**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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x                               **QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2008**

 

**or**

 

o                                  **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                     to                     **

 

**CommissionFile Number 001-33291**

 

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**OPTIMERPHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

 

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

 

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

 

Yes x       No o

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer x                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

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

 

Yes o       No x

 

The number of shares ofthe registrant’s Common Stock, no par value, outstanding as of May 1, 2008was 27,925,356 shares.

 

 

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**OPTIMERPHARMACEUTICALS, INC.FORM 10-QFor the Quarterly Period Ended March 31, 2008**

 

**TABLEOF CONTENTS**

 
| ** **                                                                                                | **Page** |
|-----------------------------------------------------------------------------------------------------------|----------|
| **PART I –  FINANCIAL INFORMATION**                                                             |     |
|                                                                                                      |     |
| Item 1.  Financial Statements (unaudited)                                                            |     |
|                                                                                                      |     |
| Consolidated  Balance Sheets – March 31, 2008 and December 31, 2007                        | 3        |
|                                                                                                      |     |
| Consolidated Statements of Operations – Three months  ended March 31, 2008 and 2007             | 4        |
|                                                                                                      |     |
| Consolidated Statements of Cash Flows – Three months  ended March 31, 2008 and 2007             | 5        |
|                                                                                                      |     |
| Notes to Consolidated Financial Statements                                                                | 6        |
|                                                                                                      |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 17       |
|                                                                                                      |     |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                  | 23       |
|                                                                                                      |     |
| Item 4.  Controls and Procedures                                                                     | 24       |
|                                                                                                      |     |
| **PART II –  OTHER INFORMATION**                                                                |     |
|                                                                                                      |     |
| Item 1A.  Risk Factors                                                                               | 24       |
|                                                                                                      |     |
| Item 6.  Exhibits                                                                                    | 56       |
|                                                                                                      |     |
| SIGNATURE                                                                                                 |     |
| EXHIBIT 31.1                                                                                              |     |
| EXHIBIT 31.2                                                                                              |     |
| EXHIBIT 32                                                                                                |     |

 

2

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**PART I —FINANCIAL INFROMATION**

 

**Item 1.  Financial Statements**

** **

**Optimer Pharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**

** **
| ** **                                                                                                                                                                                                        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  assets:                                                                                                                                                                                                  |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                         |       | $                        | 18,728,550 |                        | $          | 3,191,814 |   |
| Short-term investments                                                                                                                                                                                            |       | 31,103,852               |       | 55,613,785                  |       |
| Research grant and contract receivables                                                                                                                                                                           |       | 486,666                  |       | 95,184                      |       |
| Prepaid expenses and other current assets                                                                                                                                                                         |       | 1,282,630                |       | 872,810                     |       |
| Total  current assets                                                                                                                                                                                             |       | 51,601,698               |       | 59,773,593                  |       |
| Property and  equipment, net                                                                                                                                                                                      |       | 681,076                  |       | 705,374                     |       |
| Long-term  investments                                                                                                                                                                                            |       | 1,157,500                |       | —                      |       |
| Other assets                                                                                                                                                                                                      |       | 308,469                  |       | 306,573                     |       |
| Total assets                                                                                                                                                                                                      |       | $                        | 53,748,743 |                        | $          | 60,785,540 |   |
| ** **                                                                                                                                                                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                             |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                                  |       | $                        | 4,036,392  |                        | $          | 2,602,152 |   |
| Accrued expenses                                                                                                                                                                                                  |       | 3,893,863                |       | 4,998,025                   |       |
| Total  current liabilities                                                                                                                                                                                        |       | 7,930,255                |       | 7,600,177                   |       |
| Deferred  rent                                                                                                                                                                                                    |       | 273,723                  |       | 281,894                     |       |
| Commitments  and contingencies                                                                                                                                                                                    |       |                     |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                       |       |                     |       |                        |       |
| Preferred stock, par value $0.001,  10,000,000 shares authorized, no shares issued and oustanding at  March 31, 2008 and December 31, 2007                                                              |       | —                   |       | —                      |       |
| Common stock, $0.001 par value, 75,000,000  shares authorized, 27,922,750 and 27,903,705 shares issued and outstanding at  March 31, 2008 and December 31, 2007, respectively; 46,153 held in  treasury |       | 27,923                   |       | 27,904                      |       |
| Treasury stock, at cost; 46,153 shares                                                                                                                                                                            |       | (100,000                 | )          | (100,000                    | )          |
| Additional paid-in capital                                                                                                                                                                                        |       | 151,132,574              |       | 150,681,519                 |       |
| Accumulated other comprehensive income  (loss)                                                                                                                                                                    |       | 121,871                  |       | (8,396                      | )          |
| Accumulated deficit                                                                                                                                                                                               |       | (105,637,603             | )          | (97,697,558                 | )          |
| Total  stockholders’ equity                                                                                                                                                                                  |       | 45,544,765               |       | 52,903,469                  |       |
|                                                                                                                                                                                                              |       |                     |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                  |       | $                        | 53,748,743 |                        | $          | 60,785,540 |   |

 

See accompanying notes.

 

3

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**OptimerPharmaceuticals, Inc**

**ConsolidatedStatements of Operations**

**(unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                               | ** ** | **2007** | ** ** |
|                                                         |       |                                   |       |   |   |
| Revenues:                                                    |       |                                   |       |   |   |
| Research grants                                              |       | $                                      | 486,666    |   | $ | 146,298 |   |
| Operating  expenses:                                         |       |                                   |       |   |   |
| Research and development                                     |       | 6,905,376                              |       | 23,446,267 |   |
| Marketing                                                    |       | 365,568                                |       | 551,997 |   |
| General and administrative                                   |       | 1,737,051                              |       | 1,094,468 |   |
| Total operating expenses                                     |       | 9,007,995                              |       | 25,092,732 |   |
| Loss from  operations                                        |       | (8,521,329                             | )          | (24,946,434 | ) |
| Interest  income and other, net                              |       | 581,284                                |       | 442,221 |   |
| Net loss                                                     |       | $                                      | (7,940,045 | ) | $ | (24,504,213 | ) |
|                                                         |       |                                   |       |   |   |
| Basic and  diluted net loss per share                        |       | $                                      | (0.28      | ) | $ | (1.75 | ) |
| Shares used  to compute basic and diluted net loss per share |       | 27,869,675                             |       | 14,039,248 |   |

 

See accompanying notes.

 

4

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

** **
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                     | (7,940,045 | ) | $ | (24,504,213 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                |       | 54,892                                |       | 76,024 |   |
| Stock based compensation                                                     |       | 429,678                               |       | 245,267 |   |
| Deferred rent                                                                |       | (8,171                                | )          | (2,119 | ) |
| Changes in operating assets and  liabilities:                                |       |                                  |       |   |   |
| Prepaids expenses and other current assets                                   |       | (409,820                              | )          | 869,130 |   |
| Research grant and contract receivables                                      |       | (391,482                              | )          | (5,513 | ) |
| Other assets                                                                 |       | (1,896                                | )          | 13,436 |   |
| Accounts payable and accrued expenses                                        |       | 330,078                               |       | 189,771 |   |
| Net cash  used in operating activities                                       |       | (7,936,766                            | )          | (23,118,217 | ) |
| ** **                                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Investing  activities**                                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Purchases of  short-term investments                                         |       | (13,001,529                           | )          | (26,623,302 | ) |
| Sales or  maturity of short-term investments                                 |       | 36,475,000                            |       | 10,500,000 |   |
| Purchase of  property and equipment                                          |       | (30,594                               | )          | (110,120 | ) |
| Net cash  provided by (used in) investing activities                         |       | 23,442,877                            |       | (16,233,422 | ) |
| ** **                                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Financing  activities**                                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Proceeds  from sale of common stock                                          |       | 21,396                                |       | 43,713,805 |   |
| Proceeds  from exercise of warrants                                          |       | —                                |       | 1,370,267 |   |
| Net cash  provided by financing activities                                   |       | 21,396                                |       | 45,084,072 |   |
| Effect of  exchange rate changes on cash and cash equivalents                |       | 9,229                                 |       | 30,573 |   |
| Net increase  in cash and cash equivalents                                   |       | 15,536,736                            |       | 5,763,006 |   |
| Cash and  cash equivalents at beginning of period                            |       | 3,191,814                             |       | 6,122,438 |   |
| Cash and  cash equivalents at end of period                                  |       | $                                     | 18,728,550 |   | $ | 11,885,444 |   |
|                                                                         |       |                                  |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Conversion  of redeemable convertible preferred stock to common stock        |       | —                                |       | 65,461,166 |   |

 

See accompanying notes.

 

5

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**1.     Interim FinancialInformation**

** **

***Organizationand Business Activities***

** **

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

 

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

 

*Basisof Presentation*

* *

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of these interimperiods have been included. The results of operations for the three monthsended March 31, 2008 are not necessarily indicative of the results thatmay be expected for the full year. These unaudited consolidated financialstatements should be read in conjunction with the audited financial statementsand related notes thereto included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, which was filed with theSecurities and Exchange Commission (“SEC”) on March 26, 2008.

 

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

 

**2.     Summary of SignificantAccounting Policies**

 

*Cash, Cash Equivalents andInvestments*

* *

Investmentswith original maturities of less than 90 days at the date of purchase areconsidered to be cash equivalents.  Allother investments are classified as current or noncurrent available-for-salesecurities and are reported at fair value with net unrealized gains or lossesreported within accumulated other comprehensive income (loss) in theconsolidated balance sheets.  Realizedgains and losses, and declines in value judged to be other than temporary, areincluded in investment income or interest expense. The cost of securities soldis computed using the specific identification method.

 

6

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

Auctionrate preferred securities are classified as noncurrent available-for-salesecurities in the consolidated balance sheet because of the intent and abilityto hold these securities until the market for auction rate preferred securitiesstabilizes or until the issuer refinances the underlying security.

 

*Revenue Recognition*

* *

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

 

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

 

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

 

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

 

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

 

7

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

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

 

*Research and DevelopmentExpenses*

* *

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

 

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

 

*Comprehensive Income (Loss)*

* *

TheCompany has applied SFAS No. 130, *Reporting ComprehensiveIncome*, which requires that all components of comprehensive income(loss), including net income (loss), be reported in the financial statements inthe period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during aperiod from transactions and other events and circumstances from non-ownersources.  Net income (loss) and othercomprehensive income (loss), including foreign currency translation adjustmentsand unrealized gains and losses on investments, is required to be reported, netof their related tax effect, to arrive at comprehensive income (loss).  The Company’s comprehensive loss was $7.8million and $24.5 million for the three months ended March 31, 2008 and2007, respectively.

