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**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**x**        **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended June 30,2008**

 

**or**

 

**o**         **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from            to          **

 

**Commission File Number 001-33291**

 

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**OPTIMER PHARMACEUTICALS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days:

 

Yes x       No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large  accelerated filer o | Accelerated  filer o | Non-accelerated  filer x | Smaller  reporting company o |
|----------------------------|---------------------------|--------------------------|-----------------------------------|
|                       |                      |                     |                              |

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

 

Yes o       No x

 

Thenumber of shares of the registrant’s Common Stock, no par value, outstanding asof August 1, 2008 was 29,704,257 shares.

 

 

 

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**OPTIMER PHARMACEUTICALS, INC.FORM 10-QFor the Quarterly Period Ended June 30, 2008**

**TABLE OF CONTENTS**

 
| ** **                                                                                                  | **Page** |
|-------------------------------------------------------------------------------------------------------------|----------|
| **PART I – FINANCIAL INFORMATION**                                                                |     |
|                                                                                                        |     |
| Item 1.  Financial Statements (unaudited)                                                              |     |
|                                                                                                        |     |
| Consolidated Balance Sheets – June 30, 2008 and  December 31, 2007                           | 3        |
|                                                                                                        |     |
| Consolidated Statements of Operations – Three months  and six months ended June 30, 2008 and 2007 | 4        |
|                                                                                                        |     |
| Consolidated Statements of Cash Flows – Six months  ended June 30, 2008 and 2007                  | 5        |
|                                                                                                        |     |
| Notes to Consolidated Financial Statements                                                                  | 6        |
|                                                                                                        |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations    | 17       |
|                                                                                                        |     |
| Item 3. Quantitative and Qualitative Disclosures  about Market Risk                                    | 24       |
|                                                                                                        |     |
| Item 4. Controls and Procedures                                                                        | 24       |
|                                                                                                        |     |
| **PART II – OTHER INFORMATION**                                                                   |     |
|                                                                                                        |     |
| Item 1A.  Risk Factors                                                                                 | 25       |
|                                                                                                        |     |
| Item 4. Submission of matters to a Vote of  Security Holders                                           | 56       |
|                                                                                                        |     |
| Item 6.  Exhibits                                                                                      | 57       |
|                                                                                                        |     |
| SIGNATURE                                                                                                   |     |
| EXHIBIT  31.1                                                                                               |     |
| EXHIBIT  31.2                                                                                               |     |
| EXHIBIT  32                                                                                                 |     |

 

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**PART I – FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

 

**OptimerPharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                                         | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                    |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                          |       | $                 | 16,905,838 |                  | $          | 3,191,814 |   |
| Short-term investments                                                                                                                                                                                             |       | 26,177,939        |       | 55,613,785            |       |
| Research grant and contract receivables                                                                                                                                                                            |       | 144,003           |       | 95,184                |       |
| Prepaid expenses and other current assets                                                                                                                                                                          |       | 832,592           |       | 872,810               |       |
| Total current assets                                                                                                                                                                                               |       | 44,060,372        |       | 59,773,593            |       |
| Property and equipment, net                                                                                                                                                                                        |       | 652,780           |       | 705,374               |       |
| Long-term investments                                                                                                                                                                                              |       | 1,150,000         |       | —                |       |
| Other assets                                                                                                                                                                                                       |       | 308,943           |       | 306,573               |       |
| Total assets                                                                                                                                                                                                       |       | $                 | 46,172,095 |                  | $          | 60,785,540 |   |
|                                                                                                                                                                                                               |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                     |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                               |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                   |       | $                 | 3,800,225  |                  | $          | 2,602,152 |   |
| Accrued expenses                                                                                                                                                                                                   |       | 4,134,009         |       | 4,998,025             |       |
| Total current liabilities                                                                                                                                                                                          |       | 7,934,234         |       | 7,600,177             |       |
| Deferred rent                                                                                                                                                                                                      |       | 265,552           |       | 281,894               |       |
| Commitments and contingencies                                                                                                                                                                                      |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                         |       |              |       |                  |       |
| Preferred stock, par value $0.001,  10,000,000 shares authorized, no shares issued and oustanding at June 30,  2008 and December 31, 2007                                                                          |       | —            |       | —                |       |
| Common stock, $0.001 par value, 75,000,000  shares authorized, 27,952,042 shares and 27,903,705 shares issued and  outstanding at June 30, 2008 and December 31, 2007, respectively; 46,153  held in treasury |       | 27,952            |       | 27,904                |       |
| Treasury stock, at cost; 46,153 shares                                                                                                                                                                             |       | (100,000          | )          | (100,000              | )          |
| Additional paid-in capital                                                                                                                                                                                         |       | 151,711,395       |       | 150,681,519           |       |
| Accumulated other comprehensive gain (loss)                                                                                                                                                                        |       | 23,862            |       | (8,396                | )          |
| Accumulated deficit                                                                                                                                                                                                |       | (113,690,900      | )          | (97,697,558           | )          |
| Total stockholders’ equity                                                                                                                                                                                    |       | 37,972,309        |       | 52,903,469            |       |
|                                                                                                                                                                                                               |       |              |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                    |       | $                 | 46,172,095 |                  | $          | 60,785,540 |   |

