Table ofContents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

----

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2010**

 

**or**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                     to                    **

 

**CommissionFile Number 001-33291**

 

----

 

**OPTIMER PHARMACEUTICALS, INC.**

(Exact name of registrant as specified in its charter)

 

----

 

| **Delaware**  (State or other jurisdiction of  incorporation or organization)                         |       | **33-0830300**  (I.R.S. Employer  Identification No.) |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|
|                                                                                                  |       |                                                  |
| **10110 Sorrento Valley Road, Suite C  San Diego, CA**

(Address of principal executive offices) | ** ** | **92121**

(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 of1934 during 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 has submitted electronically and posted onits corporate website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files): Yes  o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act:

 

| Large Accelerated Filer o |   | Accelerated Filer x         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated Filer o   |   | Smaller Reporting Company o |

 

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, par value $0.001 per share,outstanding as of October 29, 2010 was 39,075,816 shares.

 

 

 

----

Table ofContents

 

**OPTIMER PHARMACEUTICALS, INC.FORM 10-QFor the Quarterly Period Ended September 30, 2010**

**TABLE OF CONTENTS**

 
| ** **                                                                                                        | **Page** |
|-------------------------------------------------------------------------------------------------------------------|----------|
| **PART I — FINANCIAL INFORMATION**                                                                      |     |
|                                                                                                              |     |
| Item 1.  Financial Statements (unaudited)                                                                    |     |
|                                                                                                              |     |
| Consolidated Balance Sheets — September 30, 2010  and December 31, 2009                            | 3        |
|                                                                                                              |     |
| Consolidated Statements of Operations — Three months  and nine months ended September 30, 2010 and 2009 | 4        |
|                                                                                                              |     |
| Consolidated Statements of Cash Flows — Nine months  ended September 30, 2010 and 2009                  | 5        |
|                                                                                                              |     |
| Notes to Consolidated Financial Statements                                                                        | 6        |
|                                                                                                              |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations          | 20       |
|                                                                                                              |     |
| Item 3. Quantitative and Qualitative Disclosures  about Market Risk                                          | 29       |
|                                                                                                              |     |
| Item 4. Controls and Procedures                                                                              | 30       |
|                                                                                                              |     |
| **PART II — OTHER INFORMATION**                                                                         |     |
|                                                                                                              |     |
| Item 1A.  Risk Factors                                                                                       | 31       |
|                                                                                                              |     |
| Item 6.  Exhibits                                                                                            | 63       |
|                                                                                                              |     |
| SIGNATURE                                                                                                         | 64       |

 

2

----

Table ofContents

 

**PART I — FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**Optimer Pharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                                                                                   |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                         |       | $                      | 27,085,967 |                  | $          | 17,054,328 |   |
| Short-term  investments                                                                                                                                                                            |       | 31,611,954             |       | 21,131,145            |       |
| Research  grant and contract receivables                                                                                                                                                           |       | 54,872                 |       | 84,164                |       |
| Prepaid  expenses and other current assets                                                                                                                                                         |       | 600,249                |       | 332,695               |       |
| Total  current assets                                                                                                                                                                              |       | 59,353,042             |       | 38,602,332            |       |
| Property  and equipment, net                                                                                                                                                                       |       | 746,178                |       | 672,896               |       |
| Long-term  investments                                                                                                                                                                             |       | 882,000                |       | 882,000               |       |
| Other  assets                                                                                                                                                                                      |       | 503,529                |       | 498,762               |       |
| Total  assets                                                                                                                                                                                      |       | $                      | 61,484,749 |                  | $          | 40,655,990 |   |
|                                                                                                                                                                                               |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                                              |       |                   |       |                  |       |
| Accounts  payable                                                                                                                                                                                  |       | $                      | 3,565,072  |                  | $          | 2,625,240 |   |
| Accrued  expenses                                                                                                                                                                                  |       | 2,667,698              |       | 5,025,669             |       |
| Total  current liabilities                                                                                                                                                                         |       | 6,232,770              |       | 7,650,909             |       |
| Deferred  rent                                                                                                                                                                                     |       | 173,202                |       | 253,474               |       |
| Commitments  and contingencies                                                                                                                                                                     |       | —                 |       | —                |       |
| Stockholders’  equity:                                                                                                                                                                        |       |                   |       |                  |       |
| Preferred  stock, par value $0.001, 10,000,000 shares authorized, no shares issued and outstanding  at September 30, 2010 and December 31, 2009, respectively                            |       | —                 |       | —                |       |
| Common  stock, $0.001 par value, 75,000,000 shares authorized, 38,972,010 shares and  33,139,373 shares issued and outstanding at September 30, 2010 and December 31,  2009 respectively |       | 38,972                 |       | 33,139                |       |
| Additional  paid-in capital                                                                                                                                                                        |       | 263,596,046            |       | 205,114,914           |       |
| Accumulated  other comprehensive income                                                                                                                                                            |       | 304,685                |       | 38,063                |       |
| Accumulated  deficit                                                                                                                                                                               |       | (210,868,403           | )          | (175,474,665          | )          |
| Total  Optimer Pharmaceuticals, Inc. stockholders’ equity                                                                                                                                |       | 53,071,300             |       | 29,711,451            |       |
| Noncontrolling  interest                                                                                                                                                                           |       | 2,007,477              |       | 3,040,156             |       |
| Total  stockholders’ equity                                                                                                                                                                   |       | 55,078,777             |       | 32,751,607            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                   |       | $                      | 61,484,749 |                  | $          | 40,655,990 |   |

 

See accompanyingnotes.

 

3

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Operations**

**(unaudited)**

 
| ** **                                                                                                                      | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                      | ** ** | **September 30,**           | ** **  | **September 30,**          | ** ** |
| ** **                                                                                                                      | ** ** | **2010**                         | ** **  | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                                                      | ** ** | ** **                       | ** **  | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                                                                       |       |                             |        |                            |       |   |   |   |   |
| Research  grants                                                                                                                |       | $                                | 169,137     |                            | $          | 176,202 |   | $ | 824,010 |   | $ | 583,992 |   |
| Collaborative  research agreements                                                                                              |       | 500,000                          |        | —                          |       | 500,000 |   | 100,000 |   |
| Total  revenues                                                                                                                 |       | 669,137                          |        | 176,202                         |       | 1,324,010 |   | 683,992 |   |
| Operating  expenses:                                                                                                            |       |                             |        |                            |       |   |   |   |   |
| Research  and development                                                                                                       |       | 8,076,278                        |        | 7,192,383                       |       | 25,857,108 |   | 26,519,447 |   |
| Marketing                                                                                                                       |       | 2,130,232                        |        | 393,864                         |       | 3,055,290 |   | 1,179,212 |   |
| General  and administrative                                                                                                     |       | 2,713,984                        |        | 2,030,137                       |       | 8,789,138 |   | 5,949,946 |   |
| Total  operating expenses                                                                                                       |       | 12,920,494                       |        | 9,616,384                       |       | 37,701,536 |   | 33,648,605 |   |
| Loss  from operations                                                                                                           |       | (12,251,357                      | )           | (9,440,182                      | )          | (36,377,526 | ) | (32,964,613 | ) |
| Interest  income and other, net                                                                                                 |       | 22,894                           |        | 33,935                          |       | 101,391 |   | 308,973 |   |
| Consolidated  net loss                                                                                                          |       | $                                | (12,228,463 | )                               | $          | (9,406,247 | ) | $ | (36,276,135 | ) | $ | (32,655,640 | ) |
| Net  loss attributable to noncontrolling interest                                                                               |       | 391,375                          |        | —                          |       | 882,395 |   | — |   |
| Net  loss attributable to Optimer Pharmaceuticals, Inc.                                                                    |       | $                                | (11,837,088 | )                               | $          | (9,406,247 | ) | $ | (35,393,740 | ) | $ | (32,655,640 | ) |
| Basic  and diluted net loss per share attributable to Optimer Pharmaceuticals, Inc.  common stockholders                        |       | $                                | (0.30       | )                               | $          | (0.28 | ) | $ | (0.95 | ) | $ | (1.01 | ) |
| Shares  used to compute basic and diluted net loss per share attributable to Optimer Pharmaceuticals,  Inc. common stockholders |       | 38,816,782                       |        | 33,103,345                      |       | 37,389,070 |   | 32,250,194 |   |

 

See accompanyingnotes.

 

4

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

** **
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2010**                                                | ** **  | **2009** | ** ** |
| ** **                                                                   | ** ** | ** **                                              | ** **  | ** ** | ** ** |
| **Operating activities**                                                     |       |                                                    |        |   |   |
| Net loss                                                                     |       | $                                                       | (36,276,135 | ) | $ | (32,655,640 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                                    |        |   |   |
| Depreciation and amortization                                                |       | 217,005                                                 |        | 185,615 |   |
| Stock based compensation                                                     |       | 4,231,152                                               |        | 2,085,556 |   |
| Stock awards                                                                 |       | 802,100                                                 |        | — |   |
| Issuance of common stock for consulting services                             |       | 1,638,037                                               |        | — |   |
| Deferred rent                                                                |       | (80,272                                                 | )           | 24,980 |   |
| Changes in operating assets and liabilities:                                 |       |                                                    |        |   |   |
| Prepaid expenses and other current assets                                    |       | (267,554                                                | )           | 9,605 |   |
| Research grant and contract receivables                                      |       | 29,292                                                  |        | 155,931 |   |
| Other assets                                                                 |       | (4,767                                                  | )           | (394 | ) |
| Accounts payable and accrued expenses                                        |       | (1,418,139                                              | )           | 213,005 |   |
| Net cash used in operating activities                                        |       | (31,129,281                                             | )           | (29,981,342 | ) |
|                                                                         |       |                                                    |        |   |   |
| **Investing activities**                                                     |       |                                                    |        |   |   |
| Purchases of short-term investments                                          |       | (50,177,269                                             | )           | (28,683,091 | ) |
| Sales or maturity of short-term investments                                  |       | 39,685,000                                              |        | 28,153,000 |   |
| Purchases of property and equipment                                          |       | (290,287                                                | )           | (188,760 | ) |
| Net cash used by investing activities                                        |       | (10,782,556                                             | )           | (718,851 | ) |
|                                                                         |       |                                                    |        |   |   |
| **Financing activities**                                                     |       |                                                    |        |   |   |
| Proceeds from sale of common stock                                           |       | 51,815,676                                              |        | 33,159,511 |   |
| Net cash provided by financing activities                                    |       | 51,815,676                                              |        | 33,159,511 |   |
| Effect of exchange rate changes on cash and cash  equivalents                |       | 127,800                                                 |        | 2,584 |   |
| Net increase in cash and cash equivalents                                    |       | 10,031,639                                              |        | 2,461,902 |   |
| Cash and cash equivalents at beginning of period                             |       | 17,054,328                                              |        | 16,778,880 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                       | 27,085,967  |   | $ | 19,240,782 |   |

 

See accompanying notes.

 

5

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements**

**(unaudited)**

 

**1.****             ****InterimFinancial Information**

 

*Organization and Business Activities*

 

OptimerPharmaceuticals, Inc. (“Optimer” or the “Company”) was incorporated inDelaware on November 18, 1998. The Company has one majority-ownedsubsidiary, Optimer Biotechnology, Inc. (“OBI”), which is incorporated andlocated in Taiwan. In October 2009, Optimer sold 40% of its equityinterest in OBI. Prior to the sale, OBI was a wholly owned subsidiary ofOptimer.

 

Optimer is abiopharmaceutical company focused on discovering, developing andcommercializing hospital specialty products. The Company currently has two anti-infective product candidates,fidaxomicin, for the treatment of *Clostridiumdifficile*-infection (“CDI”), and PruvelTM (prulifloxacin), for thetreatment of infectious diarrhea. The Company is developing additional productcandidates using its proprietary technology, including its OPopSTM drugdiscovery platform.

 

*Basis of Presentation*

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of these interim periodshave been included. The results of operations for the three months and ninemonths ended September 30, 2010 are not necessarily indicative of theresults that may be expected for the full year. These unaudited consolidatedfinancial statements should be read in conjunction with the audited financialstatements and related notes thereto included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2009, which wasfiled with the Securities and Exchange Commission (“SEC”) on March 11,2010.

 

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

 

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

 

*Cash,Cash Equivalents and Investments*

 

Investments with originalmaturities of less than 90 days at the date of purchase are considered to becash equivalents.  Except for one auctionrate preferred security, all other investments are classified as short-terminvestments which are deemed by management to be available-for-sale and arereported at fair value with net unrealized gains or losses reported withinother comprehensive loss in the consolidated statement of stockholders’equity.  Realized gains and losses, anddeclines in value judged to be other than temporary, are included in investmentincome or interest expense.  The cost ofsecurities sold is computed using the specific identification method.

 

6

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

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

**(Unaudited)**

 

TheCompany’s auction rate preferred security (“ARPS”) is classified as anoncurrent available-for-sale security in the consolidated balance sheet becauseof the Company’s intent and ability to hold this security until the market forARPSs returns or until the issuer refinances the underlying security.

 

*RevenueRecognition*

 

TheCompany’s license and collaboration agreements contain multiple elements, includingnon-refundable upfront fees, payments for reimbursement of third-party researchcosts, payments for research, payments associated with achieving specificdevelopment milestones and royalties based on specified percentages of netproduct sales, if any.  Agreementscontaining multiple elements are divided into separate units of accounting ifcertain criteria are met, including whether the delivered element hasstand-alone value to the collaborator and whether there is objective andreliable evidence of the fair value of the undelivered obligation(s). Theconsideration received is allocated among the separate units either on thebasis of each unit’s fair value or using the residual method, and theapplicable revenue recognition criteria are applied to each of the separateunits.

 

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

 

Inconnection with certain research collaboration agreements, revenues are recognizedfrom non-refundable upfront fees, which the Company does not believe arespecifically tied to a separate earnings process, ratably over the term of theagreement.  Research fees are recognizedas revenue as the related research activities are performed.

 

Withrespect to revenues derived from reimbursement of direct out-of-pocket expensesfor research costs associated with grants, where the Company acts as aprincipal, with discretion to choose suppliers, bears credit risk and performspart of the services required in the transaction, the Company records revenuefor the gross amount of the reimbursement. The costs associated with thesereimbursements are reflected as a component of research and development expensein the consolidated statements of operations. None of the payments that theCompany has received from collaborators to date, whether recognized as revenueor deferred, are refundable even if the related program is not successful.

 

7

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

*Researchand Development Expenses*

 

TheCompany expenses costs related to research and development until technologicalfeasibility has been established for the product.  Once technological feasibility isestablished, all product costs are generally capitalized until the product isavailable for general release to customers. The Company has determined that technological feasibility for itsproduct candidates will be reached when the requisite regulatory approvals areobtained to make the product available for sale, which, in the United States,generally occurs upon the approval of the new drug application (“NDA”) for suchproduct.  The Company’s research anddevelopment expenses consist primarily of license fees, salaries and relatedemployee benefits, costs associated with clinical trials managed by the Company’scontract research organizations and costs associated with non-clinicalactivities and regulatory approvals.  TheCompany uses external service providers and vendors to conduct clinical trials,to manufacture supplies of product candidates to be used in clinical trials, toassist and consult on regulatory filings and to provide various other researchand development-related products and services.

 

When nonrefundable paymentsfor goods or services to be received in the future for use in research anddevelopment activities are made, the Company defers and capitalizes these typesof payments. The capitalized amounts are expensed when the related goods aredelivered or the services are performed.

 

Inthe statement of operations for the three months and nine months ended September 30,2009 included in this filing, the Company reclassified $108,000 and $432,000,respectively, of medical affairs department expenses from marketing expenses toresearch and development expenses to be consistent with the classification inthe three months and nine months ended September 30, 2010.

 

*Comprehensive Income (Loss)*

 

Comprehensive income (loss)is defined as the change in equity during a period from transactions and otherevents and circumstances from non-owner sources.  Net income (loss) and other comprehensiveincome (loss), including foreign currency translation adjustments andunrealized gains and losses on investments, is required to be reported, net oftheir related tax effect, to arrive at comprehensive income (loss).  Consolidated comprehensive loss was $12.3million and $9.4 million for the three months ended September 30, 2010 and2009, respectively.  Consolidatedcomprehensive loss was $36.2 million and $32.6 million for the nine monthsended September 30, 2010 and 2009, respectively. As of September 30,2010, the unrealized gain on investments and the gain on foreign currencytranslation adjustment was $2,499 and $264,123, respectively. As of December 31,2009, the unrealized gain on investments and the cumulative loss on foreigncurrency adjustment was $13,959 and $52,022, respectively.