 

*Net Loss Per Share*

* *

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

 

8

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

equivalentshares consist of common shares issuable upon the exercise of stock options andwarrants. Since the Company has a net loss for all periods presented, the effectof all potentially dilutive securities is anti-dilutive. Accordingly, basic anddiluted net loss per share is the same.

 

Forthe three months ended March 31, 2008 and 2007, common shares issuableupon the exercise of stock options and warrants totaling 1,992,272 and1,644,252 shares, respectively, were excluded from the calculation as theireffect would have been antidilutive.

 

*IncomeTaxes*

 

On January 1, 2007 the Company adopted FASBissued Financial Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109*.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan entity’s financial statements in accordance with SFAS No. 109, *Accounting for Income Taxes*, and prescribes a recognitionthreshold and measurement attributes for financial statement disclosure of taxpositions taken or expected to be taken on a tax return. The impact of anuncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to be sustained upon audit bythe relevant taxing authority. An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained.Additionally, FIN 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. There were no unrecognized tax benefits as of the date of adoptionand there were no unrecognized tax benefits included in the balance sheet at March 31,2008 that would, if recognized, affect the Company’s effective tax rate.

 

The Company’s practice is to recognize interest and/orpenalties related to income tax matters as income tax expense. The Company had$0 accrued for interest and penalties on the Company’s balance sheet at March 31,2008 and had recognized $0 in interest and/or penalties in the statement ofoperations for the quarter ended March 31, 2008.

 

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

 

The Company is currently undergoing a Section 382/383analysis regarding the limitation of net operating loss and research anddevelopment credit carryforwards. When this analysis is finalized, the Companyplans to update its unrecognized tax benefits under FIN 48. The Company expectsthe Section 382/383 analysis to be completed within the next12 months. Due to the existence of the valuation allowance, future changesin the Company’s unrecognized tax benefits will not impact the Company’seffective tax rate.

 

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

 

9

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

*Recently Issued AccountingPronouncements*

 

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

 

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

 

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

 

10

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

*RecentlyAdopted Accounting Pronouncements*

* *

EffectiveJanuary 1, 2008, the Company adopted SFAS No. 157 (“SFAS 157”), *Fair Value Measurements*, which defines fair value,establishes a framework for measuring fair value under generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  As defined in SFAS 157,fair value is based on the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between marketparticipants at the measurement date.  OnFebruary 6, 2008, the FASB deferred the effective date of SFAS 157 for allnonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis. These nonfinancial items include assets and liabilities suchas reporting units measured at fair value in a goodwill impairment test andnonfinancial assets acquired and liabilities assumed in a business combination.See note 3 for further discussion on SFAS 157.

 

EffectiveJanuary 1, 2008, the Company adopted SFAS No. 159 (“SFAS 159”), *The Fair Value Option for Financial Assets andLiabilities.* SFAS 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value. The Company didnot elect to adopt the fair value option under this Statement.

 

Effective January 1,2008, the Company adopted EITF 07-3, *Accounting forNonrefundable Advance Payments for Goods or Services to be used in FutureResearch and Development Activities*. EITF 07-3 requires that nonrefundable advance payments for goods orservices to be received in the future for use in research and developmentactivities should be deferred and capitalized. The capitalized amounts shouldbe expensed as the related goods are delivered or the services are performed.The adoption did not have a material impact on the Company’s financialposition, cash flows, and results of operations.

 

**3.   Fair Value of Financial Instruments**

 

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

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

 

11

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**Optimer Pharmaceuticals, Inc.**

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

**(Unaudited)**

 

The followingtable summarizes the Company’s assets measured at fair value on a recurringbasis subject to the disclosure requirements of SFAS 157 as of March 31,2008:

 
| ** **            | ** ** | **Quoted Prices in  Active Markets********(Level 1)** | ** ** | **Other  Observable  Inputs********(Level 2)** | ** ** | **Unobservable  Inputs********(Level 3)** | ** ** | **Total** | ** ** |
|-----------------------|------------|-------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------|------------|-----------|------------|
| Marketable securities |       | $                                                     | 30,736,352 |                                           | $          | —                                    |       | $         | 1,525,000  |   | $ | 32,261,352 |   |
|                       |            |                                                       |            |                                                |            |                                           |            |           |            |  |  |  |  |

 

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

 
| ** **                                                                               | ** ** | **Auction Rate  Preferred Securities** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| Beginning balance at January 1, 2008                                                |       | $                                      | —     |   |
| Total gains and losses                                                                   |       |                                   |       |
| Realized net income                                                                      |       | —                                 |       |
| Unrealized in accumulated  other comprehensive income                                    |       | —                                 |       |
| Purchases, sales,  issuances and settlements                                             |       | —                                 |       |
| Transfers in (out) of  Level 3                                                           |       | 1,525,000                              |       |
| Ending balance at March 31, 2008                                                    |       | $                                      | 1,525,000  |   |
|                                                                                     |       |                                   |       |
| Change in unrealized gains (losses) included in net income related to  assets still held |       | $                                      | —     |   |

 

Allof the Company’s investments in available-for-sale securities are recorded atfair value based on quoted market prices. At March 31, 2008, the Companyheld two auction rate preferred securities valued at $1.5 million withperpetual maturity dates that reset every 28 days. $367,500 of the $1.5 millionis expected to be redeemed on or after May 21, 2008 and therefore isconsidered short-term. Since February 2008, the auctions for thesesecurities have failed, and the interest rates were reset to 3.62% and 4.90%,from their previous rates of 4.65% and 5.55%. The Company does not believethere is any impairment of the auction rate preferred securities at March 31,2008, but has classified these securities to long-term investments on theconsolidated balance sheet because the Company has the intent and ability tohold these securities until the market for auction rate preferred securitiesstabilizes or until the issuer refinances the underlying security.

 

**4.     Short-Term Investments**

 

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

 

12

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 
| ** **                                        | ** ** | **March 31, 2008** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **Gross  Amortized  Cost**   | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Market Value** | ** ** |
| Certificates of deposits                          |       | $                            | 3,804,762  |   | $ | 8,789 |   | $ | — |   | $ | 3,813,551 |   |
| Corporate debt securities                         |       | 23,324,963                   |       | 78,618 |   | (23,161 | ) | 23,380,420 |   |
| Foreign debt securities                           |       | 2,518,084                    |       | 22,266 |   | — |   | 2,540,350 |   |
| U.S. securities and other  government obligations |       | 1,000,049                    |       | 1,982 |   | — |   | 1,002,031 |   |
|                                              |       | $                            | 30,647,858 |   | $ | 111,655 |   | $ | (23,161 | ) | $ | 30,736,352 |   |

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

 

Investments in net unrealized loss positions as of March 31, 2008are 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** | ** ** |
| Corporate debt securities |       | 5                               |       | $                                                                         | 3,728,895  |                                                                         | $          | (23,161                              | )          | $ | — |   | $ | — |   | $ | 3,728,895 |   | $ | (23,161 | ) |
|                           |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

TheCompany believes that the decline in value is temporary and primarily relatedto the change in market interest rates since purchase.  The Company anticipates full recovery ofamortized cost with respect to these securities at maturity or sooner in theevent of a change in the market interest rate environment.

 

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

 

Effective January 1, 2006, the Company adoptedthe provisions of SFAS No. 123(R) using the modifiedprospective-transition-method and therefore, prior period results will not berestated.  SFAS No. 123(R) supersedesAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, and revises guidance in SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”).  Under this transition method, thecompensation costs related to all equity instruments granted prior to, but notyet vested as of, the adoption date of SFAS 123(R) are recognizedbased on the grant-date fair value which is estimated in accordance with theoriginal provisions of SFAS 123. Compensation costs related to all equity instruments granted after January 1,2006 are recognized at the grant-date fair value 

 

13

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

of the awards in accordance with the provisions ofSFAS 123(R).  Additionally, underthe provisions of SFAS 123(R), the Company is required to include anestimate of the value of the awards that will be forfeited in calculatingcompensation costs, which is recognized over the requisite service period ofthe awards on a straight-line basis.

 

The Black-Scholes option-pricing model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  In addition,the Black-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected stock price volatility.  The following table shows the assumptionsused to compute stock-based compensation expense for the stock options grantedduring the three months ended March 31, 2008 and 2007, using theBlack-Scholes option pricing model:

 
| ** **                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Risk-free interest rate           |       | 2.96                                   | %          | 4.80 | % |
| Dividend yield                    |       | 0.00                                   | %          | 0.00 | % |
| Expected life of options  (years) |       | 6.02-6.08                              |       | 6.08 |   |
| Volatility                        |       | 64.95                                  | %          | 65.82 | % |

 

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

 

Basedon these assumptions, the weighted average grant-date fair values of stockoptions granted during the****three monthsended March 31, 2008 was $6.82****per share.

 

Asof March 31, 2008, the total unrecognized compensation expense related tounvested stock options was approximately $3,678,017 and the relatedweighted-average period over which it is expected to be recognized isapproximately 3.0 years.

 

Totalstock-based compensation expense, related to all of the Company’s stockoptions, stock awards and employee stock purchases, recognized for the threemonths ended March 31, 2008 and 2007 was comprised as follows:

 
| ** **                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Research and development          |       | $                                      | 110,547    |   | $ | 60,948 |   |
| Marketing                         |       | 78,484                                 |       | 53,306 |   |
| General and administrative        |       | 240,647                                |       | 131,013 |   |
| Stock-based compensation  expense |       | $                                      | 429,678    |   | $ | 245,267 |   |

 

14

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

Taxbenefits recognized and related to stock-based compensation and related cashflow impacts were not material during the three months ended March 31,2008.

