, thereby delaying or preventingregulatory approval and/or commercialization of the affected product candidate,and adversely affecting our ability to generate revenues. Further, developmentof large-scale manufacturing processes will require additional validationstudies, which the FDA must review and approve. Even if we are able toestablish additional or replacement manufacturers, identifying these sourcesand entering into definitive supply agreements and obtaining regulatoryapprovals may take a substantial amount of time and cost and such supplyarrangements may not be available on acceptable economic terms.

 

In addition, we, our collaborators and other third-party manufacturersof our products must comply with current strictly enforced cGMP requirementsenforced by the FDA through its facilities inspection program. Theserequirements include quality control, quality assurance and the maintenance ofrecords and documentation. We rely on Biocon to manufacture OPT-80 drugsupplies. Biocon is the manufacturer and supplier of API for OPT-80 and islocated in India. As such, Biocon will be subject to ongoing periodicunannounced inspections by the FDA and other agencies for compliance withcurrent cGMP, and similar foreign standards. We also rely on

 

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Nippon Shinyaku, which contracts with Juzen Chemical Corporation, orJuzen, and Angelini ACRAF/SpA, or Angelini, to manufacture Prulifloxacin drugsupplies. The manufacturing facilities of Biocon and Juzen have been inspectedand approved by the FDA for other companies’ drug products; however, neitherBiocon’s nor Juzen’s facilities have yet been approved for the manufacture ofour drug supplies. Angelini’s facilities have not been inspected or approved bythe FDA. We or other third-party manufacturers of our products may be unable tocomply with cGMP requirements and with other FDA, state, local and foreignregulatory requirements. We and our collaborators have little control overthird-party manufacturers’ compliance with these regulations and standards. Afailure to comply with these requirements by our third-party manufacturers,including Biocon, Juzen and Angelini, 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. In addition, we have no control over thesemanufacturers’ ability to maintain adequate quality control, quality assuranceand qualified personnel. If the safety of any quantities supplied by thirdparties is compromised due to their failure to adhere to applicable laws or forother reasons, we may not be able to obtain or maintain regulatory approval foror successfully commercialize one or more of our product candidates, whichwould 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 product candidates are approved by the appropriateregulatory authorities for marketing and sale, physicians may not prescribe ourproduct candidates, which would prevent us from generating revenues or becomingprofitable. Market acceptance of OPT-80, Prulifloxacin and any of our futureproduct candidates by physicians, patients and healthcare payors will depend ona number of factors, many of which are beyond our 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;

 

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

 

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

 

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

 

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

 

•      relative convenience andease of administration; and

 

•      prevalence and severity ofadverse side effects.

 

Because OPT-80 is a differentiated antibiotic for the treatment ofCDAD, it may encounter additional hurdles to market acceptance by physicians,who may be skeptical about its clinical benefits or healthcare payors who mayresist reimbursing a premium-priced therapeutic particularly in light of theavailability of generic alternatives.

 

We plan to target our marketing of Prulifloxacin primarily tohigh-prescribing physicians of antibiotics for travelers’ diarrhea, includingthose at travel clinics. Because of the number of these physicians in theUnited States, we will be required to expend significant time and resources toobtain broad market acceptance of Prulifloxacin among these physicians. We donot have experience in marketing to this population of physicians and do notcurrently have the resources to be able to conduct such marketing efforts onour own. As such, we may not be successful in any of these marketing effortswhich would limit the commercial success of Prulifloxacin. In addition, becausePrulifloxacin has already been marketed by other companies to treat a widerange of bacterial infections, including infectious diarrhea, urinary tractinfections, or UTIs, and respiratory tract infections, or RTIs, patients may beable to obtain Prulifloxacin from these other companies, and not from us, ifPrulifloxacin is approved in the market where the patient is located. We haverights to Prulifloxacin only in the United States. These patients may obtainPrulifloxacin in these other markets from other companies even if thesepatients are from the United States.

 

**Ifwe fail to develop and commercialize other products or product candidates, wemay be unable to grow our business.**

** **

A key element of our strategy is to commercialize a portfolio of newanti-infective products in addition to OPT-80 and Prulifloxacin. As asignificant part of our growth strategy, we intend to develop and commercializeadditional products and product candidates through our discovery researchprogram using our proprietary technology, including OPopS. The success of thisstrategy depends upon our ability to identify, select and acquire pharmaceuticalproduct candidates and products that fit into our development plans on termsthat are acceptable to us.

 

Any product candidate we identify may require additional developmentefforts prior to commercial sale, including pre-clinical studies, extensiveclinical testing and approval by the FDA and applicable foreign regulatoryauthorities. All product candidates are prone to the risks of failure that areinherent in pharmaceutical product development, including the possibility thatthe product candidate will not be shown to be sufficiently safe and/oreffective for approval by regulatory authorities. In addition, we cannot assureyou that any such products that are approved will be manufactured or producedeconomically, successfully commercialized or

 

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widely accepted in the marketplace or be more effective than othercommercially available alternatives.

 

A significant portion of the research that we are conducting involvesnew 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. Ourresearch programs may initially show promise in identifying potential productcandidates, yet fail to yield product candidates for clinical development.