 

*NetLoss Per Share Attributable to Common Stockholders*

 

Basicnet loss per common share is computed by dividing net loss by theweighted-average number of common shares outstanding. Diluted net loss per commonshare is computed by dividing net loss by the weighted-average number of commonshares and dilutive common share equivalents outstanding. Common equivalentshares consist of common shares issuable upon the exercise of stock options andwarrants. Since the Company has a net loss for all periods presented, theeffect of all potentially dilutive securities is anti-dilutive. Accordingly,basic and diluted net loss per share is the same for all periods presented. Asof September 30, 2010 and 2009, there were 3,742,846 and 2,571,383 sharesof common stock, respectively, issuable upon the exercise of stock options andwarrants which were excluded from the calculation, as their effect would havebeen antidilutive.

 

8

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

*Income Taxes*

 

Income taxes are accountedfor under the asset and liability method. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized as income in theperiod that includes the enactment date. The Company provides a valuation allowance against net deferred taxassets unless, based upon the available evidence, it is more likely than notthat the deferred tax assets will be realized.

 

*Recently Issued Accounting Pronouncements*

 

InApril 2010, the Financial Accounting Standards Board (“FASB”) issuedamendments related to the revenue recognition method for milestone payments inresearch and development agreements.  Under these amendments, entities canmake an accounting policy election to recognize a payment that is contingentupon the achievement of a substantive milestone in its entirety in the periodin which the milestone is achieved.  The amendments are effective on aprospective basis for milestones achieved in fiscal years, and interim periodswithin those years, beginning on or after June 15, 2010. The adoption ofthis standard is not expected to have a material impact on the Company’sfinancial position, cash flow or results of operations.

 

**3.   Fair Value of Financial Instruments**

 

The followingtable summarizes the Company’s financial assets measured at fair value on arecurring basis as of September 30, 2010:

 
| ** **                        | ** ** | **Quoted Prices in  Active Markets********(Level 1)** | ** ** | **Other  Observable  Inputs********(Level 2)** | ** ** | **Unobservable  Inputs********(Level 3)** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Cash equivalents                  |       | $                                                                         | 27,085,967 |                                                | $          | —                                         |       | $         | —     |   | $ | 27,085,967 |   |
| Government agency bonds           |       | $                                                                         | 31,611,954 |                                                | $          | —                                         |       | $         | —     |   | $ | 31,611,954 |   |
| Auction rate preferred securities |       | $                                                                         | —     |                                                | $          | —                                         |       | $         | 882,000    |   | $ | 882,000 |   |

 

9

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

Level 1:                   Quoted prices in active markets for identical assetsand liabilities; or

 

Level 2:                   Quoted prices for identical or similar assets andliabilities in markets that are not active, or observable inputs other thanquoted prices in active markets for identical assets and liabilities; or

 

Level 3:                   Unobservable inputs.

 

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

 
| ** **                                                                               | ** ** | **Auction Rate  Preferred  Securities as of  September 30,  2010** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| Beginning balance at  January 1, 2010                                               |       | $                                                                                      | 882,000    |   |
| Total gains and losses:                                                                  |       |                                                                                   |       |
| Realized net income                                                                      |       | —                                                                                 |       |
| Unrealized in accumulated  other comprehensive income                                    |       | —                                                                                 |       |
| Purchases, sales, issuances and settlements                                              |       | —                                                                                 |       |
| Transfers in (out) of Level 3                                                            |       | —                                                                                 |       |
| Ending balance at September 30, 2010                                                |       | $                                                                                      | 882,000    |   |
| Change in unrealized gains (losses) included in  net income related to assets still held |       | $                                                                                      | —     |   |

 

Allof the Company’s investments in available-for-sale securities are recorded atfair value based on quoted market prices. As of September 30, 2010, theCompany held one ARPS valued at $882,000 with a perpetual maturity date thatresets every 28 days.  Although as of September 30,2010, this ARPS continued to pay interest according to its stated terms, themarket in these securities continues to be illiquid. Based on a discounted cashflow model used to determine the estimated fair value of its investment in theARPS, the Company has previously recognized in the consolidated statement ofoperations an unrealized loss of approximately $118,000 in investment incomesince the Company had determined that the decline in value was other thantemporary. The assumptions used for the discontinued cash flow model include estimatesfor interest rates, timing and amount of cash flows and expected holding periodof the ARPS.  The Company’s ARPS isclassified as a long-term investment on the consolidated balance sheets, as theCompany does not believe it could liquidate this security in the near term.

 

**4.****             ****Short-TermInvestments**

 

The following is a summaryof the Company’s short-term investment securities, all of which are classifiedas available-for-sale. The determination of estimated fair value is based uponquoted market prices as of the dates presented.

 

10

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 
| ** **              | ** ** | **September 30, 2010** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Gross  Amortized  Cost**       | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Market Value** | ** ** |
| Government agency bonds |       | $                                | 31,609,455 |   | $ | 8,337 |   | $ | (5,838 | ) | $ | 31,611,954 |   |
|                         |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                | ** ** | **December 31, 2009** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Gross  Amortized  Cost**      | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Market Value** | ** ** |
| Government agencies bonds |       | $                               | 21,117,189 |   | $ | 14,235 |   | $ | (279 | ) | $ | 21,131,145 |   |
|                           |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Investmentsin net unrealized loss positions as of September 30, 2010 are as follows:

 
| ** **                 | ** ** | ** **                      | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|----------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **Number of  Investments** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Government  agencies bonds |       | 4                               |       | $                                                                         | 8,298,024  |                                                                         | $          | (5,838                               | )          | $ | **—** |   | $ | **—** |   | $ | 8,298,024 |   | $ | (5,838 | ) |
|                            |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortized cost andestimated fair value of securities available-for-sale at September 30,2010, by contractual maturity, are as follows:

 
| ** **                    | ** ** | **Amortized Cost** | ** ** | **Estimated Fair Value** | ** ** |
|-------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| Due  in one year or less      |       | $                       | 29,444,350 |                               | $          | 29,447,809 |   |
| Due  in one year or two years |       | $                       | 2,165,105  |                               | $          | 2,164,145 |   |
|                          |       | $                       | 31,609,455 |                               | $          | 31,611,954 |   |

 

Theweighted-average maturity of our short-term investments as of September 30,2010 and 2009, was approximately six months and three months, respectively.

 

*Evaluating Investments forOther-than Temporary Impairments*

 

The Company considered anumber of factors to determine whether the decline in value in its investmentswas other than temporary, including the length of time and the extent to whichthe market value has been less than cost, the financial condition of the issuerand the Company’s intent to hold and ability to retain these short-terminvestments.  Based on these factors,except for the ARPS which the Company recorded as an other temporary impairmentin 2008, the Company believes that the decline in value of its short-terminvestments is temporary and primarily related to the change in market interestrates since purchase.  The Companydetermined that it does not intend to sell its short-term investments and it isnot more likely than not that the Company will be required to sell itsshort-term investments before recovery of their amortized cost bases, which maynot occur until maturity. The Company anticipates full recovery of amortizedcost with respect to these securities at maturity or sooner in the event of a changein the market interest rate environment.

 

11

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

**5.****             ****Stockholders’Equity**

 

*NoncontrollingInterest*

 

InOctober 2009, the Company sold 40% of its equity interest in OBI.  Pursuant to authoritative guidance, theCompany accounts and reports for minority interests, the portion of OBI notowned by the Company, as noncontrolling interests and classifies them as acomponent of stockholders’ equity on the consolidated balance sheets of theCompany.  The Company includes the netloss attributable to noncontrolling interests as part of its consolidated netloss.

 

The following tablereconciles equity attributable to noncontrolling interest:

 
| ** **                                        | ** ** | **For the Nine Months Ended  September 30, 2010** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Noncontrolling  interest, January 1, 2010    |       | $                                                                               | 3,040,156  |   |
| Net  loss attributable to noncontrolling interest |       | (882,396                                                                        | )          |
| Translation  adjustments                          |       | (150,283                                                                        | )          |
| Noncontrolling  interest, September 30, 2010 |       | $                                                                               | 2,007,477  |   |

 

*Warrants*

 

In connection with aregistered direct offering which occurred in March 2009, the Company soldwarrants to purchase up to an aggregate of 91,533 shares of its common stock.The warrants are exercisable at an exercise price of $10.93 per share and willexpire five years from March 9, 2009.

 

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

 

*Optimer Pharmaceuticals, Inc.*

 

*Stock Options*

 

Optimerhas in effect the 2006 Equity Incentive Plan (“2006 Plan”) which becameeffective upon the effectiveness of the Optimer’s initial public offering in2007. Optimer’s 1998 Stock Plan (“1998 Plan”) was terminated upon theeffectiveness of Optimer’s initial public offering after which Optimer ceasedgranting options under the 1998 Plan. Options granted under both the 1998 Planand the 2006 Plan generally expire no later than ten years from the date ofgrant (five years for a 10% stockholder) and vest over a period of four years.The exercise price of options granted must at least be equal to the fair marketvalue of Optimer’s common stock on the date of grant.

 

12

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

*Performance-Based Stock Options, Performance-Based Restricted StockUnits, and Stock Awards*

 

OnMay 5, 2010, the Company’s Board of Directors appointed Pedro Lichtingeras its President and CEO and as a member of its Board of Directors.  Pursuant to Mr. Lichtinger offer letter,he received performance-based stock options to purchase up to an aggregate of480,000 shares of common stock and performance-based restricted stock unitscovering up to an aggregate of 120,000 shares of common stock, which vest overtime beginning on the dates the Company achieves specified development andcommercialization goals.

 

Simultaneouslywith Mr. Lichtinger’s appointment, Michael Chang resigned as the Company’sPresident and CEO.  The Company enteredinto a consulting agreement with Dr. Chang to provide general consultingservices. Pursuant to his consulting agreement and as part of his compensation,Dr. Chang received performance-based stock options to purchase up to anaggregate of 400,000 shares of common stock which vest over time beginning onthe dates certain regulatory filings are accepted and approved. Dr. Changhas continued to serve as a member of the Company’s Board of Directors asChairman and following Dr. Chang’s appointment as Chairman, Dr. Changreceived a grant of 65,000 fully-vested shares of common stock.

 

Theperformance-based stock options, performance-based restricted stock units andstock grant were made under the 2006 Plan.

 

*Employee Stock Purchase Plan*

 

Optimeralso grants stock awards under its employee stock purchase plan (“ESPP”). Underthe terms of the ESPP, eligible employees may purchase shares of Optimer’scommon stock at the lesser of 85% of the fair market value of Optimer’s commonstock on the offering date or the purchase date.

 

*Valuations*

 

TheBlack-Scholes option-pricing model was developed for use in estimating the fairvalue of traded options and stock awards, which have no vesting restrictionsand are fully transferable.  In addition,the Black-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected stock price volatility of the underlyingstock.  The following table shows theassumptions used to compute stock-based compensation expense for the stockoptions, performance based stock options, performance based restricted stockunits, and ESPP purchase rights during the three months and nine months ended September 30,2010 and 2009, using the Black-Scholes option pricing model:

 

13

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 
| **Stock Options including performance** | ** ** | **Three months ended********September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **stock options**                                 | ** ** | **2010**                                                   | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free interest rate                                |       | 2.48-2.66                                                  | %          | 2.00                                                    | %          | 2.48-3.53 | % | 2.00 | % |
| Dividend yield                                         |       | 0.00                                                       | %          | 0.00                                                    | %          | 0.00 | % | 0.00 | % |
| Expected life of options  (years)                      |       | 6.08-9.67                                                  |       | 6.08                                                    |       | 5.02-10.00 |   | 5.27-6.08 |   |
| Volatility                                             |       | 69.03-78.27                                                | %          | 69.93                                                   | %          | 69.03%-79.07 | % | 69.93 | % |

 
| ** **                        | ** ** | **Three months ended********September 30,** | ** ** | **Nine months ended********September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **ESPP**                          | ** ** | **2010**                                                   | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free interest rate           |       | 0.20                                                       | %          | 0.30-0.31                                                 | %          | 0.17-0.20 | % | 0.30-0.43 | % |
| Dividend yield                    |       | 0.00                                                       | %          | 0.00                                                      | %          | 0.00 | % | 0.00 | % |
| Expected life of options  (years) |       | 6 months                                                   |       | 6 months                                                  |       | 6 months |   | 6 months |   |
| Volatility                        |       | 38.76                                                      | %          | 62.93 -68.27                                              | %          | 34.08% - 39.62 | % | 62.93-74.94 | % |

 

Therisk-free interest rate assumption was based on the United States Treasury’srates for U.S. Treasury zero-coupon bonds with maturities similar to those ofthe expected term of the award being valued. The assumed dividend yield was based on Optimer’s expectation of notpaying dividends in the foreseeable future. The weighted-average expected life of options was calculated using thesimplified method.  This decision was basedon the lack of relevant historical data due to the Company’s limitedhistory.  In addition, due to the Company’slimited historical data, the Company used the historical volatility ofcomparable companies whose share prices are publicly available to estimate theCompany’s options volatility rate.

 

Duringthe three months and nine months ended September 30, 2010, Optimerrecorded stock-based compensation expense of $795,387 and $984,221,respectively, related to both performance based and non-performance based stockoptions issued to consultants.

 

Totalstock-based compensation expense related to all of Optimer’s stock options,restricted stock units, stock awards issued to employees, employee stockpurchases and consultants, recognized for the three months and nine monthsended September 30, 2010 and 2009, was comprised as follows:

 
| ** **                       | ** ** | **Three months ended September  30,** | ** ** | **Nine months ended September  30,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Research and development         |       | $                                                    | 429,277    |                                                | $          | 327,389 |   | $ | 1,219,419 |   | $ | 847,806 |   |
| Marketing                        |       | 134,538                                              |       | 93,519                                              |       | 322,846 |   | 279,274 |   |
| General and administrative       |       | 1,281,922                                            |       | 321,300                                             |       | 3,372,928 |   | 958,476 |   |
| Stock-based compensation expense |       | $                                                    | 1,845,737  |                                                | $          | 742,208 |   | $ | 4,915,193 |   | $ | 2,085,556 |   |

 

Asof September 30, 2010, the total unrecognized compensation expense relatedto unvested stock options and restricted stock units issued to employees wasapproximately $8.5 million and the related weighted-average period over whichit is expected to be recognized is approximately 3.8 years.

 

14

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

*Optimer Biotechnology, Inc.*

 

*Stock Options*

 

InMarch 2010, OBI’s board of directors approved a Stock Option Plan andreserved 8.0 million shares of OBI common stock for issuance of equity awardsthereunder. The Stock Option Plan provides for the issuance of stock options,restricted stock awards and stock appreciation rights to employees, directorsand consultants of OBI. The options generally vest over four years and have amaximum contractual term of ten years.

 

*Valuations*

 

Thefollowing table shows the assumptions used to compute stock-based compensationexpense for the stock options granted by OBI during the three and nine monthsended September 30, 2010 and 2009, using the Black-Scholes option pricingmodel:

 
| ** **                       | ** ** | **Three months ended********September 30, 2010** | ** ** | **Nine months ended********September 30, 2010** | ** ** |
|----------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| Risk-free interest rate          |       | 1.375                                                                | %          | 1.25-1.375                                                          | %          |
| Dividend yield                   |       | 0.00                                                                 | %          | 0.00                                                                | %          |
| Expected life of options (years) |       | 6.08                                                                 |       | 6.08                                                                |       |
| Volatility                       |       | 88.40                                                                | %          | 88.40-92.14                                                         | %          |

 

Therisk-free interest rate assumption was based on the Central Bank of Chinainterest rates.  The assumed dividendyield was based on OBI’s expectation of not paying dividends in the foreseeablefuture.  The weighted-average expectedlife of options was calculated using the simplified method.  This decision was based on the lack ofrelevant historical data due to OBI’s limited history.  Due to OBI’s limited historical data, OBIused the historical volatility of OBI’s peers whose share prices are publiclyavailable to estimate the volatility rate of OBI options.

 

Thefollowing table summarizes the stock-based compensation expense for OBIincluded in each operating expense line item in Optimer’s consolidatedstatements of operations:

 
| ** **                        | ** ** | **Three months ended  September 30, 2010** | ** ** | **Nine months ended  September 30, 2010** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Research and development          |       | $                                                              | 11,973     |                                                          | $          | 31,000 |   |
| General and administrative        |       | 24,274                                                         |       | 87,059                                                        |       |
| Stock-based compensation  expense |       | $                                                              | 36,247     |                                                          | $          | 118,059 |   |

 

AtSeptember 30, 2010, the total unrecognized stock-based compensationexpense relating to OBI’s unvested stock-based awards granted to employees, netof forfeitures, was $478,588, which OBI anticipates recognizing as a chargeagainst income over a weighted average period of 3.2 years.