 

**6.     Stockholders’ Equity**

** **

*Stock Options*

* *

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

 

InDecember 2006, the Company’s board of directors approved the 2006 EquityIncentive Plan (“2006 Plan”).  The 2006Plan became effective upon the effectiveness of the Company’s initial publicoffering. The Company has reserved a total of 2,000,000 shares of its commonstock for issuance pursuant to the 2006 Plan. The 2006 Plan provides for annual increases in the number of sharesavailable for issuance thereunder on the first day of each fiscal year,beginning with the Company’s 2008 fiscal year, equal to the lesser of (i) 5%of the outstanding shares of the Company’s common stock on the last day of theimmediately preceding fiscal year; (ii) 750,000 shares; or (iii) suchother amount as the board of directors may determine. Pursuant to this provision, 750,000additional shares of the Company’s common stock were reserved for issuanceunder the 2006 Plan on January 1, 2008.

 

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

 

Followingis a summary of stock option activity for the three months ended March 31,2008:

 
| ** **                            | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-------------|------------|---------------------------------------------|------------|
| Balance as of  December 31, 2007 |       | 1,615,317   |       | $                                           | 2.65       |   |
| Granted                               |       | 396,000     |       | $                                           | 6.82       |   |
| Exercised                             |       | (19,045     | )          | $                                           | 1.12       |   |
| Canceled                              |       | —      |       | $                                           | —     |   |
| Balance as of  March 31, 2008    |       | 1,992,272   |       | $                                           | 3.49       |   |

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

As of March 31, 2008, options were outstanding under the 1998 Planand the 2006 Plan as follows:

 
| ** **                | ** ** | **March 31, 2008**      | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
| **Exercise   Price** | ** ** | **Number  Outstanding**      | ** ** | **Weighted Average  Remaining  Contractual  Life (in years)** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
| $0.22 - $0.65             |       | 433,945                      |       | 3.59 |   | $ | 0.59 |   | 433,945 |   | $ | 0.59 |   |
| $1.08 - $1.08             |       | 528,933                      |       | 6.98 |   | $ | 1.08 |   | 408,067 |   | $ | 1.08 |   |
| $2.17 - $6.59             |       | 449,144                      |       | 8.72 |   | $ | 3.23 |   | 152,648 |   | $ | 2.17 |   |
| $6.90 - $9.70             |       | 575,750                      |       | 9.45 |   | $ | 8.04 |   | 59,040 |   | $ | 9.49 |   |
| $10.00                    |       | 4,500                        |       | 9.06 |   | $ | 10.00 |   | — |   | $ | — |   |
| $0.22 - $10.00            |       | 1,992,272                    |       | 7.35 |   | $ | 3.49 |   | 1,053,700 |   | $ | 1.51 |   |

 

Ofthe options outstanding, options to purchase 1,053,700 shares were vested as ofMarch 31, 2008, with a weighted average remaining contractual life of 5.9years and a weighted average exercise price of $1.51 per share, while optionsto purchase 938,572 shares were unvested.

 

*Employee Stock Purchase Plan*

* *

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

 

The offering periods commence on the first trading day on or after May 15and November 15 of each year. As of March 31, 2008,there were 22,683 shares of common stock issued and 477,317 shares wereavailable for issuance under the ESPP.

 

During the three months ended March 31, 2008,the Company recorded stock-based compensation expense of approximately $25,950related to the ESPP.

 

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

 

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

 

**Overview**

** **

We are a biopharmaceutical company focused ondiscovering, developing and commercializing innovative anti-infectiveproducts.  Our initial developmentefforts address products that treat gastrointestinal infections and relateddiseases where current therapies have limitations, including limited efficacy,serious adverse side effects, drug-to-drug interactions, difficult patientcompliance and bacterial resistance.

 

We currently have two late-stage anti-infectiveproduct candidates, OPT-80 and Prulifloxacin. OPT-80, our lead product candidate, is an antibiotic currently in twoPhase 3 registration trials for the treatment of *Clostridium difficile*-infection, or CDI,the most common nosocomial, or hospital acquired, diarrhea.  In April 2005, we entered into acollaboration agreement with Par Pharmaceutical, Inc., or Par, pursuant towhich we and Par, exclusively collaborated in the clinical development andcommercialization of OPT-80.  In February 2007,we elected to terminate the collaboration agreement with Par, exercised ourright under a prospective buy-back agreement to repurchase Par’s rights todevelop and commercialize OPT-80 in North America and Israel and paid Par aone-time $20.0 million termination fee. As a result, we now hold worldwiderights to OPT-80.  The Food and DrugAdministration, or FDA, has granted Fast Track status for OPT-80 in thetreatment of CDI.  Fast Track designationindicates that OPT-80 has the potential to treat life-threatening diseases withunmet medical needs.  The FDA also choseOPT-80 to be the only investigational new drug in the Continuous MarketingApplications, or CMA, Pilot 2 Program in the Division of Anti-Infectiveand Ophthalmology Products.  The CMAdesignation offers several potential benefits, including a program ofcontinuous FDA feedback designed to streamline the development process.  Participation in these programs will noteliminate any phase of clinical development. Prulifloxacin is an antibiotic currently in two Phase 3 trials forthe treatment of travelers’ diarrhea, a form of infectious diarrhea caused bybacteria.  We will seek a label for Prulifloxacinfor the treatment of infectious diarrhea in travelers and initially plan tofocus commercialization efforts on the treatment of travelers’ diarrhea.  Prulifloxacin is a prodrug in thefluoroquinolone class of antibiotics, a widely-used class of broad-spectrumantibiotics. We are developing additional product candidates using ourproprietary technology, including our OPopS drug discovery platform.

 

We were incorporated in November 1998.  Since inception, we have focused ondeveloping our product candidates, including OPT-80 and Prulifloxacin.  We have never been profitable and haveincurred significant net losses since our inception.  As of March 31, 2008, we had anaccumulated deficit of $105.6 million. These losses have resulted principally from costs 

 

17

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

 

**Critical Accounting Policies**

** **

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

 

*Revenue Recognition*

* *

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

 

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

 

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

 

Inconnection with certain research collaboration agreements, revenues arerecognized from non-refundable upfront fees, which we do not believe arespecifically tied to a separate earnings process, ratably over the term of theagreement or the period over which we have significant 

 

18

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involvementor perform services.  Research fees arerecognized as revenue as the related research activities are performed.

 

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

 

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

 

*Research and Development*

 

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

 

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

 

*Accrued Clinical Trial Costs*

* *

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

 

19

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*Stock-Based Compensation*

* *

Effective January 1, 2006, we adopted Statementof Financial Accounting Standards, or SFAS, No. 123(R), *Share-Based Payment*, which revises SFAS No. 123,*Accounting for Stock-Based Compensation*and supersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS No. 123(R) requires thatshare-based payment transactions with employees be recognized in the financialstatements based on their fair value and recognized as compensation expenseover the vesting period.  We used themodified prospective method when we adopted SFAS No. 123(R) andaccordingly we did not restate the results of operations for the prior periods.Compensation expense of $430,000 and $245,000 was recognized in the quartersended March 31, 2008 and 2007, respectively, for all awards granted on orafter December 31, 2005 as well as for the unvested portion of awardsgranted before December 31, 2005.

 

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

 

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

 

Equity instruments issued to non-employees arerecorded at their fair value as determined in accordance with SFAS No.123(R) and EITF Issue 96-18, *Accounting for Equity Instruments That are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling Goods andServices*, and are periodically revalued as the equity instrumentsvest and are recognized as expense over the related service period.

 

**Results of Operations**

** **

***Comparison of***Three Months Ended March 31,2008 and 2007

*** ***

*Collaborationand Grant Revenues*. Collaboration and grant revenues for the three months ended March 31,2008 and 2007 was $487,000 and $146,000, respectively. The increase of$341,000, or 233%, was primarily due to revenue from a National Institutes of Health grant.

 

*Researchand Development Expense*. Research and development expense for the three months ended March 31,2008 and 2007 was $6.9 million and $23.4 million, respectively, a decrease of$16.5 million, or 71%.   The decrease isprimarily due to a one-time $20.0 million payment to Par in the first quarterof the prior year

 

20

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toregain the North American rights to OPT-80 and was partially offset by an increasein expenses related to our OPT-80 and Prulifloxacin Phase 3 clinical trials.

 

*MarketingExpense*. * *Marketingexpense for the three months ended March 31, 2008 and 2007 was $366,000and $552,000, respectively. The decrease of $186,000, or 34%, was primarily dueto the timing of the ECCMID symposium and conference which in 2007 was held in March andin 2008 was held in April.

 

*Generaland Administrative Expense*.  General and administrative expense for thethree months ended March 31, 2008 and 2007 was $1.7 million and $1.1 million,respectively.  The increase of $600,000,or 59%, was due to higher compensation expenses, including $241,000 of stockcompensation expense, an increase of $110,000 over the same period in the prioryear, as well as higher legal, patent and allocated facilities expenses.

 

*InterestIncome and Other, net*.  Netinterest income and other for the three months ended March 31, 2008 and2007 was $581,000 and $442,000, respectively. The increase was primarily due to higher cash and short-term investmentbalances as a result of our private placement offering in October 2007.

 

**Liquidity and CapitalResources**

** **

*Sources of Liquidity*

* *

Since inception, our operations have been financed primarily throughthe sale of equity securities.  Through March 31,2008, we received gross proceeds of approximately $154.8 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; and

 

·                  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 placementoffering for proceeds of $35.9 million.

 

Untilrequired for operations, we have invested a substantial portion of ouravailable funds in money market funds, corporate debt securities, United Statesgovernment instruments and other readily marketable debt instruments, all ofwhich are investment-grade quality.  Wehave 

 

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establishedguidelines relating to diversification and maturities of our investments topreserve principal and maintain liquidity.

 

*Cash Flows*

* *

Asof March 31, 2008, cash, cash equivalents and short-term investmentstotaled approximately $49.8 million as compared to $58.8 million as of December 31,2007, a decrease of approximately $9.0 million. The decrease in our cash, cash equivalents and short-term investmentswas primarily due to day-to-day operating expenses and the reclassification of$1.2 million of auction rate securities to long-term investments.

 

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.

 

In February 2007, we repurchased the rights todevelop and commercialize OPT-80 in North America and Israel under theprospective buy-back agreement. Under the term of the prospective buy-backagreement, we are obligated to pay Par a one-time $5.0 million milestonepayment, a 5% royalty on net sales by us or our affiliates of OPT-80 in NorthAmerica and Israel, and a 1.5% royalty on net sales by us or our affiliates ofOPT-80 in the rest of the world.  Inaddition, in the event we license our right to market OPT-80 in the rest of theworld, we will be required to pay Par a 6.25% royalty on net revenues wereceive related to OPT-80.  We areobligated 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.