 

See accompanying notes.

 

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**Optimer Pharmaceuticals, Inc**

**Consolidated Statements of Operations**

**(unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                   | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                    |       |                             |       |                           |       |   |   |   |   |
| Research grants                                              |       | $                                | 118,797    |                           | $          | 51,002 |   | $ | 605,463 |   | $ | 197,300 |   |
| Collaborative research agreements                            |       | 50,000                           |       | 160,000                        |       | 50,000 |   | 160,000 |   |
| Total revenues                                               |       | 168,797                          |       | 211,002                        |       | 655,463 |   | 357,300 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Operating expenses:                                          |       |                             |       |                           |       |   |   |   |   |
| Research and development                                     |       | 6,220,482                        |       | 7,022,093                      |       | 13,125,858 |   | 30,468,360 |   |
| Marketing                                                    |       | 913,916                          |       | 299,071                        |       | 1,279,484 |   | 851,068 |   |
| General and administrative                                   |       | 1,521,446                        |       | 1,513,175                      |       | 3,258,497 |   | 2,607,643 |   |
| Total operating expenses                                     |       | 8,655,844                        |       | 8,834,339                      |       | 17,663,839 |   | 33,927,071 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Loss from operations                                         |       | (8,487,047                       | )          | (8,623,337                     | )          | (17,008,376 | ) | (33,569,771 | ) |
| Interest income and other, net                               |       | 433,750                          |       | 495,280                        |       | 1,015,034 |   | 937,501 |   |
| Net loss                                                     |       | $                                | (8,053,297 | )                              | $          | (8,128,057 | ) | $ | (15,993,342 | ) | $ | (32,632,270 | ) |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted net loss per share                         |       | $                                | (0.29      | )                              | $          | (0.35 | ) | $ | (0.57 | ) | $ | (1.75 | ) |
| Shares used to compute basic and diluted  net loss per share |       | 27,891,870                       |       | 23,136,754                     |       | 27,880,772 |   | 18,613,135 |   |

 

See accompanying notes.

 