 

If we are unable to develop suitable potential product candidatesthrough internal research programs or by obtaining rights to novel therapeuticsfrom third parties, our business and prospects will suffer.

 

Our focus on drug discovery and development using our technologyplatform, including our patented proprietary OPopS drug discovery platform, isnovel and unique. As a result, we cannot be certain that our product candidateswill produce commercially viable drugs that safely and effectively treatinfectious diseases or other diseases. To date, our technology platform hasyielded only a small number of anti-infective product candidates. In addition,we do not have significant clinical data with respect to any of these potentialproduct candidates. Even if we are successful in completing clinicaldevelopment and receiving regulatory approval for one commercially viable drugfor the treatment of one disease using our technology platform and carbohydratechemistry focus, we cannot be certain that we will also be able to develop andreceive regulatory approval for other drug candidates for the treatment ofother forms of that disease or other diseases. If we fail to develop andcommercialize viable drugs using our platform and specialized focus, we willnot be successful in developing a pipeline of potential product candidates tofollow OPT-80 and Prulifloxacin, and our business prospects would be harmedsignificantly.

 

**Ourfuture growth depends on our ability to identify and acquire or in-licenseproducts. If we do not successfully identify and acquire or in-license relatedproduct candidates or integrate them into our operations, we may have limitedgrowth opportunities.**

** **

We in-licensed the U.S. rights to Prulifloxacin from Nippon Shinyakuwho, along with Meiji-Seika Kaisha Ltd., conducted the initial development ofthis product candidate. An important part of our business strategy is tocontinue to develop a pipeline of product candidates by acquiring or in-licensingproducts, businesses or technologies that we believe are a strategic fit forour business. Future in-licenses or acquisitions, however, may entail numerousoperational and financial risks, including:

 

•      exposure to unknownliabilities;

 

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

 

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

 

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•      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 to identify and execute the acquisition or in-licensingof third-party products, businesses and technologies and integrate them intoour current infrastructure. In particular, we may compete with largerpharmaceutical companies and other competitors in our efforts to establish newcollaborations and in-licensing opportunities. These competitors likely willhave access to greater financial resources than us and may have greaterexpertise in identifying and evaluating new opportunities. Moreover, we maydevote resources to potential acquisitions or in-licensing opportunities thatare never completed, or we may fail to realize the anticipated benefits of suchefforts.

 

**Ifwe do not find collaborators for our future product candidates, we may berequired to reduce or delay our rate of product development andcommercialization and/or increase our expenditures.**

** **

Our strategy to develop and commercialize our product candidates inpre-clinical studies or early clinical trials includes entering intorelationships with pharmaceutical or biotechnology companies to advance ourprograms. We may not be able to negotiate collaborations with these partners onacceptable terms. If we are unable to establish collaborative arrangements, wemay be required to reduce or delay further development of some of our programsand/or increase our expenditures and undertake the development activities atour own expense.

 

If we are able to identify and reach agreement with collaborators forour product candidates, those relationships will also be subject to a number ofrisks, including:

 

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

 

•      collaborators may delay clinicaltrials, underfund a clinical trial program, stop a clinical trial or abandon aproduct candidate, repeat or conduct additional clinical trials or require thedevelopment of a new formulation of a product candidate for clinical testing;

 

•      a collaborator withmarketing and distribution rights to one or more of our products may not commitsufficient resources to the marketing and distribution of our

 

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products, limiting ourpotential revenues from the commercialization of these products; and 

 

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

 

Even if we successfully establish collaborations or commercialagreements, these relationships may never result in the successful developmentor commercialization of any product candidates or the generation of sales orroyalty revenues.

 

**Ourability to pursue the development and commercialization of Prulifloxacin, ourother product candidates and our future product candidates depends upon thecontinuation of our licenses from third parties.**

** **

Our license agreement with Nippon Shinyaku provides us with anexclusive license to develop and commercialize Prulifloxacin for any indicationin the United States, with a right to sublicense to third parties. In the eventNippon Shinyaku is not able to supply us with Prulifloxacin, the licenseagreement provides us with a non-exclusive, worldwide right and license tomanufacture or have Prulifloxacin manufactured for us. Either we or NipponShinyaku may terminate the license agreement immediately upon the bankruptcy ordissolution of the other party or upon a breach of any material provision ofthe agreement if the breach is not cured within 60 days following writtennotice. In addition, we are entitled to terminate the agreement in the eventthat the FDA compels us to cease sales of Prulifloxacin in the United States. Ifour license agreement with Nippon Shinyaku terminates, we will lose our rightsto develop, manufacture and commercialize Prulifloxacin and our potentialrevenues would be limited. Similarly, if our agreement with TSRI for thelicense of our OPopS technology is terminated, we will not be able to furtherdevelop future product candidates using our OPopS technology.

 

**Ifproduct liability lawsuits are brought against us, we may incur substantialliabilities and may be required to limit commercialization of our productcandidates.**

** **

We face an inherent risk of product liability lawsuits related to thetesting of our product candidates, and will face an even greater risk ifproduct candidates are introduced commercially. An individual may bring aliability claim against us if one of our product candidates causes, or merelyappears to have caused, an injury. If we cannot successfully defend ourselvesagainst the product liability claim, we may incur substantial liabilities. Regardlessof 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;

 

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•      significant litigationcosts;

 

•      substantial monetary awardsto or costly settlement with patients;

 

•      product recalls;

 

•      loss of revenues; and

 

•      the inability tocommercialize our product candidates.

