Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

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

 

**or**

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

 

**For the transition period from                     to                     **

 

**CommissionFile Number 001-33291**

 

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**OPTIMER PHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days:  Yes x No o

 

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

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act):  Yes o No x

 

The number of shares ofthe registrant’s Common Stock, no par value, outstanding as of October 30,2009 was 33,103,345 shares.

 

 

 

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

 

**TABLEOF CONTENTS**

 
|                                                                                                                | **Page** |
|---------------------------------------------------------------------------------------------------------------------|----------|
| **PART I –  FINANCIAL INFORMATION**                                                                       |     |
|                                                                                                                |     |
| Item 1. Financial Statements (unaudited)                                                                       |     |
|                                                                                                                |     |
| Consolidated  Balance Sheets – September 30, 2009 and December 31, 2008                              | 3        |
|                                                                                                                |     |
| Consolidated  Statements of Operations – Three months and nine months ended September   30, 2009 and 2008 | 4        |
|                                                                                                                |     |
| Consolidated  Statements of Cash Flows – Nine months ended September 30, 2009 and 2008                    | 5        |
|                                                                                                                |     |
| Notes to Consolidated Financial Statements                                                                          | 6        |
|                                                                                                                |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations            | 20       |
|                                                                                                                |     |
| Item 3. Quantitative and Qualitative Disclosures  about Market Risk                                            | 28       |
|                                                                                                                |     |
| Item 4. Controls and Procedures                                                                                | 28       |
|                                                                                                                |     |
| **PART II  – OTHER INFORMATION**                                                                          |     |
|                                                                                                                |     |
| Item 1A. Risk Factors                                                                                          | 29       |
|                                                                                                                |     |
| Item  5. Other Information                                                                                          | 58       |
|                                                                                                                |     |
| Item 6. Exhibits                                                                                               | 60       |
|                                                                                                                |     |
| SIGNATURE                                                                                                           |     |

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**Optimer Pharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                                                                                   |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                         |       | $                      | 19,240,782 |                  | $          | 16,778,880 |   |
| Short-term  investments                                                                                                                                                                            |       | 23,243,958             |       | 22,547,515            |       |
| Research  grant and contract receivables                                                                                                                                                           |       | 55,368                 |       | 211,299               |       |
| Prepaid  expenses and other current assets                                                                                                                                                         |       | 523,766                |       | 533,371               |       |
| Total  current assets                                                                                                                                                                              |       | 43,063,874             |       | 40,071,065            |       |
| Property  and equipment, net                                                                                                                                                                       |       | 697,328                |       | 694,183               |       |
| Long-term  investments                                                                                                                                                                             |       | 882,000                |       | 1,032,000             |       |
| Other  assets                                                                                                                                                                                      |       | 498,644                |       | 498,250               |       |
| Total  assets                                                                                                                                                                                      |       | $                      | 45,141,846 |                  | $          | 42,295,498 |   |
|                                                                                                                                                                                               |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                                              |       |                   |       |                  |       |
| Accounts  payable                                                                                                                                                                                  |       | $                      | 4,136,058  |                  | $          | 3,767,831 |   |
| Accrued  expenses                                                                                                                                                                                  |       | 3,890,438              |       | 4,045,660             |       |
| Total  current liabilities                                                                                                                                                                         |       | 8,026,496              |       | 7,813,491             |       |
| Deferred  rent                                                                                                                                                                                     |       | 276,484                |       | 251,504               |       |
| Commitments  and contingencies                                                                                                                                                                     |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                        |       |                   |       |                  |       |
| Preferred  stock, par value $0.001, 10,000,000 shares authorized, no shares issued and outstanding  at September 30, 2009 and December 31, 2008, respectively                            |       | —                 |       | —                |       |
| Common  stock, $0.001 par value, 75,000,000 shares authorized, 33,103,345 shares and  29,716,751 shares issued and outstanding at September 30, 2009 and December 31,  2008 respectively |       | 33,103                 |       | 29,717                |       |
| Additional  paid-in capital                                                                                                                                                                        |       | 202,786,484            |       | 167,544,806           |       |
| Accumulated  other comprehensive income                                                                                                                                                            |       | 57,027                 |       | 38,088                |       |
| Accumulated  deficit                                                                                                                                                                               |       | (166,037,748           | )          | (133,382,108          | )          |
| Total  stockholders’ equity                                                                                                                                                                   |       | 36,838,866             |       | 34,230,503            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                   |       | $                      | 45,141,846 |                  | $          | 42,295,498 |   |

 

See accompanying notes.

 

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**Optimer Pharmaceuticals, Inc**

**ConsolidatedStatements of Operations**

**(unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                   | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                   | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                    |       |                   |       |                   |       |   |   |   |   |
| Research  grants                                             |       | $                      | 176,202    |                   | $          | 239,212 |   | $ | 583,992 |   | $ | 844,675 |   |
| Collaborative  research agreements                           |       | —                 |       | —                 |       | 100,000 |   | 50,000 |   |
| Total  revenues                                              |       | 176,202                |       | 239,212                |       | 683,992 |   | 894,675 |   |
| Operating  expenses:                                         |       |                   |       |                   |       |   |   |   |   |
| Research  and development                                    |       | 7,192,383              |       | 7,877,906              |       | 26,519,447 |   | 21,003,764 |   |
| Marketing                                                    |       | 393,864                |       | 415,916                |       | 1,179,212 |   | 1,695,400 |   |
| General  and administrative                                  |       | 2,030,137              |       | 1,544,925              |       | 5,949,946 |   | 4,803,422 |   |
| Total  operating expenses                                    |       | 9,616,384              |       | 9,838,747              |       | 33,648,605 |   | 27,502,586 |   |
| Loss  from operations                                        |       | (9,440,182             | )          | (9,599,535             | )          | (32,964,613 | ) | (26,607,911 | ) |
| Interest  income and other, net                              |       | 33,935                 |       | 411,352                |       | 308,973 |   | 1,426,386 |   |
| Net  loss                                                    |       | $                      | (9,406,247 | )                      | $          | (9,188,183 | ) | $ | (32,655,640 | ) | $ | (25,181,525 | ) |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| Basic  and diluted net loss per share                        |       | $                      | (0.28      | )                      | $          | (0.31 | ) | $ | (1.01 | ) | $ | (0.89 | ) |
| Shares  used to compute basic and diluted net loss per share |       | 33,103,345             |       | 29,253,693             |       | 32,250,194 |   | 28,377,733 |   |

 

See accompanyingnotes.

 

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2009**                                 | ** **  | **2008** | ** ** |
| ** **                                                                   | ** ** | ** **                               | ** **  | ** ** | ** ** |
| **Operating activities**                                                     |       |                                     |        |   |   |
| Net loss                                                                     |       | $                                        | (32,655,640 | ) | $ | (25,181,525 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                     |        |   |   |
| Depreciation and amortization                                                |       | 185,615                                  |        | 168,109 |   |
| Stock based compensation                                                     |       | 2,085,556                                |        | 1,278,830 |   |
| Deferred rent                                                                |       | 24,980                                   |        | (14,918 | ) |
| Changes in operating assets and liabilities:                                 |       |                                     |        |   |   |
| Prepaid expenses and other current assets                                    |       | 9,605                                    |        | 68,259 |   |
| Research grant and contract receivables                                      |       | 155,931                                  |        | 62,700 |   |
| Restricted cash                                                              |       | —                                   |        | (170,000 | ) |
| Other assets                                                                 |       | (394                                     | )           | (26,214 | ) |
| Accounts payable and accrued expenses                                        |       | 213,005                                  |        | (1,858,050 | ) |
| Net cash used in operating activities                                        |       | (29,981,342                              | )           | (25,672,809 | ) |
|                                                                         |       |                                     |        |   |   |
| **Investing activities**                                                     |       |                                     |        |   |   |
| Purchases of short-term investments                                          |       | (28,683,091                              | )           | (22,886,304 | ) |
| Sales or maturity of short-term investments                                  |       | 28,153,000                               |        | 54,650,000 |   |
| Purchase of property and equipment                                           |       | (188,760                                 | )           | (110,760 | ) |
| Net cash provided by (used in) investing activities                          |       | (718,851                                 | )           | 31,652,936 |   |
|                                                                         |       |                                     |        |   |   |
| **Financing activities**                                                     |       |                                     |        |   |   |
| Proceeds from sale of common stock                                           |       | 33,159,511                               |        | 14,950,101 |   |
| Net cash provided by financing activities                                    |       | 33,159,511                               |        | 14,950,101 |   |
| Effect of exchange rate changes on cash and cash  equivalents                |       | 2,584                                    |        | (19,296 | ) |
| Net increase in cash and cash equivalents                                    |       | 2,461,902                                |        | 20,910,932 |   |
| Cash and cash equivalents at beginning of period                             |       | 16,778,880                               |        | 3,191,814 |   |
| Cash and cash equivalents at end of period                                   |       | $                                        | 19,240,782  |   | $ | 24,102,746 |   |
|                                                                         |       |                                     |        |   |   |
| **Supplemental disclosure of cash  flow information:**                       |       |                                     |        |   |   |
| Retirement of treasury stock                                                 |       | —                                   |        | 100,000 |   |

 

Seeaccompanying notes.

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**1.     Interim FinancialInformation**

** **

***Organizationand Business Activities***

** **

Optimer Pharmaceuticals, Inc. (“Optimer” or the “Company”)was incorporated in Delaware on November 18, 1998. The Company has onemajority owned subsidiary, Optimer Biotechnology, Inc. (“OBI”), which isincorporated and located in Taiwan. In October 2009, Optimer sold 40% ofits equity interest in OBI. Prior to the sale, OBI was a wholly ownedsubsidiary of Optimer. Refer to the Subsequent Event note in these ConsolidatedFinancial Statements for additional information.

 

Optimer is a biopharmaceutical company focused ondiscovering, developing and commercializing anti-infective products.  The Company currently has two anti-infectiveproduct candidates, fidaxomicin, for the treatment of *Clostridium difficile*-infection, andPruvelTM (prulifloxacin), for the treatment of infectious diarrhea. The Companyis developing additional product candidates using its proprietary technology,including its OPopSTM 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 and ninemonths ended September 30, 2009 are not necessarily indicative of theresults that may be expected for the full year. These unaudited consolidatedfinancial statements should be read in conjunction with the audited financialstatements and related notes thereto included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2008, which wasfiled with the Securities and Exchange Commission (“SEC”) on March 12, 2009.

 

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

 

**2.     Summary of SignificantAccounting Policies**

 

*Cash, Cash Equivalents andInvestments*

* *

Investments with original maturities of less than 90days at the date of purchase are considered to be cash equivalents.  All other investments are classified asshort-term investments which are deemed by management to be available-for-saleand are reported at fair value with net unrealized gains or losses reported withinother comprehensive loss in the consolidated statement of 

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

stockholders’ equity. Realized gains and losses, and declines in value judged to be other thantemporary, are included in investment income or interest expense.  The cost of securities sold is computed usingthe specific identification method.

 

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

 

*Revenue Recognition*

* *

TheCompany’s license and collaboration agreements contain multiple elements,including non-refundable upfront fees, payments for reimbursement ofthird-party research costs, payments for ongoing research, payments associatedwith achieving specific development milestones and royalties based on specifiedpercentages of net product sales, if any. The Company 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. The Company generally recognizes revenue when it is realized orrealizable and earned when all of the following criteria are met — 1)persuasive evidence of an arrangement exists; 2) delivery has occurred orservices have been rendered; 3) the seller’s price to the buyer is fixed ordeterminable;  and 4) collectibility is reasonablyassured.

 

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.

 

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.

 

Withrespect to revenues derived from reimbursement of direct out-of-pocket expensesfor research costs associated with grants, where the Company acts as aprincipal, with discretion to choose suppliers, bears credit risk and performspart of the services required in the transaction, the Company records revenuefor the gross amount of the reimbursement. The costs associated with thesereimbursements are reflected as a component of research and development expensein the consolidated statements of operations.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

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

 

*Research and DevelopmentExpenses*

* *

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

 

*Comprehensive Income (Loss)*

* *

Comprehensiveincome (loss) is defined as the change in equity during a period from transactionsand other events and circumstances from non-owner sources.  Net income (loss) and other comprehensiveincome (loss), including foreign currency translation adjustments andunrealized gains and losses on investments, is required to be reported, net oftheir related tax effect, to arrive at comprehensive income (loss).  The Company’s comprehensive loss was $9.4million and $9.6 million for the three months ended September 30, 2009 and2008, respectively. The Company’s comprehensive loss was $32.6 million and$25.5 million for the nine months ended September 30, 2009 and 2008,respectively.