 

15

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

**7.****             ****Revenue andOther Collaborative Agreements**

 

*Revenuesfrom Research Grants*

 

The Company has one activegrant from the National Institute of Allergy and Infectious Diseases (“NIAID”).This $3 million grant was awarded in September 2007 for three years, wasextended to August 2011 and as of September 30, 2010 has $377,859 ofrevenue remaining to be recognized under the grant.  The award is being used to conductsupplementary studies to the ongoing fidaxomicin trials to confirm narrowspectrum activity and potency of fidaxomicin against hypervirulent epidemicstrains, to support additional toxicology and microbiological studies todemonstrate the safety and efficacy of the fidaxomicin compound and its majormetabolite in CDI patients and to support a surveillance study of *C. difficile* isolates across North Americato compare activity of fidaxomicin with existing CDI treatments.  For the three months ended September 30,2010 and 2009, the Company recognized revenues related to research grants of$169,137 and $176,202, respectively. For the nine months ended September 30,2010 and 2009, the Company recognized revenues related to research grants of$824,010, and $583,992, respectively.

 

*OtherCollaborative Agreements*

 

*Par Pharmaceutical, Inc.*

 

The Company holds worldwiderights to fidaxomicin.  InFebruary 2007, the Company repurchased the rights to develop andcommercialize fidaxomicin in North America and Israel from ParPharmaceutical, Inc. (“Par”) under a prospective buy-back agreement.  The Company paid Par a one-time $5.0 millionmilestone payment in June 2010 for the successful completion by theCompany of its second pivotal Phase 3 trial for fidaxomicin.  The Company may be obligated to pay Par a 5%royalty on net sales by the Company, its affiliates or its licensees of fidaxomicinin North America and Israel, and a 1.5% royalty on net sales by the Company orits affiliates of fidaxomicin in the rest of the world.  In addition, in the event the Companylicenses its right to market fidaxomicin in the rest of the world, the Companywill be required to pay Par a 6.25% royalty on net revenues received by itrelated to fidaxomicin.  The Company isobligated to pay each of these royalties, if any, on a country-by-country basisfor seven years commencing on the applicable commercial launch in each suchcountry.

 

*Biocon Limited*

 

InMay 2010, the Company entered into a long-term supply agreement withBiocon Limited (“Biocon”) for the commercial manufacture of fidaxomicin’sactive pharmaceutical ingredient (“API”).  Pursuant to the agreement, Biocon agreed to manufacture and supply theCompany up to certain limits, fidaxomicin API and subject to certainconditions, the Company agreed to purchase from Biocon at least a portion ofits requirements for fidaxomicin API in the United States and Canada.  TheCompany previously paid to Biocon $2.5 million for certain equipment purchasesand manufacturing scale-up activities, and the Company may be entitled torecover up to $1.5 million of this amount under the supply agreement in theform of discounted prices for 

 

16

----

Table ofContents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

fidaxomicinAPI.  The Company expensed the entire $2.5 million in the second quarterof 2009 because at the time of payment the recovery of up to $1.5 million couldnot be assured.  The Company may beobligated to make additional payments to Biocon if it fails to meet the minimumpurchase requirements after Biocon has dedicated certain manufacturing capacityto the production of fidaxomicin API and if Biocon is unable to manufacturealternative products with the dedicated capacity.  Unless both the Companyand Biocon agree to extend the term of the supply agreement, it will terminateseven and a half years from the date the Company obtains marketingauthorization for fidaxomicin in the United States or Canada.  The supplyagreement will be terminated earlier in the event that the Company does notobtain marketing authorization for fidaxomicin in the United States or Canadaprior to December 31, 2013.  In addition, the supply agreement may beearlier terminated (i) by either party by giving two and a half yearsnotice after the fifth anniversary of the Effective Date or upon a materialbreach of the supply agreement by the other party, (ii) by the Companyupon the occurrence of certain events, including Biocon’s failure to supplyrequested amounts of fidaxomicin API, or (iii) by Biocon upon the occurrenceof certain events, including the Company’s failure to purchase amounts offidaxomicin API that it indicates in binding forecasts.  The supplyagreement terminated and supersede the prior supply agreement with Biocon,dated August 29, 2005, which was assigned to the Company by Par inFebruary 2007.

 

*NipponShinyaku, Co., Ltd.*

 

In June 2004, theCompany entered into a license agreement with Nippon Shinyaku, Co., Ltd.(“Nippon Shinyaku”).  Under the terms ofthe agreement, the Company acquired the non-exclusive right to import andpurchase Pruvel, and the exclusive right (with the right to sublicense), withinthe United States, to develop, make, use, offer to sell, sell and licenseproducts suitable for consumption by humans containing Pruvel.  Under this agreement, the Company paid NipponShinyaku an up-front fee in the amount of $1.0 million and will be required tomake one future milestone payment in the amount of $1.0 million uponsubmission, if any, of its first NDA for Pruvel in the United States.  Under the agreement, the Company pays NipponShinyaku for certain materials.  IfNippon Shinyaku is unable to supply the Company with the contracted amount ofPruvel, then Nippon Shinyaku is obligated to grant the Company a non-exclusive,worldwide license to make or have made Pruvel, in which event the Company willowe Nippon Shinyaku a royalty based on the amount of net sales of Pruvelgenerated by the Company and the Company’s subsidiary.  Additionally, the Company will owe NipponShinyaku certain royalties based on the amount of net sales of Pruvel less theamount of Pruvel the Company buys from Nippon Shinyaku.  Either party may terminate the agreement 60days after giving notice of a material breach which remains uncured 60 daysafter written notice.  If not terminatedearlier, the agreement will terminate upon the later of ten years from the dateof the first commercial sale of Pruvel in the United States or the date onwhich the last valid patent claim relating to Pruvel expires in the United States.

 

17

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

*Cempra Pharmaceuticals, Inc.*

 

In March 2006, theCompany entered into a collaborative research and development and licenseagreement with Cempra Pharmaceuticals, Inc. (“Cempra”).  The Company granted to Cempra an exclusiveworldwide license, except in Association of Southeast Asian Nations (“ASEAN”)countries, with the right to sublicense, to the Company’s patent and know-howrelated to the Company’s macrolide and ketolide antibacterial program.  As partial consideration for granting Cemprathe license, the Company obtained equity of Cempra and the Company assigned novalue to such equity.   Pursuant to theterms of the agreement, in July 2010, the Company received a $500,000milestone payment from Cempra for the continuing development of a nextgeneration macrolide, CEM-101, for the treatment of respiratory infections. TheCompany may receive additional milestone payments as product candidates aredeveloped and/or co-developed by Cempra, in addition to milestone paymentsbased on certain sublicense revenue.  Theaggregate potential amount of such milestone payments is not capped and, basedin part on the number of products developed under the agreement, may exceed$24.5 million.  The Company will alsoreceive royalty payments based on a percentage of net sales of licensedproducts.  The milestone payments will betriggered upon the completion of certain clinical development milestones and incertain instances, regulatory approval of products.  In consideration of the foregoing, Cempra mayreceive milestone payments from the Company in the amount of $1.0 million foreach of the first two products the Company develops under the agreement whichreceive regulatory approval in ASEAN countries, as well as royalty payments onthe net sales of such products.  Theresearch term of the agreement was completed in March 2008.  Subject to certain exceptions, on acountry-by-country basis, the general terms of this agreement continue untilthe later of: (i) the expiration of the last to expire patent rights of acovered product in the applicable country or (ii) ten years from the firstcommercial sale of a covered product in the applicable country.  Either party may terminate the agreement inthe event of a material breach by the other party, subject to prior notice andthe opportunity to cure.  Either partymay also terminate the agreement for any reason upon 30 days prior writtennotice provided that all licenses granted by the terminating party to thenon-terminating party will survive upon the express election of thenon-terminating party.

 

*Memorial Sloan-Kettering CancerCenter*

 

In July 2002, theCompany entered into a license agreement with Memorial Sloan-Kettering CancerCenter (“MSKCC”) to acquire, together with certain nonexclusive licenses,exclusive, worldwide licensing and sublicensing rights to certain patented andpatent-pending carbohydrate-based cancer immunotherapies.  As partial consideration for the licensingrights, the Company paid to MSKCC a one-time fee consisting of both cash and55,383 shares of its common stock.  Inanticipation of the various transactions involving OBI which the Companycompleted in October 2009, the Company assigned its rights and obligationsunder this agreement to OBI. Under the agreement, which was amended inJune 2005, OBI owes MSKCC milestone payments in the following amounts foreach licensed product: (i) $500,000 upon the commencement of Phase 3clinical studies, (ii) $750,000 upon the filing of the first NDA,(iii) $1.5 million upon obtaining marketing approval in the United Statesand (iv) $1.0 million upon obtaining marketing approval in each and any ofJapan and certain European countries, but only to the extent that OBI, and nota sublicensee, achieves such milestones. OBI may owe MSKCC royalties based on net sales generated from thelicensed products and income OBI receives from its sublicensing activities,which royalty payments are credited against a minimum annual royalty paymentOBI owes to MSKCC during the term of the agreement.

 

18

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

*Scripps Research Institute*

 

InJuly 1999, the Company acquired exclusive, worldwide rights to its OPopStechnology from the Scripps Research Institute (“TSRI”).  This agreement includes the license to theCompany of patents, patent applications and copyrights related to OPopStechnology.  The Company also acquired, pursuantto three separate license agreements with TSRI, exclusive, worldwide rights toover 20 TSRI patents and patent applications related to other potential drugcompounds and technologies, including HIV/FIV protease inhibitors,aminoglycoside antibiotics, polysialytransferase, selectin inhibitors, nucleicacid binders, carbohydrate mimetics and osteoarthritis.  Under the four agreements with TSRI, theCompany paid TSRI license fees consisting of an aggregate of 239,996 shares ofits common stock with a deemed aggregate fair market value of $46,400, asdetermined on the dates of each such payment. Additionally, under each agreement, the Company may owe TSRI royaltiesbased on net sales by the Company, its affiliates and sublicensees of thecovered products and royalties based on revenue the Company generates fromsublicenses granted pursuant to the agreements. For the first licensed product under each of the four agreements, theCompany will also owe TSRI payments upon achievement of certainmilestones.  In three of the four TSRIagreements, the milestones are the initiation of a Phase 2 trial or itsforeign equivalent, the filing of an NDA or its foreign equivalent andgovernment marketing and distribution approval. In the remaining TSRI agreement, the milestones are the successfulcompletion of a Phase 3 trial or its foreign equivalent, the filing of anNDA or its foreign equivalent and government marketing and distributionapproval.  The aggregate potential amountof milestone payments the Company may be required to pay TSRI under all fourTSRI agreements is approximately $14.0 million. In anticipation of the various transactions involving OBI which theCompany completed in October 2009, the Company assigned its rights andobligations under one of these agreements related to osteoarthritis to OBI.

 

*Optimer Biotechnology, Inc.*

 

InOctober 2009, the Company assigned to OBI certain of its patents and knowhow related to OPT-88 and OPT-822/821 and also assigned to OBI its rights andobligation under license agreements with MSKCC and TSRI.  Under the agreement with OBI, the Company iseligible to receive up to $10 million in milestone payments for each productdeveloped under the development programs and is also eligible to receiveroyalties on net sales of any product which is commercialized under theprograms.  The term of the IntellectualProperty Assignment and License Agreement continues until the last to expire ofthe patents assigned by the Company to OBI and the patents licensed to OBIunder the TSRI and MSKCC agreements.

 

Toprovide capital for OBI’s product development efforts, the Company and OBI alsoentered into a financing agreement with a group of new investors. Simultaneously, the Company sold 40 percent of its existing OBI shares to thesame group of new investors, and the Company and the new investors alsopurchased new OBI shares.  Also under the financing agreement, if OBIachieves certain development milestones in the future, the Company and the newinvestors will be obligated to invest approximately an additional $8.6 millionand $5.7 million, respectively, in exchange for new OBI shares.  Followingthe sale of its existing OBI shares and the initial investments in exchange fornew OBI shares, the Company currently maintains a 60 percent ownership interestin OBI.

 

19

----

Table ofContents

 

**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*Thefollowing discussion and analysis should be read in conjunction with ourconsolidated financial statements and accompanying notes appearing elsewhere inthis report, as well as the audited financial statements and accompanying notesincluded in our annual report on Form 10-K for the fiscal year ended December 31,2009, as filed with the Securities and Exchange Commission, or SEC.  This discussion and other parts of thisreport may contain forward-looking statements based upon current expectationsthat involve risks and uncertainties. Our actual results and the timing of selected events could differmaterially from those anticipated in these forward-looking statements as aresult of several factors, including those set forth under “Risk Factors” andelsewhere in this report.*

 

**Overview**

 

We are a biopharmaceuticalcompany focused on discovering, developing and commercializing innovativehospital specialty products. Our current development efforts are focused onproducts that treat gastrointestinal infections****and related diseases where current therapies havelimitations, including limited efficacy, serious adverse side effects,drug-to-drug interactions, difficult patient compliance and bacterialresistance. We currently have two late-stage anti-infective product candidates,fidaxomicin and PruvelTM (prulifloxacin).

 

Fidaxomicin,our lead product candidate, is a narrow spectrum antibiotic with minimalsystemic absorption. We are developing fidaxomicin for the treatment of CDI,the most common nosocomial, or hospital acquired, diarrhea. We currently holdworldwide rights to fidaxomicin and intend to seek one or more partners for thecommercialization of fidaxomicin outside of the United States. In September 2010,we began a submission to the United States Food and Drug Administration, orFDA, of a rolling NDA for marketing authorization of fidaxomicin in the UnitedStates. We expect to complete our NDA submission for fidaxomicin in the fourthquarter of 2010.  In July 2010 wefiled, and in August 2010 the European Medicines Agency, or EMA, acceptedfor review, a Marketing Authorization Application, or MAA, for marketingauthorization of fidaxomicin in Europe. We have completed two fidaxomicin Phase3 trials which showed that fidaxomicin achieved the primary endpoint ofclinical cure and demonstrated a significantly lower recurrence rate andsignificantly higher global cure rate (defined as cure with no recurrencewithin four weeks of completing therapy) compared to Vancocin, the onlyFDA-approved antibiotic for the treatment of CDI. The data also indicated thattreatment with fidaxomicin significantly improved the recurrence rate andglobal cure rate in CDI patients requiring concomitant antibiotics, compared tovancomycin.  Fidaxomicin was alsowell-tolerated in the trials. We have also reported additional data from thesecond Phase 3 trial showing a clinically meaningful reduction in recurrencerates and higher global cure rates compared to Vancocin in both thehyper-virulent BI/NAP1/027 and the non-BI strain type subgroups. Clinical curerates for fidaxomicin and Vancocin were similar in these two strain typesubgroups

 

20

----

Table ofContents

 

Inaddition, in September 2010, we reported additional data from our twofidaxomicin Phase 3 trial at the Annual Interscience Conference onAntimicrobial Agents and Chemtherapy, or ICAAC, which showed that fidaxomicinwas superior to vancomycin in treatment of CDI patients suffering arecurrence.  In the two fidaxomicin Phase3 trials, a separate stratum was constructed of subjects who had experienced aprior CDI episode and recurred within three months of entering the study. The 178 subjects with recurrent CDI were randomized to be treated witheither fidaxomicin or vancomycin and 128 of these subjects were subsequentlyevaluable for recurrence within the study. Following treatment, 35.5% (22/62)of the subjects who received vancomycin experienced another recurrence comparedto 19.7% (13/66) among the subjects who received fidaxomicin (p=0.045). This equates to a 45% reduction in repeat CDI recurrence with fidaxomicin. Thedata also indicated that fidaxomicin was superior to vancomycin in preventingrecurrences and in promoting global cure in patients requiring concomitantantibiotics.  The analysis from the Phase3 trials indicated that in patients receiving concomitant antibiotics, thosetreated with fidaxomicin versus vancomycin had a significantly lower CDIrecurrence rate (17% vs. 28%, p=0.039) and had a significantly improved globalcure rate (73% vs. 60%, p=0.013).  At the same time, among subjects whoreceived no concomitant antibiotics, recurrence in vancomycin-treated subjectswas double that of fidaxomicin-treated subjects (23% vs. 11.5%, p<0.001).

 

Weplan to build our own marketing and sales force to commercialize fidaxomicin inthe United States and are seeking third-party partners outside of the UnitedStates.