 

In June 2004, we entered into a license agreementwith Nippon Shinyaku Co., Ltd. to which we acquired the non-exclusive right toimport and purchase Prulifloxacin , and the exclusive right (with the right tosublicense), within the United States, to develop, make, use, offer to sell,sell and license products suitable for consumption by humans containingPrulifloxacin.  Additionally, we acquiredrights within the United States to a key patent which covers the compound andthe treatment of bacterial infections in humans and animals.  Under the terms of the agreement, we will berequired to pay Nippon Shinyaku a milestone payment in the amount of $1.0million upon the filing, if any, of a new drug application for Prulifloxacin inthe United States.

 

*Funding Requirements*

* *

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

 

·                  the progress of our clinical trials,including expenses to support the trials and the milestone payments that maybecome payable to Par and Nippon Shinyaku;

 

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

 

·                  the costs involved in enforcing or defendingpatent claims or other intellectual property rights;

 

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·                  the costs and timing of regulatory approvals;

 

·                  the costs of establishing sales ordistribution capabilities;

 

·                  the success of the commercialization of ourproducts; and

 

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

 

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

 

Untilwe can generate significant cash from our operations, we expect to continue tofund our operations with existing cash resources that were primarily generatedfrom the proceeds of offerings of our equity securities and collaborations andgovernment grants.  In addition, we mayfinance future cash needs through the sale of additional equity securities,strategic collaboration agreements and debt financing.  However, we may not be successful incompleting future equity financings, in entering into additional collaborationagreements, in receiving milestone or royalty payments under new or existingcollaboration agreements, in obtaining new government grants or in obtainingdebt financing.  In addition, we cannotbe sure that our existing cash and investment resources will be adequate, thatfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or our stockholders.  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 would otherwisechoose.  Failure to obtain adequatefinancing 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 about Market Risk**

 

Ourcash and cash equivalents and short-term investments as of March 31, 2008consisted primarily of money market funds, corporate debt securities, UnitedStates government instruments and other readily marketable debt instruments.  Our primary exposure to market risk isinterest income sensitivity, which is affected by changes in the general levelof U.S. interest rates.  The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk.  Ahypothetical ten percent change in interest rates during the quarter endedMarch 31, 2008 would have resulted in approximately a $62,000 change innet loss. Accordingly, we would not expect our operating results or cashflows to be affected to any significant degree by the effect of a sudden changein market interest rates applicable to our securities portfolio.  In general, money market funds are notsubject to market risk because the interest paid on such funds fluctuates withthe prevailing interest rate.

 

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**Item 4. Controls and Procedures**

 

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

 

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

 

In addition, we have reviewed our internal controlsover financial reporting and have made no changes during the quarter ended March 31,2008, that our certifying officers concluded materially affected, or arereasonably 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, 2007, as filedwith the SEC.

 

**RisksRelated to Our Business**

** **

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We have experienced significant operating losses sinceour inception in 1998.  As of March 31,2008, we had an accumulated deficit of approximately $105.6 million.  We have generated no revenues from productsales to date.  We have funded ouroperations to date from the sale of approximately $154.8 million of oursecurities and through research funding pursuant to collaborations withpartners or government grants.  We expectto continue to incur substantial additional operating losses for the nextseveral years as we advance our clinical trials and research and developmentinitiatives and build our marketing and sales capabilities.  Because of the numerous risks anduncertainties associated with developing and commercializing antibiotics, weare unable to predict the extent of any future losses.  We may never successfully commercialize ourproduct candidates and thus may never have any significant future revenues orachieve and sustain profitability.

 

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

 

We will require additional capital to commercializeour current lead product candidates OPT-80 and Prulifloxacin.  We cannot be certain that additional fundingwill be available on acceptable terms, or at all.  To the extent that we raise additional fundsby issuing equity securities, our stockholders may experience significantdilution.  Any debt financing, ifavailable, may require 

 

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us to pledge our assets as collateral or involverestrictive covenants, such as limitations on our ability to incur additionalindebtedness, limitations on our ability to acquire or license intellectualproperty rights and other operating restrictions that could negatively impactour ability to conduct our business.  Ifwe are unable to raise additional capital when required or on acceptable terms,we may have to significantly delay, scale back or discontinue the developmentor commercialization of one or more of our product candidates or one or more ofour other research and development initiatives. We also could be required to:

 

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

 

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

 

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

 

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

 

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

 

We currently plan to build our own marketing and salesforce for OPT-80 in North America and Prulifloxacin in the United States, andwe may also seek one or more partners for the commercialization of OPT-80outside of North America.  We cannot becertain that we would be successful in attracting any such partners.  If we were not able to find appropriatepartners for the continued development and commercialization of OPT-80, wewould either have to delay these initiatives which would harm our business andprospects, or raise significant additional funds to develop clinical andcommercialization capabilities internally.

 

We are subject to a number of additional risksassociated with our dependence on collaborations with third parties.** **Conflictsmay arise between us and collaborators, such as conflicts concerning theinterpretation of clinical data, the achievement of milestones, theinterpretation of financial provisions or the ownership of intellectualproperty developed during the collaboration. If any such conflicts arise, a collaborator could act in its ownself-interest, which may be adverse to our best interests.  Any such disagreement between us and acollaborator could result in one or more of the following, each of which coulddelay or prevent the development or commercialization of OPT-80, and in turnprevent us from generating sufficient revenues to achieve or maintainprofitability:

 

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

 

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

 

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

 

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

 

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

 

If we cannot commercialize OPT-80, we will have torely solely on Prulifloxacin and earlier stage product candidates for anyfuture revenues, and our ability to achieve and sustain profitability will bematerially and adversely harmed.

 

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

 

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

 

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

 

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The FDA has substantialdiscretion in the approval process and may either refuse to consider ourapplication for substantive review or may form the opinion after review of ourdata that our application is insufficient to allow approval of our productcandidates.  If the FDA does not consideror approve an application that we submit, it may require that we conductadditional clinical, pre-clinical or manufacturing validation studies andsubmit that data before it will reconsider our application.  Depending on the extent of these or any otherstudies, approval of any applications that we submit may be delayed by severalyears, or may require us to expend more resources than we have available.  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.

 

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

 

Although the FDA has granted Fast Track status toOPT-80 and selected it for participation in a CMA Pilot 2 Program, we cannotbe certain that we will receive any benefits from these designations or thatthe designations will expedite regulatory review or approval of OPT-80.  Participation in these programs will noteliminate any phase of clinical development. Moreover, our participation in the CMA Pilot 2 Program will involvefrequent scientific discussions and other interactions with the staff of theFDA during the investigational new drug phase of our development ofOPT-80.  These frequent discussions couldsubject OPT-80 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 OPT-80’s Fast Track and CMA Pilot 2 Programdesignations, significant uncertainty remains regarding the clinicaldevelopment and regulatory approval process for OPT-80.

 

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

 

Clinical testing is expensive and can take many yearsto complete, and its outcome is uncertain. Failure can occur at any time during the clinical trial process.  The results of pre-clinical studies and earlyclinical trials of our product candidates may not be predictive of the resultsof later-stage clinical trials.  Productcandidates in later stages of clinical trials may fail to show the desiredsafety and efficacy traits despite having progressed through pre-clinicalstudies and initial clinical testing.  Inaddition, the type and amount of clinical data necessary to gain regulatoryapproval for our product candidates may change.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We may experience delays in clinical trials of ourproduct candidates.  OPT-80 is currentlyin two Phase 3 clinical trials for the treatment of CDI.  We anticipate enrollment in the first trialwill be completed within the next couple of months and also anticipatecompleting enrollment and reporting data from the second trial in 2009. If bothtrials are successful, we intend to file an NDA as soon as practicablethereafter. In addition, we are planning to conduct a registration study forother formulations and proof-of-concept clinical trials for other indicationsof OPT-80.  Prulifloxacin is in twoPhase 3 trials for infectious diarrhea in travelers. We have completedenrollment in the first trial and expect to report data in the next couple ofmonths.  We anticipate completing enrollmentand reporting data of the second trial in the second half of 2008.  We intend to conduct a Phase 4 trial ofPrulifloxacin subsequent to the NDA submission to compare Prulifloxacin tociprofloxacin for the treatment of infectious diarrhea.  We do not know whether planned clinicaltrials will begin on time, will need to be redesigned or will be completed onschedule, if at all.  Clinical trials canbe delayed for a variety of reasons, including delays in 

 

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obtaining regulatory approval to commence a trial, inreaching agreement on acceptable terms with prospective clinical researchorganizations, or CROs, and clinical trial sites, in obtaining institutionalreview board approval at each site, in recruiting suitable patients toparticipate in a trial, in having patients complete a trial or return forpost-treatment follow-up, in adding new sites or in obtaining sufficientsupplies of clinical trial materials. Many factors affect patient enrollment, including the size and nature ofthe patient population, the proximity of patients to clinical sites, theeligibility criteria for the trial, the design of the clinical trial, competingclinical trials, clinicians’ and patients’ perceptions as to the potentialadvantages of the drug being studied in relation to other available therapies,including any new drugs that may be approved for the indications we areinvestigating and whether the clinical trial design involves comparison toplacebo.  Several of our principalinvestigators have stated that the enrollment rate in the clinical trials forOPT-80 has often been less than projected. Our original projections were based on enrollment rates for ourPhase 2a trial of OPT-80.  If wecontinue to experience lower than expected enrollment in the trials, the trialsmay not be completed as currently scheduled and we may incur delays inobtaining regulatory approval as well as additional significant expenses.  Furthermore, with respect to the clinicaltrials conducted by third parties, we will have no control over their timing orsuccess.