 

*Net Loss Per Share*

* *

Basicnet loss per common share is computed by dividing net loss by theweighted-average number of common shares outstanding. Diluted net loss percommon share is computed by dividing net loss by the weighted-average number ofcommon shares and dilutive common share equivalents then outstanding. Commonequivalent shares consist of common shares issuable upon the exercise of stockoptions and warrants. Since the Company has a net loss for all periodspresented, the effect of all potentially dilutive securities is anti-dilutive.Accordingly, basic and diluted net loss per share is the same for all periodspresented.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

Forthe nine months ended September 30, 2009 and 2008, common shares issuableupon the exercise of stock options and warrants totaling 2,571,383 and1,981,975 shares, respectively, were excluded from the calculation, as theireffect would have been antidilutive.

 

*IncomeTaxes*

 

The Company follows the FASB guidance issued on January 1,2007 which**clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements andprescribes a recognition threshold and measurement attributes for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. The impact of an uncertain income tax position on the income tax returnmust be recognized at the largest amount that is more-likely-than-not to besustained upon audit by the relevant taxing authority. An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained. The FASB guidance also provides for derecognition, classification,interest and penalties, accounting in interim periods, disclosure and transition.

 

*Future Accounting Requirements*

 

The Financial AccountingStandards Board (“FASB”) issued the following new accounting standards:

 

InSeptember 2009, the FASB issued ASU No. 2009-12, *Fair Value Measurements and Disclosure**s* (“ASU 2009-12”). This standard provides additionalguidance on using the net asset value per share, provided by an investee, whenestimating the fair value of an alternate investment that does not have areadily determinable fair value and enhances the disclosures concerning theseinvestments. Examples of alternate investments, within the scope of thisstandard, include investments in hedge funds and private equity, real estate,and venture capital partnerships. This Standard is effective for interim andannual periods ending after December 15, 2009.  The Company is currently evaluating thepotential impact of this standard on its financial position and results ofoperations.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

InOctober 2009, the FASB issued ASU No. 2009-13, *Multiple-Deliverable Revenue Arrangements*(“ASU 2009-13”).  ASU 2009-13, amends existing revenuerecognition accounting pronouncements that are currently within the scope ofFASB Accounting Standards Codification (“ASC”) Subtopic 605-25 (previouslyincluded within EITF 00-21, Revenue Arrangements with Multiple Deliverables(“EITF 00-21”)). ASU 2009-13 guidance eliminates the requirement toestablish the fair value of undelivered products and services and insteadprovides for separate revenue recognition based upon management’s estimate ofthe selling price for an undelivered item when there is no other means todetermine the fair value of that undelivered item. EITF 00-21 previouslyrequired that the fair value of the undelivered item be the price of the itemeither sold in a separate transaction between unrelated third parties or theprice charged for each item when the item is sold separately by the vendor.Under EITF 00-21, if the fair value of all of the elements in thearrangement was not determinable, then revenue was deferred until all of theitems were delivered or fair value was determined. ASU 2009-13 is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010. The Company is currentlyevaluating the potential impact of this standard on its financial position andresults of operations.

 

In June 2009, the FASBissued authoritative guidance which amends its existing guidance **to determine whether anenterprise’s variable interest or interests give it a controlling financialinterest in a variable interest entity. **Theguidance will be effective as of the beginning of the Company’s first annualreporting period that begins after November 15, 2009, for interim periodswithin that first annual reporting period, and for interim and annual reportingperiods thereafter.  Earlier application is prohibited. The Company iscurrently evaluating the impact, if any, of this amended guidance on itsfinancial position and results of operations.

 

In June 2009, the FASBissued authoritative guidance which amends the existing guidance for *Accounting for Transfers of Financial Assets*to improve therelevance, representational faithfulness, and comparability of the informationthat a reporting entity provides in its financial statements about a transferof financial assets, the effects of a transfer on its financial position,financial performance, and cash flows, and a transferor’s continuinginvolvement, if any, in transferred financial assets.  The guidance removes the concept of aqualifying special-purpose entity and removes the exception from applying *Consolidation of Variable Interest Entities*toqualifying special-purpose entities.  Theguidance will be**effective at the start of theCompany’s first fiscal year beginning after November 15, 2009. The Companyis currently evaluating the impact, if any, of this amended guidance on itsfinancial position and results of operations.

 

*RecentlyAdopted Guidance*

* *

In August 2009, theFASB issued Accounting Standards Update No. 2009-05, *Measuring Liabilities at Fair Value* (“ASU2009-05”). ASU 2009-05 amends Accounting Standards Codification Topic 820, *Fair Value Measurements.*Specifically, ASU2009-05 provides clarification that in circumstances in which a quoted price inan active market for the identical liability is not available, a reportingentity is required to measure fair value using one or more of the followingmethods: 1) a valuation technique that uses a) the quoted price ofthe identical liability when traded as an asset or b) quoted prices forsimilar liabilities or similar liabilities when traded as assets and/or2) a valuation technique that is consistent with the principles of Topic820 of the Accounting Standards Codification (e.g. an income approach or marketapproach). ASU 2009-05 also clarifies that when estimating the fair value of aliability, a reporting entity is not required to make adjustments to includeinputs relating to the existence of transfer restrictions on that liability.The adoption of this standard did not have an impact on the Company’s financialposition or results of operations; however, this standard may impact theCompany’s in future periods.

 

Effective for the quarterending September 30, 2009, the Company adopted ASC which became the single source of all authoritative generallyaccepted accounting principles in the United States (“GAAP”). The adoption didnot have any material impact on the Company’s financial position or results ofoperations.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

**3.   Fair Value of Financial Instruments**

 

The followingtable summarizes the Company’s assets measured at fair value on a recurringbasis as of September 30, 2009:

 
| ** **                 | ** ** | **Quoted Prices in  Active Markets  (Level 1)** | ** ** | **Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** | **Total**  | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|------------|------------|
| Cash and cash  equivalents |       | $                                               | 19,240,782 |                                     | $          | —                              |       | $          | —     |   | $ | 19,240,893 |   |
| Marketable  securities     |       | 23,243,958                                      |       | —                                   |       | —                              |       | 23,243,958 |       |
| Auction rate  securities   |       | —                                          |       | —                                   |       | 882,000                             |       | 882,000    |       |
|                            |            |                                                 |            |                                          |            |                                     |            |            |            |  |  |  |  |

 

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

 

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

 

Level 3:      Unobservable inputs.

 

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, 2009                                                |       | $                                        | 1,032,000  |   |
| Transfer  from level 3 into level 1                                                       |       | —                                   |       |
| Total unrealized losses  included in accumulated other comprehensive income               |       | —                                   |       |
| Total realized losses  included in interest income and other, net                         |       | —                                   |       |
| Purchases,  sales, issuances and settlements                                              |       | (150,000                                 | )          |
| Ending  balance at September 30, 2009                                                |       | $                                        | 882,000    |   |
| Change  in unrealized gains (losses) included in net income related to assets still  held |       | $                                        | —     |   |

 

Allof the Company’s investments in available-for-sale securities are recorded atfair value based on quoted market prices. As of September 30, 2009, theCompany held one auction rate preferred security (“ARPS”) valued at $882,000with a perpetual maturity date that resets every 28 days.  Although as of September 30, 2009, theCompany’s remaining ARPS continued to pay interest according to its statedterms, the market in these securities continues to be illiquid. Based on valuationmodels on the individual security, the Company has previously recognized in theconsolidated statement of operations an unrealized loss of approximately$118,000 in investment income since the Company had determined that the declinein value was other than temporary. The Company’s remaining ARPS has beenclassified as a long-term investment on the consolidated balance sheets as theCompany does not believe it could liquidate the security in the near term.

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

**4.     Short-Term Investments**

 

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

 
| ** **              | ** ** | **September 30, 2009** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Gross  Amortized********Cost** | ** ** | **Gross  Unrealized********Gains** | ** ** | **Gross  Unrealized********Losses** | ** ** | **Market Value** | ** ** |
|                    |       |                             |       |   |   |   |   |   |   |
| Government  obligations |       | $                                | 23,232,980 |   | $ | 16,093 |   | $ | (5,115 | ) | $ | 23,243,958 |   |
|                         |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

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

 

Investments in net unrealized loss positions as of September 30,2009 are as follows:

 
| ** **             | ** ** | ** **                      | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **Number of  Investments** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Government obligations |       | 5                               |       | $                                                                         | 5,064,480  |                                                                         | $          | (5,115                               | )          | $ | — |   | $ | — |   | $ | 5,064,480 |   | $ | (5,115 | ) |
|                        |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortized cost and estimated fair value ofsecurities available-for-sale at September 30, 2009 and December 31,2008, respectively, by contractual maturity, are as follows:

 
| ** **                            | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **Amortized  Cost**               | ** ** | **Estimated  Fair Value**        | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| Due  in one year or less              |       | $                                 | 23,232,980 |                             | $          | 23,243,958 |   | $ | 22,552,889 |   | $ | 22,547,515 |   |
| Due  after one year through two years |       | —                            |       | —                           |       | — |   | — |   |
| Total                                 |       | $                                 | 23,232,980 |                             | $          | 23,243,958 |   | $ | 22,552,889 |   | $ | 22,547,515 |   |

 

The weighted average maturity of our short-terminvestments as of September 30, 2009 and December 31, 2008, wasapproximately three months.

 

*Evaluating Investments for Other-than TemporaryImpairments*

 

Except for the ARPS which the Company recorded as another than temporary impairment in 2008, the Company considered a number offactors to determine whether the decline in value in its investments is otherthan temporary, including the length of time and the extent to which the 

 

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**Optimer Pharmaceuticals, Inc.**

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

**(unaudited)**

 

market value has been less than cost, the financialcondition of the issuer and the Company’s intent to hold and ability to retainthese short-term investments.  Based onthese factors, the Company believes that the decline in value is temporary andprimarily related to the change in market interest rates since purchase.  The Company determined that it does notintend to sell its short-term investments and it is not more likely than notthat the Company will be required to sell its short-term investments beforerecovery of their amortized cost bases, which may not occur until maturity. TheCompany anticipates that it will fully recover the amortized cost with respectto these securities at maturity or sooner in the event of a change in themarket interest rate environment.

 

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

 

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

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

 

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

 

Asof September 30, 2009, the total unrecognized compensation expense relatedto unvested stock options was approximately $5,277,250 and the relatedweighted-average period over which it is expected to be recognized isapproximately 2.75 years.

 

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

 

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**Optimer Pharmaceuticals, Inc.**

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

**(Unaudited)**

 
| ** **                        | ** ** | **Three months ended********September 30,** | ** ** | **Nine months ended********September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Research  and development         |       | $                                                | 327,389    |                                            | $          | 134,157 |   | 847,806 |   | $ | 364,664 |   |
| Marketing                         |       | 93,519                                           |       | 75,605                                          |       | 279,274 |   | 228,901 |   |
| General  and administrative       |       | 321,300                                          |       | 221,065                                         |       | 958,476 |   | 685,265 |   |
| Stock-based  compensation expense |       | $                                                | 742,208    |                                            | $          | 430,827 |   | $ | 2,085,556 |   | $ | 1,278,830 |   |
|                                   |            |                                                  |            |                                                 |            |  |  |  |  |  |  |  |  |

 

**6.     Stockholders’ Equity**

 

*Stock Options*

* *

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

 

InDecember 2006, the Company’s board of directors approved the 2006 EquityIncentive Plan (“2006 Plan”).  The 2006Plan became effective upon the effectiveness of the Company’s initial publicoffering. The Company initially reserved a total of 2,000,000 shares of itscommon stock for issuance pursuant to the 2006 Plan.  The 2006 Plan provides for annual increasesin the number of shares available for issuance thereunder on the first day ofeach fiscal year, beginning with the Company’s 2008 fiscal year, equal to thelesser of (i) 5% of the outstanding shares of the Company’s common stockon the last day of the immediately preceding fiscal year; (ii) 750,000shares; or (iii) such other amount as the board of directors maydetermine.  As of September 30, 2009, a total of 3,500,000shares of the Company’s common stock had been reserved for issuance under the2006 Plan.

 

Optionsgranted under both the 1998 Plan and the 2006 Plan generally expire no laterthan ten years from the date of grant (five years for a 10% stockholder) andvest over a period of four years. The exercise price of options granted must atleast be equal to the fair market value of the Company’s common stock on thedate of grant.  The 2006 Plan isadministered by the Compensation Committee of the Company’s Board of Directors.In September 2008, the Company’s board of directors established a New HireStock Option Committee consisting of the Chief Executive Officer and the ChiefFinancial Officer, with authority to grant options to newly-hired non-executiveemployees within pre-determined limits.