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2008**                                          | ** **  | **2007** | ** ** |
| ** **                                                                   | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Operating  activities**                                                    |       |                                              |        |   |   |
| Net loss                                                                     |       | $                                                 | (15,993,342 | ) | $ | (32,632,270 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                              |        |   |   |
| Depreciation and amortization                                                |       | 110,304                                           |        | 148,945 |   |
| Stock based compensation                                                     |       | 848,002                                           |        | 607,965 |   |
| Deferred rent                                                                |       | (16,342                                           | )           | (4,237 | ) |
| Changes in operating assets and  liabilities:                                |       |                                              |        |   |   |
| Prepaids expenses and other current assets                                   |       | 40,218                                            |        | 855,791 |   |
| Research grant and contract receivables                                      |       | (48,819                                           | )           | 114,016 |   |
| Other assets                                                                 |       | (2,370                                            | )           | 13,233 |   |
| Accounts payable and accrued expenses                                        |       | 334,057                                           |        | 2,652,540 |   |
| Net cash used in operating activities                                        |       | (14,728,292                                       | )           | (28,244,017 | ) |
|                                                                         |       |                                              |        |   |   |
| **Investing  activities**                                                    |       |                                              |        |   |   |
| Purchases of short-term investments                                          |       | (17,040,787                                       | )           | (39,177,453 | ) |
| Sales or maturity of short-term investments                                  |       | 45,350,000                                        |        | 31,160,000 |   |
| Purchase of property and equipment                                           |       | (57,710                                           | )           | (183,639 | ) |
| Net cash provided by (used in) investing  activities                         |       | 28,251,503                                        |        | (8,201,092 | ) |
|                                                                         |       |                                              |        |   |   |
| **Financing  activities**                                                    |       |                                              |        |   |   |
| Proceeds from sale of common stock                                           |       | 181,922                                           |        | 43,716,750 |   |
| Proceeds from exercise of warrants                                           |       | —                                            |        | 1,370,267 |   |
| Net cash provided by financing activities                                    |       | 181,922                                           |        | 45,087,017 |   |
| Effect of exchange rate changes on cash and  cash equivalents                |       | 8,891                                             |        | 31,224 |   |
| Net increase in cash and cash equivalents                                    |       | 13,714,024                                        |        | 8,673,132 |   |
| Cash and cash equivalents at beginning of  period                            |       | 3,191,814                                         |        | 6,122,438 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                 | 16,905,838  |   | $ | 14,795,570 |   |
|                                                                         |       |                                              |        |   |   |
| **Supplemental  disclosure of cash flow information:**                       |       |                                              |        |   |   |
| Conversion of redeemable convertible  preferred stock to common stock        |       | —                                            |        | 65,461,166 |   |

 

See accompanying notes.

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated Financial Statements**

**(unaudited)**

 

**1.             Interim Financial Information**

** **

***Organizationand Business Activities***

** **

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

 

Optimer is abiopharmaceutical company focused on discovering, developing andcommercializing anti-infective products. The Company currently has two anti-infective product candidates, OPT-80for the treatment of *Clostridium difficile*-infection,and Prulifloxacin, for the treatment of infectious diarrhea in travelers. TheCompany is developing additional product candidates using its proprietarytechnology, including its OPopS drug discovery platform.

 

*Basisof Presentation*

* *

The accompanying unaudited consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.In the opinion of management, all adjustments, consisting of normal recurringaccruals, considered necessary for a fair presentation of the results of theseinterim periods have been included. The results of operations for the three andsix months ended June 30, 2008 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, 2007, which wasfiled with the Securities and Exchange Commission (“SEC”) on March 26,2008.

 

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

 

**2.             Summary ofSignificant Accounting Policies**

 

*Cash,Cash Equivalents and Investments*

* *

Investments with original maturities of less than 90 days at the dateof purchase are considered to be cash equivalents.  All other investments are classified ascurrent or noncurrent available-for-sale securities and are reported at fairvalue with net unrealized gains or losses reported within accumulated othercomprehensive income (loss) in the consolidated balance sheets.  Realized gains and losses, and declines invalue judged to be other than temporary, are included in investment income orinterest expense. The cost of securities sold is computed using the specificidentification method.

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

Auction rate preferred securities are classified as noncurrentavailable-for-sale securities in the consolidated balance sheet because of theintent and ability to hold these securities until the market for auction ratepreferred securities stabilizes or until the issuer refinances the underlyingsecurity.

 

*RevenueRecognition*

* *

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

 

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

 

When a payment is specifically tied to a separate earnings process,revenues are recognized when the specific performance obligation associatedwith the payment is completed.  Performanceobligations typically consist of significant and substantive milestonespursuant to the related agreement. Revenues from milestone payments may be considered separable fromfunding for research services because of the uncertainty surrounding theachievement of milestones for products in early stages of development.  Accordingly, these payments are allowed to berecognized as revenue if and when the performance milestone is achieved if theyrepresent a separate earnings process as described in EITF 00-21.