 

Pruvelis a prodrug in the fluoroquinolone class of antibiotics, a widely-used classof broad-spectrum antibiotics. We are developing Pruvel as a treatment forinfectious diarrhea.  In July 2008,we reported positive top-line data from the first Phase 3 trial conducted inMexico and Peru and in February 2009, we reported positive top-line datafrom the second Phase 3 trial conducted in India, Guatemala and Mexico. Thetop-line analysis of data from these studies showed that Pruvel met the primaryendpoint of time to last unformed stool compared to placebo. Based upon theresults of these two Phase 3 trials we intend to submit an NDA for Pruvel inthe first quarter of 2011. We plan to initially seek approval for Pruvel forthe treatment of infectious diarrhea.

 

Weare developing additional product candidates using our proprietary technology,including our Optimer One-Pot Synthesis, or OPopSTM drug discovery platform.OPopS is a computer-aided technology that allows the development of potentialdrug candidates through carbohydrate mediated medicinal chemistry and enablesthe rapid synthesis of a wide variety of proprietary molecules. It includesGlycoOptimization, which enables the modification of a carbohydrate group on anexisting drug to improve its properties, and De Novo Glycosylation, whichintroduces new carbohydrate groups on existing drugs to create new patentablecompounds with improvement of pharmacokinetics.

 

Wepreviously acquired exclusive rights to two other product candidates: OPT-88, adisease-modifying intra-articular therapy for osteoarthritis which we licensedfrom the Scripps Research Institute, or TSRI, and OPT-822/821, a novelcarbohydrate-based cancer immunotherapy which we licensed from MemorialSloan-Kettering Cancer Center, or MSKCC.  In October 2009, weassigned to OBI certain of our patent rights and know-how related to OPT-88 andOPT-822/821 and also assigned to OBI our rights and obligations under the TSRIand MSKCC agreements. OBI recently filed an IND in Taiwan for OPT-822/821and plans to initiate a Phase 

 

21

----

Table ofContents

 

2/3clinical trial in Asia in the second half of 2010.  Other potential indications for OPT-822/821are being evaluated.  After furtherevaluation, OBI has determined not to pursue additional development ofOPT-88.  We maintain a 60% equityinterest in OBI and have the right to receive up to $10 million in futuremilestone payments for OPT-822/821 as well as royalties on net sales of thisproduct.

 

Wewere incorporated in November 1998. Since inception, we have focused on developing our product candidates,including fidaxomicin and Pruvel.  Wehave never been profitable and have incurred significant net losses since ourinception.  As of September 30,2010, we had an accumulated deficit of $210.9 million.  These losses have resulted principally fromcosts incurred in connection with research and development activities,including the costs of clinical trial activities associated with our currentlead product candidates, license fees and general and administrativeexpenses.  We expect to continue to incuroperating losses for the next several years as we pursue the clinicaldevelopment, regulatory approval and commercialization of our productcandidates, as well as acquire or in-license additional products or productcandidates, technologies or businesses that are complementary to our own.

 

**Critical Accounting Policies**

 

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

 

*Revenue Recognition*

 

Ourlicense and collaboration agreements contain multiple elements, includingnon-refundable upfront fees, payments for reimbursement of third-party researchcosts, payments for ongoing research, payments associated with achievingspecific development milestones and royalties based on specified percentages ofnet product sales, if any. Agreements containing multiple elements are dividedinto separate units of accounting if certain criteria are met, includingwhether the delivered element has stand-alone value to the collaborator andwhether there is objective and reliable evidence of the fair value of theundelivered obligation(s). The consideration received is allocated among theseparate units either on the basis of each unit’s fair value or using theresidual method, and the applicable revenue recognition criteria are applied toeach of the separate units.

 

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

 

Whena payment is specifically tied to a separate earnings process, revenues arerecognized when the specific performance obligation associated with the paymentis completed.  

 

22

----

Table ofContents

 

Performanceobligations typically consist of significant and substantive milestones.  Revenues from milestone payments may beconsidered separable from funding for research services because of theuncertainty surrounding the achievement of milestones for products in earlystages of development.  Accordingly,these milestone payments are allowed to be recognized as revenue if and whenthe performance milestone is achieved if they represent a substantive earningsprocess.

 

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

 

Withrespect to revenues derived from reimbursement of direct out-of-pocket expensesfor research costs associated with grants, where we act as a principal, withdiscretion to choose suppliers, bear credit risk and perform part of theservices required in the transaction, we record revenue for the gross amount ofthe reimbursement. The costs associated with these reimbursements are reflectedas a component of research and development expense in the consolidatedstatements of operations.

 

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

 

*Researchand Development*

 

Research and developmentcosts are expensed as incurred and consist primarily of costs associated withclinical trials, compensation, including stock-based compensation, and otherexpenses related to research and development, including personnel costs,facilities costs and depreciation.

 

When nonrefundable paymentsfor goods or services to be received in the future for use in research anddevelopment activities are made, we defer and capitalize these types ofpayments. The capitalized amounts are expensed when the related goods aredelivered or the services are performed.

 

*Accrued Expenses*

 

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

 

23

----

Table ofContents

* *

*Stock-Based Compensation*

 

The Financial AccountingStandards Board, or FASB, authoritative guidance requires that share-basedpayment transactions with employees be recognized in the financial statementsbased on their fair value and recognized as compensation expense over thevesting period.  We used the modifiedprospective method and accordingly we did not restate the results ofoperations for the prior periods.

 

Total consolidatedstock-based compensation expense of $1.9 million and $742,000 was recognized inthe three months ended September 30, 2010 and 2009, respectively.  Total consolidated stock-based compensationexpense of $5.0 million and $2.1 million was recognized in the nine monthsended September 30, 2010 and 2009, respectively. The stock-basedcompensation expense recognized during the three months and nine months ended September 30,2010 include expense from performance-based stock options and restricted stockunits granted.

 

Stock-based compensationexpense is estimated as of the grant date based on the fair value of the awardand is recognized as expense over the requisite service period, which generallyrepresents the vesting period. We estimate the fair value of our stock optionsusing the Black-Scholes option-pricing model and the fair value of our stockawards and restricted stock units based on the quoted market price of ourcommon stock.

 

Estimatingthe fair value for stock options requires judgment, including estimatingstock-price volatility, expected term, expected dividends and risk-freeinterest rates. Due to Optimer’s and OBI’s limited historical data, theexpected volatility incorporates the historical volatility of comparablecompanies whose share prices are publicly available. The average expected termis calculated using the SimplifiedMethod for Estimating the Expected Term. Expected dividends are estimated based on Optimer’s and OBI’s dividendhistory as well as Optimer’s and OBI’s current projections. The risk-freeinterest rate for Optimer is based on the United States Treasury rate for theU.S. Treasury zero-coupon bonds with maturities similar to the periodsapproximating the expected terms of the options. The risk-free rate forOBI is based on the Central Bank of China interest rates. These assumptions areupdated on an annual basis or sooner if there is a significant change incircumstances that could affect these assumptions.

 

Equity instruments issued tonon-employees are recorded at their fair value and are periodically revalued asthe equity instruments vest and are recognized as expense over the relatedservice period.

 

**Results of Operations**

 

***Comparison of******Three Months Ended September 30,2010 and 2009***

 

*CollaborationResearch and Grant Revenues*.  Collaboration research and grant revenues forthe three months ended September 30, 2010 and 2009 were $669,000 and$176,000, respectively. The increase of $493,000, or 280%, was primarily due toa $500,000 milestone payment received from Cempra Pharmaceuticals for thecompletion of its Phase 1 study for the treatment of respiratory infections.

 

24

----

Table ofContents

 

*Researchand Development Expense*. Research and development expense for the three months ended September 30,2010 and 2009 was $8.1 million and $7.2 million, respectively, an increase of$884,000 or 12%.   The increase was dueto expenses to prepare the fidaxomicin in regulatory filings offset by lowerclinical trial expenses.  In addition,our subsidiary, OBI, incurred expenses in preparation for a breast cancer clinicaltrial.

 

*MarketingExpense*. * *Marketingexpense for the three months ended September 30, 2010 and 2009 was $2.1million and $394,000, respectively.  Theincrease of $1.7 million, or 441%, was primarily due to increased marketresearch and pre-launch commercialization efforts related to our fidaxomicinprogram.

 

*Generaland Administrative Expense*.  General and administrative expense for thethree months ended September 30, 2010 and 2009 was $2.7 million and $2.0million, respectively.  The increase of $684,000,or 34%, was primarily due to higher compensation expenses, including $1.3million of stock compensation expense, an increase of $985,000 over the sameperiod in the prior year as well as higher recruitment and consulting expenses.The increase was offset by lower legal expenses.

 

*InterestIncome and Other, net*.  Netinterest income and other for the three months ended September 30, 2010and 2009 was $23,000 and $34,000, respectively. The decrease was primarily due to lower interest rates on cash, cashequivalents and investments.

 

***Comparison of******Nine******Months Ended September 30,2010 and 2009***

 

*CollaborationResearch and Grant Revenues*.  Collaboration research and grant revenues forthe nine months ended September 30, 2010 and 2009 were $1.3 million and$684,000, respectively. The increase of $640,000, or 94%, was due to a $500,000milestone payment received from Cempra Pharmaceuticals for the completion ofits Phase 1 study for the treatment of respiratory infections as well as anincrease in research funding related to an NIH grant.

 

*Researchand Development Expense*. Research and development expense for the nine months ended September 30,2010 and 2009 was $25.9 million and $26.5 million, respectively, a decrease of$662,000, or 2%.   The decrease wasprimarily due to a decrease in fidaxomicin and Pruvel development expenses andmanufacturing set-up expenses reimbursable to Biocon Inc. incurred in the prioryear.  The decrease was offset by $5.0million milestone to Par for the successful completion of the secondfidaxomicin Phase 3 trial.

 

*MarketingExpense*. * *Marketingexpense for the nine months ended September 30, 2010 and 2009 was $3.1million and $1.2 million, respectively. The increase of $1.9 million, or 159%, was primarily due to increasedmarket research and pre-launch commercialization efforts related to ourfidaxomicin program.

 

*Generaland Administrative Expense*.  General and administrative expense for thenine months ended September 30, 2010 and 2009 was $8.8 million and $5.9million, respectively.  The increase of$2.8 million, or 48%, was due primarily to higher compensation expenses,including $3.5 million of stock compensation expense, an increase of $2.5million over the same period in the prior year.

 

25

----

Table ofContents

 

*InterestIncome and Other, net*.  Netinterest income and other for the nine months ended September 30, 2010 and2009 was $101,000 and $309,000, respectively. The decrease was primarily due to lower interest rates on cash, cashequivalents and investments.

 

**Liquidity and Capital Resources**

 

*Sources of Liquidity*

 

Sinceinception, our operations have been financed primarily through the sale of equitysecurities.  Through September 30,2010, we received gross proceeds of approximately $256.2 million from the saleof shares of our preferred and common stock as follows:

 

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

 

·                  from March 2001 to December 2001,we sold a total of 4.1 million shares of Series B preferred stock forproceeds of $32.2 million;

 

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

 

·                  from April 2005 to November 2005,we sold a total of 2.9 million shares of Series D preferred stock forproceeds of $22.3 million;

 

·                  in February 2007, we sold a total of 7.0million shares of our common stock in connection with our initial publicoffering for proceeds of $49.0 million;

 

·                  in October 2007, we sold a total of 4.6million shares of our common stock in connection with a private placement offeringfor proceeds of $35.9 million;

 

·                  inJuly 2008, we sold a total of 1.7 million shares of our common stock in aregistered direct offering for proceeds of $14.7 million;

 

·                  inMarch 2009, we sold a total of 3.3 million shares of our common stock andwarrants to purchase up to an aggregate of 91,533 shares of our common stock ina registered direct offering for proceeds of $32.9 million; and

 

·                  in March 2010, we sold a total of 4.9million shares of our common stock in a public offering for proceeds of $53.8million.

 

Untilrequired for operations, we invest a substantial portion of our available fundsin money market funds, corporate debt securities, United States governmentinstruments and other readily marketable debt instruments, all of which are investment-gradequality.  We have established guidelinesrelating to diversification and maturities of our investments to preserveprincipal and maintain liquidity.

 

26

----

Table ofContents

 

*Cash Flows*

 

Asof September 30, 2010, cash, cash equivalents and short-term investmentstotaled approximately $58.7 million as compared to $38.2 million as ofDecember 31, 2009, an increase of approximately $20.5 million.  The increase in our cash, cash equivalent andshort-term investments was primarily due to the net $51.2 million raised in afollow-on offering of our common stock in March 2010, offset by the use ofcash for our operating expenses.  Of the$58.7 million, $4.1 million was held by OBI as of September 30, 2010.

 

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

 

InFebruary 2007, we regained worldwide rights to fidaxomicin from Par undera prospective buy-back agreement.  Wepaid Par a one-time $5.0 million milestone payment in June 2010 for oursuccessful completion of the second pivotal Phase 3 trial forfidaxomicin.  We are also obligated topay Par a 5% royalty on net sales by us or our affiliates of fidaxomicin inNorth America and Israel, and a 1.5% royalty on net sales by us or ouraffiliates of fidaxomicin in the rest of the world.  In addition, in the event we license ourright to market fidaxomicin in the rest of the world, we will be required topay Par a 6.25% royalty on net revenues we receive related to fidaxomicin.  We are obligated to pay each of theseroyalties, if any, on a country-by-country basis for seven years commencing onthe applicable commercial launch in each such country.

 

InMay 2010, we entered into a long-term supply agreement with Biocon for thecommercial manufacture of fidaxomicin’s active pharmaceutical ingredient, orAPI. Pursuant to the agreement, Biocon agreed to manufacture and supply to us,up to certain limits, fidaxomicin API and, subject to certain conditions, weagreed to purchase from Biocon at least a portion of our requirements forfidaxomicin API in the United States and Canada.  We previously paid toBiocon $2.5 million for certain equipment purchases and manufacturing scale-upactivities, and we may be entitled to recover up to $1.5 million of this amountunder the Supply Agreement in the form of discounted prices for fidaxomicinAPI.  We may be obligated to make additional payments to Biocon if we failto meet minimum purchase requirements after Biocon has dedicated certainmanufacturing capacity to the production of fidaxomicin API and if Biocon isunable to manufacture alternative products with the dedicated capacity.

 

In June 2004, weentered into a license agreement with Nippon Shinyaku to which we acquired thenon-exclusive right to import and purchase Pruvel, and the exclusive right(with the right to sublicense), within the United States, to develop, make,use, offer to sell, sell and license products suitable for consumption byhumans containing Pruvel.  Under theterms of the agreement, we will be required to pay Nippon Shinyaku a milestonepayment in the amount of $1.0 million upon the submission, if any, of a NDA forPruvel in the United States.

 

In October 2008, ourCompensation Committee adopted a Severance Benefit Plan covering certaineligible employees of the Company, including executive officers.  In May 2010, the Severance Benefit Planwas amended and restated.  Pursuant tothe plan, upon an involuntary termination other than for cause or aconstructive termination, an eligible employee may be 

 

27

----

Table of Contents

 

entitled to receivespecified severance benefits. The benefits may include cash severance paymentsand acceleration of stock award vesting. The level of benefits provided under the plan depends upon an eligibleemployee’s position and years of service, and whether the termination isrelated to a change in control.

 

In October 2009, weentered into certain transactions with our subsidiary, OBI, pursuant to whichwe assigned certain intellectual property rights and license agreements to OBIrelated to our OPT-88 and OPT-822/821 product candidates.  In connectionwith these transactions, we entered into a financing agreement with OBI and agroup of new investors.  Under the terms of the financing agreement, ifOBI achieves certain development milestones with respect to OPT-88 andOPT-822/821, we and the group of new investors may be required to purchaseapproximately an additional $8.6 million and $5.7 million,respectively, of new OBI common shares. In light of OBI’s decision tonot pursue further development of OPT-88, we do not expect that we will berequired to purchase the additional OBI common shares until such time, if ever,that we and the group of new investors agree to waive the milestonerequirements with respect to OPT-88.

 

In July 2010, theCompany received a $500,000 milestone payment from Cempra under the terms of alicensing agreement between the companies.   The milestone payment was made as a result ofCempra’s continuing development of a next-generation macrolide (CEM-101) forthe treatment of respiratory infections. Cempra licensed CEM-101 from Optimerand has successfully completed a Phase 1 study.