 

Followingis a summary of stock option activity for the nine months ended September 30,2009:

 
| ** **                            | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-------------|------------|---------------------------------------------|------------|
| Balance as of December 31, 2008  |       | 1,979,660   |       | $                                           | 3.64       |   |
| Granted                               |       | 626,250     |       | $                                           | 11.24      |   |
| Exercised                             |       | (111,153    | )          | $                                           | 1.11       |   |
| Canceled                              |       | (14,907     | )          | $                                           | 8.45       |   |
| Balance as of September 30, 2009 |       | 2,479,850   |       | $                                           | 5.64       |   |

 

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**Optimer Pharmaceuticals, Inc.**

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

**(Unaudited)**

 

As of September 30, 2009, options were outstanding under the 1998Plan and the 2006 Plan as follows:

 
| ** **                | ** ** | **September 30, 2009**  | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
| **Exercise   Price** | ** ** | **Number  Outstanding**      | ** ** | **Weighted-Average  Remaining  Contractual  Life (in years)** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| $0.22 - $1.08             |       | 832,906                      |       | 4.21 |   | $ | 0.90 |   | 831,199 |   | $ | 0.90 |   |
| $2.17 - $9.70             |       | 1,025,194                    |       | 7.62 |   | $ | 6.10 |   | 579,094 |   | $ | 5.60 |   |
| $10.00 - $14.86           |       | 621,750                      |       | 9.31 |   | $ | 11.24 |   | 19,936 |   | $ | 10.72 |   |
| $0.22 - $14.86            |       | 2,479,850                    |       | 6.90 |   | $ | 5.64 |   | 1,430,229 |   | $ | 2.94 |   |

 

Ofthe options outstanding, options to purchase 1,430,229 shares were vested as ofSeptember 30, 2009, with a weighted-average remaining contractual life of5.6 years and a weighted-average exercise price of $2.94 per share, whileoptions to purchase 1,049,621 shares were unvested.

 

*Employee Stock Purchase Plan*

* *

Concurrentwith the Company’s initial public offering in February 2007, the Company’sboard of directors adopted the employee stock purchase plan (“ESPP”) in December 2006,and the stockholders approved the plan in January 2007.  A total of 200,000 shares of the Company’scommon stock were initially made available for sale under the plan.  The ESPP provides for annual increases in thenumber of shares available for issuance on the first day of each fiscal year,beginning with the Company’s 2008 fiscal year, equal to the lesser of (i) 3%of the outstanding shares of the Company’s common stock on the last day of theimmediately preceding fiscal year; (ii) 300,000 shares; or (iii) suchother amount as may be determined by the Company’s board of directors. As of September 30, 2009, a total of500,000 shares of the Company’s common stock had been reserved for issuanceunder the ESPP.

 

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

 

During the three and nine months ended September 30,2009, the Company recorded stock-based compensation expense of approximately$33,769 and $114,873, respectively, related to the ESPP.

 

*Warrants*

 

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

 

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**Optimer Pharmaceuticals, Inc.**

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

**(Unaudited)**

 

**7.     Revenue and OtherCollaborative Agreements**

 

*Revenuesfrom Research Grants*

 

The Company has received several research grants fromU.S. government agencies since 2003, all of which except for one were completedon or prior to June 30, 2009. The active grant was awarded from NationalInstitute of Allergy and Infectious Diseases (“NIAID”) in September 2007.This grant is renewable for $1 million each year until August 2010, up toa maximum of $3 million. The award is being used to conduct supplementarystudies to the ongoing fidaxomicin trials to confirm narrow spectrum activityand potency of fidaxomicin against hypervirulent epidemic strains, to supportadditional toxicology and microbiological studies to demonstrate the safety andefficacy of the fidaxomicin compound and its major metabolite in CDI patientsand to support a surveillance study of *C.difficile* isolates across North America to compare activity offidaxomicin with existing CDI treatments. For the three months ended September 30, 2009 and 2008, the Companyrecognized revenues related to research grants of $176,202 and $239,212,respectively. For the nine months ended September 30, 2009 and 2008, theCompany recognized revenues related to research grants of $583,992 and$844,675, respectively.

 

*Other Collaborative Agreements*

 

*Par Pharmaceuticals, Inc.*

 

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

 

*Cempra Pharmaceuticals, Inc.*

 

In March 2006, the Company entered into acollaborative research and development and license agreement with CempraPharmaceuticals, Inc. (“Cempra”). The Company granted to Cempra an exclusive worldwide license, except inAssociation of Southeast Asian Nations (“ASEAN”) countries, with the right tosublicense, the Company’s patent and know-how related to the Company’smacrolide and ketolide antibacterial program. As partial consideration for granting 

 

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**Optimer Pharmaceuticals, Inc.**

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

**(Unaudited)**

 

Cempra the licenses, the Company obtained equity ofCempra and the Company assigned no value to such equity.  The Company may receive milestone payments asproduct candidates are developed and/or co-developed by Cempra, in addition tomilestone payments based on certain sublicense revenue.  The aggregate potential amount of suchmilestone payments is not capped and, based in part on the number of productsdeveloped under the agreement, may exceed $24.5 million.  The Company will also receive royaltypayments based on a percentage of net sales of licensed products.  The milestone payments will be triggered uponthe completion of certain clinical development milestones and in certaininstances, regulatory approval of products. In consideration of the foregoing, Cempra may receive milestone paymentsfrom the Company in the amount of $1.0 million for each of the first twoproducts the Company develops which receive regulatory approval in ASEANcountries, as well as royalty payments on the net sales of such products.  The research term of the agreement wascompleted in March 2008.  Subject tocertain exceptions, on a country-by-country basis, the general terms of thisagreement continue until the later of: (i) the expiration of the last toexpire patent rights of a covered product in the applicable country or (ii) tenyears from the first commercial sale of a covered product in the applicablecountry.  Either party may terminate theagreement in the event of a material breach by the other party, subject toprior notice and the opportunity to cure. Either party may also terminate the agreement for any reason upon 30days’ prior written notice provided that all licenses granted by theterminating party to the non-terminating party will survive upon the expresselection of the non-terminating party.

 

*Nippon Shinyaku, Co., Ltd.*

 

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

 

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**Optimer Pharmaceuticals, Inc.**

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

**(Unaudited)**

 

*Memorial Sloan-Kettering Cancer Center*

 

In July 2002, the Company entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center (“MSKCC”) to acquire,together with certain nonexclusive licenses, exclusive, worldwide licensing andsublicensing rights to certain patented and patent-pending carbohydrate-basedcancer immunotherapies.  As partialconsideration for the licensing rights, the Company paid to MSKCC a one-timefee consisting of both cash and 55,383 shares of its common stock.  Under the agreement, which was amended in June 2005,the Company owes MSKCC milestone payments in the following amounts for eachlicensed product: (i) $500,000 upon the commencement of Phase 3clinical studies, (ii) $750,000 upon the filing of the first NDA, (iii) $1.5million upon obtaining marketing approval in the United States and (iv) $1.0million upon obtaining marketing approval in each and any of Japan and certainEuropean countries, but only to the extent that the Company, and not asublicensee, achieves such milestones. The Company may also owe MSKCC royalties based on net sales generatedfrom the licensed products and income the Company receives from itssublicensing activities, which royalty payments are credited against a minimumannual royalty payment the Company may owe to MSKCC during the term of theagreement.  The term of the agreementcontinues until the later of July 31, 2017, or the expiration of the lastto expire of the patents licensed under this agreement, unless the agreement isearlier terminated.  The agreement can beterminated by MSKCC for a variety of reasons, including (i) upon 60 days’notice in the event the Company fails to meet a development milestone specifiedin the agreement or (ii) upon 30 days’ notice, in the event the Companyfails to pay any licensing fees, royalties or patent expenses due under theagreement within 30 days of the due date and thereafter fails to pay suchdeficit in-full within the 30-day notice period.  Inanticipation of certain transactions involving OBI and described in theSubsequent Event note, the Company previously assigned and OBI assumed theCompany’s rights and obligations under the agreement.  See the Subsequent Event note belowfor additional information on the transactions involving OBI.

 

*Scripps Research Institute*

 

In July 1999, the Company acquired exclusive,worldwide rights to its OPopS technology from the Scripps Research Institute (“TSRI”).  This agreement includes the license to theCompany of patents, patent applications and copyrights related to OPopStechnology.  The Company also acquired,pursuant to three separate license agreements with TSRI, exclusive, worldwiderights to over 20 TSRI patents and patent applications related to otherpotential drug compounds and technologies, including HIV/FIV proteaseinhibitors, aminoglycoside antibiotics, polysialytransferase, selectininhibitors, nucleic acid binders, carbohydrate mimetics andosteoarthritis.  Under the fouragreements, the Company paid TSRI license fees consisting of an aggregate of239,996 shares of its common stock with a deemed aggregate fair market value of$46,400, as determined on the dates of each such payment.  Additionally, under each agreement, theCompany may owe TSRI royalties based on net sales by the Company, itsaffiliates and sublicensees of the covered products and royalties based on revenuethe Company generates from sublicenses granted pursuant to the agreements.  For the first licensed product under each ofthe four agreements, the Company will also owe TSRI payments upon achievementof certain milestones.  In three of thefour TSRI agreements, the milestones are the initiation of a Phase 2 

 

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**Optimer Pharmaceuticals, Inc.**

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

**(Unaudited)**

 

trial or its foreign equivalent, the filing of an NDAor its foreign equivalent and government marketing and distributionapproval.  In the remaining TSRIagreement, the milestones are the successful completion of a Phase 3 trialor its foreign equivalent, the filing of an NDA or its foreign equivalent andgovernment marketing and distribution approval. The aggregate potential amount of milestone payments the Company may berequired to pay TSRI under all four TSRI agreements is approximately $14.0million.  Each TSRI agreement terminatesin part as follows: (i) with respect to each product which utilizes patentrights licensed under the agreement, on a country-by-country basis concurrentlywith the expiration of the last to expire of the applicable patent rights, (ii) withrespect to each product which utilizes technology licensed under the agreementbut which does not utilize patent rights also licensed thereunder, 15 yearsafter the date of the first commercial sale of the product in each country and (iii) withrespect to software licensed under the 1999 OPopS agreement, 75 years after thedate the applicable copyright is filed in the United States.  Inanticipation of certain transactions involving OBI and described in theSubsequent Event note, the Company previously assigned and OBI assumed theCompany’s rights and obligations under one of the agreements with TSRI relatedto osteoarthritis.  See theSubsequent Event note below for additional information on the transactionsinvolving OBI.

 

**8.     Subsequent Event**

 

InOctober 2009, the Company entered into certain transactions involving itsTaiwan subsidiary, OBI, to provide funding for the development of two of theCompany’s early-stage, non-core programs.

 

Thetransactions with OBI included an Intellectual Property Assignment and LicenseAgreement, pursuant to which the Company assigned to OBI certain patent rights,information and know-how related to a product candidate for the treatment ofosteoarthritis, and a product candidate for carbohydrate-based cancerimmunotherapy. Under this agreement, the Company is eligible to receive up to$10 million in milestone payments for each product developed under thedevelopment programs and is also eligible to receive royalties on net sales ofany product which is commercialized under the programs.

 

TheIntellectual and Property Assignment and License Agreement also terminates anexisting license agreement between the Company and OBI, including the Company’sprevious license to OBI to develop fidaxomicin in certain Asian countries.  Under the agreement, the Company also forgaveprevious intercompany loans to OBI totaling $3.3 million. The term of theagreement continues until the last to expire of the patents assigned to OBI bythe Company and the patents licensed to OBI under the TSRI and MSKCCagreements.

 

Toprovide capital for OBI’s product development efforts, the Company and OBI alsoentered into a financing agreement with a group of new investors.  Simultaneously, the Company sold 40 percentof its existing OBI shares to the same group of new investors for grossproceeds of approximately $2.1 million. Under the financing agreement, the Company and the new investorsinvested approximately $3.7 million and $2.5 million, respectively, in new OBIshares.  Also under the financingagreement, if OBI achieves certain development milestones in the future, theCompany and the new investors will be obligated to invest approximately anadditional $8.6 million and $5.7 million, respectively, in exchange for new OBIshares.  Following the sale of itsexisting OBI shares and the initial investments in exchange for new OBI shares,the Company maintains a 60 percent ownership interest in OBI.

 

TheCompany has evaluated events and transactions that occurred after September 30,2009 through November 3, 2009, the date the Company issued these financialstatements. Except for the transactions with OBI described above, the Companydid not have any other material recognizable subsequent events.

 

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

 

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

 

**Overview**

 

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

 

We currently have two late-stage anti-infectiveproduct candidates, fidaxomicin and PruvelTM (prulifloxacin).

 

Fidaxomicin, our lead product candidate, is a narrowspectrum antibiotic with minimal systemic absorption, currently in its secondPhase 3 registration trial for the treatment of *Clostridium difficile*-infection, or CDI, the most commonnosocomial, or hospital acquired, diarrhea. In November 2008, we reportedpositive data from the first fidaxomicin Phase 3 trial, the largest singlecomparative study ever conducted against Vancocin. The top-line analysis ofdata from this trial showed that fidaxomicin achieved the primary endpoint ofclinical cure and demonstrated a significantly lower recurrence rate comparedto Vancocin, the only FDA-approved antibiotic for the treatment of CDI.  Fidaxomicin was also well-tolerated in thetrial.  The second fidaxomicin Phase 3trial is on-going and we anticipate completing enrollment in 2009 and reportingdata from this trial in the first quarter of 2010.  We currently hold worldwide rights tofidaxomicin and intend to seek one or more partners for thecommercialization of fidaxomicin outside of North America.