 

We could encounter delays if prescribing physiciansencounter unresolved ethical issues associated with enrolling patients inclinical trials of our product candidates in lieu of prescribing existingantibiotics that have established safety and efficacy profiles or withadministering placebo to patients in our placebo-controlled trials.  Further, a clinical trial may be suspended orterminated by us, our collaborators, the FDA or other regulatory authoritiesdue to a number of factors, including failure to conduct the clinical trial inaccordance with regulatory requirements or our clinical protocols, inspectionof the clinical trial operations or trial site by the FDA or other regulatoryauthorities resulting in the imposition of a clinical hold, unforeseen safetyissues or adverse side effects, failure to demonstrate a benefit from using adrug, changes in governmental regulations or administrative actions or lack ofadequate funding to continue the clinical trial.  In addition, our Prulifloxacin productcandidate treats bacterial infections which tend to peak during high travelseasons.  As a result, during certaintimes of the year, it is more difficult to enroll patients in our trials forPrulifloxacin.  If we experience delaysin the completion of, or termination of, any clinical trial of our productcandidates, the commercial prospects of our product candidates will be harmed,and our ability to generate product revenues from any of these productcandidates will be delayed.  In addition,any delays in completing our clinical trials will increase our costs, slow downour product development and approval process and jeopardize our ability tocommence product sales and generate revenues. Any of these occurrences may significantly harm our business, financialcondition and prospects.

 

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

 

Our clinical trials may be suspended at any time for anumber of reasons.  We may voluntarilysuspend or terminate our clinical trials if at any time we believe that theypresent an unacceptable risk to participants. In addition, regulatory agencies may order the temporary or permanentdiscontinuation of our clinical trials at any time if they believe that theclinical trials are not being conducted in accordance with applicableregulatory requirements or that they present an 

 

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

 

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

 

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

 

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

 

Typically, the CROs conducting clinical trials of ourproduct candidates have the right to terminate their agreements with us or ourcollaborators upon notice in the event of an uncured material breach.  In addition, some CROs have an ability toterminate their respective agreements with us if we fail to perform ourobligations, if it can be reasonably demonstrated that the safety of thesubjects participating in our clinical trials warrants such termination, if wemake a general assignment for the benefit of our creditors or if we areliquidated.  INC Research has beenheavily involved in the clinical development and regulatory approval processfor our lead 

 

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product candidates and possesses significantexperience with the regulatory process. We substantially rely on INC Research to conduct the clinical trials forOPT-80 and Prulifloxacin.  INC Researchhas also subcontracted with other third-party CROs for various aspects of theclinical trials.  If any relationshipswith INC Research or these other third-party CROs terminate, we or ourcollaborators may not be able to enter into arrangements with alternative CROsor we may enter into arrangements with alternative CROs that do not have theexpertise or relationships that INC Research has with government agencies. Forexample, a third party service provider recently terminated their clinicaltrial agreement regarding the enrollment of patients in our Prulifloxacin trialin Guatemala.  As a result, we are unableto recruit new patients in Guatemala and are evaluating additional sites tosupplement existing ones in India and Mexico.

 

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

 

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

 

Sales of our product candidates outside of the UnitedStates will be subject to foreign regulatory requirements governing clinicaltrials and marketing approval.  Even ifthe FDA grants marketing approval for a product candidate, comparableregulatory authorities of foreign countries must also approve the manufacturingand marketing of the product candidate in those countries.  This is important for the commercializationof OPT-80 for which we currently have exclusive worldwide marketingrights.  Obtaining foreign regulatory approvalscould result in significant delays, difficulties and costs for us and requireadditional pre-clinical studies or clinical trials which would be costly andtime consuming.  Regulatory requirementscan vary widely from country to country and could delay the introduction of ourproducts in those countries.  Clinicaltrials conducted in one country may not be accepted by regulatory authoritiesin other countries, and regulatory approval in one country does not mean thatregulatory approval will be obtained in any other country.  In addition, our failure to obtain regulatoryapproval in any country may delay or have negative effects on the process forregulatory approval in others.  Otherthan Prulifloxacin, which is sold by other parties in Japan, Italy and certainother European countries, none of our product candidates is approved for salein any international market for which we have rights, and we do not haveexperience in obtaining regulatory approval in international markets.  If we fail to comply with regulatoryrequirements in our international 

 

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markets or to obtain and maintain required approvals,our target market will be reduced and our ability to generate revenues will bediminished, which would significantly harm our business, results of operationsand prospects.

 

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

 

We currently have a limited marketing organization anddo not have a sales organization for the marketing, sales and distribution ofpharmaceutical products.  In order tocommercialize any products, we must build our marketing, sales, distribution,managerial and other non-technical capabilities or make arrangements with thirdparties to perform these services.  Weplan to build our own marketing and sales force to commercialize OPT-80 inNorth America and will seek third-party partners outside North America.  We own exclusive rights to commercializePrulifloxacin in the United States, and we contemplate establishing our ownsales force or seeking third-party partners to sell Prulifloxacin in the UnitedStates.  The establishment anddevelopment of our own sales force to market any products we may develop willbe expensive and time consuming and could delay any product launch, and wecannot be certain that we will be able to successfully develop thiscapability.  We will also have to competewith other pharmaceutical and biotechnology companies to recruit, hire, trainand retain marketing and sales personnel. To the extent we rely on third parties to commercialize our products, ifany, we may receive less revenues than if we commercialized these productsourselves.  In addition, we may havelittle or no control over the sales efforts of any third parties involved incommercializing our products.  In theevent we are unable to develop and expand our own marketing and sales force orcollaborate with a third-party marketing and sales organization, we would notbe able to commercialize our product candidates which would negatively impactour ability to generate product revenues.

 

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

 

If appropriate regulatory approvals are obtained, weintend to commercialize OPT-80 outside of North America through collaborationarrangements with third parties.  We maybe unable to enter into collaboration arrangements in internationalmarkets.  In addition, there can be noguarantee that if we enter into these collaboration arrangements with otherparties that they will be successful or result in more revenues than we couldobtain by marketing OPT-80 on our own. If we are unable to enter intocollaboration arrangements for our products or develop an effectiveinternational sales force, our ability to generate product revenues would belimited, which would adversely affect our business, financial condition,results of operations and prospects. If we are unable to enter into suchcollaboration arrangements, we may need to develop our own marketing and salesforce to market OPT-80 in a number of countries in Europe and Latin America tohospital-based and long-term care physicians. These efforts may not be successful as we have no relationships amongsuch hospital-based and long-term care physicians.  There is no 

 

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guarantee that we will be able to develop an effectiveinternational sales force to successfully commercialize our products in theseinternational markets.

 

**If our product candidates are unableto compete effectively with branded and generic antibiotics, our commercialopportunity would be reduced or eliminated. (*)**

 

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

 

We anticipate that, if approved, OPT-80 andPrulifloxacin will face increasing competition in the form of generic versionsof branded products of competitors that will lose their patentexclusivity.  For example, OPT-80, ifapproved, will immediately face steep competition from an inexpensive genericform of metronidazole.  OPT-80 currentlyfaces generic oral vancomycin competition in Europe and may face competitionfrom generic oral vancomycin in the United States in 2008.  Generic antibiotic therapies typically aresold at lower prices than branded antibiotics and are generally preferred bymanaged care providers of health services. For example, because metronidazole is sold at such a low price, webelieve it will be difficult to sell OPT-80 as a first-line therapy for thetreatment of CDI.  If we are unable todemonstrate to physicians and patients that, based on experience, clinicaldata, side-effect profiles and other factors, our products are preferable tothese generic antibiotic therapies, we may never generate meaningful productrevenues.  In addition, many antibioticsexperience bacterial resistance over time because of their continued use.  There can be no guarantee that bacteria wouldnot develop resistance to OPT-80, Prulifloxacin or any of our other productcandidates.  Our commercial opportunitywould also be reduced or eliminated if our competitors develop andcommercialize generic or branded antibiotics that are safer, more effective,have fewer side effects or are less expensive than our product candidates.

 

**We currently depend, and will in thefuture continue to depend, on third parties to manufacture our productcandidates, including OPT-80 and Prulifloxacin. If these manufacturers fail to provide us and our collaborators withadequate supplies of clinical trial materials and commercial product or fail tocomply with the requirements of regulatory authorities, we may be unable todevelop or commercialize our products. (*)**

 

We outsource all manufacturing of clinical trialsupplies of our product candidates to third parties.  We seek to establish long-term supplyarrangements with third-party contract 

 

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

 

In addition, we, our collaborators and otherthird-party manufacturers of our products must comply with current strictlyenforced cGMP requirements enforced by the FDA through its facilitiesinspection program.  These requirementsinclude quality control, quality assurance and the maintenance of records anddocumentation.  We rely on Biocon tomanufacture OPT-80 API and rely on Patheon, Inc. to manufacture the drugproduct supplies.  As such, Biocon andPatheon will be subject to ongoing periodic unannounced inspections by the FDAand other agencies for compliance with current cGMP, and similar foreignstandards. We also rely on Nippon Shinyaku, which contracts with Juzen, andAngelini and Patheon to manufacture Prulifloxacin drug supplies.  The manufacturing facilities of Biocon, Juzenand Patheon have been inspected and approved by the FDA for other companies’drug products; however, neither Biocon’s nor Juzen’s nor Patheon’s facilitieshave yet been approved 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 regulatory requirements.  We and our collaborators have little controlover third-party manufacturers’ compliance with these regulations andstandards.  A failure to comply withthese requirements by our third-party manufacturers, including Biocon, Juzen,Angelini, and Patheon could result in the issuance of untitled letters and/orwarning letters from authorities, as well as sanctions being imposed on us,including fines and civil penalties, suspension of production, suspension ordelay in product approval, product seizure or recall or withdrawal of productapproval.  In addition, we have nocontrol over these manufacturers’ ability to maintain adequate quality control,quality assurance and qualified personnel. If the safety of any quantities supplied by third parties is compromised

 

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due to their failure to adhere to applicable laws orfor other reasons, we may not be able to obtain or maintain regulatory approvalfor or successfully commercialize one or more of our product candidates, whichwould significantly harm our business and prospects.

 

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

 

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

 

·                  the clinical indications for which theproduct candidate is approved;

 

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

 

·                  perceived advantages over alternativetreatments;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  relative convenience and ease ofadministration; and

 

·                  prevalence and severity of adverse sideeffects.