 

We may become dependent upon consumer perceptions of us and the safetyand quality of our product candidates. We could be adversely affected if we orour product candidates are subject to negative publicity. We could also beadversely affected if any of our potential products or any similar productsdistributed by other companies prove to be, or are asserted to be, harmful toconsumers. Also, because of our dependence upon consumer perceptions, anyadverse publicity associated with illness or other adverse effects resultingfrom consumers’ use or misuse of our potential products or any similar productsdistributed by other companies could have a material adverse impact on ourresults of operations.

 

We have global clinical trial liability insurance that covers ourclinical trials up to a $6.0 million annual aggregate limit. Our current orfuture insurance coverage may prove insufficient to cover any liability claimsbrought against us. We intend to expand our insurance coverage to include thesale of commercial products if marketing approval is obtained for our productcandidates, which would increase our insurance premiums. Because of theincreasing costs of insurance coverage, we may not be able to maintaininsurance coverage at a reasonable cost or obtain insurance coverage that willbe adequate to satisfy any liability that may arise.

 

**Evenif we receive regulatory approval for our product candidates, we will besubject to ongoing significant regulatory obligations and oversight.**

** **

Even if we receive regulatory approval to sell our product candidates,the FDA and foreign regulatory authorities will likely impose significantrestrictions on the indicated uses or marketing of such products, or imposeongoing requirements for potentially costly post-approval studies. In addition,following any regulatory approval of our product candidates, we and ourcollaborators will be subject to continuing regulatory obligations, such asrequirements for storage, recordkeeping and safety reporting, and additionalpost-marketing obligations, including regulatory oversight of the labeling, packaging,promotion and marketing of our products. If we or our collaborators becomeaware of previously unknown problems with any of our product candidates in theUnited States or overseas or at our third-party manufacturers’ facilities, aregulatory agency may impose restrictions on our products, our third-partymanufacturers or on us, including requiring us to reformulate our products,conduct additional clinical trials, make changes in the labeling of ourproducts, implement changes to, or obtain re-approvals of, our third-partymanufacturers’ facilities, or withdraw the product from the market. Inaddition, we or our collaborators may experience a significant drop in thesales of the affected products and our product revenues will be reduced, ourreputation in the marketplace may suffer and we may become the target oflawsuits, including class action suits. Moreover, if we or our collaborators orthird-party manufacturers fail to comply with applicable regulatoryrequirements, we may be

 

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subject to civil or criminal fines, suspension or withdrawal ofregulatory approvals, product recalls, seizure of products, operatingrestrictions, costly new manufacturing requirements and criminal prosecution. Anyof these events could harm or prevent sales of the affected products and reduceour related revenues or could substantially increase the costs and expenses ofcommercializing and marketing these products, which would significantly harmour business, financial condition and prospects.

 

**Ifwe fail to attract and retain senior management and key scientific personnel,we may be unable to successfully develop our product candidates, conduct ourclinical trials and commercialize our product candidates.**

** **

Our success depends in part on our continued ability to attract, retainand motivate highly qualified management, clinical and scientific personnel andon our ability to develop and maintain important relationships with leadingacademic institutions, clinicians and scientists. We are highly dependent uponour senior management and scientific staff, particularly Michael N. Chang,Ph.D., our President and Chief Executive Officer, Tessie M. Che, Ph.D.,our Senior Vice President, Corporate Affairs, Youe-Kong Shue, Ph.D., our VicePresident, Clinical Development, and Kevin P. Poulos, our Vice President,Marketing and Sales. The loss of services of any of Dr. Chang,Dr. Che, Dr. Shue or Mr. Poulos or one or more of our othermembers of senior management could delay or prevent the successful completionof our planned clinical trials or the commercialization of our productcandidates. Replacing key employees may be difficult and costly and may take anextended period of time because of the limited number of individuals in ourindustry with the breadth of skills and experience required to develop andcommercialize 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 individuals on an at-will basis and their employmentcan be terminated by us or them at any time, for any reason and with or withoutnotice.

 

We will need to hire additional personnel as we expand our clinicaldevelopment and commercial activities. We may not be able to attract or retainqualified management and scientific personnel on acceptable terms in the futuredue to the intense competition for qualified personnel among biotechnology,pharmaceutical and other businesses, particularly in the San Diego, Californiaarea. If we are not able to attract and retain the necessary personnel toaccomplish our business objectives, we may experience constraints that willimpede significantly the achievement of our research and developmentobjectives, our ability to raise additional capital and our ability toimplement our business strategy. In particular, if we lose any members of oursenior management team, we may not be able to find suitable replacements, andour business and prospects may be harmed as a result.