 

*Funding Requirements*

 

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

 

·                  the costs ofpreparing and pursuing applications for regulatory approvals and the timing ofsuch approvals;

 

·                  the costs ofestablishing sales or distribution capabilities and the timing of such efforts;

 

·                  our decision toconduct future clinical trials, including the timing and progress of suchclinical trials;

 

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

 

·                  the costsinvolved in prosecuting, enforcing or defending patent claims or other intellectualproperty rights;

 

·                  the success ofthe commercialization of our products; and

 

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

 

28

----

Table ofContents

 

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

 

Untilwe can generate significant cash from our operations, we expect to continue tofund our operations with existing cash resources that were primarily generatedfrom the proceeds of offerings of our equity securities and collaborations andgovernment grants.  In addition, we mayfinance future cash needs through the sale of additional equity securities,strategic collaboration agreements and debt financing.  However, we may not be successful incompleting future equity financings, in entering into additional collaborationagreements, in receiving milestone or royalty payments under new or existingcollaboration agreements, in obtaining new government grants or in obtainingdebt financing.  In addition, we cannotbe sure that our existing cash and investment resources will be adequate, thatfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or our stockholders.  The credit markets and the financial servicesindustry have been experiencing a period of unprecedented turmoil which hasgenerally made equity and debt financing more difficult to obtain, and maynegatively impact our ability to complete financing transactions.  Having insufficient funds may require us todelay, scale-back or eliminate some or all of our development programs,relinquish some or even all of our rights to product candidates at an earlierstage of development or renegotiate less favorable terms than we wouldotherwise choose.  Failure to obtainadequate financing also may adversely affect our ability to operate as a goingconcern.  If we raise funds by issuingequity securities, substantial dilution to existing stockholders would likelyresult.  If we raise funds by incurringadditional debt financing, the terms of the debt may involve significant cashpayment obligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

 

**Item 3. Quantitative and Qualitative Disclosures aboutMarket Risk**

 

*Cash Equivalents and Marketable Securities Risk*

 

Ourcash and cash equivalents and short-term investments as of September 30,2010 consisted primarily of money market funds and United States governmentinstruments and other readily marketable debt instruments.  Our primary exposure to market risk is interestincome sensitivity, which is affected by changes in the general level of U.S.interest rates.  The primary objective ofour investment activities is to preserve principal while at the same timemaximizing the income we receive from our investments without significantlyincreasing risk.  A hypotheticalten percent change in interest rates during the quarter ended September 30,2010 would have resulted in approximately a $5,000 change in netloss. Accordingly, we would not expect our operating results or cash flowsto be affected to any significant degree by a sudden change in market interestrates applicable to our securities portfolio. In general, money market funds are not subject to market risk becausethe interest paid on such funds fluctuates with the prevailing interest rate.

 

29

----

Table ofContents

 

*Fair Value Measurements*

 

Allof our investment securities are available-for-sale securities and are reportedon the consolidated balance sheet at market value except for one auction ratepreferred security, or ARPS, with a par value of approximately$1.0 million. As a result of the negative conditions in the global creditmarkets, our ARPS is currently not liquid. In the event we need to access the funds that are in an illiquid state,we will not be able to do so without a loss of principal, until the security isredeemed by the issuer or it matures.

 

*Foreign Currency Risk*

 

Wehave operated primarily in the United States of America and most transactionsduring the three months and nine months ended September 30, 2010 have beenmade in U.S. dollars. Accordingly, we have not had any material exposure toforeign currency rate fluctuations. We do not have any foreign currency hedginginstruments in place.

 

Certaintransactions related to us and our subsidiary, OBI, are denominated primarilyin Taiwan dollars.  As a result, our financial results could be affectedby factors such as changes in foreign currency exchange rates or weak economicconditions in foreign markets where we conduct business, including the impactof the existing crisis in the global financial markets in such countries andthe impact on both the U.S. dollar and the Taiwan dollar.

 

Wedo not use derivative financial instruments for speculative purposes. We do notengage in exchange rate hedging or hold or issue foreign exchange contracts fortrading purposes. Currently, we do not expect the impact of fluctuations in therelative fair value of other currencies to be material.

 

**Item 4.Controls and Procedures**

 

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

 

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

 

30

----

Table ofContents

 

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

 

**PART II — OTHER INFORMATION**

 

**Item 1a.Risk Factors**

 

Therisk factors set forth below with an asterisk (*) next to the title are newrisk factors or risk factors containing changes, including any materialchanges, from the risk factors previously disclosed in Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2009, as filedwith the SEC.

 

**RisksRelated to Our Business**

 

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

 

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

 

·                  developing andsecuring U.S. and/or foreign regulatory approvals for fidaxomicin and Pruveland, to a lesser extent, other product candidates;

 

·                  commercializing,alone or with a partner, any product candidates for which we receive approvalfrom the FDA and/or comparable foreign regulatory authorities; and

 

·                  generating apipeline of innovative product candidates utilizing our drug discovery platformor through licensing strategies.

 

Our product candidates willgenerally require extensive clinical study and evaluation, regulatory approvalin multiple jurisdictions, substantial investment and significant marketingefforts before we generate any revenues from product sales.  We are not permitted to market or promote ourproduct candidates before we receive regulatory approval from the FDA orcomparable foreign regulatory authorities. We recently commenced submission of a rolling NDA for fidaxomicin to theFDA and submitted a MAA for fidaxomicin to the EMA.  We have not previously submitted an NDA orMAA, nor have we received marketing approval for either fidaxomicin orPruvel.  We cannot be certain that eitherof these product candidates will receive regulatory approval or be successfulin any future clinical trials.  If we donot receive regulatory approval for and successfully commercialize fidaxomicinand Pruvel, we will not generate any revenues from product sales for severalyears, if at all, and we may not be able to continue our operations.

 

We believe our initialsuccess will be more dependent on fidaxomicin than Pruvel, because we believethat the market for the treatment of CDI is larger than the market for thetreatment of infectious diarrhea.  Evenif we successfully obtain regulatory approval to market fidaxomicin or Pruvel,our revenues for either drug candidate will be dependent upon the size of themarkets in 

 

31

----

Table of Contents

 

the territories for which wehave commercial rights and our ability to successfully commercialize our drugcandidates in those markets, either alone or with a partner.  If the markets for the treatment of CDI orinfectious diarrhea are not as significant as we estimate or we are otherwiseunsuccessful in commercializing our drug candidates, our business and prospectswill be harmed.

 

**We haveincurred significant operating losses since inception and anticipate that wewill incur continued losses for the foreseeable future.***

 

We have experienced significantoperating losses since our inception in 1998. As of September 30, 2010, we had an accumulated deficit ofapproximately $210.9 million.  We havegenerated no revenues from product sales to date.  We have funded our operations through September 30,2010 from the sale of approximately $256.2 million of our securities andthrough research funding pursuant to collaborations with partners or governmentgrants.  We expect to continue to incursubstantial additional operating losses for the next several years as weprepare submissions for regulatory approval of our lead product candidates,build our marketing and sales capabilities and continue our clinical trial andresearch and development initiatives. Because of the numerous risks and uncertainties associated withdeveloping, obtaining regulatory approval for and commercializing our productcandidates, we are unable to predict the extent of any future losses.  We may never successfully commercialize ourproduct candidates and thus may never have any significant future revenues orachieve and sustain profitability.

 

**If we failto obtain additional financing, we may be unable to commercialize****fidaxomicin****and Pruvel or develop and commercialize other product candidates, orcontinue our other research and development programs.***

 

We will require additionalcapital to commercialize our current lead product candidates, fidaxomicin andPruvel.  We cannot be certain thatadditional funding will be available on acceptable terms, or at all.  Since 2008, the credit markets and thefinancial services industry have been experiencing a period of unprecedentedturmoil which has generally made equity and debt financing more difficult toobtain, and may negatively impact our ability to complete financingtransactions.  To the extent that weraise additional funds by issuing equity securities, our stockholders mayexperience significant dilution.  Anydebt financing, if available, may require us to pledge our assets as collateralor involve restrictive covenants, such as limitations on our ability to incuradditional indebtedness, limitations on our ability to acquire or licenseintellectual property rights and other operating restrictions that couldnegatively impact our ability to conduct our business.  If we are unable to raise additional capitalwhen required or on acceptable terms, we may have to significantly delay, scaleback or discontinue the development or commercialization of one or more of ourproduct candidates or one or more of our other research and development initiatives.  We also could be required to:

 

·                  seekcollaborators for one or more of our current or future product candidates at anearlier stage than otherwise would be desirable or on terms that are lessfavorable than might otherwise be available; or

 

·                  relinquish orlicense on unfavorable terms our rights to technologies or product candidatesthat we otherwise would seek to develop or commercialize ourselves.

 

32

----

Table ofContents

 

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

 

We do not currently havesufficient resources to commercialize fidaxomicin and Pruvel on our own. If weare unable to raise additional capital or are unable to effectively collaboratewith one or more partners for the commercialization of fidaxomicin or Pruvel,we will not generate significant revenues from sales of these products and our businesswill be materially harmed.

 

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

 

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

 

This regulatory review andapproval process, which includes evaluation of pre-clinical studies andclinical trials of our product candidates as well as the evaluation of ourmanufacturing processes and our third-party contract manufacturers’ facilities,is lengthy, expensive and uncertain.  Toreceive approval for a product candidate, we must, among other things,demonstrate with substantial evidence from well-controlled clinical trials thatthe product candidate is both safe and effective for each indication for whichapproval is sought.  Satisfaction of theapproval requirements typically takes several years and the time needed tosatisfy them may vary substantially, based on the type, complexity and noveltyof the pharmaceutical product.  We cannotpredict if or when we might receive regulatory approvals for any of our productcandidates currently under development.

 

InSeptember 2010, we began our submission of a rolling NDA filing forfidaxomicin to the FDA. With the exception of our recently submittedfidaxomicin NDA, we have not previously submitted NDAs to the FDA. In addition,we have never obtained FDA approval for any drug. This lack of experience mayimpede our ability to obtain FDA approval in a timely manner, if at all, forfidaxomicin, Pruvel or our other product candidates. We may also experience delays in submitting our NDA forPruvel to the FDA and/or delays in the FDA review of that NDA submission.  If we experience difficulty or delays inacquiring and assembling the extensive information needed to support an NDAfiling for fidaxomicin or Pruvel, our NDA submissions with respect to theseproduct candidates may be impaired or delayed, which could negatively impactour or a collaborator’s ability to successfully commercialize these productcandidates.  After we complete submissionof an NDA filing for fidaxomicin or after we submit an NDA filing for Pruvelwith the FDA, we may also experience delays in the FDA’s review process.  As part of the Prescription Drug User FeeAct, or PDUFA, the FDA has a goal to review and act on a percentage of allsubmissions in a given time frame. The FDA has missed a portion of their PDUFAgoals, and it is unknown whether the review of an NDA filing for fidaxomicin orPruvel, or for any of our other drug candidates, will be completed within theFDA review goals or will be delayed. Moreover, the duration of the FDA’s reviewmay depend on the number and type of other NDAs that are submitted with the FDAaround the same time period.

 

33

----

Table ofContents

 

Evenif our product candidates receive regulatory approval, any approvals that weobtain may not cover all of the clinical indications for which we are seekingapproval, or could contain significant limitations in the form of narrowindications, warnings, precautions or contra-indications with respect toconditions of use.  In such an event, ourability to generate revenues from such products would be greatly reduced andour business would be harmed.

 

TheFDA has substantial discretion in the approval process and may either refuse toconsider our applications for substantive review or may form the opinion afterreview of our data that our applications are insufficient to allow approval ofour product candidates.  Even if webelieve that data collected from our preclinical studies and clinical trials ofour product candidates are promising, our data may not be sufficient to supportmarketing approval by the FDA, or regulatory interpretation of these data andprocedures may be unfavorable. In addition, the FDA’s regulatory review of NDAsfor product candidates intended for widespread use by a large proportion of thegeneral population is becoming increasingly focused on safety. If the FDA doesnot consider or approve an application that we submit, it may require that weconduct additional clinical, pre-clinical or manufacturing validation studiesand submit that data before it will reconsider our application.  Depending on the extent of these or any otherstudies, approval of any applications that we submit may be delayed by severalyears, or may require us to expend more resources than we have available.  For example, we intend to rely in part oncertain legacy data from a third party to support an NDA for Pruvel. If the FDAdeems this data to be insufficient, it may delay our submission of a NDA forPruvel and could require us to complete additional studies.  It is also possible that additional studies,if performed and completed, may not be successful or considered sufficient bythe FDA for approval or even to make our applications approvable.  If any of these outcomes occur, we may beforced to abandon one or more of our future applications for approval, whichmight significantly harm our business and prospects. As a result, we cannotpredict when or whether regulatory approval will be obtained for any productcandidate we develop.

 

Even after completingclinical trials and other studies, our product candidates could fail to receiveregulatory approval for many reasons, including the following:

 

·                  the results ofour clinical trials and other studies may not demonstrate to the satisfactionof or meet the level of statistical significance required by the FDA orcomparable foreign regulatory authorities that a product candidate is safe andeffective for any indication;

 

·                  the FDA orcomparable foreign regulatory authorities may disagree with the design orimplementation of our clinical trials or other studies;

 

·                  the results ofour clinical trials or other studies may not demonstrate that a productcandidate’s clinical and other benefits outweigh its safety risks;

 

·                  the results ofour clinical trials or other studies may not demonstrate that a productcandidate presents an advantage over existing therapies, or over placebo in anyindications for which the FDA requires a placebo-controlled trial;

 

34

----

Table of Contents

 

·      the FDAor comparable foreign regulatory authorities may disagree with ourinterpretation of data from clinical trials or other studies;

 

·      the datacollected from clinical trials and other studies of our product candidates maynot be sufficient to support the submission of an  NDA or other submission or to obtainregulatory approval in the United States or elsewhere; and

 

·      theapproval policies or regulations of the FDA or comparable foreign regulatoryauthorities may significantly change in a manner rendering our clinical andother study data insufficient for approval.

 

Althoughwe have requested priority review by the FDA of our NDA for fidaxomicin, thereis no guarantee that the FDA will grant this request or otherwise complete itsreview within the timelines requested or anticipated by the Company.  In addition, although the FDA has grantedFast Track status to fidaxomicin and selected it for participation in a CMAPilot 2 Program, we cannot be certain that we will receive any benefitsfrom these designations or that the designations will expedite regulatoryreview or approval of fidaxomicin. Participation in these programs has not eliminated any phase of clinicaldevelopment.  Moreover, our participationin the CMA Pilot 2 Program has involved and will continue to involvefrequent discussions and other interactions with the staff of the FDA.  These frequent discussions could subjectfidaxomicin to a greater level of scrutiny than it might otherwise havereceived or require us to make more frequent submissions and endure otherburdens that would have been avoided if we had not participated in theprogram.  Therefore, despite anypotential benefits of fidaxomicin’s Fast Track and CMA Pilot 2 Programdesignations, significant uncertainty remains regarding the clinicaldevelopment and regulatory approval process for fidaxomicin. In addition, weexpect that the FDA will request an Advisory Committee review of fidaxomicin. We cannot ensure a positive outcome from any Advisory Committee meeting and theviews of the Committee could directly impact the FDA’s decision on whether toapprove our NDA for fidaxomicin.

 

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

 

Salesof our product candidates outside of the United States will be subject toforeign regulatory requirements governing clinical trials and marketingapproval.  Even if the FDA grantsmarketing approval for a product candidate, comparable regulatory authoritiesof foreign countries must also approve the marketing of the product candidatein those countries.  This is importantfor the commercialization of fidaxomicin for which we currently have exclusiveworldwide marketing rights.  Obtainingforeign regulatory approvals could result in significant delays, difficultiesand costs for us and require additional pre-clinical studies or clinical trialswhich would be costly and time consuming. Regulatory requirements can vary widely from country to country andcould delay the introduction of our products in those countries.  Clinical trials conducted in one country maynot be accepted by regulatory authorities in other countries, and regulatoryapproval in one country does not guarantee regulatory approval will be obtainedin any other country.  In addition, ourfailure to obtain regulatory approval in any country may delay or have negativeeffects on the process for regulatory approval in others.  For example, in 

 

35

----

Table ofContents

 

July 2010we filed an MAA for  fidaxomicin via thecentralized procedure with the EMA.  If unanticipated concerns are raisedby the EMA in its review, these concerns could negatively impact our NDAsubmission for fidaxomicin, or a subsequent submission for marketing approvalof fidaxomicin in a different country or territory.

 

Other than Pruvel, which issold by other parties in Japan, Italy and certain other Europeancountries, none of our product candidates is approved for sale in anyinternational market for which we have rights. If we fail to comply withregulatory requirements in our international markets or to obtain and maintainrequired approvals, 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.