 

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

 

Revenues derived from reimbursement of direct out-of-pocket expensesfor research costs associated with grants are recorded in compliance with EITFIssue 99-19, *Reporting Revenue Gross as a PrincipalVersus Net as an Agent*, and EITF Issue 01-14, *Income Statement Characterization of Reimbursements Received for“Out-of-Pocket” Expenses Incurred*. According to the criteria established by these EITF Issues, in transactionswhere the Company acts as a principal, with discretion to choose suppliers,bears credit risk and performs part of the services required in thetransaction, the Company records revenue for the gross amount of thereimbursement.  The costs associated withthese reimbursements are reflected as a component of research and developmentexpense in the consolidated statements of operations.

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

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

 

*Researchand Development Expenses*

* *

The Company accounts for research and development costs in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 2, *Accounting for Research and Development Costs* (“SFAS2”).  SFAS 2 specifies that research anddevelopment costs should be charged to expense until technological feasibilityhas been established for the product. Once technological feasibility is established, all product costs shouldbe capitalized until the product is available for general release tocustomers.  The Company has determinedthat technological feasibility for its product candidates will be reached whenthe requisite regulatory approvals are obtained to make the product availablefor sale, or approval of the new drug application (“NDA”) for suchproduct.  The Company’s research anddevelopment expenses consist primarily of license fees, salaries and relatedemployee benefits, costs associated with clinical trials managed by theCompany’s contract research organizations (“CROs”) and costs associated withnon-clinical activities and regulatory approvals.  The Company uses external service providersand vendors to conduct clinical trials, to manufacture supplies of productcandidates to be used in clinical trials and to provide various other researchand development-related products and services.

 

When nonrefundable paymentsfor goods or services to be received in the future for use in research anddevelopment activities are made, the Company applies the criteria outlined inEITF Issue 07-3, (“EITF 07-3”) *Accountingfor Non-Refundable Advance Payments for Goods or Services to be Used in FutureResearch and Development Activities .*In accordance with EITF 07-3,these types of payments are deferred and capitalized. The capitalized amountsare expensed when the related goods are delivered or the services areperformed.

 

*ComprehensiveIncome (Loss)*

* *

The Company has applied SFAS No. 130, *ReportingComprehensive Income*, which requires that all components ofcomprehensive income (loss), including net income (loss), be reported in thefinancial statements in the period in which they are recognized.  Comprehensive income (loss) is defined as thechange in equity during a period from transactions and other events andcircumstances from non-owner sources. Net income (loss) and other comprehensive income (loss), includingforeign currency translation adjustments and unrealized gains and losses oninvestments, is required to be reported, net of their related tax effect, toarrive at comprehensive income (loss). The Company’s comprehensive loss was $8.2 million and $8.1 million forthe three months ended June 30, 2008 and 2007, respectively.  The Company’s comprehensive loss was $16.0million and $32.6 million for the six months ended June 30, 2008 and 2007,respectively.

 

*NetLoss Per Share*

* *

The Company computes net loss per share in accordance with SFAS No. 128(“SFAS 128”), *Earnings per Share*.Under the provisions of SFAS 128, basic net loss per common share is computedby dividing net loss by the weighted-average number of common sharesoutstanding.

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

Diluted net loss per common share is computed by dividing net loss bythe weighted-average number of common shares and dilutive common shareequivalents then outstanding. Common equivalent shares consist of common sharesissuable upon the exercise of stock options and warrants. Since the Company hasa net loss for all periods presented, the effect of all potentially dilutivesecurities is anti-dilutive. Accordingly, basic and diluted net loss per shareis the same.

 

For the six months ended June 30, 2008 and 2007, common sharesissuable upon the exercise of stock options and warrants totaling 1,994,965 and1,649,230 shares, respectively, were excluded from the calculation as theireffect would have been antidilutive.