 

Pruvel is a prodrug in the fluoroquinolone class ofantibiotics, a widely-used class of broad-spectrum antibiotics. We aredeveloping Pruvel as a treatment for infectious diarrhea.  In July 2008, we reported positivetop-line data from the first Phase 3 trial conducted in Mexico and Peru and in February 2009,we reported positive top-line data from the second Phase 3 trial conducted inIndia, Guatemala and Mexico.  Thetop-line analysis of data from these studies showed that Pruvel met the primaryendpoint of time to last unformed stool, or TLUS, compared to placebo. Weintend to conduct a Phase 4 trial of Pruvel subsequent to a new drugapplication, or NDA, submission to compare Pruvel to ciprofloxacin for thetreatment of infectious diarrhea.  

 

We plan to initially seek approval for Pruvel for thetreatment of infectious diarrhea.

 

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We are developingadditional product candidates using our proprietary technology, including ourOptimer One-Pot Synthesis, or OPopSTM drug discovery platform. OPopS is acomputer-aided technology that enables the rapid and low-cost synthesis of awide array of carbohydrate-based compounds. Two components of the OPopS technology that allow us to synthesize new compoundsare GlycoOptimization and De Novo Glycosylation.  These technologies are capable of rapidlygenerating drug candidates for broad therapeutic application.

 

Wepreviously acquired exclusive rights to two other product candidates: OPT-88, adisease-modifying intra-articular, or within the joint, therapy forosteoarthritis which we licensed from the Scripps Research Institute, or TSRI,and OPT-822/821, a novel carbohydrate-based cancer immunotherapy which welicensed from the Memorial Sloan-Kettering Cancer Center, or MSKCC.  In October 2009,we entered into a number of transactions involving our Taiwanese subsidiary,Optimer Biotechnology, Inc., or OBI, in which we sold 40% of our existingequity in OBI to a group of new investors and, simultaneously, we and the groupof new investors purchased approximately $3.7 million and $2.5 million,respectively, of new common shares of OBI.  In connection with thesetransactions, we assigned to OBI certain of our patent rights and know-howrelated to OPT-88 and OPT-822/821 and also assigned to OBI our rights andobligations under the TSRI and MSKCC agreements.  We anticipate that OBIwill use the proceeds from the sale of new common shares to fund thedevelopment of OPT-88 and OPT-822/821.  Following these transactions, wemaintain a 60% equity interest in OBI and have the right to receive up to $10million in future milestone payments for each product incorporating OPT-88 orOPT-822/821 and royalties on net sales of any such products.

 

We were incorporated in November 1998.  Since inception, we have focused ondeveloping our product candidates, including fidaxomicin and Pruvel.  We have never been profitable and haveincurred significant net losses since our inception.  As of September 30, 2009, we had anaccumulated deficit of $166.0 million. These losses have resulted principally from costs incurred in connectionwith research and development activities, including the costs of clinical trialactivities associated with our current lead product candidates, license feesand general and administrative expenses. We expect to continue to incur operating losses for the next severalyears as we pursue the clinical development and commercialization of ourproduct candidates, as well as acquire or in-license additional products orproduct candidates, technologies or businesses that are complementary to ourown.

 

**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.

 

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*Revenue Recognition*

* *

Ourlicense and collaboration agreements contain multiple elements, includingnon-refundable upfront fees, payments for reimbursement of third-party researchcosts, payments for ongoing research, payments associated with achievingspecific development milestones and royalties based on specified percentages ofnet product sales, if any.  We consider avariety of factors in determining the appropriate method of revenue recognitionunder these arrangements, such as whether the elements are separable, whetherthere are determinable fair values and whether there is a unique earningsprocess 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.

 

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

 

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

 

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

 

*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 defer and capitalize these types of payments.

 

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The capitalized amounts are expensed when the relatedgoods are delivered or the services are performed.

 

*Accrued Clinical Trial Costs*

* *

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

 

*Stock-Based Compensation*

* *

The Financial Accounting Standards Board, or FASB,authoritative guidance requires that share-based payment transactions withemployees be recognized in the financial statements based on their fair valueand recognized as compensation expense over the vesting period.  We used the modified prospectivemethod and accordingly we did not restate the results of operations forthe prior periods. Compensation expense of $742,000 and $431,000 was recognizedin the three months ended September 30, 2009 and 2008, respectively.  Compensation expense of $2.1 million and $1.3million was recognized in the nine months ended September 30, 2009 and2008, respectively.

 

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

 

Estimating the fair valuefor stock options requires judgment, including estimating stock-pricevolatility, expected term, expected dividends and risk-free interest rates. Theexpected volatility rates are based on the historical fluctuation in the stockprice since inception. The average expected term is calculated using the Simplified Method for Estimating theExpected Term.  Expected dividendsare estimated based on our dividend history as well as our current projections.The risk-free interest rate for periods approximating the expected terms of theoptions is based on the U.S. Treasury yield curve in effect at the time ofgrant. These assumptions are updated on an annual basis or sooner if there is asignificant change in circumstances that could affect these assumptions.

 

Equity instruments issued to non-employees arerecorded at their fair value and are periodically revalued as the equityinstruments vest and are recognized as expense over the related service period.

 

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**Results of Operations**

** **

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

*** ***

*TotalRevenues*.  Grantrevenues for the three months ended September 30, 2009 and 2008 were$176,000 and $239,000, respectively. The decrease of $63,000, or 26%, wasprimarily due to lower revenue from a National Institute of Health grant.

 

*Researchand Development Expense*. Research and development expense for the three months ended September 30,2009 and 2008 was $7.2 million and $7.9 million, respectively, a decrease of$686,000, or 9%.   The decrease wasprimarily due to the completion of clinical trials for Pruvel in the prior yearand was partially offset by an increase in expenses to prepare regulatoryfilings related to fidaxomicin and Pruvel.

 

*MarketingExpense*. * *Marketingexpense of $394,000 for the three months ended September 30, 2009 wasrelatively consistent with the $416,000 for the three months ended September 30,2008.

 

*Generaland Administrative Expense*.  General and administrative expense for thethree months ended September 30, 2009 and 2008 was $2.0 million and $1.5million, respectively.  The increase of$485,000, or 31%, was due to higher compensation expenses, including $321,000of stock compensation expense, an increase of $100,000 over the same period inthe prior year, as well as an increase in patent and consulting expenses.

 

*InterestIncome and Other, net*.  Netinterest income and other for the three months ended September 30, 2009and 2008 was $34,000 and $411,000, respectively.  The decrease was primarily due to lowerinterest rates on cash, cash equivalents and investments.

 

***Comparison of***Nine Months Ended September 30,2009 and 2008

 

*TotalRevenues*.  Grantrevenues for the nine months ended September 30, 2009 and 2008 were$684,000 and $895,000, respectively. The decrease of $211,000, or 24%, was primarilydue to the conclusion of one of two National Institutes of Health grants as wellas lower revenue from another grant.

 

*Researchand Development Expense*. Research and development expense for the nine months ended September 30,2009 and 2008 was $26.5 million and $21.0 million, respectively, an increase of$5.5 million, or 26%.   The increase wasprimarily due to an increase in development expenses, manufacturing scale-upexpenses and expenses to prepare regulatory filings related to fidaxomicin andPruvel.

 

*MarketingExpense*. * *Marketingexpense for the nine months ended September 30, 2009 and 2008 was $1.2million and $1.7 million, respectively. The decrease of $516,000, or 30%, was primarily due to lower medicaleducation, tradeshow and consulting expenses.

 

*Generaland Administrative Expense*.  General and administrative expense for thenine months ended September 30, 2009 and 2008 was $5.9 million and $4.8million, respectively.  The increase of$1.1 million, or 24%, was due to higher compensation expenses, including$958,000 of stock compensation expense, an increase of $275,000 over the sameperiod in the prior year, as well as an increase in patent and consultingexpenses.

 

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*InterestIncome and Other, net*.  Netinterest income and other for the nine months ended September 30, 2009 and2008 was $309,000 and $1.4 million, respectively.  The decrease was primarily due to lowerinterest rates on cash, cash equivalents and investments.

 

**Liquidity and CapitalResources**

 

*Sources of Liquidity*

* *

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  in July 2008,we sold a total of 1.7 million shares of our common stock in a registereddirect offering for proceeds of $14.7 million; and

 

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

 

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

 

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*Cash Flows*

* *

Asof September 30, 2009, cash, cash equivalents and short-term investmentstotaled approximately $42.5 million as compared to $39.3 million as of December 31,2008, an increase of approximately $3.2 million.  The increase in our cash, cash equivalentsand short-term investments was primarily due to the $32.9 million raised in aregistered direct offering of our common stock in March 2009 offset by theuse of cash for our operating expenses.

 

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

 

In February 2007, we regained worldwide rights tofidaxomicin from Par under a prospective buy-back agreement.  We are obligated to pay Par a one-time $5.0million milestone payment, a 5% royalty on net sales by us or our affiliates offidaxomicin in North America and Israel, and a 1.5% royalty on net sales by usor our affiliates of fidaxomicin in the rest of the world.  In addition, in the event we license ourright to market fidaxomicin in the rest of the world, we will be required topay Par a 6.25% royalty on net revenues we receive related to fidaxomicin.  We are obligated to pay each of theseroyalties, if any, on a country-by-country basis for seven years commencing onthe applicable commercial launch in each such country.   In connection with theexercise of our rights under the prospective buy-back agreement, Par assignedto us a supply agreement with Biocon. Under this agreement, Biocon is obligatedto supply to us our requirements of the fidaxomicin active pharmaceuticalingredients for certain markets.

 

In June 2004, we entered into a license agreementwith Nippon Shinyaku Co., Ltd. to which we acquired the non-exclusive right toimport and purchase Pruvel, 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 containingPruvel.  Under the terms of theagreement, we will be required to pay Nippon Shinyaku a milestone payment inthe amount of $1.0 million upon the filing, if any, of a NDA for Pruvel in theUnited States.

 

InOctober 2009, we entered into certain transactions with our subsidiary,OBI, pursuant to which we assigned certain intellectual property rights andlicense agreements to OBI related to our OPT-88 and OPT-822/821 productcandidates.  In connection with these transactions, we entered into afinancing agreement with OBI and a group of new investors.  Under theterms of the financing agreement, if OBI achieves certain developmentmilestones with respect to OPT-88 and OPT-822/821, we and the group of newinvestors may be required to purchase approximately an additional $8.6million and $5.7 million, respectively, of new OBI common shares. While we currently cannot anticipate when, if ever, OBI will achieve thesedevelopment milestones, under the terms of the financing agreement, ourobligation to purchase the additional OBI common shares will not occur prior toJune 30, 2010.

 

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

 

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*FundingRequirements*

 

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

 

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

 

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

 

·                  the costs involvedin prosecuting, enforcing or defending patent claims or other intellectualproperty rights;

 

·                  the costs andtiming of regulatory approvals;

 

·                  the costs ofestablishing sales or distribution capabilities;

 

·                  the success ofthe commercialization of our products; and

 

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

 

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

 

Untilwe can generate significant cash from our operations, we expect to continue tofund our operations with existing cash resources that were primarily generatedfrom the proceeds of offerings of our equity securities and collaborations andgovernment grants.  In addition, we mayfinance future cash needs through the sale of additional equity securities,strategic collaboration agreements and debt financing.  However, we may not be successful incompleting future equity financings, in entering into additional collaborationagreements, in receiving milestone or royalty payments under new or existingcollaboration agreements, in obtaining new government grants or in obtainingdebt financing.  In addition, we cannotbe sure that our existing cash and investment resources will be adequate, thatfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or our stockholders.  Recently, the credit markets and thefinancial services industry have been experiencing a period of unprecedentedturmoil and upheaval characterized by the government take-over, bankruptcy,failure, collapse or sale of various financial institutions.  These events have generally made equity anddebt financing more difficult to obtain, and may negatively impact our abilityto complete financing transactions. Having insufficient funds may require us to delay, scale-back oreliminate some or all of our development programs, relinquish some or even allof our rights to product candidates at an earlier stage of development orrenegotiate less favorable terms than 

 

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wewould otherwise choose.  Failure toobtain adequate financing also may adversely affect our ability to operate as agoing concern.  If we raise funds byissuing equity securities, substantial dilution to existing stockholders wouldlikely result.  If we raise funds byincurring additional debt financing, the terms of the debt may involvesignificant cash payment obligations as well as covenants and specificfinancial ratios that may restrict our ability to operate our business.

 

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

 

Ourcash and cash equivalents and short-term investments as of September 30,2009 consisted primarily of money market funds and United States governmentinstruments and other readily marketable debt instruments.  Our primary exposure to market risk isinterest income sensitivity, which is affected by changes in the general levelof U.S. interest rates.  The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk.  Ahypothetical ten percent change in interest rates during the quarter endedSeptember 30, 2009 would have resulted in approximately a $4,700 change innet loss. Accordingly, we would not expect our operating results or cashflows to be affected to any significant degree by a sudden change in marketinterest 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.