 

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

** **

We are a small company with 43 employees as of November 1, 2007. Tocontinue our clinical trials and commercialize our product candidates, we willneed 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

 

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running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performanceand our ability to commercialize our product candidates and to competeeffectively will depend, in part, on our ability to manage any future growtheffectively. To that end, we must be able to:

 

•      manage our developmentefforts effectively;

 

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

 

•      integrate additionalmanagement, administrative and manufacturing personnel;

 

•      build a marketing and salesorganization; and

 

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

 

We may not be able to accomplish these tasks, and accordingly, may notachieve our research, development and commercialization goals. Our failure toaccomplish any of these goals could harm our financial results 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 sales of our product candidates will depend onreimbursement policies and may be affected by future healthcare reform measures.Government third-party payors, such as the Medicare and Medicaid programs, andprivate payors, including health maintenance organizations, decide which drugsthey will pay for and establish reimbursement levels for these drugs. Becausethird-party payors increasingly are challenging prices charged and thecost-effectiveness of medical products, significant uncertainty exists as tothe ability of our product candidates to receive adequate coverage andreimbursement. We cannot be sure that third-party payors will place our productcandidates on approved formularies or that reimbursement will be available inwhole or in part for any of our product candidates. Also, we cannot be surethat insufficient reimbursement amounts will not reduce the demand for, or theprice of, our products.

 

Many healthcare providers, such as hospitals, receive a fixedreimbursement amount per procedure or other treatment therapy, and theseamounts are not necessarily based on the actual costs incurred. As a result,these healthcare providers may choose only the least expensive therapiesregardless of efficacy. We cannot guarantee that our product candidates will bethe least expensive alternative and thus providers may decide not to use themor buy them for treatment.

 

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

 

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**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 for our products from lower priced productsfrom foreign countries that have placed price controls on pharmaceuticalproducts. The Medicare Modernization Act of 2003, or MMA, contains provisionsthat may change U.S. importation laws and expand consumers’ ability to importlower priced versions of our and competing products from Canada, where thereare government price controls. These changes to U.S. importation laws will nottake effect unless and until the Secretary of Health and Human Servicescertifies that the changes will lead to substantial savings for consumers andwill not create a public health safety issue. The Secretary of Health and HumanServices has not yet announced any plans to make the required certification.Even if the changes do not take effect, and other changes are not enacted,imports from Canada and elsewhere may continue to increase due to market andpolitical forces, and the limited enforcement resources of the FDA, the U.S.Customs Service, and other government agencies. For example, Pub. L.No. 109-295, which was signed into law on October 4, 2006 andprovides appropriations for the Department of Homeland Security for fiscal year2007, expressly prohibits the U.S. Customs Service from using funds to preventindividuals from importing from Canada less than a 90-day supply of aprescription drug for personal use, when the drug otherwise complies with theFederal Food, Drug and Cosmetic Act. Further, several states and localgovernments have implemented importation schemes for their citizens, and, inthe absence of federal action to curtail such activities, we expect otherstates and local governments to launch importation efforts. The importation offoreign products that compete with our own product candidates could negativelyimpact 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 States and certain foreign jurisdictions, there havebeen, and we anticipate there will continue to be, a number of legislative andregulatory changes to the healthcare system that could impact our ability tosell our products profitably. In particular, the MMA added an outpatient prescriptiondrug benefit to Medicare, the publicly-funded health insurance program in theUnited States generally for the elderly and disabled, which became effective onJanuary 1, 2006. Drug benefits under this new benefit are administeredthrough private plans that negotiate price concessions from pharmaceuticalmanufacturers. We cannot be certain that OPT-80 and Prulifloxacin or othercurrent or future drug candidates will successfully be placed on the list ofdrugs covered by particular health plan formularies, nor can we predict thenegotiated price for our drug candidates, which will be determined by marketfactors.

 

The MMA also changed the formula for determining payment for certaindrugs, which include drugs provided in physician offices and other outpatientsettings. Further, with respect to the Medicaid program, the Deficit ReductionAct of 2005 made changes to certain formulas used to calculate pharmacyreimbursement under Medicaid, the health insurance program in the United Statesgenerally for individuals and families with low incomes and resources, whichbecame effective on January 1, 2007. These changes could lead to reducedpayments to pharmacies. Many states have also created preferred drug lists andinclude drugs on those lists only when the

 

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manufacturers agree to pay a supplemental rebate. If OPT-80 andPrulifloxacin or other current or future drug candidates are not included onthese preferred drug lists, physicians may not be inclined to prescribe them totheir Medicaid patients, thereby diminishing the potential market for ourproducts.

 

As a result of legislative proposals and the trend towards 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 may also refuse to provide any coverage ofuses of approved products for medical indications other than those for whichthe FDA has granted market approvals. As a result, significant uncertaintyexists as to whether and how much third-party payors will reimburse fornewly-approved drugs, which in turn will put pressure on the pricing of drugs. Further,we do not have experience in ensuring approval by applicable third-party payorsoutside of the United States for reimbursement of our products. Theavailability of numerous generic antibiotics at lower prices than brandedantibiotics can also be expected to substantially reduce the likelihood ofreimbursement for OPT-80 and Prulifloxacin. We also anticipate pricingpressures in connection with the sale of our products due to the trend towardmanaged healthcare, the increasing influence of health maintenanceorganizations and additional legislative proposals.