 

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

 

Even if we receiveregulatory approval to sell our product candidates, the FDA and foreignregulatory authorities will likely impose significant restrictions on theindicated uses or marketing of such products, or impose ongoing requirementsfor potentially costly post-approval studies. In addition, following any regulatory approval of our productcandidates, we and our collaborators will be subject to continuing regulatoryobligations, such as requirements for storage, recordkeeping and safety reporting,and additional post-marketing obligations, including regulatory oversight ofthe labeling, packaging, promotion and marketing of our products.  If we or our collaborators become aware ofpreviously unknown problems with any of our product candidates in the UnitedStates or overseas or at our third-party manufacturers’ facilities, aregulatory agency may impose restrictions on our products, our third-partymanufacturers or on us, including requiring us to reformulate our products,conduct additional clinical trials, make changes in the labeling of ourproducts, implement changes to, or obtain re-approvals of, our third-partymanufacturers’ facilities, or withdraw the product from the market.  In addition, we or our collaborators mayexperience a significant drop in the sales of the affected products and ourproduct revenues will be reduced, our reputation in the marketplace may sufferand we may become the target of lawsuits, including class action suits.  Moreover, if we or our collaborators orthird-party manufacturers fail to comply with applicable regulatoryrequirements, we may be subject to civil or criminal fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions, costly new manufacturing requirements and criminalprosecution.  Any of these events couldharm or prevent sales of the affected products and reduce our related revenuesor could substantially increase the costs and expenses of commercializing andmarketing these products, which would significantly harm our business,financial condition and prospects.

 

**Wecurrently have no sales organization and have no experience as a company inmarketing drug products.  If we areunable to expand our marketing capabilities and establish sales capabilities orenter into agreements with third parties to market and sell our productcandidates, we may not be able to generate product revenues.***

 

Our strategy is to build afully-integrated U.S.-focused biopharmaceutical company to successfully executethe commercial launch of fidaxomicin in the U.S. market following regulatoryapproval.  We currently have only alimited marketing organization and do not have a sales organization formarketing, sales and distribution of pharmaceutical products and, as a company,we do not have any experience commercializing pharmaceutical products on ourown. In order to commercialize any products, we must build our marketing,sales, distribution, managerial and other non-technical capabilities or makearrangements with third parties to perform these services. We plan to build ourown marketing and sales force to commercialize fidaxomicin in the United Statesand are seeking third-party partners outside of the United States. We ownexclusive rights to commercialize Pruvel in the United States, and areevaluating our commercialization options for Pruvel in the United States. Theestablishment and development of our own sales force to market any products wemay develop will be expensive and time consuming and could delay any productlaunch, and we cannot be certain that we will be able to successfully developthis capability. We do not currently have sufficient funds to develop a salesforce and other resources that we believe would be necessary to adequatelymarket fidaxomicin and Pruvel in the United States. We will also have tocompete with other pharmaceutical and biotechnology companies to recruit, hire,train and retain marketing and sales personnel. To the extent we rely on thirdparties to commercialize our products, if any, we may receive less revenuesthan if we commercialized these products ourselves. In addition, we may havelittle or no control over the sales efforts of any third parties involved incommercializing our products. In the event we are unable to develop our ownmarketing and sales force or collaborate with a third-party marketing and salesorganization, we would not be able to commercialize our product candidateswhich would negatively impact our ability to generate product revenues.

 

**If we failto attract and retain senior management and key scientific personnel, we may beunable to successfully develop or commercialize our product candidates.***

 

36

----

Table of Contents

 

Our success depends in parton our continued ability to attract, retain and motivate highly qualifiedmanagement, clinical and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, cliniciansand scientists.  We are highly dependenton our chief executive officer, and the other principal members of ourexecutive and scientific teams. The unexpected loss of the service of any ofthese persons may significantly delay or prevent the achievement of research,development, commercialization and other business objectives.  Replacing key employees may be difficult andcostly and may take an extended period of time because of the limited number ofindividuals in our industry with the breadth of skills and experience requiredto develop and commercialize pharmaceutical products successfully.  We do not maintain “key person” insurancepolicies on the lives of these individuals or the lives of any of our otheremployees.  We employ these individualson an at-will basis and their employment can be terminated by us or them at anytime, for any reason and with or without notice.

 

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

 

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

 

We are a small company with74 employees as of October 29, 2010. To commercialize our product candidates or commence new clinical trials,we will need to expand our employee base for managerial, operational,marketing, sales, financial and other resources.  Future growth will impose significant addedresponsibilities on members of management, including the need to identify,recruit, maintain and integrate additional employees and may take time awayfrom running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performance and our ability to commercialize ourproduct candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively.  In particular, as our commercialization plansand strategies develop, we will need to recruit and train a substantial numberof sales and marketing personnel and expect to need to expand the size of ouremployee base for managerial, operational, financial and other resources. Tothat end, we must be able to:

 

·      manageour development efforts effectively;

 

·      integrateadditional management, administrative and manufacturing personnel;

 

·      build amarketing and sales organization; and

 

·      maintainsufficient administrative, accounting and management information systems andcontrols.

 

37

----

Table ofContents

 

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

 

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

 

If appropriate regulatoryapprovals are obtained, we intend to commercialize fidaxomicin outside of theUnited States through collaboration arrangements with third parties.  We may be unable to enter into collaborationarrangements in international markets. In addition, there can be no guarantee that if we enter into thesecollaboration arrangements with other parties that they will be successful orresult in more revenues than we could obtain by marketing fidaxomicin on ourown. If we are unable to enter into collaboration arrangements for our productsor develop an effective international sales force, our ability to generateproduct revenues would be limited, which would adversely affect our business,financial condition, results of operations and prospects. If we are unable toenter into such collaboration arrangements, we may need to develop our ownmarketing and sales force to market fidaxomicin in a number of countries inEurope and Latin America to hospital-based and long-term care physicians.  These efforts may not be successful as wehave no relationships among such hospital-based and long-term care physiciansand do not currently have sufficient funds to develop an adequate sales forcein these regions.  There is no guaranteethat we will be able to develop an effective international sales force tosuccessfully commercialize our products in these international markets.  If we cannot commercialize fidaxomicin, wewill have to rely solely on Pruvel and earlier stage product candidates for anyfuture revenues, and our ability to achieve and sustain profitability will bematerially harmed.

 

**We aredependent on third party collaborators and we may be unable to enter intofuture collaboration agreements or we may have disagreements with thesecollaborators.**

 

We currently plan to buildour own marketing and sales force for fidaxomicin in the United States and areevaluating our commercialization options for Pruvel in the United States, andwe are seeking one or more partners for the commercialization of fidaxomicinoutside of the United States.  We cannotbe certain that we will be successful in attracting any such partners.  If we were not able to find appropriatepartners for the continued development and commercialization of fidaxomicin, orour other product candidates, we would either have to delay further developmentand commercialization initiatives,  whichwould harm our business and prospects, or raise significant additional funds todevelop clinical and commercialization capabilities internally.

 

We are subject to a numberof additional risks associated with our dependence on collaborations with thirdparties.** **Conflicts may arise between us and collaborators, such asconflicts concerning the payment or reimbursement of development andcommercialization costs, the strategies for developing and commercializingproduct candidates subject to the collaboration, the achievement of milestones,the interpretation of financial provisions, the ownership of intellectualproperty developed during the collaboration or the interpretation of clinicaldata.  If 

 

38

----

Table of Contents

 

any such conflicts arise, acollaborator could act in its own self-interest, which may be adverse to ourbest interests.  Any such disagreementbetween us and a collaborator could result in one or more of the following,each of which could delay or prevent the development or commercialization offidaxomicin, and our other product candidates, and in turn prevent us fromgenerating sufficient revenues to achieve or maintain profitability:

 

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

 

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

 

·                  delays in further development or commercializationactivities by us or a collaborator if we and a collaborator are unable to agreeon development or commercialization activities or the associated costs of theseactivities;

 

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

 

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

 

In addition, a collaboratormay not have or devote sufficient resources to develop and commercialize ourproduct candidates, may elect to underfund, discontinue or may not properlyperform pre-clinical studies or clinical trials, or may divert resources toother programs that are potentially competitive with our product candidates.

 

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

 

If approved, our leadproduct candidates will compete against both branded antibiotic therapies, suchas Vancocin Pulvules with respect to fidaxomicin and Xifaxan®/rifaxamin with respect toPruvel, and generic antibiotics such as metronidazole and oral vancomycin withrespect to fidaxomicin and ciprofloxacin with respect to Pruvel.  In addition, we anticipate that fidaxomicinwill compete with other antibiotic and anti-infective product candidatescurrently in development for the treatment of CDI. Many of these products havebeen or will be developed and marketed by major pharmaceutical companies, whohave significantly greater financial resources and expertise in research anddevelopment, pre-clinical testing, conducting clinical trials, obtainingregulatory approvals, manufacturing and marketing approved products than wedo.  As a result, these companies mayobtain regulatory approval more rapidly than we are able to and may be moreeffective in selling and marketing their products as well.  Smaller or early-stage companies may alsoprove to be significant competitors, particularly through collaborativearrangements with large, established companies.

 

39

----

Table of Contents

 

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

 

40

----

Table ofContents

 

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

 

We outsource allmanufacturing of clinical trial supplies of our product candidates to thirdparties.  We seek to establish long-termsupply arrangements with third-party contract manufacturers. For example, in May 2010,we entered into a long-term supply agreement with Biocon for the commercialmanufacturing of the fidaxomicin API.  We intend to continue outsourcing the manufacture of our productcandidates to third parties for any future clinical trials and large-scalecommercialization of any product candidates that receive regulatory approvaland become commercial drugs.

 

Our ability to develop andcommercialize fidaxomicin and Pruvel and any other product candidates dependsin part on our ability to arrange for collaborators or other third parties tomanufacture our products at a competitive cost, in accordance with strictlyenforced regulatory requirements and in sufficient quantities for clinicaltesting and eventual commercialization. We have not yet manufactured commercial batches of fidaxomicin, Pruvelor any of our other product candidates. Collaborators or third-party manufacturers that we select to manufactureour product candidates for clinical testing or on a commercial scale mayencounter difficulties with the small- and large-scale formulation andmanufacturing processes required for such manufacture.  Such difficulties could result in delays inclinical trials, regulatory submissions and approvals, or commercialization ofour product candidates.  The inability ofus or our collaborators to enter into and maintain agreements with third-partymanufacturers on acceptable terms would cause shortages of clinical trialsupplies of our product candidates, thereby delaying or preventing regulatoryapproval and/or commercialization of the affected product candidate, andadversely affecting our ability to generate revenues.  Specifically, Biocon is currently our solesupplier of fidaxomicin API.  While wework closely with Biocon to try to ensure continuity of supply whilemaintaining high quality and reliability, we cannot guarantee that theseefforts will be successful.  A reductionor interruption in our supply of fidaxomicin API from Biocon, and an inabilityto develop alternative sources for such supply, could adversely affect ourability to manufacture fidaxomicin in a timely or cost effective manner to makeour related product sales. Further, development of large-scale manufacturingprocesses will require additional validation studies, which the FDA must reviewand approve, and the time it will take us or a third party manufacturer todevelop such large-scale processes and capabilities may delay any productlaunch following regulatory approval. Even if we are able to establish additional or replacementmanufacturers, identifying these sources and entering into definitive supplyagreements and obtaining regulatory approvals may involve a substantial amountof time and cost and such supply arrangements may not be available onacceptable economic terms.

 

In addition, we, ourcollaborators and other third-party manufacturers of our products must complywith strictly enforced current good manufacturing practices, or cGMP,requirements enforced by the FDA through its facilities inspectionprogram.  These requirements includequality control, quality assurance and the maintenance of records anddocumentation.  We currently rely onBiocon to manufacture fidaxomicin API and rely on Patheon, Inc. to 

 

41

----

Table of Contents

 

manufacture the drug productsupplies.  As such, Biocon and Patheonwill be subject to ongoing periodic unannounced inspections by the FDA andother agencies for compliance with current cGMP, and similar foreign standards.We also rely on Nippon Shinyaku, which contracts with Juzen, as well asAngelini and Patheon, to manufacture Pruvel drug supplies.  The manufacturing facilities of Biocon, Juzenand Patheon have been inspected and approved by the FDA for other companies’drug products; however, none of Biocon’s, Juzen’s nor Patheon’s facilities havebeen inspected by the FDA for the manufacture of our drug supplies.  Angelini’s facilities have not been inspectedor approved by the FDA.  We or otherthird-party manufacturers of our products may be unable to comply with cGMPrequirements and with other FDA, state, local and foreign regulatoryrequirements.  We and our collaboratorshave little control over third-party manufacturers’ compliance with theseregulations and standards.  A failure tocomply with these requirements by our third-party manufacturers, includingBiocon, Juzen, Angelini, and Patheon could result in the issuance of untitledletters and/or warning letters from authorities, as well as sanctions beingimposed on us, including fines and civil penalties, suspension of production,suspension or delay in product approval, product seizure or recall orwithdrawal of product approval.  Inaddition, we have no control over these manufacturers’ ability to maintainadequate quality control, quality assurance and qualified personnel.  If the safety of any quantities supplied bythird parties is compromised due to their failure to adhere to applicable lawsor for other reasons, we may not be able to obtain or maintain regulatoryapproval for or successfully commercialize one or more of our productcandidates, which would significantly harm our business and prospects.

 

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

 

Even if our productcandidates are approved by the appropriate regulatory authorities for marketingand sale, physicians may not prescribe our product candidates, which wouldprevent us from generating revenues or becoming profitable.  Market acceptance of fidaxomicin, Pruvel andany of our future product candidates by physicians, patients and healthcarepayors will depend on a number of factors, many of which are beyond ourcontrol, including:

 

·                  timing of market introduction of our productcandidates as well as of competitive drugs;

 

·                  the clinical indications for which the productcandidate is approved;

 

·                  acceptance by physicians and patients of each productcandidate as a safe and effective treatment;

 

·                  perceived advantages over alternative treatments;

 

·                  the cost of treatment in relation to alternativetreatments, including numerous generic antibiotics;

 

42

----

Table ofContents

 

·                  the extent to which the product candidate is approvedfor inclusion on formularies of hospitals and managed care organizations;

 

·                  the extent to which bacteria develops resistance tothe product candidate, thereby limiting its efficacy in treating or managinginfections;

 

·                  whether the product candidate is designated underphysician treatment guidelines as a first-line therapy or as a second- orthird-line therapy for particular infections;

 

·                  the availability of adequate reimbursement by thirdparties, such as insurance companies and other healthcare payors;

 

·                  limitations or warnings contained in a product’sFDA-approved labeling;

 

·                  relative convenience and ease of administration; and

 

·                  prevalence and severity of adverse side effects.

 

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

 

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

 

In addition, inJuly 2008 the FDA notified makers of fluoroquinolone antimicrobial drugsfor systemic use that a boxed warning is necessary for those products due tothe risk of tendonitis and tendon rapture. As prulifloxacin, the generic name for Pruvel, is a fluoroquinoloneantibiotic it may be required to carry a black box warning.  Although these risks have been described foryears on the product label of many fluoroquinolones, the increased awareness ofthis risk may impact the market potential for the fluoroquinolone class ofantibiotics, including prulifloxacin. Furthermore, because prulifloxacin has already been marketed by othercompanies outside the United States to treat a wide range of bacterialinfections, including infectious diarrhea, urinary tract infections  and respiratory tract infections, patientsmay be able to obtain prulifloxacin from these other companies, and not fromus, if prulifloxacin is approved in the market where the patient islocated.  We have rights to Pruvel onlyin the United States.  These patients mayobtain prulifloxacin in these other markets from other companies even if thesepatients are from the United States.

 

43

----

Table ofContents

 

**If we failto develop and commercialize other products or product candidates, we may beunable to grow our business.**

 

A key element of ourstrategy is to commercialize a portfolio of new anti-infective products inaddition to fidaxomicin and Pruvel.  As asignificant part of our growth strategy, we intend to develop andcommercialize, independently and/or through collaboration partners, additionalproducts and product candidates through our discovery research program usingour proprietary technology, including OPopS. The success of this strategy depends upon our ability to identify,select and acquire pharmaceutical product candidates and products that fit intoour development plans on terms that are acceptable to us. To supplement thisstrategy, we may also obtain rights to additional product candidates from thirdparties through acquisition or in-licensing transactions.