 

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

 

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We plan to target our marketing of Prulifloxacinprimarily to high-prescribing physicians of antibiotics for travelers’diarrhea, including those at travel clinics. Because of the number of these physicians in the United States, we willbe required to expend significant time and resources to obtain broad marketacceptance of Prulifloxacin among these physicians.  We do not have experience in marketing tothis population of physicians and do not currently have the resources to beable to conduct such marketing efforts on our own.  As such, we may not be successful in any ofthese marketing efforts which would limit the commercial success ofPrulifloxacin.  In addition, becausePrulifloxacin has already been marketed by other companies to treat a widerange of bacterial infections, including infectious diarrhea, urinary tractinfections and respiratory tract infections, patients may be able to obtainPrulifloxacin from these other companies, and not from us, if Prulifloxacin isapproved in the market where the patient is located.  We have rights to Prulifloxacin only in theUnited States.  These patients may obtainPrulifloxacin in these other markets from other companies even if thesepatients are from the United States.

 

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

 

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

 

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

 

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

 

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

 

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Our focus on drug discovery and development using ourtechnology platform, including our patented proprietary OPopS drug discoveryplatform, is novel and unique.  As aresult, we cannot be certain that our product candidates will producecommercially viable drugs that safely and effectively treat infectious diseasesor other diseases.  To date, ourtechnology platform has yielded only a small number of anti-infective productcandidates.  In addition, we do not havesignificant clinical data with respect to any of these potential productcandidates.  Even if we are successful incompleting clinical development and receiving regulatory approval for onecommercially viable drug for the treatment of one disease using our technologyplatform and carbohydrate chemistry focus, we cannot be certain that we willalso be able to develop and receive regulatory approval for other drugcandidates for the treatment of other forms of that disease or otherdiseases.  If we fail to develop andcommercialize viable drugs using our platform and specialized focus, we willnot be successful in developing a pipeline of potential product candidates tofollow OPT-80 and Prulifloxacin, and our business prospects would significantlybe harmed.

 

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

 

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

 

·                  exposure to unknown liabilities;

 

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

 

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

 

·                  higher than expected acquisition and integrationcosts;

 

·                  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.

 

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

 

**If we do not find collaborators forour future product candidates, we may be required to reduce or delay our rateof product development and commercialization and/or increase our expenditures.**

 

Our strategy to develop and commercialize our productcandidates in pre-clinical studies or early clinical trials includes enteringinto relationships with pharmaceutical or biotechnology companies to advanceour programs.  We may not be able tonegotiate collaborations with these partners on acceptable terms.  If we are unable to establish collaborativearrangements, we may be required to reduce or delay further development of someof our programs and/or increase our expenditures and undertake the developmentactivities at our own expense.

 

If we are able to identify and reach agreement withcollaborators for our product candidates, those relationships will also besubject to a number of risks, including:

 

·                  collaborators may not pursue further development andcommercialization of product candidates resulting from our collaboration or mayelect not to renew research and development programs;

 

·                  collaborators may delay clinical trials, underfund aclinical trial program, stop a clinical trial or abandon a product candidate,repeat or conduct additional clinical trials or require the development of anew formulation of a product candidate for clinical testing;

 

·                  a collaborator with marketing and distribution rightsto one or more of our products may not commit sufficient resources to themarketing and distribution of our products, limiting our potential revenuesfrom the commercialization of these products; and

 

·                  disputes may arise delaying or terminating theresearch, development or commercialization of our product candidates, or resultin significant litigation or arbitration.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Even if we receive regulatory approval to sell ourproduct candidates, the FDA and foreign regulatory authorities will likelyimpose significant restrictions on the indicated uses or marketing of suchproducts, or impose ongoing requirements for potentially costly post-approvalstudies.  In addition, following anyregulatory approval of our product candidates, we and our collaborators will besubject to continuing regulatory obligations, such as requirements for storage,recordkeeping and safety reporting, and additional post-marketing obligations,including regulatory oversight of the labeling, packaging, promotion andmarketing of our products.  If we or ourcollaborators become aware of previously unknown problems with any of ourproduct candidates in the United States or overseas or at our third-partymanufacturers’ facilities, a regulatory agency may impose restrictions on ourproducts, our third-party manufacturers or on us, including requiring us toreformulate our products, conduct additional clinical trials, make changes inthe labeling of our products, implement changes to, or obtain re-approvals of,our third-party manufacturers’ facilities, or withdraw the product from themarket.  In addition, we or ourcollaborators may experience a significant drop in the sales of the affectedproducts and our product revenues will be reduced, our reputation in themarketplace may suffer and we may become the target of lawsuits, includingclass action suits.  Moreover, if we orour collaborators or third-party manufacturers fail to comply with applicableregulatory requirements, we may be subject to civil or criminal fines,suspension or withdrawal of regulatory approvals, product recalls, seizure ofproducts, operating restrictions, costly new manufacturing requirements andcriminal prosecution.  Any of theseevents could harm or prevent sales of the affected products and reduce ourrelated revenues or could substantially increase the costs and expenses ofcommercializing and marketing these products, which would significantly harmour business, financial condition and prospects.

 

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

 

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

 

We will need to hire additional personnel as we expandour clinical development and commercial activities.  We may not be able to attract or retainqualified management and scientific personnel on acceptable terms in the futuredue to the intense competition for qualified personnel among biotechnology,pharmaceutical and other businesses, particularly in the San Diego, Californiaarea.  If we are not able to attract andretain the necessary personnel to accomplish our business objectives, we may experienceconstraints that will impede significantly the achievement of our research anddevelopment objectives, our ability to raise additional capital and our abilityto implement our business strategy.  Inparticular, if we lose any members of our senior management team, we may not beable to find suitable replacements, and our business and prospects may beharmed as a result.

 

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

 

We are a small company with 46 employees as of May 1,2008.  To continue our clinical trialsand commercialize our product candidates, we will need to expand our employeebase for managerial, operational, marketing, sales, financial and otherresources.  Future growth will imposesignificant added responsibilities on members of management, including the needto identify, recruit, maintain and integrate additional employees and may taketime away from running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performance and our ability to commercialize ourproduct candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively.  To that end, we must be able to:

 

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·                  manage our development efforts effectively;

 

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

 

·                  integrate additional management, administrative andmanufacturing personnel;

 

·                  build a marketing and sales organization; and

 

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

 

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

 

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

 

Market acceptance and sales of our product candidateswill depend on reimbursement policies and may be affected by future healthcarereform measures.  Government third-partypayors, such as the Medicare and Medicaid programs, and private payors,including health maintenance organizations, decide which drugs they will payfor and establish reimbursement levels for these drugs.  Because third-party payors increasingly arechallenging prices charged and the cost-effectiveness of medical products,significant uncertainty exists as to the ability of our product candidates toreceive adequate coverage and reimbursement. We cannot be sure that third-party payors will place our productcandidates on approved formularies or that reimbursement will be available inwhole or in part for any of our product candidates.  For example, the Deficit Reduction Act of2005 requires an adjustment in Medicare payments for reimbursement of certain-hospitalacquired conditions.  The Centers forMedicare and Medicaid Services, or CMS, is likely to expand its list ofnon-payment for preventable hospital acquired infections.  Both CDI and MRSA infections have beendiscussed but CMS has determined that further analysis is required beforeconsidering these conditions for non-reimbursement.  Also, we cannot be sure that insufficientreimbursement amounts will not reduce the demand for, or require us to reducethe price of our products, if approved.

 

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

 

We have not commenced efforts to have our productcandidates reimbursed by government or third-party payors.  If reimbursement is not available or isavailable only to limited levels, we 

 

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may not be able to commercialize our productssuccessfully or at all, which would harm our business and prospects.

 

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

 

We may face competition for our products from lowerpriced products from foreign countries that have placed price controls onpharmaceutical products.  The MedicareModernization Act of 2003, or MMA, contains provisions that may change U.S.importation laws and expand consumers’ ability to import lower priced versionsof our and competing products from Canada, where there are government pricecontrols.  These changes to U.S.importation laws will not take effect unless and until the Secretary of Healthand Human Services certifies that the changes will lead to substantial savingsfor consumers and will not create a public health safety issue.  The Secretary of Health and Human Serviceshas not yet announced any plans to make the required certification.  Even if the changes do not take effect, andother changes are not enacted, imports from Canada and elsewhere may continueto increase due to market and political forces, and the limited enforcementresources of the FDA, the U.S. Customs Service, and other governmentagencies.  For example, Pub. L. No. 109-295,which was signed into law on October 4, 2006 and provides appropriationsfor the Department of Homeland Security for fiscal year 2007, expresslyprohibits the U.S. Customs Service from using funds to prevent individuals fromimporting from Canada less than a 90-day supply of a prescription drug forpersonal use, when the drug otherwise complies with the Federal Food, Drug andCosmetic Act.  Further, several statesand local governments have implemented importation schemes for their citizens,and, in the absence of federal action to curtail such activities, we expectother states and local governments to launch importation efforts.  The importation of foreign products thatcompete with our own product candidates could negatively impact our businessand prospects.

 

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

 

In both the United States and certain foreignjurisdictions, there have been, and we anticipate there will continue to be, anumber of legislative and regulatory changes to the healthcare system thatcould impact our ability to sell our products profitably.  In particular, the MMA added an outpatientprescription drug benefit to Medicare, the publicly-funded health insuranceprogram in the United States generally for the elderly and disabled, whichbecame effective on January 1, 2006. Drug benefits under this new benefit are administered through privateplans that negotiate price concessions from pharmaceutical manufacturers.  We cannot be certain that OPT-80 and Prulifloxacinor other current or future drug candidates will successfully be placed on thelist of drugs covered by particular health plan formularies, nor can we predictthe negotiated price for our drug candidates, which will be determined bymarket factors.

 

The MMA also changed the formula for determiningpayment for certain drugs, which include drugs provided in physician officesand other outpatient settings.  Further,with respect to the Medicaid program, the Deficit Reduction Act of 2005 madechanges to certain formulas used to 

 

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calculate pharmacy reimbursement under Medicaid, thehealth insurance program in the United States generally for individuals andfamilies with low incomes and resources, which became effective on January 1,2007.  These changes could lead toreduced payments to pharmacies.  Manystates have also created preferred drug lists and include drugs on those listsonly when the manufacturers agree to pay a supplemental rebate.  If OPT-80 and Prulifloxacin or other currentor future drug candidates are not included on these preferred drug lists,physicians may not be inclined to prescribe them to their Medicaid patients,thereby diminishing the potential market for our products.