 

**Wemust comply with federal and state “fraud and abuse” laws, and, if we areunable to fully comply with such laws, we could face substantial penalties,which may adversely affect our business, financial condition and results ofoperations.**

** **

We are subject to various federal and state laws pertaining tohealthcare fraud and abuse, including anti-kickback laws and physicianself-referral laws. Violations of these laws are punishable by criminal andcivil sanctions, including, in some instances, exclusion from participation infederal and state healthcare programs, including Medicare and Medicaid, and thecurtailment or restructuring of operations. We believe that our operations arein material compliance with such laws. However, because of the far-reachingnature of these laws, there can be no assurance that we would not be requiredto alter one or more of our practices to be in compliance with these laws. Inaddition, there can be no assurance that the occurrence of one or moreviolations of these laws or regulations would not result in a material adverseeffect on our financial condition and results of operations.

 

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

** **

Our third-party manufacturers’ activities and, to a lesser extent, ourown activities involve the controlled storage, use and disposal of hazardousmaterials, including the components of our product candidates and otherhazardous compounds. We and our manufacturers are subject to federal, state andlocal laws and regulations governing the use, manufacture, storage, handlingand 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 currentlyhave insurance coverage in the amount of approximately $250,000 for damageclaims arising from contamination on our property. These amounts may not besufficient

 

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to adequately protect us from liability for damage claims relating tocontamination. If we are subject to liability exceeding our insurance coverageamounts, our business and prospects would be harmed. In the event of anaccident, state or federal authorities may also curtail our use of thesematerials and interrupt our business operations.

 

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

** **

Despite the implementation of security measures, our internal computersystems are vulnerable to damage from computer viruses, unauthorized access,natural disasters, terrorism, war and telecommunication and electrical failures.Any system failure, accident or security breach that causes interruptions inour operations could result in a material disruption of our drug developmentprograms. For example, the loss of clinical trial information from completed orongoing clinical trials for OPT-80 or Prulifloxacin, which is maintained by ourthird-party CRO, could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data. To theextent that any disruption or security breach results in a loss or damage toour data or applications, or inappropriate disclosure of confidential orproprietary information, we may incur liability and the further development ofour product candidates may be delayed.

 

**RisksRelated to Our Intellectual Property**

** **

**Itis difficult and costly to protect our intellectual property and ourproprietary technologies, and we may not be able to ensure their protection.**

** **

Our commercial success will depend in part on obtaining and maintainingpatent protection and trade secret protection of the use, formulation andstructure of our product candidates, and the methods used to manufacture them,as well as successfully defending these patents against third-party challenges,including those from generic drug manufacturers. Our ability to protect ourproduct candidates from unauthorized making, using, selling, offering to sellor importing by third parties is dependent upon the extent to which we haverights under valid and enforceable patents or trade secrets that cover theseactivities.

 

The patent positions of pharmaceutical and biotechnology companies canbe highly uncertain and involve complex legal and factual questions for whichimportant legal principles remain unresolved. No consistent policy regardingthe breadth of claims allowed in biotechnology patents has emerged to date inthe United States. The biotechnology patent situation outside the United Statesis even more uncertain. Changes in either the patent laws or in interpretationsof patent laws in the United States and other countries may diminish the valueof 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 future protection for our proprietary rights isuncertain, because legal means afford only limited protection and may notadequately protect our rights or permit us to gain or keep our competitiveadvantage. For example:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In addition, to the extent we are unable to obtain and maintain patentprotection for one of our lead product candidates or in the event such patentprotection expires, it may no longer be cost effective to extend our portfolioby pursuing additional development of a product candidate for follow-onindications.

 

While we have filed 6 patent applications for OPT-80, we do not yethave any issued patents for OPT-80.

 

These patent applications related to OPT-80 encompass various topicsrelating to:

 

•      composition of matter;

 

•      crystalline polymorphs

 

•      manufacture process;

 

•      treatment of diseases;

 

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•      methods of treating *Clostridium difficile*-associated diarrhea and Methicillin-resistant *Staphylococcus***** and Vancomycin-resistant*Enterococcus***** infections; and

 

•      formulation.

 

If we are unable to obtain a composition of matter patent, ourcompetitors, including generic drug companies, may be able to design othersimilar formulations of the active ingredient of OPT-80. Furthermore, even ifthese process and formulation patent applications become issued patents, ourcompetitors, including generic drug companies, may be able to design around ourmanufacturing processes or formulation for OPT-80. As a result, our competitorsmay be able to develop competing products.

 

In addition, assuming our clinical trials are successful and completedin a timely manner, we currently plan to launch Prulifloxacin for the treatmentof infectious diarrhea in 2009. However, the patent covering Prulifloxacin isscheduled to expire in February 2009, and due to this short remaining patentlife we may be forced to abandon plans to pursue development and approval ofPrulifloxacin for any indications, including infectious diarrhea. Although wealso currently plan to apply for an extension of this patent term until 2014,we cannot assure you that the United States Patent and Trademark Office, orPTO, will grant the extension for the full additional five years, or at all. Ineither event, our business and prospects would be significantly harmed.