 

Any product candidate weidentify or to which we acquire rights will likely require additionaldevelopment efforts prior to commercial sale, including pre-clinical studies,extensive clinical testing and approval by the FDA and applicable foreignregulatory authorities.  All productcandidates are prone to the risks of failure that are inherent inpharmaceutical product development, including the possibility that the productcandidate will not be shown to be sufficiently safe and/or effective forapproval by regulatory authorities.  Inaddition, we cannot assure you that any such products that are approved will bemanufactured or produced economically, successfully commercialized or widelyaccepted in the marketplace or be more effective than other commerciallyavailable alternatives.

 

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

 

If we are unable to developsuitable potential product candidates through internal research programs or byobtaining rights to novel therapeutics from third parties, our business andprospects will suffer.

 

Our focus on drug discoveryand development using our technology platform, including our patentedproprietary OPopS drug discovery platform, is novel and unique.  As a result, we cannot be certain that ourproduct candidates will produce commercially viable drugs that safely andeffectively treat infectious diseases or other diseases.  To date, our technology platform has yieldedonly a small number of anti-infective product candidates.  In addition, we do not have significantclinical data with respect to any of these potential product candidates.  Even if we or our collaborators aresuccessful in completing clinical development and receiving regulatory approvalfor one commercially viable drug for the treatment of one disease using ourtechnology platform and carbohydrate chemistry focus, we cannot be certain thatwe or our collaborators will also be able to develop and receive regulatoryapproval for other drug candidates for the treatment of other forms of thatdisease or other diseases.  If we fail todevelop and commercialize, independently and/or through collaborators, viabledrugs using our platform and specialized focus, we will not be successful indeveloping a pipeline of potential product candidates to follow fidaxomicin andPruvel, and our business prospects would be significantly harmed.

 

44

----

Table ofContents

 

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

 

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

 

·                  exposure to unknown liabilities;

 

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

 

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

 

·                  higher than expected acquisition and integrationcosts;

 

·                  increased amortization expenses;

 

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

 

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

 

·                  inability to retain key employees of any acquiredbusinesses.

 

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

 

45

----

Table ofContents

 

**Our abilityto pursue the development and commercialization of Pruvel, our other productcandidates and our future product candidates depends upon the continuation ofour licenses from third parties.**

 

Our license agreement withNippon Shinyaku provides us with an exclusive license to develop andcommercialize Pruvel for any indication in the United States, with a right tosublicense to third parties.  In theevent Nippon Shinyaku is not able to supply us with Pruvel, the licenseagreement provides us with a non-exclusive, worldwide right and license tomanufacture or have Pruvel manufactured for us. Either we or Nippon Shinyaku may terminate the license agreementimmediately upon the bankruptcy or dissolution of the other party or upon abreach of any material provision of the agreement if the breach is not curedwithin 60 days following written notice. In addition, we are entitled to terminate the agreement in the eventthat the FDA compels us to cease sales of Pruvel in the United States.  If our license agreement with Nippon Shinyakuterminates, we will lose our rights to develop, manufacture and commercializePruvel and our potential revenues would be limited.  Similarly, if our agreement with TSRI, forthe license of our OPopS technology is terminated, we will not be able tofurther develop future product candidates using our OPopS technology, and ourthird party licensees may be unable to continue development of our existingout-licensed product candidates.

 

**We rely onour majority-owned subsidiary, OBI, for the development of one of our productcandidates.***

 

In October 2009, wecompleted a number of transactions involving our subsidiary, OBI, including thesale of 40% of our ownership interest in OBI to various third partyinvestors.  In connection with thesetransactions, we assigned to OBI, and OBI assumed from us, our rights andobligations under our license agreement with MSKCC related to our OPT-822/821product candidate and our rights and obligations under one of our licenseagreements with TSRI related to our OPT-88 product candidate.  We also assigned to OBI certain of ourintellectual property and know-how related to these two product candidates. Inexchange for these assignments, we have the right to receive certain milestoneor royalty payments relating to these product candidates.

 

OBI subsequently decided notto pursue further development of OPT-88, and we cannot assure you that OBI willsuccessfully advance the development of OPT-822/821.  In addition, if OBI does not comply with itsobligations under the agreement with MSKCC, the agreement may be terminated andwe may not be able to re-assume our rights under the agreement.  If the agreement with MSKCC was terminatedand we were unable to re-assume our rights, we would not be able to pursuefurther development of OPT-822/821. Moreover, the addition of third party investors in OBI has alsodiminished our ability to control OBI, which is now subject in some respects tothe rights of the third party minority stockholders.  In the future, additional equity financingsor other issuances of equity securities or securities convertible into equityby OBI may further reduce our ownership position in OBI and we may not maintaina controlling interest in OBI.  To theextent that we do not maintain a controlling equity interest in OBI in thefuture, we would have to rely on OBI’s contractual obligations, including underour Intellectual Property Assignment and License Agreement, to ensure that OBIcontinues development of OPT-822/821 and complies with its obligations underthe MSKCC agreement.  Finally, OBI will 

 

46

----

Table of Contents

 

need additional funds tofurther develop and commercialize OPT-822/821, and OBI may not be able tosecure adequate funding or be able to do so on terms you or we believe arefavorable.  If OBI is unable to raiseadditional funds to continue operations, or otherwise fails to advance thedevelopment of OPT-822/821, we will not receive milestone or royalty paymentswith respect to this product candidate, and the value of our OBI equityposition would likely diminish.

 

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

 

We face an inherent risk ofproduct liability lawsuits related to the testing of our product candidates,and will face an even greater risk if product candidates are introduced commercially.  An individual may bring a liability claimagainst us if one of our product candidates causes, or merely appears to havecaused, an injury.  If we cannotsuccessfully defend ourselves against the product liability claim, we may incursubstantial liabilities.  Regardless ofmerit or eventual outcome, liability claims may result in:

 

·                  decreased demand for our product candidates;

 

·                  injury to our reputation;

 

·                  termination of clinical trial sites or entire clinicaltrial programs;

 

·                  withdrawal of clinical trial participants;

 

·                  significant litigation costs;

 

·                  substantial monetary awards to or costly settlementwith patients;

 

·                  product recalls;

 

·                  loss of revenues; and

 

·                  the inability to commercialize our product candidates.

 

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

 

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

 

47

----

Table ofContents

 

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

 

Clinical testing isexpensive and can take many years to complete, and its outcome isuncertain.  Failure can occur at any timeduring the clinical trial process. The results of pre-clinical studies andearly clinical trials of our product candidates may not be predictive of theresults of later-stage clinical trials. Product candidates in later stages ofclinical trials may fail to show the desired safety and efficacy traits despitehaving progressed through pre-clinical studies and initial clinicaltesting.  In addition, sub-analysis ofclinical trial data may reveal limitations of our product candidates eventhough top-line results are positive. The type and amount of clinical data necessary to gain regulatoryapproval for our product candidates may also change during or after completionof our clinical trials or we may inaccurately characterize such requirements.

 

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

 

We have in the past experienceddelays in clinical trials of our product candidates and we may experiencedelays in future clinical trials.  Forexample, we are planning to conduct proof-of-concept clinical trials for otherindications of fidaxomicin and we may conduct a study subsequent to NDAsubmission to compare fidaxomicin to metronidazole for the treatment ofCDI.  We do not know whether plannedclinical trials will begin on time, will need to be redesigned or will becompleted on schedule, if at all. Clinical trials can be delayed for a variety of reasons, includingdelays in obtaining regulatory approval to commence a trial, in reachingagreement on acceptable terms with prospective clinical research organizations,or CROs, and clinical trial sites, in obtaining institutional review boardapproval at each site, in recruiting suitable patients to participate in atrial, in having patients complete a trial or return for post-treatmentfollow-up, in adding new sites or in obtaining sufficient supplies of clinicaltrial materials.  Many factors affectpatient enrollment, including the size and nature of the patient population,the proximity of patients to clinical sites, the eligibility criteria for thetrial, the design of the clinical trial, competing clinical trials, clinicians’and patients’ perceptions as to the potential advantages of the drug beingstudied in relation to other available therapies, including any new drugs thatmay be approved for the indications we are investigating and whether theclinical trial design involves comparison to placebo.

 

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

 

48

----

Table of Contents

 

or our clinical protocols,inspection of the clinical trial operations or trial site by the FDA or otherregulatory authorities resulting in the imposition of a clinical hold,unforeseen safety issues or adverse side effects, failure to demonstrate abenefit from using a drug, changes in governmental regulations oradministrative actions or lack of adequate funding to continue the clinicaltrial.  If we experience delays in thecompletion of, or termination of, any clinical trial of our product candidates,the commercial prospects of our product candidates may be harmed, and ourability to generate product revenues from any of these product candidates willbe delayed.  In addition, any delays incompleting our clinical trials will increase our costs, slow down our productdevelopment and approval process and jeopardize our ability to commence productsales and generate revenues.  Any ofthese occurrences may significantly harm our business, financial condition andprospects.

 

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

 

Our clinical trials may besuspended at any time for a number of reasons. We may voluntarily suspend or terminate our clinical trials if at anytime we believe that they present an unacceptable risk to participants.  In addition, regulatory agencies may orderthe temporary or permanent discontinuation of our clinical trials at any timeif they believe that the clinical trials are not being conducted in accordancewith applicable regulatory requirements or that they present an unacceptablesafety risk to participants.  In our Phase3 clinical trials of fidaxomicin, the most common drug-related side effectsreported were nausea, vomiting, constipation, anorexia, headache anddizziness.  Patients treated with Pruvelhave experienced drug-related side effects including abdominal pain, diarrhea,nausea, renal toxicities, cardiac arrhythmias, photosensitivity, rash,excessive flushing of the skin and central nervous system effects, such asseizures.  If adverse, drug-relatedevents are encountered or suspected, our trials would be interrupted, delayedor halted and the FDA or comparable foreign regulatory authorities could orderus to cease further development of or deny approval of our product candidatesfor any or all targeted indications. Adverse events encountered in any post-approval studies may also harmour collaborators’ efforts to market our product candidates or could result inwithdrawal of regulatory approvals.  Evenif we believe our product candidates are safe, our data is subject to review bythe FDA, which may disagree with our conclusions and delay or deny approval ofour product candidates which would significantly harm the commercial prospectsof such product candidates.  Moreover, wecould be subject to significant liability if any volunteer or patient suffers,or appears to suffer, adverse side effects as a result of participating in ourclinical trials.  Any of theseoccurrences may significantly harm our business and prospects.

 

**We haverelied and in the future may rely on third parties to conduct our clinicaltrials.  If these third parties do notsuccessfully carry out their contractual duties or meet expected deadlines, weand our collaborators may not be able to obtain regulatory approval for orcommercialize our product candidates.***

 

We have in the past enteredinto agreements with third-party CROs, such as INC Research, to providemonitors for and to manage data for our clinical programs.

 

49

----

Table ofContents

 

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

 

In addition, thesethird-party CROs are not our employees, and we cannot control whether or notthey devote sufficient time and resources to our clinical programs.  These CROs may also have relationships withother commercial entities, including our competitors, for whom they may also beconducting clinical studies or other drug development activities, which couldharm our competitive position.  If CROsdo not successfully carry out their contractual duties or obligations or meetexpected deadlines, if they need to be replaced, or if the quality or accuracyof the clinical data they obtain is compromised due to the failure to adhere toour clinical protocols, regulatory requirements, or for other reasons, ourclinical trials may be extended, delayed or terminated or may have to berepeated, and we may not be able to obtain regulatory approval for orsuccessfully commercialize our product candidates.  As a result, our financial results and thecommercial prospects for our product candidates would be harmed, our costscould increase and our ability to generate revenues could be delayed.

 

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

 

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

 

Many healthcare providers,such as hospitals, receive a fixed reimbursement amount per procedure or othertreatment therapy, and these amounts are not necessarily based on the actualcosts incurred.  As a result, these healthcareproviders may choose only the least expensive therapies regardless ofefficacy.  We cannot guarantee that ourproduct candidates will be the least expensive alternative and thus providersmay decide not to use them or buy them for treatment.

 

50

----

Table ofContents

 

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

 

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

 

TheU.S. and some foreign jurisdictions are considering or have enacted a number oflegislative and regulatory proposals to change the healthcare system in waysthat could affect our ability to sell our products profitably. Among policymakers and payors in the U.S. and elsewhere, there is significant interest inpromoting changes in healthcare systems with the stated goals of containinghealthcare costs, improving quality and/or expanding access. In the U.S., thepharmaceutical industry has been a particular focus of these efforts and hasbeen significantly affected by major legislative initiatives.

 

InMarch 2010, the Patient Protection and Affordable Care Act, as amended by theHealth Care and Education Affordability Reconciliation Act, or collectively,PPACA, became law in the U.S. PPACA substantially changes the way healthcare isfinanced by both governmental and private insurers and significantly affectsthe pharmaceutical industry. Among the provisions of PPACA of greatestimportance to the pharmaceutical industry are the following:

 

·                  an annual, nondeductible fee on any entity thatmanufactures or imports certain branded prescription drugs and biologic agents,apportioned among these entities according to their market share in certaingovernment healthcare programs, beginning in 2011;

 

·                  an increase in the rebates a manufacturer must payunder the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to23.1% and 13% of the average manufacturer price for branded and generic drugs,respectively;

 

·                  a new Medicare Part D coverage gap discount program,in which manufacturers must agree to offer 50% point-of-sale discounts offnegotiated prices of applicable brand drugs to eligible beneficiaries duringtheir overage gap period, as a condition for the manufacturer’s outpatientdrugs to be covered under Medicare Part D, beginning in 2011;

 

·                  extension of manufacturers’ Medicaid rebate liabilityto covered drugs dispensed to individuals who are enrolled in Medicaid managedcare organizations, effective March 23, 2010;

 

·                  expansion of eligibility criteria for Medicaidprograms by, among other things, allowing states to offer Medicaid coverage toadditional individuals beginning in April 2010 and by adding new mandatoryeligibility categories for certain individuals with income at or below 133% ofthe Federal Poverty Level beginning in 2014, thereby potentially increasingmanufacturers’ Medicaid rebate liability;

 

51

----

Tableof Contents

 

·                  expansion of the entities eligible for discounts underthe Public Health Service pharmaceutical pricing program, effective in January2010;

 

·                  new requirements to report certain financialarrangements with physicians, including reporting any “transfer of value” madeor distributed to prescribers and other healthcare providers, effective March30, 2013, and reporting any investment interests held by physicians and theirimmediate family members during the preceding calendar year;

 

·                  a new requirement to annually report drug samples thatmanufacturers and distributors provide to physicians, effective April 1,2012;

 

·                  a licensure framework for follow-on biologic products;and

 

·                  a new Patient-Centered Outcomes Research Institute tooversee, identify priorities in, and conduct comparative clinical effectivenessresearch, along with funding for such research.

 

Weanticipate that the PPACA, as well as other healthcare reform measures that maybe adopted in the future, may result in more rigorous coverage criteria and inadditional downward pressure on the price that we receive for any approvedproduct, and could seriously harm our business. Any reduction in reimbursementfrom Medicare or other government programs may result in a similar reduction inpayments from private payors.

 

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

 

As a result of the PPACA andthe trend towards cost-effectiveness criteria and managed healthcare in theUnited States, third-party payors are increasingly attempting to containhealthcare costs by limiting both coverage and the level of reimbursement ofnew drugs.  They may also refuse toprovide any coverage of uses of approved products for medical indications otherthan those for which the FDA has granted market approvals.  As a result, significant uncertainty existsas to whether and how much third-party payors will reimburse for newly-approveddrugs, which in turn will put pressure on the pricing of drugs.  Further, we do not have experience inensuring approval by applicable third-party payors outside of the United Statesfor reimbursement of our products.  Theavailability of numerous generic antibiotics at lower prices than brandedantibiotics can also be expected to substantially reduce the likelihood ofreimbursement for fidaxomicin and Pruvel. We also anticipate pricing pressures in connection with the sale of ourproducts due to the trend toward managed healthcare, the increasing influenceof health maintenance organizations and additional legislative proposals.

 

52

----

Table ofContents

 

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

 

We are subject to variousfederal and state laws pertaining to healthcare fraud and abuse, includinganti-kickback laws, the False Claims Act, the Foreign Corrupt Practices Act andstate laws requiring reporting and certification under comprehensive complianceprograms governing our financial relationships with healthcare providers.  Violations of these laws are punishable bycriminal and civil sanctions, including, in some instances, exclusion fromparticipation in federal and state healthcare programs, including Medicare andMedicaid, and the curtailment or restructuring of operations.  We believe that our operations are inmaterial compliance with such laws and we are aware of the need to increase ourcompliance resources if we begin marketing products.  However, because of the far-reaching nature ofthese laws, there can be no assurance that we would not be required to alterone or more of our practices to be in compliance with these laws.  In addition, there can be no assurance thatthe occurrence of one or more violations of these laws or regulations would notresult in a material adverse effect on our financial condition and results ofoperations.