 

**Item 4.Controls and Procedures**

 

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

 

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

 

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

 

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**PART II – OTHER INFORMATION**

 

**Item 1A. Risk Factors**

 

Therisk factors set forth below with an asterisk (*) next to the title are newrisk factors or risk factors containing changes, including any materialchanges, from the risk factors previously disclosed in Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2008, as filedwith the SEC.

 

**RisksRelated to Our Business**

** **

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

 

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

 

·                  developing and securing U.S.and/or foreign regulatory approvals for fidaxomicin and Pruvel and, to a lesserextent, other product candidates;

 

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

 

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

 

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

 

We believe our initialsuccess will be more dependent on fidaxomicin than Pruvel, because we believethat the market for the treatment of CDI is larger than the market for thetreatment of infectious diarrhea.  Evenif we successfully obtain regulatory approval to market fidaxomicin or Pruvel,our revenues for either drug candidate will be dependent upon the size of themarkets in the territories for which we have commercial rights and our abilityto successfully commercialize our drug candidates in those markets.  If the markets for the treatment of CDI orinfectious diarrhea are not as significant as we estimate or we are otherwiseunsuccessful in commercializing our drug candidates, our business and prospectswill be harmed.

 

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

 

We have experienced significant operating losses since our inception in1998.  As of September 30, 2009, wehad an accumulated deficit of approximately $166.0 million.  We have generated no revenues from productsales to date.  We have funded ouroperations through September 30, 2009 from the sale of approximately$202.4 million of our securities and through research funding pursuant tocollaborations with partners or government grants.  We expect to continue to incur substantialadditional operating losses for the next several years as we advance ourclinical trials and research and development initiatives, prepare submissionsfor regulatory approval of our lead product candidates and build our marketingand sales capabilities.  Because of thenumerous risks and uncertainties associated with developing, obtaining regulatoryapproval for and commercializing our product candidates, we are unable topredict the extent of any future losses. We may never successfully commercialize our product candidates and thusmay never have any significant future revenues or achieve and sustainprofitability.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We currently plan to buildour own marketing and sales force for fidaxomicin in North America and Pruvelin the United States, and we are seeking one or more partners for thecommercialization of fidaxomicin outside of North America.  We cannot be certain that we will besuccessful in attracting any such partners. If we were not able to find appropriate partners for the continueddevelopment and commercialization of fidaxomicin, or our other product candidates,we would either have to delay further development and commercializationinitiatives,  which would harm ourbusiness and prospects, or raise significant additional funds to developclinical and commercialization capabilities internally.

 

We are subject to a numberof additional risks associated with our dependence on collaborations with thirdparties.** **Conflicts may arise between us and collaborators, such asconflicts concerning the interpretation of clinical data, the achievement ofmilestones, the interpretation of financial provisions or the ownership ofintellectual property developed during the collaboration.  If any such conflicts arise, a collaboratorcould act in its own self-interest, which may be adverse to our best interests.  Any such disagreement between us and acollaborator could result in one or more of the following, each of which coulddelay or prevent the development or commercialization of fidaxomicin, and ourother product candidates, and in turn prevent us from generating sufficientrevenues to achieve or maintain profitability:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

TheFDA has substantial discretion in the approval process and may either refuse toconsider our applications for substantive review or may form the opinion afterreview of our data that our applications are insufficient to allow approval ofour product candidates.  If the FDA doesnot consider or approve an application that we submit, it may require that weconduct additional clinical, pre-clinical or manufacturing validation studiesand submit that data before it will reconsider our application.  Depending on the extent of these or any otherstudies, approval of any applications that we submit may be delayed by severalyears, or may require us to expend more resources than we have available.  For example, we intend to rely in part oncertain legacy data from a third party to support an NDA for Pruvel. If we areunable to obtain this data in a timely manner or the FDA deems this data to beinsufficient, it may delay our filing of a NDA for Pruvel and could require usto complete additional studies.  It isalso possible that additional studies, if performed and completed, may not besuccessful or considered sufficient by the FDA for approval or even to make ourapplications approvable.  If any of theseoutcomes occur, we may be forced to abandon one or more of our futureapplications for approval, which might significantly harm our business andprospects.

 

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

 

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

 

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

 

Clinical testing isexpensive and can take many years to complete, and its outcome isuncertain.  Failure can occur at any timeduring the clinical trial process. The results of pre-clinical studies andearly clinical trials of our product candidates may not be predictive of theresults of later-stage clinical trials. For example, results from the firstfidaxomicin Phase 3 trial, while positive, may not predict results from thesecond Phase 3 trial which is on-going. Product candidates in later stages of clinical trials may fail to showthe desired safety and efficacy traits despite having progressed throughpre-clinical studies and initial clinical testing.  In addition, the type and amount of clinicaldata necessary to gain regulatory approval for our product candidates maychange or we may inaccurately characterize such requirements.  For example, we are preparing a MarketingAuthorization Application, or MAA, for submission to the European MedicinesAgency, or EMEA, for fidaxomacin based on the results from our first Phase 3trial.  Although we currently believethat the EMEA will accept an MAA for fidaxomicin based on only one completedPhase 3 trial, we may be incorrect in this belief and may be required toresubmit our filing following the completion of our second Phase 3 trial.  Such a resubmission would involve additionaldelay and expense related to any approval of fidaxomicin in Europe.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We have experienced and maycontinue to experience delays in clinical trials of our product candidates.  For example, due to slower patient enrollmentrates than we initially predicted in our second of two Phase 3 trialsevaluating fidaxomicin for the treatment of CDI, we now anticipate completingenrollment in this trial by the end of 2009 and reporting data in the firstquarter of 2010. In addition, we are planning to conduct a registration studyfor other formulations and proof-of-concept clinical trials for otherindications of fidaxomicin.  We alsointend to conduct a Phase 4 trial of Pruvel subsequent to NDA submissionto compare Pruvel to ciprofloxacin for the treatment of infectious diarrhea. Wedo not know whether planned clinical trials will begin on time, will need to beredesigned or will be completed on schedule, if at all.  Clinical trials can be delayed for a varietyof reasons, including delays in obtaining regulatory approval to commence atrial, in reaching agreement on acceptable terms with prospective CROs andclinical trial sites, in obtaining institutional review board approval at each site,in recruiting suitable patients to participate in a trial, in having patientscomplete a trial or return for post-treatment follow-up, in adding new sites orin obtaining sufficient supplies of clinical trial materials.  Many factors affect patient enrollment,including the size and nature of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, the designof the clinical trial, competing clinical trials, clinicians’ and patients’perceptions as to the potential advantages of the drug being studied inrelation to other available therapies, including any new drugs that may beapproved for the indications we are investigating and whether the clinicaltrial design involves comparison to placebo.

 

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

 

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

 

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

 

Our clinical trials may besuspended at any time for a number of reasons. We may voluntarily suspend or terminate our clinical trials if at anytime we believe that they present an unacceptable risk to participants.  In addition, regulatory agencies may orderthe temporary or permanent discontinuation of our clinical trials at any timeif they believe that the clinical trials are not being conducted in accordancewith applicable regulatory requirements or that they present an unacceptablesafety risk to participants.  In thefirst Phase 3 clinical trial of fidaxomicin, the most common drug-related sideeffects reported were nausea, vomiting, constipation, anorexia, headache anddizziness.  Patients treated with Pruvelhave experienced drug-related side effects including abdominal pain, diarrhea,nausea, renal toxicities, cardiac arrhythmias, photosensitivity, rash,excessive flushing of the skin and central nervous system effects, such asseizures.  The FDA recommended that weconduct a study to determine the effect, if any, of Pruvel on the prolongationof the QT interval, a condition that is associated with potentiallylife-threatening cardiac arrhythmias.  Inresponse to the FDA’s recommendation, we have completed a QT interval study ofPruvel and we plan to include the data from such QT interval study in our NDAfiling to the FDA.  If adverse,drug-related events are encountered or suspected, our trials would beinterrupted, delayed or halted and the FDA or comparable foreign regulatoryauthorities could order us to cease further development of or deny approval ofour product candidates for any or all targeted indications.  Even if we believe our product candidates aresafe, our data is subject to review by the FDA, which may disagree with ourconclusions and delay or deny approval of our product candidates which wouldsignificantly harm the commercial prospects of such product candidates.  Moreover, we could be subject to significantliability if any volunteer or patient suffers, or appears to suffer, adverseside effects as a result of participating in our clinical trials.  Any of these occurrences may significantlyharm our business and prospects.

 

**We rely onthird parties to conduct our clinical trials. If these third parties do not successfully carry out their contractualduties or meet expected deadlines, we and our collaborators may not be able toobtain regulatory approval for or commercialize our product candidates.***

 

We have entered intoagreements with third-party CROs, such as INC Research, to provide monitors forand to manage data for our on-going clinical programs.

 

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

 

Typically, the CROsconducting clinical trials of our product candidates have the right to terminatetheir agreements with us or our collaborators upon notice in the event of anuncured material breach.  In addition,some CROs have an ability to terminate their respective agreements with us ifwe fail to perform our obligations, if it can be reasonably demonstrated thatthe safety of the subjects participating in our clinical trials warrants suchtermination, if we make a general assignment for the benefit of our creditorsor if we are liquidated.  We have reliedsubstantially on INC Research to conduct the clinical trials for fidaxomicinand Pruvel.  INC Research has alsosubcontracted with other third-party CROs for various aspects of the clinicaltrials.  If any relationships with INCResearch or these other third-party CROs terminate, we or our collaborators maynot be able to enter into arrangements with alternative CROs or we may enterinto arrangements with alternative CROs that do not have the expertise orrelationships that INC Research has with government agencies.

 

In addition, these third-partyCROs are not our employees, and we cannot control whether or not they devotesufficient time and resources to our on-going clinical programs.  These CROs may also have relationships withother commercial entities, including our competitors, for whom they may also beconducting clinical studies or other drug development activities, which couldharm our competitive position.  If CROsdo not successfully carry out their contractual duties or obligations or meetexpected deadlines, if they need to be replaced, or if the quality or accuracyof the clinical data they obtain is compromised due to the failure to adhere toour clinical protocols, regulatory requirements, or for other reasons, ourclinical trials may be extended, delayed or terminated, and we may not be ableto obtain regulatory 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 failto gain and/or maintain marketing approvals from regulatory authorities ininternational markets for****fidaxomicin****and any future product candidates for which we have rights ininternational markets, our market opportunities will be limited.***

 

Sales of our productcandidates outside of the United States will be subject to foreign regulatory 

 

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requirements governingclinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate,comparable regulatory authorities of foreign countries must also approve themarketing of the product candidate in those countries.  This is important for the commercializationof fidaxomicin for which we currently have exclusive worldwide marketingrights.  Obtaining foreign regulatoryapprovals could result in significant delays, difficulties and costs for us andrequire additional pre-clinical studies or clinical trials which would becostly and time consuming.  Regulatoryrequirements can vary widely from country to country and could delay theintroduction of our products in those countries.  Clinical trials conducted in one country maynot be accepted by regulatory authorities in other countries, and regulatoryapproval in one country does not guarantee regulatory approval will be obtainedin any other country.  In addition, ourfailure to obtain regulatory approval in any country may delay or have negativeeffects on the process for regulatory approval in others.  For example, if our planned MAA forfidaxomicin is rejected or unanticipated concerns are raised by the EMEA duringits review, a subsequent NDA submission for fidaxomicin could be negativelyimpacted. Other than Pruvel, which is sold by other parties in Japan, Italy andcertain other European countries, none of our product candidates is approvedfor sale in any international market for which we have rights. If we fail tocomply with regulatory requirements in our international markets or to obtainand maintain required approvals, our target market will be reduced and ourability to generate revenues will be diminished, which would significantly harmour business, results of operations and prospects.

 

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

 

We currently have a limitedmarketing organization and do not have a sales organization for marketing,sales and distribution of pharmaceutical products. In order to commercializeany products, we must build our marketing, sales, distribution, managerial andother non-technical capabilities or make arrangements with third parties toperform these services. We plan to build our own marketing and sales force tocommercialize fidaxomicin in North America and are seeking third-party partnersoutside North America. We own exclusive rights to commercialize Pruvel in theUnited States, and we contemplate establishing our own sales force or seekingthird-party partners to sell Pruvel in the United States. 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 this capability.We do not currently have sufficient funds to develop a sales force and otherresources that we believe would be necessary to adequately market fidaxomicinand Pruvel in the United States. We will also have to compete with otherpharmaceutical and biotechnology companies to recruit, hire, train and retainmarketing and sales personnel. To the extent we rely on third parties tocommercialize our products, if any, we may receive less revenues than if wecommercialized these products ourselves. In addition, we may have little or nocontrol over the sales efforts of any third parties involved in commercializingour products. In the event we are unable to develop our own marketing and salesforce or collaborate with a third-party marketing and sales organization, wewould not be able to commercialize our product candidates which wouldnegatively impact our ability to generate product revenues.