 

As a result of legislative proposals and the trendtowards managed healthcare in the United States, third-party payors areincreasingly attempting to contain healthcare costs by limiting both coverageand the level of reimbursement of new drugs. They may also refuse to provide any coverage of uses of approvedproducts for medical indications other than those for which the FDA has grantedmarket approvals.  As a result,significant uncertainty exists as to whether and how much third-party payorswill reimburse for newly-approved drugs, which in turn will put pressure on thepricing of drugs.  Further, we do nothave experience in ensuring approval by applicable third-party payors outsideof the United States for reimbursement of our products.  The availability of numerous genericantibiotics at lower prices than branded antibiotics, can also be expected tosubstantially reduce the likelihood of reimbursement for OPT-80 andPrulifloxacin.  We also anticipatepricing pressures in connection with the sale of our products due to the trendtoward managed healthcare, the increasing influence of health maintenanceorganizations and additional legislative proposals.

 

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

 

We are subject to various federal and state lawspertaining to healthcare fraud and abuse, including anti-kickback laws and physicianself-referral laws.  Violations of theselaws are punishable by criminal and civil sanctions, including, in someinstances, exclusion from participation in federal and state healthcareprograms, including Medicare and Medicaid, and the curtailment or restructuringof operations.  We believe that ouroperations are in material compliance with such laws.  However, because of the far-reaching natureof these laws, there can be no assurance that we would not be required to alterone or more of our practices to be in compliance with these laws.  In addition, there can be no assurance thatthe occurrence of one or more violations of these laws or regulations would notresult in a material adverse effect on our financial condition and results ofoperations.

 

**Our business involves the use ofhazardous materials and we and our third-party manufacturers must comply withenvironmental laws and regulations, which can be expensive and restrict how wedo business.**

 

Our third-party manufacturers’ activities and, to alesser extent, our own activities involve the controlled storage, use anddisposal of hazardous materials, including the components of our productcandidates and other hazardous compounds. We and our manufacturers are subject to federal, state and local lawsand regulations governing the use, manufacture, storage, handling 

 

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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.

 

**Our business and operations wouldsuffer in the event of computer, telecommunications or other system failure.**

 

Despite the implementation of security measures, ourinternal computer systems are vulnerable to damage from computer viruses,unauthorized access, natural disasters, terrorism, war and telecommunicationand electrical failures.  Any systemfailure, accident or security breach that causes interruptions in ouroperations could result in a material disruption of our drug developmentprograms.  For example, the loss ofclinical trial information from completed or ongoing clinical trials for OPT-80or Prulifloxacin, which is maintained by our third-party CRO, could result indelays in our regulatory approval efforts and significantly increase our coststo recover or reproduce the data.  To theextent that any disruption or security breach results in a loss or damage toour data or applications, or inappropriate disclosure of confidential orproprietary information, we may incur liability and the further development ofour product candidates may be delayed.

 

**RisksRelated to Our Intellectual Property**

 

**It is difficult and costly to protectour intellectual property and our proprietary technologies, and we may not beable to ensure their protection. (*)**

 

Our commercial success will depend in part onobtaining and maintaining patent protection and trade secret protection of theuse, formulation and structure of our product candidates, and the methods usedto manufacture them, as well as successfully defending these patents againstthird-party challenges, including those from generic drug manufacturers.  Our ability to protect our product candidatesfrom unauthorized making, using, selling, offering to sell or importing bythird parties is dependent upon the extent to which we have rights under validand enforceable patents or trade secrets that cover these activities.

 

The patent positions of pharmaceutical andbiotechnology companies can be highly uncertain and involve complex legal andfactual questions for which important legal principles remain unresolved.  No consistent policy regarding the breadth ofclaims allowed in biotechnology patents has emerged to date in the UnitedStates.  The biotechnology patentsituation outside the United States is even more uncertain.  Changes in either the patent laws or ininterpretations of patent laws in the United States and other countries maydiminish 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.

 

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The degree of future protection for our proprietaryrights is uncertain, because legal means afford only limited protection and maynot adequately protect our rights or permit us to gain or keep our competitiveadvantage.  For example:

 
| · | others may be able to make compounds that are  similar to our product candidates but that are not covered by the claims of  our pending patent applications or licensed patents, or for which we are not  licensed under our license agreements;                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                  |
| · | others may be able to make competing pharmaceutical  formulations containing our product candidates or components of our product  formulations that are either not covered by the claims of our licensed  patents, not licensed to us under our license agreements or are subject to  patents that expire;                            |
|   |                                                                                                                                                                                                                                                                                                                                  |
| · | we or our licensors might not have been the first to  make the inventions covered by our pending patent applications or the pending  patent applications and issued patents of our licensors;                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                  |
| · | we or our licensors might not have been the first to  file patent applications for these inventions;                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                  |
| · | others may independently develop similar or  alternative technologies or duplicate any of our technologies;                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                  |
| · | it is possible that our pending patent applications  or our licensed patent applications will not result in issued patents;                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                  |
| · | our pending patent applications or the pending  patent applications and issued patents of our licensors may not provide us  with any competitive advantages, may be designed around by our competitors,  including generic drug companies, or may be held invalid or unenforceable as  a result of legal challenges by third parties; |
|   |                                                                                                                                                                                                                                                                                                                                  |
| · | we may not develop additional proprietary  technologies that are patentable; or                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                  |
| · | the patents of others may have an adverse effect on  our business.                                                                                                                                                                                                                                                                    |

 

In addition, to the extent we are unable to obtain andmaintain patent protection for one of our lead product candidates or in theevent such patent protection expires, it may no longer be cost effective toextend our portfolio by pursuing additional development of a product candidatefor follow-on indications.

 

We have filed 8 patent applications related toOPT-80.  Although we have recentlyreceived a “Notice of Allowance” from the United States Patent and TrademarkOffice, or U.S. PTO, on our polymorphism patent, we do not yet have any issuedpatents related to OPT-80.

 

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These patent applications related to OPT-80 encompassvarious topics relating to:

 

·                  composition of matter for OPT-80;

 

·                  composition of matter for OPT-80 related substancesand use for CDI;

 

·                  polymorphic forms;

 

·                  compositioncomprising a polymorphic form;

 

·                  manufacturing processes;

 

·                  treatment of diseases;

 

·                  formulation; and

 

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

 

If we are unable to obtain a composition of matterpatent, our competitors, including generic drug companies, may be able todesign other similar formulations of the active ingredient of OPT-80.  Furthermore, even if these process andformulation patent applications become issued patents, our competitors,including generic drug companies, may be able to design around ourmanufacturing processes or formulation for OPT-80.  As a result, our competitors may be able todevelop competing products.

 

In addition, assuming our clinical trials aresuccessful and completed in a timely manner, we currently plan to file a NDAfor Prulifloxacin for the treatment of infectious diarrhea in travelers in2009.  However, the patent coveringPrulifloxacin is scheduled to expire in February 2009, and due to thisshort remaining patent life we may be forced to abandon plans to pursuedevelopment and approval of Prulifloxacin for any indications, includinginfectious diarrhea. Although we also currently plan to apply for an extensionof this patent term up to 2014, we cannot assure you that the U.S. PTO willgrant the extension for the full additional five years, or at all.  In either event, our business and prospectswould be significantly harmed.

 

We depend, in part, on our licensors and collaboratorsto protect a portion of our proprietary rights. In such cases, our licensors and collaborators may be primarily orwholly responsible for the maintenance of patents and prosecution of patentapplications relating to important areas of our business.  For example, Nippon Shinyaku, SKI, TSRI andCempra are responsible for the maintenance of patents and prosecution of patentapplications relating to Prulifloxacin, OPT-822/OPT-821 combination therapy,our OPopS technology, and OPT-1068 also known as CEM-101, respectively.  We may also be dependent on Par to providetechnical support for patent applications relating to OPT-80.  If any of these parties fail to adequatelyprotect these product candidates with issued patents, our business andprospects would be significantly harmed.

 

Under our agreement with Nippon Shinyaku, in the eventNippon Shinyaku fails to take all steps necessary to seek extension of thepatents licensed to us in the United States 180 days after we request such actionbe taken, then we have the right to take all necessary actions to extend thelicensed patents.  Our agreements withSKI, TSRI, Cempra and Par do not have explicit 

 

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provisions regarding our rights to take necessaryaction with respect to maintenance of patents and prosecution of patentapplications nor do such agreements provide us with any legal recourse in theevent such parties do not so maintain and/or prosecute.  If any of these parties fails to adequatelymaintain patents and prosecute patent applications relating to technologylicensed to or from us, we may be required to take further action on our own toprotect this technology.  However, we maynot be successful in maintaining such patents or prosecuting such patentapplications and if so, our business and prospects would be significantlyharmed.

 

We also rely on trade secrets to protect ourtechnology, especially where we do not believe patent protection is appropriateor obtainable.  However, trade secretsare difficult to protect.  Although weuse reasonable efforts to protect our trade secrets, our employees,consultants, contractors, outside scientific collaborators and other advisorsmay unintentionally or willfully disclose our information to competitors.  Enforcing a claim that a third-party entityillegally obtained and is using any of our trade secrets is expensive and timeconsuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willingto protect trade secrets.  Moreover, ourcompetitors may independently develop equivalent knowledge, methods andknow-how.

 

If we or our licensors fail to obtain or maintainpatent protection or trade secret protection for our product candidates or ourtechnologies, third parties could use our proprietary information, which couldimpair our ability to compete in the market and adversely affect our ability togenerate revenues and attain profitability.

 

**We may incur substantial costs as aresult of litigation or other proceedings relating to our patent, trademark andother intellectual property rights, and we may be unable to protect our rightsto, or use, our technology.**

 

If we choose to go to court to stop someone else fromusing our inventions, that individual or company has the right to ask the courtto rule that the underlying patents are invalid and/or should not beenforced against that third party.  Theselawsuits are expensive and would consume time and other resources even if wewere successful in stopping the infringement of these patents.  There is also the risk that, even if thevalidity of these patents is upheld, the court will refuse to stop the otherparty on the ground that such other party’s activities do not infringe ourrights to these patents.