 

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

 

Our third-partymanufacturers’ activities and, to a lesser extent, our own activities involvethe controlled storage, use and disposal of hazardous materials, including thecomponents of our product candidates and other hazardous compounds.  We and our manufacturers are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of these hazardous materials.  Although we believe that the safetyprocedures for handling and disposing of these materials comply with thestandards prescribed by these laws and regulations, we cannot eliminate therisk of accidental contamination or injury from these materials.  We currently have insurance coverage in theamount of approximately $250,000 for damage claims arising from contaminationon our property.  These amounts may notbe sufficient to adequately protect us from liability for damage claimsrelating to contamination.  If we aresubject to liability exceeding our insurance coverage amounts, our business andprospects would be harmed.  In the eventof an accident, state or federal authorities may also curtail our use of thesematerials and interrupt our business operations.

 

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

 

Despite the implementationof security measures, our internal computer systems are vulnerable to damagefrom computer viruses, unauthorized access, natural disasters, terrorism, warand telecommunication and electrical failures. Any system failure, accident or security breach that causesinterruptions in our operations could result in a material disruption of ourdrug 

 

53

----

Table of Contents

 

development programs.  For example, the loss of clinical trialinformation from completed or ongoing clinical trials for fidaxomicin orPruvel, which is maintained by our third-party CRO, could result in delays inour regulatory approval efforts and significantly increase our costs to recoveror reproduce the data.  To the extentthat any disruption or security breach results in a loss or damage to our dataor applications, or inappropriate disclosure of confidential or proprietaryinformation, we may incur liability and the further development of our productcandidates may be delayed.

 

**RisksRelated to Our Intellectual Property**

 

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

 

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

 

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

 

The degree of futureprotection for our proprietary rights is uncertain, because legal means affordonly limited protection and may not adequately protect our rights or permit usto gain or keep our competitive advantage. For example:

 

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

 

·                  others may be able to make competing pharmaceuticalformulations containing our product candidates or components of our productformulations that are either not covered by the claims of our issued patents orlicensed patents, not licensed to us under our license agreements or aresubject to patents that expire;

 

·                  we or our licensors might not have been the first tomake the inventions covered by our issued patents and pending patentapplications or the pending patent applications and issued patents of ourlicensors;

 

54

----

Tableof Contents

 

·                  we or our licensors might not have been the first tofile patent applications for these inventions;

 

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

 

·                  it is possible that our pending patent applications orour licensed patent applications will not result in issued patents;

 

·                  our issued patents and pending patent applications orthe pending patent applications and issued patents of our licensors may notprovide us with any competitive advantages, may be designed around by ourcompetitors, including generic drug companies, or may be held invalid orunenforceable as a result of legal challenges by third parties;

 

·                  we may not develop additional proprietary technologiesthat are patentable; or

 

·                  the patents of others may have an adverse effect onour business.

 

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

 

We have two issued patentsand 13 pending patent applications related to fidaxomicin in the U.S.  We also have two issued foreign patentsrelated to fidaxomicin.

 

The patent and patentapplications related to fidaxomicin encompass various topics relating to:

 

·                  composition of matter;

 

·                  pharmaceutical composition and methods of use;

 

·                  polymorphic forms and pharmaceutical compositions thereof;

 

·                  manufacturing processes;

 

·                  treatment of diseases;

 

·                  formulation;

 

·                  selected indications in CDI patients; and

 

·                  primary metabolites.

 

55

----

Table ofContents

 

If we are unable to obtainsufficient patent protection encompassing fidaxomicin, our competitors,including generic drug companies, may be able to design other similarformulations of the active ingredient of fidaxomicin.  Furthermore, even though the manufacturingprocess patent has issued, and even if the formulation patent applicationresults in an issued patent, our competitors, including generic drug companies,may be able to design around our manufacturing processes or formulation forfidaxomicin.  As a result, ourcompetitors may be able to develop competing products without infringing ourpatents.

 

Inaddition, we currently plan to submit an NDA for Pruvel for the treatment ofinfectious diarrhea in the first quarter of 2011.  The patent covering Pruvel expired inFebruary 2009.  In 2009, ourlicensor, Nippon Shinyaku received an additional patent in the U.S. whichrelates to a key intermediate in the manufacturing process for Pruvel.  Despite its issuance, this patent may laterbe challenged by a third party or fail to prevent a third party from producingand marketing a generic form of Pruvel in the United States.   If the available protection afforded by thispatent is insufficient, we will likely rely on one or more regulatory marketingexclusivities for Pruvel in the United States. Specifically, if our NDA for Pruvel is approved, we expect to receive afive-year period of marketing exclusivity under the Hatch-Waxman Act. Thisexclusivity period is available to the first applicant to gain approval of anNDA for a new chemical entity, or NCE, that has not previously been approved asan active ingredient under Section 505(b) of the Food Drug and CosmeticAct, or FDCA.  While we expect that theNCE exclusivity period will be available for Pruvel, if the recent patent isinsufficient to maintain exclusivity in the United States with respect toPruvel, we may face generic competition in the United States five years afterour NDA for Pruvel is approved by the FDA. If we are unable to obtain marketingexclusivity beyond five years from the approval of our NDA, our potentialrevenues from Pruvel sales in the U.S. will be limited.

 

We depend, in part, on ourlicensors and collaborators to protect a portion of our proprietaryrights.  In such cases, our licensors andcollaborators may be primarily or wholly responsible for the maintenance ofpatents and prosecution of patent applications relating to important areas of ourbusiness.  For example, Nippon Shinyakuis responsible for the maintenance of patents and prosecution of patentapplications relating to Pruvel.  We mayalso be dependent on Par to provide technical support for patent applicationsrelating to fidaxomicin.  If any of theseparties fail to adequately protect these product candidates with issuedpatents, our business and prospects would be significantly harmed.

 

Under our agreement withNippon Shinyaku, in the event Nippon Shinyaku fails to take all steps necessaryto seek extension of the patents licensed to us in the United States 180 daysafter we request such action be taken, then we have the right to take allnecessary actions to extend the licensed patents.  Our agreement with Par does not have explicitprovisions regarding our rights to take necessary action with respect tomaintenance of patents and prosecution of patent applications nor do suchagreements provide us with any legal recourse in the event such parties do notso maintain and/or prosecute.  If any ofthese parties or others on which we rely for patent maintenance and prosecutionfail to adequately maintain patents and prosecute patent applications relatingto technology licensed to or from us, we may be required to take further actionon our own to protect this technology. However, we may not be successful in maintaining such patents orprosecuting such patent applications and if so, our business and prospectswould be significantly harmed.

 

56

----

Table ofContents

 

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

 

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

 

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

 

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

 

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

 

57

----

Table ofContents

 

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

 

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

 

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

 

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

 

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

 

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

 

58

----

Table ofContents

 

The trading price of our common stock is likely to behighly volatile and could be subject to wide fluctuations in price in responseto various factors, many of which are beyond our control, including:

 

·                  general economic and market conditions and otherfactors that may be unrelated to our operating performance or the operatingperformance of our competitors;

 

·                  announcement of FDA or comparable foreign regulatoryagency approval or non-approval of our product candidates, or specific labelindications for their use, or delays in the FDA or comparable foreignregulatory agency review process;

 

·                  actions taken by the FDA or other regulatory agencieswith respect to our product candidates, clinical trials, manufacturing processor marketing and sales activities;

 

·                  any adverse development or perceivedadverse development with respect to the FDA’s review of our NDA for fidaxomicinor the EMA’s review of our MAA for fidaxomicin, including a request foradditional information;

 

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

 

·                  the success of our development efforts and clinicaltrials, particularly with respect to fidaxomicin and Pruvel;

 

·                  announcements by our collaborators with respect toclinical trial results, regulatory submissions and communications from the FDAor comparable foreign regulatory agencies;

 

·                  the success of our efforts to acquire or in-licenseadditional products or product candidates;

 

·                  developments concerning our collaborations and partnerships,including but not limited to those with our sources of manufacturing supply andour development and commercialization partners;

 

·                  our failure to successfully execute ourcommercialization strategy with respect to our products following marketingapproval thereof;

 

·                  inability to obtain adequate commercial supply for anyproduct following marketing approval thereof, or inability to do so atacceptable prices;

 

·                  actual or anticipated variations in our quarterlyoperating results;

 

·      announcements of technological innovations by us,our collaborators or our competitors;

 

59

----

Tableof Contents

 

·                  new products or services introduced or announced by usor our commercialization partners, or our competitors and the timing of theseintroductions or announcements;

 

·                  third-party coverage or reimbursement policies;

 

·                  actual or anticipated changes in earnings estimates orrecommendations by securities analysts;

 

·                  conditions or trends in the biotechnology andbiopharmaceutical industries;

 

·                  announcements by us or our competitors of significantacquisitions, strategic partnerships, joint ventures or capital commitments;

 

·                  changes in the market valuations of similar companies;

 

·                  sales of common stock or other securities by us or ourstockholders in the future;

 

·                  additions or departures of key scientific ormanagement personnel;

 

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

 

·                  trading volume of our common stock.

 

In addition, the stock market in general and themarket for biotechnology and biopharmaceutical companies in particular haveexperienced extreme price and volume fluctuations that have often beenunrelated and/or disproportionate to the operating performance of thosecompanies.  These broad market andindustry factors may significantly harm the market price of our common stock,regardless of our operating performance. In the past, following periods of volatility in the market, securitiesclass-action litigation has often been instituted against companies.  Such litigation, if instituted against us,could result in substantial costs and diversion of management’s attention andresources, which could significantly harm our business, financial condition andprospects.

 

**Future sales of our common stock inthe public market could cause our stock price to decline.**

 

Persons who were our stockholders prior to our initialpublic offering continue to hold a substantial number of shares of our commonstock. Many of these stockholders are able to sell their shares in the publicmarket. Significant portions of these shares are held by a small number ofstockholders. Sales by such 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 number of shares of our commonstock have rights, subject to certain conditions, to require us to fileregistration statements to permit the resale of their shares in the publicmarket or to include their shares in registration statements that we may filefor ourselves or other stockholders.

 

60

----

Table ofContents

 

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

 

**We may notbe able to liquidate our holding in an auction rate security.***

 

Our investment securitiesconsist of money market funds, corporate debt securities and government agencysecurities. As of September 30, 2010, we held one auction rate preferredsecurity valued at $882,000 with perpetual maturity dates that reset every 28days.  The negative conditions in theglobal credit markets have prevented some investors from liquidating theirholdings, including their holdings of auction rate securities.  There was insufficient demand at auction forour auction rate preferred security.  Asa result, such security is currently not liquid, and we could be required to holdit until it is redeemed by the issuer or to maturity.  In the event we need to access the funds thatare in an illiquid state, we will not be able to do so without a loss ofprincipal, until a future auction on this investment is successful, the securityis redeemed by the issuer or it matures. We have reduced the carrying value ofour auction rate security by $118,000 to reflect an estimated change in fairmarket value due primarily to a lack of liquidity. Although the auction ratesecurity continues to pay interest according to its stated terms, based onvaluation models, we have recorded an unrealized loss for another-than-temporary change in valuation of $118,000.  If the credit ratings of the security issuerdeteriorates or if uncertainties in these markets continue and any decline inmarket value is determined to be other-than-temporary, we would be required toadjust the carrying value of the investment through an impairment charge, whichcould negatively affect our financial condition, cash flow and reportedearnings.

 

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

 

As a public company, we willcontinue to incur significant legal, accounting and other expenses.  In addition, the Sarbanes-Oxley Act of 2002,or the Sarbanes-Oxley Act, as well as rules subsequently implemented bythe SEC and the Nasdaq Stock Market, or Nasdaq, impose various requirements onpublic companies, including requiring establishment and maintenance ofeffective disclosure and financial controls and changes in corporate governancepractices.  Our management and otherpersonnel need to devote a substantial amount of time to these compliance initiatives.  Moreover, these rules and regulationsresult in increased legal and financial compliance costs and will make someactivities more time-consuming and costly. For example, these rules and regulations make it more difficult andmore expensive for us to maintain director and officer liability insurance, andwe may be required to incur substantial costs in the future to maintain thesame or similar coverage.

 

61

----

Table ofContents

 

The Sarbanes-Oxley Actrequires, among other things, that we maintain effective internal controls forfinancial reporting and disclosure controls and procedures. We are required toperform an evaluation of our internal controls over financial reporting toallow management to report on the effectiveness of those controls, as requiredby Section 404 of the Sarbanes-Oxley Act. Additionally, our independentauditors were required to perform a similar evaluation and report on theeffectiveness of our internal controls over financial reporting. At September30, 2010, management and our independent auditors did not identify any materialweaknesses in our internal controls over financial reporting. Our efforts to complywith Section 404 and related regulations has required, and continues torequire, the commitment of significant financial and managerial resources.While we anticipate maintaining the integrity of our internal controls overfinancial reporting and all other aspects of Section 404, we cannot becertain that a material weakness will not be identified when we test theeffectiveness of our control systems in the future. If a material weakness isidentified, we could be subject to sanctions or investigations by Nasdaq, theSEC or other regulatory authorities, which would require additional financialand management resources, costly litigation or a loss of public confidence inour internal controls, which could have an adverse effect on the market priceof our stock.

 

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

 

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

 

·                  a board of directors divided into three classesserving staggered three-year terms, such that not all members of the board willbe elected at one time;

 

·                  authorizing the issuance of “blank check” preferredstock, the terms of which may be established and shares of which may be issuedwithout stockholder approval;

 

·                  limiting the removal of directors by the stockholders;

 

·                  prohibiting stockholder action by written consent,thereby requiring all stockholder actions to be taken at a meeting of ourstockholders;

 

·                  eliminating the ability of stockholders to call aspecial meeting of stockholders; and

 

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

 

Theseprovisions may frustrate or prevent any attempts by our stockholders to replaceor remove our current management by making it more difficult for stockholdersto replace members of our board of directors, which is responsible for appointingthe members of our management.  Inaddition, we are subject to Section 203 of the Delaware GeneralCorporation Law, which generally prohibits a Delaware corporation from engagingin any of a broad range of business combinations with a stockholder owning 15%or more of our outstanding voting stock for a period of three years followingthe date on which the stockholder became an interested stockholder, unless suchtransactions are approved by our board of directors.  This provision could have the effect ofdelaying or preventing a change of control, whether or not it is desired by orbeneficial to our stockholders.  Such adelay or prevention of a change of control transaction could cause the marketprice of our stock to decline.

 

62

----

Table ofContents

 

**Item 6. Exhibits**

 
| **Exhibit  No.** | ** ** | **Description of Document**                                                                                                                                                                                                                          |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              | (2)        | Certificate  of Incorporation of Optimer Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                       |
| 3.2              | (4)        | Bylaws of Optimer Pharmaceuticals, Inc., as  amended and restated.                                                                                                                                                                                        |
| 4.1              | (3)        | Common  Stock Certificate of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                     |
| 4.2              | (1)        | Investors’  Rights Agreement by and among Optimer Pharmaceuticals, Inc. and certain  stockholders of Optimer Pharmaceuticals, Inc. dated November 30,  2005, as amended and restated.                                                      |
| 4.3              | (5)        | Registration  Rights Agreement, dated October 23, 2007, by and between Optimer  Pharmaceuticals, Inc. and the purchasers listed on the signature pages thereto.                                                                                                |
| 4.4              | (6)        | Form  of Warrant to Purchase Common Stock.                                                                                                                                                                                                                     |
| 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).                                                                                                                                                         |
| 32.1             |       | 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). |

 

----

*                                           Confidentialtreatment has been requested with respect to certain portions of thisexhibit.  Omitted portions have beenfiled separately with the Securities and Exchange Commission.

(1)                                    Filed with Registrant’sRegistration Statement on Form S-1 November 9, 2006.

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

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

(4)                                    Filed withRegistrant’s Current Report on Form 8-K on September 18, 2007.

(5)                                    Filed with Registrant’sCurrent Report on Form 8-K on October 29, 2007.

(6)                                    Filed with Registrant’sCurrent Report on Form 8-K on March 5, 2009.

 

63

----

Table ofContents

 

**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 3, 2010 |         | By:                                | /s/ John D. Prunty |
| ** **              | ** **   | **Name:**                          | **John D. Prunty** |
| ** **              | ** **   | **Title:**                         | ***Chief Financial Officer*** |
| *** ***            | *** *** | *** ***                       | ***(Duly Authorized Officer and Principal Financial   and Accounting Officer)*** |

 

64

----