 

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

 

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

 

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

 

If approved, our leadproduct candidates will compete against both branded antibiotic therapies, suchas Vancocin Pulvules with respect to fidaxomicin and Xifaxan®/rifaxamin with respect toPruvel, and generic antibiotics such as metronidazole and oral vancomycin withrespect to fidaxomicin and ciprofloxacin with respect to Pruvel.  In addition, we anticipate that fidaxomicinwill compete with other antibiotic and anti-infective product candidatescurrently in development for the treatment of CDI, such as Xifaxan®/rifaxamin. Many of theseproducts have been or will be developed and marketed by major pharmaceuticalcompanies, who have significantly greater financial resources and expertise inresearch and development, pre-clinical testing, conducting clinical trials,obtaining regulatory approvals, manufacturing and marketing approved productsthan we do.  As a result, these companiesmay obtain 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, ifapproved, fidaxomicin and Pruvel will face increasing competition in the formof generic versions of branded products of competitors that will lose theirpatent exclusivity.  For example,fidaxomicin, if approved, will immediately face steep competition from aninexpensive generic form of metronidazole. Fidaxomicin would currently face generic oral vancomycin competition inEurope and in the future may face competition from generic oral vancomycin inthe United States as well.  Genericantibiotic therapies typically are sold at lower 

 

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prices than brandedantibiotics and are generally preferred by managed care providers of healthservices.  For example, becausemetronidazole is sold at such a low price, we believe it will be difficult tosell fidaxomicin as a first-line therapy for the treatment of CDI.  If we are unable to demonstrate to physiciansand patients that, based on experience, clinical data, side-effect profiles andother factors, our products are preferable to these generic antibiotictherapies, we may never generate meaningful product revenues.  In addition, many antibiotics experiencebacterial resistance over time because of their continued use.  There can be no guarantee that bacteria wouldnot develop resistance to fidaxomicin, Pruvel or any of our other productcandidates.  Our commercial opportunitywould also be reduced or eliminated if our competitors develop andcommercialize generic or branded antibiotics that are safer, more effective,have fewer side effects or are less expensive than our product candidates.

 

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

 

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

 

Our ability to develop andcommercialize fidaxomicin and Pruvel and any other product candidates dependsin part on our ability to arrange for collaborators or other third parties tomanufacture our products at a competitive cost, in accordance with strictlyenforced regulatory requirements and in sufficient quantities for clinicaltesting and eventual commercialization. We have not yet manufactured commercial batches of fidaxomicin, Pruvelor any of our other product candidates. Collaborators or third-party manufacturers that we select to manufactureour product candidates for clinical testing or on a commercial scale mayencounter difficulties with the small- and large-scale formulation andmanufacturing processes required for such manufacture.  Such difficulties could result in delays inclinical trials, regulatory submissions and approvals, or commercialization ofour product candidates.  The inability ofus or our collaborators to enter into and maintain agreements with third-partymanufacturers on acceptable terms would cause shortages of clinical trialsupplies of our product candidates, thereby delaying or preventing regulatoryapproval and/or commercialization of the affected product candidate, andadversely affecting our ability to generate revenues.  Further, development of large-scalemanufacturing processes will require additional validation studies, which theFDA must review and approve, and the time it will take us or a third partymanufacturer to develop such large-scale processes and capabilities may delayany product launch following regulatory approval.  Even if we are able to establish additionalor replacement manufacturers, identifying these sources and entering intodefinitive supply agreements and obtaining regulatory approvals may involve asubstantial amount of time and cost and such supply arrangements may not beavailable on acceptable economic terms.

 

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In addition, we, ourcollaborators and other third-party manufacturers of our products must complywith strictly enforced current good manufacturing practices, or cGMP,requirements enforced by the FDA through its facilities inspectionprogram.  These requirements includequality control, quality assurance and the maintenance of records anddocumentation.  We currently rely onBiocon to manufacture fidaxomicin active pharmaceutical ingredient and rely onPatheon, Inc. to manufacture the drug product supplies.  As such, Biocon and Patheon will be subjectto ongoing periodic unannounced inspections by the FDA and other agencies forcompliance with current cGMP, and similar foreign standards. We also rely onNippon Shinyaku, which contracts with Juzen, as well as Angelini and Patheon,to manufacture Pruvel drug supplies.  Themanufacturing facilities of Biocon, Juzen and Patheon have been inspected andapproved by the FDA for other companies’ drug products; however, none of Biocon’s,Juzen’s nor Patheon’s facilities have yet been inspected by the FDA for themanufacture of our drug supplies. Angelini’s facilities have not been inspected or approved by theFDA.  We or other third-partymanufacturers of our products may be unable to comply with cGMP requirementsand 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 compromiseddue to their failure to adhere to applicable laws or for other reasons, we maynot be able to obtain or maintain regulatory approval for or successfullycommercialize one or more of our product candidates, which would significantlyharm our business and prospects.

 

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

 

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

 

·                  the clinical indications forwhich the product candidate is approved;

 

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

 

·                  perceived advantages overalternative treatments;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  relative convenience andease of administration; and

 

·                  prevalence and severity ofadverse side effects.

 

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

 

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

 

In addition, in July 2008the FDA notified makers of fluoroquinolone antimicrobial drugs for systemic usethat a boxed warning is necessary for those products due to the risk oftendonitis and tendon rapture.  Asprulifloxacin is a fluoroquinolone antibiotic it may be required to carry ablack box warning.  Although these riskshave been described for years on the product label of many fluoroquinolones,the increased awareness of this risk may impact the market potential for thefluoroquinolone class of antibiotics, including prulifloxacin.  Furthermore, because prulifloxacin hasalready been marketed by other companies outside the United States to treat awide range of bacterial infections, including infectious diarrhea, urinarytract infections and respiratory tract infections, patients may be able toobtain prulifloxacin from these other companies, and not from us, if prulifloxacinis approved in the market where the patient is located.  We have rights to Pruvel only in the UnitedStates.  These patients may obtainprulifloxacin in these other markets from other companies even if thesepatients are from the United States.

 

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

 

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

 

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

 

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

 

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

 

Our focus on drug discoveryand development using our technology platform, including our patentedproprietary OPopS drug discovery platform, is novel and unique.  As a result, we cannot be certain that ourproduct candidates will produce commercially viable drugs that safely andeffectively treat infectious diseases or other diseases.  To date, our technology platform has yieldedonly a small number of anti-infective product candidates.  In addition, we do not have significantclinical data with respect to any of these potential product candidates.  Even if we are successful in completingclinical development and receiving regulatory approval for one commerciallyviable drug for the treatment of one disease using our technology platform andcarbohydrate chemistry focus, we cannot be certain that we will also be able todevelop and receive regulatory approval for other drug candidates for thetreatment of other forms of that disease or other diseases.  If we fail to develop and commercializeviable drugs using our platform and specialized focus, we will not besuccessful in developing a pipeline of potential product candidates to followfidaxomicin and Pruvel, and our business prospects would be significantlyharmed.

 

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

 

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

 

·                  exposureto unknown liabilities;

 

·                  disruptionof our business and diversion of our management’s time and attention to developacquired products or technologies;

 

·                  incurrenceof substantial debt or dilutive issuances of securities to pay for acquisitions;

 

·                  higherthan expected acquisition and integration costs;

 

·                  increasedamortization expenses;

 

·                  difficultyand cost in combining the operations and personnel of any acquired businesseswith our operations and personnel;

 

·                  impairmentof relationships with key suppliers or customers of any acquired businesses dueto changes in management and ownership; and

 

·                  inabilityto retain key employees of any acquired businesses.

 

We havelimited resources to identify and execute the acquisition or in-licensing ofthird-party products, businesses and technologies and integrate them into ourcurrent infrastructure.  In particular,we may compete with larger pharmaceutical companies and other competitors inour efforts to establish new collaborations and in-licensingopportunities.  These competitors likelywill have access to greater financial resources than us and may have greaterexpertise in identifying and evaluating new opportunities.  Moreover, we may devote resources topotential acquisitions or in-licensing opportunities that are never completed,or we may fail to realize the anticipated benefits of such efforts.

 

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

 

Our licenseagreement with Nippon Shinyaku provides us with an exclusive license to developand commercialize Pruvel for any indication in the United States, with a rightto sublicense to third parties.  In theevent Nippon Shinyaku is not able to supply us with Pruvel, the licenseagreement provides us with a non-exclusive, worldwide right and license tomanufacture or have Pruvel manufactured for us. Either we or Nippon Shinyaku may terminate the license agreementimmediately upon the bankruptcy or dissolution of the other party or upon abreach of any material provision of the agreement if the breach is not curedwithin 60 days following written notice. In addition, we are entitled to terminate the agreement in the eventthat the FDA compels us to cease sales of Pruvel in the United States.  If our license agreement with Nippon Shinyakuterminates, we will lose our rights to develop, manufacture and commercializePruvel and our potential revenues would be limited.  Similarly, if our agreement with the ScrippsResearch Institute, or TSRI, for the license of our OPopS technology isterminated, we will not be able to further develop future product candidatesusing our OPopS technology.

 

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

 

We face aninherent risk of product liability lawsuits related to the testing of ourproduct candidates, and will face an even greater risk if product candidatesare introduced commercially.  Anindividual may bring a liability claim against us if one of our productcandidates causes, or merely appears to have caused, an injury.  If we cannot successfully defend ourselvesagainst the product liability claim, we may incur substantial liabilities.  Regardless of merit or eventual outcome,liability claims may result in:

 

·                  decreaseddemand for our product candidates;

 

·                  injuryto our reputation;

 

·                  terminationof clinical trial sites or entire clinical trial programs;

 

·                  withdrawalof clinical trial participants;

 

·                  significantlitigation costs;

 

·                  substantialmonetary awards to or costly settlement with patients;

 

·                  productrecalls;

 

·                  lossof revenues; and

 

·                  theinability to commercialize our product candidates.

 

We may becomedependent upon consumer perceptions of us and the safety and quality of ourproduct candidates.  We could beadversely affected if we or our product candidates are subject to negativepublicity.  We could also be adverselyaffected if any of our potential products or any similar products distributedby other companies prove to be, or are asserted to be, harmful toconsumers.  Also, because of ourdependence upon consumer perceptions, any adverse publicity

 

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associatedwith illness or other adverse effects resulting from consumers’ use or misuseof our potential products or any similar products distributed by othercompanies could have a material adverse impact on our results of operations.

 

We have globalclinical trial liability insurance that covers our clinical trials up to a$10.0 million annual aggregate limit. Our current or future insurance coverage may prove insufficient to coverany liability claims brought against us. We intend to expand our insurance coverage to include the sale ofcommercial products if marketing approval is obtained for our productcandidates, 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.

 

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

 

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

 

**If we fail to attract and retain seniormanagement and key scientific personnel, we may be unable to successfullydevelop our product candidates, conduct our clinical trials and commercializeour product candidates.***

 

Our successdepends in part on our continued ability to attract, retain and motivate highlyqualified management, clinical and scientific personnel and on our ability todevelop and maintain important relationships with leading academicinstitutions, clinicians and scientists.

 

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We are highlydependent on our chief executive officer, and the other principal members ofour executive and scientific teams. The unexpected loss of the service of anyof these persons may significantly delay or prevent the achievement ofresearch, development, commercialization and other business objectives.  Replacing key employees may be difficult andcostly and may take an extended period of time because of the limited number ofindividuals in our industry with the breadth of skills and experience requiredto develop and commercialize pharmaceutical products successfully.  We do not maintain “key person” insurancepolicies on the lives of these individuals or the lives of any of our otheremployees.  We employ these individualson an at-will basis and their employment can be terminated by us or them at anytime, for any reason and with or without notice.

 

We will needto hire additional personnel as we expand our clinical development andcommercial activities.  We may not beable to attract or retain qualified management and scientific personnel onacceptable terms in the future due to the intense competition for qualifiedpersonnel among biotechnology, pharmaceutical and other businesses,particularly in the San Diego, California area. If we are not able to attract and retain the necessary personnel toaccomplish our business objectives, we may experience constraints that willimpede significantly the achievement of our research and developmentobjectives, our ability to raise additional capital and our ability toimplement our business strategy.  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.

 

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

 

We are a smallcompany with 68 employees as of October 30, 2009.  To continue our clinical trials andcommercialize our product candidates, we will need to expand our employee basefor 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:

 

·                  manageour development efforts effectively;

 

·                  manageour current clinical trials effectively;

 

·                  integrateadditional management, administrative and manufacturing personnel;

 

·                  builda marketing and sales organization; and

 

·                  maintainsufficient administrative, accounting and management information systems andcontrols.

 

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

 

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

 

Marketacceptance and sales of our product candidates will depend on reimbursementpolicies and may be affected by future healthcare reform measures.  Government third-party payors, such as theMedicare and Medicaid programs, and private payors, including healthmaintenance organizations, decide which drugs they will pay for and establishreimbursement levels for these drugs. Because third-party payors increasinglyare challenging 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.  Also, we cannot be sure that insufficientreimbursement amounts will not reduce the demand for, or the price of, ourproducts, if approved.