 

We depend, in part, on our licensors and collaborators to protect aportion of our proprietary rights. 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, Nippon Shinyaku, SKI, TSRI and Cempra areresponsible for the maintenance of patents and prosecution of patentapplications relating to Prulifloxacin, OPT-822/OPT-821 combination therapy,our OPopS technology, and OPT-1068 and OPT-1273, respectively. We may also bedependent on Par to provide technical support for a certain patent applicationrelating to OPT-80 formulation. If any of these parties fail to adequatelyprotect these product candidates with issued patents, our business andprospects would be significantly harmed.

 

Under our agreement with Nippon Shinyaku, in the event Nippon Shinyakufails to take all steps necessary to seek extension of the patents licensed tous in the United States 180 days after we request such action be taken, then wehave the right to take all necessary actions to extend the licensed patents. Ouragreements with SKI, TSRI, Cempra and Par do not have explicit provisionsregarding our rights to take necessary action with respect to maintenance ofpatents and prosecution of patent applications nor do such agreements provideus with any legal recourse in the event such parties do not so maintain and/orprosecute. 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 this technology. However,we may not be successful in maintaining such patents or prosecuting such patentapplications and if so, our business and prospects would be significantlyharmed.

 

We also rely on trade secrets to protect our technology, especiallywhere we do not believe patent protection is appropriate or obtainable. However,trade secrets are difficult to protect. Although we use reasonable efforts toprotect our trade secrets, our employees, consultants,

 

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contractors, outside scientific collaborators and other advisors mayunintentionally or willfully disclose our information to competitors. Enforcinga claim that a third-party entity illegally obtained and is using any of ourtrade secrets is expensive and time consuming, and the outcome is unpredictable.In addition, courts outside the United States are sometimes less willing toprotect trade secrets. Moreover, our competitors may independently developequivalent knowledge, methods and know-how.

 

If we or our licensors fail to obtain or maintain patent protection ortrade secret protection for our product candidates or our technologies, thirdparties could use our proprietary information, which could impair our abilityto compete in the market and adversely affect our ability to generate revenuesand attain profitability.

 

**Wemay incur substantial costs as a result of litigation or other proceedingsrelating to our patent, trademark and other intellectual property rights, andwe may be unable to protect our rights to, or use, our technology.**

** **

If we choose to go to court to stop someone else from using ourinventions, that individual or company has the right to ask the court to rulethat the underlying patents are invalid and/or should not be enforced againstthat third party. These lawsuits are expensive and would consume time and otherresources even if we were successful in stopping the infringement of thesepatents. There is also the risk that, even if the validity of these patents isupheld, the court will refuse to stop the other party on the ground that such otherparty’s activities do not infringe our rights to these patents.

 

Furthermore, a third party may claim that we or our manufacturing orcommercialization partners are using inventions covered by the third party’spatent rights and may go to court to stop us from engaging in our normaloperations and activities, including making, using or selling our productcandidates. These lawsuits are costly and could affect our results ofoperations and divert the attention of managerial and technical personnel. Thereis a risk that a court would decide that we or our commercialization partnersare infringing the third party’s patents and would order us or our partners tostop the activities covered by the patents. In addition, there is a risk that acourt will order us or our partners to pay the other party damages for havingviolated the other party’s patents. We have indemnified our commercial partnersagainst patent infringement claims and thus would be responsible for any oftheir costs associated with such claims and actions. The biotechnology industryhas produced a proliferation of patents, and it is not always clear to industryparticipants, including us, which patents cover various types of products ormethods of use. The coverage of patents is subject to interpretation by thecourts and the interpretation is not always uniform. If we are sued for patentinfringement, we would need to demonstrate that our products or methods of useeither do not infringe the patent claims of the relevant patent and/or that thepatent claims are invalid, and we may not be able to do this. Provinginvalidity, in particular, is difficult since it requires a showing of clearand convincing evidence to overcome the presumption of validity enjoyed byissued patents.

 

Although we have conducted searches of third-party patents with respectto OPT-80 and Prulifloxacin, these searches may not have identified allthird-party patents relevant to those products and we have not conducted anextensive search of patents issued to third parties with respect to our otherproduct candidates. Consequently, no assurance can be given that third-party

 

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patents containing claims covering our products, technology or methodsdo not exist, have not been filed, or could not be filed or issued. Because ofthe 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. Inaddition, we have not conducted an extensive search of third-party trademarks,so no assurance can be given that such third-party trademarks do not exist,have not been filed, could not be filed or issued, or could not exist undercommon trademark law. While we have filed a trademark application for the names“Optimer” and “Optimer Pharmaceuticals,” we are aware that the name “Optimer”has been registered as a trademark with the PTO by more than one third party,including one in the biotechnology space. As such, we believe there is asignificant risk that third parties may allege they have trademark rightsencompassing the names for which we have applied for protection.