 

Furthermore, a third party may claim that we or ourmanufacturing or commercialization partners are using inventions covered by thethird party’s patent rights and may go to court to stop us from engaging in ournormal operations and activities, including making, using or selling ourproduct candidates.  These lawsuits arecostly and could affect our results of operations and divert the attention ofmanagerial and technical personnel. There is a risk that a court would decide that we or ourcommercialization partners are infringing the third party’s patents and wouldorder us or our partners to stop the activities covered by the patents.  In addition, there is a risk that a courtwill order us or our partners to pay the other party damages for havingviolated the other party’s patents.  Wehave indemnified our commercial partners against patent infringement claims andthus would be responsible for any of their costs associated with such claimsand actions.  The biotechnology industryhas produced a proliferation of patents, and it is 

 

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not always clear to industry participants, includingus, 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.

 

Although we have conducted searches of third-partypatents with respect to OPT-80 and Prulifloxacin, these searches may not haveidentified all third-party patents relevant to those products and we have notconducted an extensive search of patents issued to third parties with respectto our other product candidates. Consequently, no assurance can be given that third-party patentscontaining claims covering our products, technology or methods do 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” and “OptimerPharmaceuticals,” we are aware that the name “Optimer” has been registered as atrademark with the PTO by more than one third party, including one in thebiotechnology space.  As such, we believethere is a significant risk that third parties may allege they have trademarkrights encompassing the names for which we have applied for protection.

 

Because some patent applications in the United Statesmay be maintained in secrecy until the patents are issued, because patentapplications in the United States and many foreign jurisdictions are typicallynot published until eighteen months after filing, and because publications inthe scientific literature often lag behind actual discoveries, we cannot becertain that others have not filed patent applications for technology coveredby our licensors’ issued patents or our pending applications or our licensors’pending applications, or that we or our licensors were the first to invent thetechnology.  Our competitors may havefiled, and may in the future file, patent applications covering technologysimilar to ours.  Any such patentapplication may have priority over our or our licensors’ patent applicationsand could further require us to obtain rights to issued patents covering suchtechnologies.  If another party has fileda U.S. patent application on inventions similar to ours, we may have toparticipate in an interference proceeding declared by the PTO, to determinepriority of invention in the United States. The costs of these proceedings could be substantial, and it is possiblethat such efforts would be unsuccessful, resulting in a loss of our U.S. patentposition with respect to such inventions.

 

Some of our competitors may be able to sustain thecosts of complex patent litigation more effectively than we can because they havesubstantially greater resources.  Inaddition, any uncertainties resulting from the initiation and continuation ofany litigation could have a material adverse effect on our ability to raise thefunds necessary to continue our operations.

 

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**Risks Related to the SecuritiesMarket and Ownership of Our Common Stock**

 

**The market price of our common stockmay be highly volatile.**

 

Before our initial public offering in February 2007,there was no public market for our common stock.  We cannot assure you that an active tradingmarket will exist for our common stock**.**You may not be able to sell your shares quickly or at the market price iftrading in our common stock is not active.

 

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:

 

·                  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;

 

·                  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 OPT-80 and Prulifloxacin;

 

·                  announcements by our collaborators with respect toclinical trial results and communications from the FDA or comparable foreignregulatory agencies;

 

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

 

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

 

·                  actual or anticipated variations in our quarterlyoperating results;

 

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

 

·                  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;

 

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·                 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;

 

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

 

·                 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, securities class-actionlitigation 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 common stock.Many of these stockholders are now 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.

 

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We have also registered all common stock that we mayissue under our employee benefits plans. As a result, these shares can befreely sold in the public market upon issuance, subject to any applicablerestrictions under the securities laws. In addition, our directors andexecutive officers may in the future establish programmed selling plans under Rule 10b5-1of the Securities Exchange Act for the purpose of effecting sales of our commonstock. If any of these events cause a large number of our shares to be sold inthe public market, the sales could reduce the trading price of our common stockand impede our ability to raise future capital.

 

**Negative conditions in the globalcredit markets may impair the liquidity of a portion of our investmentportfolio. (*)**

 

Our investment securities consist of high-gradeauction rate securities, money market funds, corporate debt securities andgovernment agency securities. At March 31, 2008, theCompany held two auction rate preferred securities valued at $1.5 million withperpetual maturity dates that reset every 28 days. $367,500 of $1.5 million isexpected to be redeemed on or after May 21, 2008 and therefore isconsidered short-term.The recent negative conditions in the global credit markets have prevented someinvestors from liquidating their holdings, including their holdings of auctionrate securities. There was insufficient demand at auction for these two auctionrate preferred securities. As a result, these affected securities are currentlynot liquid, and we could be required to hold them until they are redeemed bythe issuer or to maturity.  In the eventwe need to access the funds that are in an illiquid state, we will not be ableto do so without a loss of principal, until a future auction on theseinvestments is successful, the securities are redeemed by the issuer or theymature. At this time, management has not obtained sufficient evidence toconclude that these investments are impaired or that they will not be settledin the short term, although the market for these investments is presently uncertain.If the credit ratings of the security issuers deteriorate 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.

 

**We will continue to incur significantcosts as a result of operating as a public company, and our management will berequired to devote substantial time to new compliance initiatives. (*)**

 

As a public company, we will continue to incursignificant legal, accounting and other expenses.  In addition, the Sarbanes-Oxley Act, as wellas rules subsequently implemented by the Securities and ExchangeCommission, or SEC, and the Nasdaq Global Market, or Nasdaq, impose variousrequirements on public companies, including requiring establishment andmaintenance of effective disclosure and financial controls and changes incorporate governance practices.  Ourmanagement and other personnel need to devote a substantial amount of time tothese compliance initiatives.  Moreover,these rules and regulations will increase our legal and financialcompliance costs and will make some activities more time-consuming andcostly.  For example, these rules andregulations to make it more difficult and more expensive for us to maintaindirector and officer liability insurance, and we may be required to incursubstantial costs in the future to maintain the same or similar coverage.

 

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The Sarbanes-Oxley Act requires, among other things,that we maintain effective internal controls for financial reporting anddisclosure controls and procedures.  Wewill be required, this year, to perform a system and process evaluation andtesting of our internal controls over financial reporting to allow managementand our independent registered public accounting firm to report on theeffectiveness of our internal controls over financial reporting, as required bySection 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registeredpublic accounting firm, may reveal deficiencies in our internal controls overfinancial reporting that are deemed to be material weaknesses.  Our compliance with Section 404 willrequire that we incur substantial accounting expense and expend significantmanagement efforts.  We currently do nothave an internal audit group, and we may need to hire additional accounting andfinancial staff with appropriate public company experience and technicalaccounting knowledge.  We currently havefive****employees dedicated full-timeto accounting and finance matters.  Inthe future we will hire full-time employees in the accounting and financedepartment, as necessary, to ensure we have effective internal controls overfinancial reporting and disclosure controls and procedures.  We also hire consultants from time to time toaddress these matters.  If we are unableto hire adequate accounting and finance personnel, we may not be able to meetour public company reporting and governance obligations, including those setforth under the Sarbanes-Oxley Act. Moreover, if we are not able to comply with the requirements of Section 404in a timely manner, or if we or our independent registered public accountingfirm identifies deficiencies in our internal controls over financial reportingthat are deemed to be material weaknesses, the market price of our stock coulddecline and we could be subject to sanctions or investigations by Nasdaq, theSEC or other regulatory authorities, which would require additional financialand management resources.

 

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

 

Provisions in our amended and restated certificate ofincorporation and bylaws, as well as provisions of Delaware law, could make itmore difficult for a third party to acquire us, even if doing so would benefitour stockholders, or remove our current management.  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;

 

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·                 a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stockentitled to vote to amend any bylaws by stockholder action, or to amendspecific provisions of our certificate of incorporation;

 

·                 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.

 

These provisions may frustrate or prevent any attemptsby our stockholders to replace or remove our current management by making itmore difficult for stockholders to replace members of our board of directors,which is responsible for appointing the members of our management.  In addition, we are subject to Section 203of the Delaware General Corporation Law, which generally prohibits a Delawarecorporation from engaging in any of a broad range of business combinations witha stockholder owning 15% or more of our outstanding voting stock for a periodof three years following the date on which the stockholder became an interestedstockholder, unless such transactions are approved by our board of directors.  This provision could have the effect ofdelaying or preventing a change of control, whether or not it is desired by orbeneficial to our stockholders.  Such adelay or prevention of a change of control transaction could cause the marketprice of our stock to decline.

 

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**Item 6.  Exhibits**

 
| Exhibit  No. | ** ** | **Description of Document**                                                                                                                                                                                                                                              |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1          | (2)        | Certificate of Incorporation of Optimer  Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                            |
| 3.2          | (4)        | Bylaws of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                               |
| 4.1          | (3)        | Common Stock Certificate of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                          |
| 4.2          | (1)        | Investors’ Rights  Agreement by and among Optimer Pharmaceuticals, Inc. and certain  stockholders of Optimer Pharmaceuticals, Inc. dated November 30,  2005, as amended and restated.                                                                |
| 4.3          | (5)        | Registration Rights  Agreement, dated October 23, 2007, by and between Optimer  Pharmaceuticals, Inc. and the purchasers listed on the signature pages thereto.                                                                                           |
| 10.1         | (6)        | Summary of Optimer Pharmaceuticals, Inc. 2008  Incentive Compensation Plan.                                                                                                                                                                                         |
| 31.1         |       | Certification of principal executive officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                               |
| 31.2         |       | Certification of principal financial officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                               |
| 32           |       | Certification by the Chief Executive Officer and the  Chief Financial Officer of the Registrant, as required by  Rule 13a-14(b) or 15d-14(b) and Section 1350 of  Chapter 63 of Title 18 of the United States Code (18 U.S.C.  1350). |

 

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(1)                                    Filed with Registrant’s Amendment No. 3to Registration Statement on Form S-1 November 9, 2006.

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

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

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

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

(6)                                    Filed with Registrant’s Current Report onForm 8-K on March 17, 2008.

 

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**SIGNATURE**

 

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

 
|                         | ** **   | ** **   | **OPTIMER PHARMACEUTICALS, INC.** |
|-------------------------|--------------|--------------|-----------------------------------|
|                    |         |         |                              |   |
| Dated: May 8, 2008 |         |         | By:                               | /s/ John D.  Prunty |
| ** **              | ** **   | ** **   | **Name:**                         | **John D.  Prunty** |
| ** **              | ** **   | ** **   | **Title:**                        | ***Chief  Financial Officer*** |
| *** ***            | *** *** | *** *** | *** ***                      | ***(Duly  Authorized Officer and Principal Financial  and Accounting Officer)*** |

 

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