 

Manyhealthcare providers, such as hospitals, receive a fixed reimbursement amountper procedure or other treatment therapy, and these amounts are not necessarilybased on the actual costs incurred.  As aresult, these healthcare providers may choose only the least expensivetherapies regardless of efficacy.  Wecannot guarantee that our product candidates will be the least expensivealternative and thus providers may decide not to use them or buy them fortreatment.

 

We have notcommenced efforts to have our product candidates reimbursed by government orthird-party payors.  If reimbursement isnot available or is available only to limited levels, we may not be able tocommercialize our products successfully or at all, which would harm ourbusiness and prospects.

 

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

 

We may facecompetition for our products from lower priced products from foreign countriesthat have placed price controls on pharmaceutical products.  Imports from Canada and elsewhere maycontinue to increase due to market and political forces, and the limitedenforcement resources of the FDA, the U.S. Customs Service, and other governmentagencies.  For example, U.S. Customs Servicegenerally does not prevent individuals from importing from Canada less than a90-day supply of a prescription drug for personal use, when the drug otherwisecomplies with the Federal Food, Drug and Cosmetic Act.  Further, several states and local governmentshave implemented importation schemes for their citizens, and, in the absence offederal action to curtail such activities, we expect other states and local governmentsto launch importation efforts.  Theimportation of foreign products that compete with our own product candidatescould negatively impact our business and prospects.

 

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

 

In both theUnited States and certain foreign jurisdictions, there have been, and weanticipate there will continue to be, a number of legislative and regulatorychanges to the healthcare system that could impact our ability to sell ourproducts profitably.  We cannot becertain that fidaxomicin and Pruvel or other current or future drug candidateswill successfully be placed on the list of drugs covered by particular healthplan formularies, nor can we predict the negotiated price for our drugcandidates, which will be determined by market factors. Many states have alsocreated preferred drug lists and include drugs on those lists only when themanufacturers agree to pay a supplemental rebate.  If fidaxomicin and Pruvel or other current orfuture drug candidates are not included on these preferred drug lists, physiciansmay not be inclined to prescribe them to their Medicaid patients, therebydiminishing the potential market for our products.

 

As a result oflegislative proposals and the trend towards cost-effectiveness criteria andmanaged healthcare in the United States, third-party payors are increasinglyattempting to contain healthcare costs by limiting both coverage and the levelof reimbursement of new drugs.  They mayalso refuse to provide any coverage of uses of approved products for medicalindications other than those for which the FDA has granted marketapprovals.  As a result, significantuncertainty exists as to whether and how much third-party payors will reimbursefor newly-approved drugs, which in turn will put pressure on the pricing ofdrugs.  Further, we do not haveexperience in ensuring approval by applicable third-party payors outside of theUnited 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 fidaxomicin andPruvel.  We also anticipate pricingpressures in connection with the sale of our products due to the trend towardmanaged healthcare, the increasing influence of health maintenanceorganizations and additional legislative proposals.

 

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

 

We are subjectto various federal and state laws pertaining to healthcare fraud and abuse,including anti-kickback laws, the False Claims Act, the Foreign CorruptPractices Act and state laws requiring reporting and certification undercomprehensive compliance programs governing our financial relationships withhealthcare providers.  Violations ofthese laws are punishable by criminal and civil sanctions, including, in someinstances, exclusion from participation in federal and state healthcareprograms, including Medicare and Medicaid, and the curtailment or restructuringof operations.  We believe that ouroperations are in material compliance with such laws and we are aware of theneed to increase our compliance resources if we begin marketing products.  However, because of the far-reaching natureof these laws, there can be no assurance that we would not be required to alterone or more of our practices to be in compliance with these laws.  In addition, there can be no assurance thatthe occurrence of one or more violations of these laws or regulations would notresult in a material adverse effect on our financial condition and results ofoperations.

 

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

 

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

 

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

 

Despite theimplementation of security measures, our internal computer systems arevulnerable to damage from computer viruses, unauthorized access, naturaldisasters, terrorism, war and telecommunication and electrical failures.  Any system failure, accident or securitybreach that causes interruptions in our operations could result in a materialdisruption of our drug development programs. For example, the loss of clinical trial information from completed orongoing clinical trials for fidaxomicin or Pruvel, which is maintained by ourthird-party CRO, could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data.  To the extent that any disruption or securitybreach results in a loss or damage to our data or applications, orinappropriate disclosure of confidential or proprietary information, we mayincur liability and the further development of our product candidates may bedelayed.

 

**RisksRelated to Our Intellectual Property**

 

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

 

Our commercialsuccess will depend in part on obtaining and maintaining patent protection andtrade secret protection of the use, formulation and structure of our productcandidates, and the methods used to manufacture them, as well as successfullydefending these patents against third-party challenges, including those fromgeneric drug manufacturers.  Our abilityto protect our product candidates from unauthorized making, using, selling,offering to sell or importing by

 

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third partiesis dependent upon the extent to which we have rights under valid andenforceable patents or trade secrets that cover these activities.

 

The patentpositions of pharmaceutical and biotechnology companies can be highly uncertainand involve complex legal and factual questions for which important legalprinciples remain unresolved.  Noconsistent policy regarding the breadth of claims allowed in biotechnologypatents has emerged to date in the United States.  The biotechnology patent environment outsidethe United States is even more uncertain. Changes in either the patent laws or in interpretations of patent lawsin the United States and other countries may diminish the value of ourintellectual property.  Accordingly, wecannot predict the breadth of claims that may be allowed or enforced in ourlicensed patents, our patents or in third-party patents.

 

The degree offuture protection for our proprietary rights is uncertain, because legal meansafford only limited protection and may not adequately protect our rights orpermit us to gain or keep our competitive advantage.  For example:

 

·                  othersmay be able to make compounds that are similar to our product candidates butthat are not covered by the claims of our pending patent applications orlicensed patents, or for which we are not licensed under our licenseagreements;

 

·                  othersmay be able to make competing pharmaceutical formulations containing ourproduct candidates or components of our product formulations that are eithernot covered by the claims of our licensed patents, not licensed to us under ourlicense agreements or are subject to patents that expire;

 

·                  weor our licensors might not have been the first to make the inventions coveredby our pending patent applications or the pending patent applications andissued patents of our licensors;

 

·                  weor our licensors might not have been the first to file patent applications forthese inventions;

 

·                  othersmay independently develop similar or alternative technologies or duplicate anyof our technologies;

 

·                  itis possible that our pending patent applications or our licensed patentapplications will not result in issued patents;

 

·                  ourpending patent applications or the pending patent applications and issuedpatents of our licensors may not provide us with any competitive advantages,may be designed around by our competitors, including generic drug companies, ormay be held invalid or unenforceable as a result of legal challenges by thirdparties;

 

·                  wemay not develop additional proprietary technologies that are patentable; or

 

·                  thepatents of others may have an adverse effect on our business.

 

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

 

We have filed12 patent applications related to fidaxomicin, one of which has resulted in theissuance of a polymorph patent and one of which has resulted in a manufacturingpatent, from the United States Patent and Trademark Office, or U. S. PTO, andten of which are pending.

 

These patentapplications related to fidaxomicin encompass various topics relating to:

 

·                  compositionof matter for fidaxomicin (issued in Taiwan);

 

·                  compositionof matter for fidaxomicin related substances and use for CDI;

 

·                  polymorphicforms (issued in U.S.);

 

·                  manufacturingprocesses (issued in U.S. and  inAustralia);

 

·                  treatmentof diseases;

 

·                  formulation;and

 

·                  fidaxomicinrelated compounds, including metabolites.

 

If we areunable to obtain a composition of matter patent, our competitors, includinggeneric drug companies, may be able to design other similar formulations of theactive ingredient of fidaxomicin. Furthermore, even though the manufacturing process patent has issued,and even if the formulation patent application results in an issued patent, ourcompetitors, including generic drug companies, may be able to design around ourmanufacturing processes or formulation for fidaxomicin.  As a result, our competitors may be able todevelop competing products. In addition, we currently plan to submit an NDA forPruvel for the treatment of infectious diarrhea in 2010.  The composition of matter patent coveringPruvel expired in February 2009. Although in some cases the U.S. PTO willgrant an extension of a patent term where the related product is subject to FDAapproval, this extension was unavailable to us with respect to the Pruvelcomposition of matter patent because we did not submit an NDA for Pruvel priorto the expiration of this patent.   There are currently no other active issued patents which would prevent thirdparties from potentially marketing Pruvel in the United States.  Therefore, we will likely rely on one or moreregulatory marketing exclusivities for Pruvel in the United States.  Specifically, if our NDA for Pruvel isapproved, we expect to receive a five-year period of marketing exclusivityunder the Hatch-Waxman Act. This exclusivity period is available to the firstapplicant to gain approval of an NDA for a new chemical entity, or NCE, thathas not previously been approved as an active ingredient under Section 505(b) ofthe Food Drug and Cosmetic Act, or FDCA. While we expect that the NCE exclusivity period will be available forPruvel, if we or Nippon Shinyaku are unsuccessful in obtaining additionalpatents related to

 

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Pruvel, we mayface generic competition in the United States five years after our NDA forPruvel is approved by the FDA. Our partner, Nippon Shinyaku, has recentlyreceived a notice of allowance from the U.S. PTO of a Pruvel-related patent,which covers the polymorphic form of the key intermediate in the manufacturingprocess for Pruvel.  Despite the noticeof allowance, Nippon Shinyaku may not ultimately receive the polymorph patentor the patent may later be challenged by a third party or fail to prevent athird part from producing and marketing a generic form of Pruvel in the UnitedStates.  If we are unable to obtain marketingexclusivity beyond five years from the approval of our NDA, our potentialrevenues from Pruvel sales in the U.S. will be limited.

 

We depend, inpart, on our licensors and collaborators to protect a portion of ourproprietary rights.  In such cases, ourlicensors and collaborators may be primarily or wholly responsible for themaintenance of patents and prosecution of patent applications relating toimportant areas of our business.  Forexample, Nippon Shinyaku and TSRI are responsible for the maintenance ofpatents and prosecution of patent applications relating to Pruvel and our OPopStechnology, respectively.  We may also bedependent on Par to provide technical support for patent applications relatingto fidaxomicin.  If any of these partiesfail to adequately protect these product candidates with issued patents, ourbusiness and prospects would be significantly harmed.

 

Under ouragreement with Nippon Shinyaku, in the event Nippon Shinyaku fails to take allsteps necessary to seek extension of the patents licensed to us in the United States180 days after we request such action be taken, then we have the right to takeall necessary actions to extend the licensed patents.  Our agreements with TSRI and Par do not haveexplicit provisions regarding our rights to take necessary action with respectto maintenance of patents and prosecution of patent applications nor do suchagreements provide us with any legal recourse in the event such parties do notso maintain and/or prosecute.  If any ofthese parties or others on which we rely for patent maintenance and prosecutionfail to adequately maintain patents and prosecute patent applications relatingto technology licensed to or from us, we may be required to take further actionon our own to protect this technology. However, we may not be successful in maintaining such patents orprosecuting such patent applications and if so, our business and prospectswould be significantly harmed.

 

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

 

If we or ourlicensors fail to obtain or maintain patent protection or trade secret protectionfor our product candidates or our technologies, third parties could use ourproprietary information, which could impair our ability to compete in themarket and adversely affect our ability to generate revenues and attainprofitability.

 

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

 

If we chooseto go to court to stop someone else from using our inventions, that individualor company has the right to ask the court to rule that the underlyingpatents are invalid and/or should not be enforced against that thirdparty.  These lawsuits are expensive andwould consume time and other resources even if we were successful in stoppingthe infringement of these patents.  Thereis also the risk that, even if the validity of these patents is upheld, thecourt will refuse to stop the other party on the ground that such other party’sactivities do not infringe our rights to these patents.

 

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

 

Although wehave conducted searches of third-party patents with respect to fidaxomicin andPruvel, these searches may not have identified all third-party patents relevantto those products and we have not conducted an extensive search of patentsissued to third parties with respect to our other product candidates.  Consequently, no assurance can be given thatthird-party patents containing claims covering our products, technology ormethods do not exist, have not been filed, or could not be filed orissued.  Because of the number of patentsissued and patent applications filed in our technical areas or fields, webelieve there is a risk that third parties may allege they have patent rightsencompassing our products, technology or methods.  In addition, we have not conducted anextensive search of third-party trademarks, so no assurance can be given thatsuch third-party trademarks do not exist, have not been filed, could not befiled or issued, or could not exist under common trademark law.  While we have filed a trademark applicationfor the names “Optimer”, “Optimer Pharmaceuticals” and “Pruvel”, we are awarethat the name “Optimer” has been registered as a trademark with the U.S. PTO bymore than one

 

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third party,including one in the biotechnology space. As such, we believe there is a significant risk that third parties mayallege they have trademark rights encompassing the names for which we haveapplied for protection.