 

Because some patent applications in the United States may be maintainedin secrecy until the patents are issued, because patent applications in theUnited States and many foreign jurisdictions are typically not published untileighteen months after filing, and because publications in the scientificliterature often lag behind actual discoveries, we cannot be certain thatothers have not filed patent applications for technology covered by ourlicensors’ issued patents or our pending applications or our licensors’ pendingapplications, or that we or our licensors were the first to invent thetechnology. Our competitors may have filed, and may in the future file, patentapplications covering technology similar to ours. Any such patent applicationmay have priority over our or our licensors’ patent applications and couldfurther require us to obtain rights to issued patents covering suchtechnologies. If another party has filed a U.S. patent application oninventions similar to ours, we may have to participate in an interferenceproceeding declared by the PTO, to determine priority of invention in theUnited States. The costs of these proceedings could be substantial, and it ispossible that such efforts would be unsuccessful, resulting in a loss of ourU.S. patent position with respect to such inventions.

 

Some of our competitors may be able to sustain the costs of complexpatent litigation more effectively than we can because they have substantiallygreater resources. In addition, any uncertainties resulting from the initiationand continuation of any litigation could have a material adverse effect on ourability to raise the funds necessary to continue our operations.

 

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

** **

**Themarket price of our common stock may be highly volatile.**

** **

Before our initial public offering in February 2007, there was nopublic market for our common stock. We cannot assure you that an active tradingmarket will exist for our common stock. You may not be able to sell your sharesquickly or at the market price if trading in our common stock is not active.

 

The trading price of our common stock is likely to be highly volatileand could be subject to wide fluctuations in price in response to variousfactors, many of which are beyond our control, including:

 

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•      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 to OPT-80and Prulifloxacin;

 

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

 

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

 

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

 

•      actual or anticipatedvariations in our quarterly operating results;

 

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

 

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

 

•      third-party coverage orreimbursement policies;

 

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

 

•      conditions or trends in thebiotechnology and biopharmaceutical industries;

 

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

 

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

 

•      changes in the marketvaluations of similar companies;

 

•      sales of common stock or othersecurities by us or our stockholders in the future;

 

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•      additions or departures ofkey scientific or management personnel;

 

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

 

•      trading volume of our commonstock.

 

In addition, the stock market in general and the market forbiotechnology and biopharmaceutical companies in particular have experiencedextreme price and volume fluctuations that have often been unrelated and/ordisproportionate to the operating performance 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, followingperiods of volatility in the market, securities class-action litigation hasoften been instituted against companies. Such litigation, if instituted againstus, could result in substantial costs and diversion of management’s attentionand resources, which could significantly harm our business, financial conditionand prospects.

 

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

** **

On August 7, 2007, our 180-day lock-up agreements between ourunderwriters and our security holders prior to our public offering expired. Asa result, persons who were our stockholders prior to the sale of shares in ourinitial public offering continue to hold a substantial number of shares of ourcommon stock that many of them are now able to sell in the public market.Significant portions of these shares are held by a small number ofstockholders. Sales by our stockholders of a substantial number of shares, orthe expectation that such sales may occur, could significantly reduce themarket price of our common stock. Moreover, the holders of a substantial numberof shares of our common stock have rights, subject to certain conditions, torequire us to file registration statements to permit the resale of their sharesin the public market or to include their shares in registration statements thatwe may file for ourselves or other stockholders.

 

We have also registered all common stock that we may issue under ouremployee benefits plans. As a result, these shares can be freely sold in thepublic market upon issuance, subject to restrictions under the securities lawsand any applicable lock-up agreement. In addition, our directors and executiveofficers may in the future establish programmed selling plans underRule 10b5-1 of the Securities Exchange Act for the purpose of effectingsales of our common stock. If any of these events cause a large number of ourshares to be sold in the public market, the sales could reduce the tradingprice of our common stock and impede our ability to raise future capital.

 

**Ourprincipal stockholders and management own a significant percentage of our stockand will be able to exercise significant influence over matters subject tostockholder approval.**

** **

As of November 1, 2007, our executive officers, directors and theirrespective affiliates, currently beneficially own approximately 14.1% of ourcommon stock. Accordingly, these

 

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stockholders will likely be able to influence the composition of ourboard of directors, influence the approval of all matters requiring stockholderapproval and continue to have significant influence over our operations. Thisconcentration of ownership could have the effect of delaying or preventing achange in our control or otherwise discouraging a potential acquirer fromattempting to obtain control of us, which in turn could cause the market valueof our common stock to decline.

 

**Wewill incur significant increased 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 are and will continue to incur significantlegal, accounting and other expenses that we did not incur as a private company.Until we are able to implement comprehensive accounting policies andprocedures, we may not be able to prepare and disclose, in a timely manner, ourfinancial statements and other required disclosures or comply with existing ornew reporting requirements. In addition, the Sarbanes-Oxley Act, as well asrules subsequently implemented by the SEC and the Nasdaq Global Market, orNasdaq, have imposed various new requirements on public companies, includingrequiring establishment and maintenance of effective disclosure and financialcontrols and changes in corporate governance practices. Our management andother personnel will need to devote a substantial amount of time to these newcompliance initiatives. Moreover, these rules and regulations will increase ourlegal and financial compliance costs and will make some activities moretime-consuming and costly. For example, we expect these rules and regulationsto make it more difficult and more expensive for us to maintain director andofficer liability insurance, and we may be required to incur substantial coststo maintain the same or similar coverage.

 

The Sarbanes-Oxley Act requires, among other things, that we maintaineffective internal controls for financial reporting and disclosure controls andprocedures. In particular, commencing in fiscal 2008, we must perform systemand process evaluation and testing of our internal controls over financialreporting to allow management and our independent registered public accountingfirm to report on the effectiveness of our internal controls over financialreporting, as required by Section 404 of the Sarbanes-Oxley Act. Ourtesting, or the subsequent testing by our independent registered publicaccounting firm, may reveal deficiencies in our internal controls overfinancial reporting that are deemed to be material weaknesses. Our compliancewith Section 404 will require that we incur substantial accounting expenseand expend significant management efforts. We currently do not have an internalaudit group, and we will need to hire additional accounting and financial staffwith appropriate public company experience and technical accounting knowledge. Wecurrently have five****employeesdedicated full-time to accounting and finance matters. In the future we willhire additional full-time employees in the accounting and finance department,as necessary, to ensure we have effective internal controls over financialreporting and disclosure controls and procedures. We also hire consultants fromtime to time to address these matters. If we are unable to hire adequateaccounting and finance personnel, we may not be able to meet our public companyreporting and governance obligations, including those set forth under theSarbanes-Oxley Act. Moreover, if we are not able to comply with therequirements of Section 404 in a timely manner, or if we or ourindependent registered public accounting firm identifies deficiencies in ourinternal controls over financial reporting that are deemed to be materialweaknesses, the market price of our stock

 

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could decline and we could be subject to sanctions or investigations byNasdaq, the SEC or other regulatory authorities, which would require additionalfinancial and management resources.

 

**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 amended and restated certificate of incorporation andbylaws, as well as provisions of Delaware law, could make it more difficult fora third party to acquire us, even if doing so would benefit our stockholders,or remove our current management. These provisions include:

 

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

 

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

 

•      limiting the removal ofdirectors by the stockholders;

 

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

 

•      a requirement of approval ofnot less than 66 2/3% of all outstanding shares of our capital stock entitledto vote to amend any bylaws by stockholder action, or to amend specificprovisions of our certificate of incorporation;

 

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

 

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

 

These provisions may frustrate or prevent any attempts by ourstockholders to replace or remove our current management by making it moredifficult for stockholders to replace members of our board of directors, whichis responsible for appointing the members of our management. In addition, weare subject to Section 203 of the Delaware General Corporation Law, whichgenerally prohibits a Delaware corporation from engaging in any of a broadrange of business combinations with a stockholder owning 15% or more of ouroutstanding voting stock for a period of three years following the date onwhich the stockholder became an interested stockholder, unless such transactionsare 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 a delay or prevention of a change ofcontrol transaction could cause the market price of our stock to decline.

 

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**Item 6. Exhibits**

 
| **Exhibit  No.** | ** ** | ** ** | ** ** | **Description of Document**                                                                                                                                                                                                                                    |
|------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | (2)        |       | Amended and Restated  Certificate of Incorporation of the registrant.                                                                                                                                                                                          |
| 3.2              |       | (4)        |       | Amended and Restated Bylaws of the registrant.                                                                                                                                                                                                                 |
| 4.1              |       | (3)        |       | Form of Common Stock  Certificate of the registrant.                                                                                                                                                                                                           |
| 4.2              |       | (1)        |       | Warrant Agreement  between the registrant and Pacific Sorrento Technology Park dated  June 1, 2000.                                                                                                                                                       |
| 4.3              |       | (1)        |       | Amended and Restated  Investors’ Rights Agreement by and among the registrant and certain  stockholders of the registrant dated November 30, 2005.                                                                                                        |
| 4.4              |       | (6)        |       | Registration  Rights Agreement, dated October 23, 2007, by and between the registrant and  the purchasers listed on the signature  pages thereto.                                                                                                              |
| 10.1             |       | (4)        |       | Optimer Pharmaceuticals,  Inc. Employee Stock Purchase Plan, as amended.                                                                                                                                                                                       |
| 10.2             |       | (5)        |       | Summary of Optimer  Pharmaceuticals, Inc. 2007 Incentive Compensation Plan.                                                                                                                                                                                    |
| 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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|   + |   | Management  contract or compensatory plan or arrangement.                                                                |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------|
| (1)           |   | Filed  with Registrant’s Registration Statement on Form S-1 on November 9,  2006.                         |
| (2)           |   | Filed  with Registrant’s Amendment No. 3 to Registration Statement on  Form S-1 on January 22, 2007. |
| (3)           |   | Filed  with Registrant’s Amendment No. 4 to Registration Statement on  Form S-1 on February 5, 2007. |
| (4)           |   | Filed  with Registrant’s Current Report on Form 8-K on September 18, 2007.                                     |
| (5)           |   | Filed  with Registrant’s Current Report on Form 8-K on July 23, 2007.                                          |
| (6)           |   | Filed  with Registrant’s Current Report on Form 8-K on October 29, 2007.                                       |

 

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**SIGNATURE**

 

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

 
|                         | ** **   | ** **   | **OPTIMER PHARMACEUTICALS, INC.** |                          |
|-------------------------|--------------|--------------|-----------------------------------|-------------------------------|
|                    |         |         |                              |                          |
| Dated: November 9, 2007 |         |         | 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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