 

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

 

Some of ourcompetitors may be able to sustain the costs of complex patent litigation moreeffectively than we can because they have substantially greater resources.  In addition, any uncertainties resulting fromthe initiation and continuation of any litigation could have a material adverseeffect on our ability to raise the funds necessary to continue our operations.

 

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

 

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

 

Before ourinitial public offering in February 2007, there was no public market forour common stock.  We cannot assure youthat an active trading market will exist for our common stock. You may not be able to sell yourshares quickly or at the market price if trading in our common stock is notactive.

 

The tradingprice of our common stock is likely to be highly volatile and could be subjectto wide fluctuations in price in response to various factors, many of which arebeyond our control, including:

 

·                  generaleconomic and market conditions and other factors that may be unrelated to ouroperating performance or the operating performance of our competitors,including the current turmoil in the credit market and financial servicesindustry;

 

·                  announcementof FDA or comparable foreign regulatory agency approval or non-approval of ourproduct candidates, or specific label indications for their use, or delays inthe FDA or comparable foreign regulatory agency review process;

 

·                  actionstaken by the FDA or other regulatory agencies with respect to our productcandidates, clinical trials, manufacturing process or marketing and salesactivities;

 

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·                  changesin laws or regulations applicable to our products, including but not limited toclinical trial requirements for approvals;

 

·                  thesuccess of our development efforts and clinical trials, particularly withrespect to fidaxomicin and Pruvel;

 

·                  announcementsby our collaborators with respect to clinical trial results and communicationsfrom the FDA or comparable foreign regulatory agencies;

 

·                  thesuccess of our efforts to acquire or in-license additional products or productcandidates;

 

·                  developmentsconcerning our collaborations and partnerships, including but not limited tothose with our sources of manufacturing supply and our commercializationpartners;

 

·                  actualor anticipated variations in our quarterly operating results;

 

·                  announcementsof technological innovations by us, our collaborators or our competitors;

 

·                  newproducts or services introduced or announced by us or our commercializationpartners, or our competitors and the timing of these introductions orannouncements;

 

·                  third-partycoverage or reimbursement policies;

 

·                  actualor anticipated changes in earnings estimates or recommendations by securitiesanalysts;

 

·                  conditionsor trends in the biotechnology and biopharmaceutical industries;

 

·                  announcementsby us or our competitors of significant acquisitions, strategic partnerships,joint ventures or capital commitments;

 

·                  generaleconomic and market conditions and other factors that may be unrelated to ouroperating performance or the operating performance of our competitors, includingthe turmoil on the credit markets and financial services industry;

 

·                  changesin the market valuations of similar companies;

 

·                  salesof common stock or other securities by us or our stockholders in the future;

 

·                  additionsor departures of key scientific or management personnel;

 

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·                  disputesor other developments relating to intellectual property, proprietary rights,including patents, litigation matters and our ability to obtain patentprotection for our technologies; and

 

·                  tradingvolume of our common stock.

 

In addition,the stock market in general and the market for biotechnology andbiopharmaceutical companies in particular have experienced extreme price andvolume fluctuations that have often been unrelated and/or disproportionate tothe operating performance of those companies. These broad market and industry factors may significantly harm themarket price of our common stock, regardless of our operating performance.  In the past, following periods of volatilityin the market, securities class-action litigation has often been institutedagainst companies.  Such litigation, ifinstituted against us, could result in substantial costs and diversion ofmanagement’s attention and resources, which could significantly harm ourbusiness, financial condition and prospects.

 

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

 

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

 

We have alsoregistered all common stock that we have issued under our employee benefitsplans. As a result, these shares can be freely sold in the public market uponissuance, subject to any applicable restrictions under the securities laws. Inaddition, our directors and executive officers may in the future establishprogrammed selling plans under Rule 10b5-1 of the Securities Exchange Actfor the purpose of effecting sales of our common stock. If any of these eventscause a large number of our shares to be sold in the public market, the salescould reduce the trading price of our common stock and impede our ability toraise future capital.

 

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

 

Our investmentsecurities consist of money market funds, corporate debt securities andgovernment agency securities. As of September 30, 2009, we held oneauction rate preferred security valued at $882,000 with perpetual maturitydates that reset every 28 days.  Thenegative conditions in the global credit markets have prevented some investorsfrom liquidating their holdings, including their holdings of auction ratesecurities.  There was insufficientdemand at auction for our auction rate preferred security.  As a result, such security is currently notliquid,

 

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and we couldbe required to hold it until it is redeemed by the issuer or to maturity.  In the event we need to access the funds thatare in an illiquid state, we will not be able to do so without a loss ofprincipal, until a future auction on this investment is successful, thesecurity is redeemed by the issuer or it matures. We have reduced the carryingvalue of our auction rate security by $118,000 to reflect an estimated changein fair market value due primarily to a lack of liquidity. Although the auctionrate security continues to pay interest according to its stated terms, based onvaluation models, we have recorded an unrealized loss for another-than-temporary change in valuation of $118,000.  If the credit ratings of the security issuerdeteriorates or if uncertainties in these markets continue and any decline inmarket value is determined to be other-than-temporary, we would be required toadjust the carrying value of the investment through an impairment charge, whichcould negatively affect our financial condition, cash flow and reportedearnings.

 

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

 

As a publiccompany, we will continue to incur significant legal, accounting and otherexpenses.  In addition, theSarbanes-Oxley Act, as well as rules subsequently implemented by the SECand the Nasdaq Global Market, or Nasdaq, impose various requirements on publiccompanies, including requiring establishment and maintenance of effectivedisclosure and financial controls and changes in corporate governancepractices.  Our management and otherpersonnel need to devote a substantial amount of time to these complianceinitiatives.  Moreover, these rules andregulations will increase our legal and financial compliance costs and willmake some activities more time-consuming and costly.  For example, these rules and regulationsmake it more difficult and more expensive for us to maintain director andofficer liability insurance, and we may be required to incur substantial costsin the future to maintain the same or similar coverage.

 

TheSarbanes-Oxley Act of 2002 requires, among other things, that we maintaineffective internal controls for financial reporting and disclosure controls andprocedures. As a result, as of December 31, 2008, we were required toperform an evaluation of our internal controls over financial reporting toallow management to report on the effectiveness of those controls, as requiredby Section 404 of the Sarbanes-Oxley Act. Additionally, our independentauditors were required to perform a similar evaluation and report on theeffectiveness of our internal controls over financial reporting. At December 31,2008, management and our independent auditors did not identify any materialweaknesses in our internal controls over financial reporting. Our efforts tocomply with Section 404 and related regulations has required, andcontinues to require, the commitment of significant financial and managerialresources. While we anticipate maintaining the integrity of our internalcontrols over financial reporting and all other aspects of Section 404, wecannot be certain that a material weakness will not be identified when we testthe effectiveness of our control systems in the future. If a material weaknessis identified, we could be subject to sanctions or investigations by Nasdaq,the SEC or other regulatory authorities, which would require additionalfinancial and management resources, costly litigation or a loss of publicconfidence in our internal controls, which could have an adverse effect on themarket price of our stock.

 

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**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 inour amended and restated certificate of incorporation and bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders, or remove ourcurrent management.  These provisionsinclude:

 

·                  aboard of directors divided into three classes serving staggered three-yearterms, such that not all members of the board will be elected at one time;

 

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

 

·                  limitingthe removal of directors by the stockholders;

 

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

 

·                  arequirement of approval of not less than 66 2/3% of all outstanding shares ofour capital stock entitled to vote to amend any bylaws by stockholder action,or to amend specific provisions of our certificate of incorporation;

 

·                  eliminatingthe ability of stockholders to call a special meeting of stockholders; and

 

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

 

These provisions may frustrate or prevent any attempts by ourstockholders to replace or remove our current management by making it moredifficult for stockholders to replace members of our board of directors, whichis responsible for appointing the members of our management.  In addition, 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 ofdirectors.  This provision could have theeffect of delaying or preventing a change of control, whether or not it isdesired by or beneficial to our stockholders. Such a delay or prevention of a change of control transaction couldcause the market price of our stock to decline.

 

**Item 5. Other Information**

 

On October 30, 2009, we entered into a number of transactionsinvolving our Taiwan subsidiary, OBI. The transactions are intended to provide funding for the development oftwo of our early-stage, non-core programs, while also allowing us to focus onour late-stage anti-infective programs.

 

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Pursuant to an Intellectual Property Assignment and License Agreement,we assigned to OBI certain patent rights, information and know-how related toOPT-88, our product candidate for the treatment of osteoarthritis, andOPT-822/821, our carbohydrate-based cancer immunotherapy productcandidate.   In anticipation of thetransactions, we previously assigned and OBI assumed our rights and obligationsunder certain in-license agreements with the TSRI and MSKCC related to the twoprograms.  Under the IntellectualProperty Assignment and License Agreement, we are eligible to receive milestonepayments for each product developed under the OPT-88 and OPT-822/821 programsand we are also eligible to receive royalties on net sales of any productswhich are commercialized under the programs.

 

The Intellectual Property Assignment and License Agreement alsoterminates the existing license agreement between us and OBI, including ourprevious license to OBI to develop fidaxomicin in certain Asian countries.  Under the agreement, we also forgave previousintercompany loans to OBI.

 

To provide capital for OBI’s product development efforts, we and OBIalso entered into a Financing Agreement with a group of new investors.  Simultaneously, we sold 40 percent of ourexiting OBI shares to the same group of new investors for gross proceeds ofapproximately $2.1 million.  Uponexecution of the Financing Agreement, we and the new investors investedapproximately $3.7 million and $2.5 million, respectively, in new OBIshares.  Also under the FinancingAgreement, if OBI achieves certain development milestones in the future, we andthe new investors will be obligated to invest approximately an additional $8.6million and $5.7 million, respectively, in exchange for new OBI shares.  Following the sale of our existing OBI sharesand the initial investments in exchange for new OBI shares, we maintain a 60percent ownership interest in OBI.

 

Michael N. Chang, our President and Chief Executive Officer and amember of our board of directors, currently serves as the chairman of the boardof directors of OBI.  Youe-Kong Shue, ourVice President of Clinical Development, currently serves as OBI’s interimPresident and Chief Executive Officer and as a director of OBI.

 

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**Item 6. Exhibits**

** **
| **Exhibit  No.** | ** ** | **Description of Document**                                                                                                                                                                                                                                              |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              | (2)        | Certificate  of Incorporation of Optimer Pharmaceuticals, Inc., as amended and  restated.                                                                                                                                                                           |
| 3.2              | (3)        | Bylaws of Optimer Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                                |
| 4.1              | (2)        | Common Stock  Certificate of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                          |
| 4.2              | (1)        | Investors’  Rights Agreement by and among Optimer Pharmaceuticals, Inc. and certain  stockholders of Optimer Pharmaceuticals, Inc. dated November 30,  2005, as amended and restated.                                                                |
| 4.3              | (4)        | Registration  Rights Agreement, dated October 23, 2007, by and between Optimer  Pharmaceuticals, Inc. and the purchasers listed on the signature pages thereto.                                                                                           |
| 4.4              | (5)        | Form of  Warrant to Purchase Common Stock issued on March 9, 2009.                                                                                                                                                                                             |
| 10.1             | *          | Collaboration  Research and Development and License Agreement between Optimer  Pharmaceuticals, Inc. and Cempra Pharmaceuticals, Inc., dated  March 31, 2006, as amended.                                                                                 |
| 10.2             | *          | Intellectual  Property Assignment and License Agreement between Optimer  Pharmaceuticals, Inc. and Optimer Biotechnology, Inc., dated  October 30, 2009.                                                                                                  |
| 10.3             |       | Financing  Agreement between Optimer Pharmaceuticals, Inc., Optimer  Biotechnology, Inc. and certain investors named therein, dated  October 30, 2009.                                                                                                    |
| 31.1             |       | Certification  of principal executive officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                              |
| 31.2             |       | Certification  of principal financial officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                              |
| 32               |       | Certification  by the Chief Executive Officer and the Chief Financial Officer of the  Registrant, as required by Rule 13a-14(b) or 15d-14(b) and  Section 1350 of Chapter 63 of Title 18 of the United States  Code (18 U.S.C. 1350). |

 

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*                                         Confidential treatment has been requestedand/or granted with respect to certain portions of this exhibit. Omittedportions have been filed separately with the SEC.

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

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

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

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

(5)                                  Filed with Registrant’s Current Report on Form 8-Kon March 5, 2009.

 

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**SIGNATURE**

 

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

 
| ** **                    | **OPTIMER  PHARMACEUTICALS, INC.** |
|-------------------------------|------------------------------------|
|                          |                               |
| Dated:  November 3, 2009 | By:                                | /s/ John D. Prunty |
| ** **                    | **Name:**                          | **John D. Prunty** |
| ** **                    | **Title:**                         | ***Chief Financial Officer*** |
| *** ***                  | *** ***                       | ***(Duly Authorized Officer and Principal  Financial and Accounting Officer)*** |
|                               |                                    |  |  |

 

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