 

*Income Taxes*

 

On January 1, 2007 theCompany adopted FASB issued Financial Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109*. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with SFAS No. 109, *Accounting for IncomeTaxes*, and prescribes a recognition threshold and measurementattributes for financial statement disclosure of tax positions taken orexpected to be taken on a tax return. The impact of an uncertain income taxposition on the income tax return must be recognized at the largest amount thatis more-likely-than-not to be sustained upon audit by the relevant taxingauthority. An uncertain income tax position will not be recognized if it hasless than a 50% likelihood of being sustained. Additionally, FIN 48 providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. There were no unrecognized taxbenefits as of the date of adoption and there were no unrecognized tax benefitsincluded in the Company’s balance sheet at June 30, 2008 that would, ifrecognized, affect the Company’s effective tax rate.

 

The Company’s practice is torecognize interest and/or penalties related to income tax matters as income taxexpense. The Company had zero accrued for interest and penalties on the itsbalance sheet at June 30, 2008 and had recognized zero in interest and/orpenalties in the statement of operations for the quarter ended June 30,2008.

 

The Company is subject totaxation in the United States, California and various foreign jurisdictions.The Company’s tax years for 1999 and forward are subject to examination by theFederal and California tax authorities due to the carryforward of unutilizednet operating losses and research and development credits.

 

The Company is currentlyundergoing a Section 382/383 analysis regarding the limitation of netoperating loss and research and development credit carryforwards. When thisanalysis is finalized, the Company plans to update its unrecognized taxbenefits under FIN 48. The Company expects the Section 382/383 analysis tobe completed within the next 12 months. Due to the existence of thevaluation allowance, future changes in the Company’s unrecognized tax benefitswill not impact the Company’s effective tax rate.

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

Pursuant toSections 382 and 383 of the Internal Revenue Code, annual use of theCompany’s net operating loss and credit carryforwards may be limited in theevent of a cumulative change in ownership of more than 50% within a three-yearperiod.

 

*RecentlyIssued Accounting Pronouncements*

 

In November 2007, the EITFissued Issue No. 07-1 (“EITF 07-1”), *Accountingfor Collaborative Arrangements Related to the Development and Commercializationof Intellectual Property*. Companies may enter into arrangements withother companies to jointly develop, manufacture, distribute, and market aproduct. Often the activities associated with these arrangements are conductedby the collaborators without the creation of a separate legal entity (that is,the arrangement is operated as a “virtual joint venture”). The arrangementsgenerally provide that the collaborators will share, based on contractuallydefined calculations, the profits or losses from the associated activities.Periodically, the collaborators share financial information related to productrevenues generated (if any) and costs incurred that may trigger a sharing paymentfor the combined profits or losses. EITF 07-1 requires collaborators in such anarrangement to present the result of activities for which they act as theprincipal on a gross basis and report any payments received from (made to)other collaborators based on other applicable GAAP or, in the absence of otherapplicable GAAP, based on analogy to authoritative accounting literature or areasonable, rational, and consistently applied accounting policy election. EITF07-1 is effective for collaborative arrangements in place at the beginning ofthe annual period beginning after December 15, 2008. The Company does notcurrently expect the adoption of EITF 07-1 to have a material impact onits consolidated financial statements.

 

In December 2007, theFASB issued SFAS No. 160 (“SFAS 160”),*Noncontrolling Interests in Consolidated Financial Statements —An Amendment of ARB No. 51*. SFAS 160 requires the recognition of a noncontrolling interest,sometimes called minority interest, as equity in the consolidated financialstatements and separate from the parent’s equity. The amount of net incomeattributable to the noncontrolling interest will be included in consolidatednet income on the face of the income statement. SFAS 160 clarifies thatchanges in a parent’s ownership interest in a subsidiary that do not result indeconsolidation are equity transactions if the parent retains its controllingfinancial interest. In addition, this statement requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated.Such gain or loss will be measured using the fair value of the noncontrollingequity investment on the deconsolidation date. SFAS 160 also includesexpanded disclosure requirements regarding the interests of the parent and its noncontrollinginterest. SFAS 160 is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008.Earlier adoption is prohibited. The Company has not determined the impact, ifany, that adopting this standard may have on its financial position, cashflows, and results of operations.

 

In March 2008, the FASB issuedSFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133*.This new standard requires enhanced disclosures for derivative instruments,including those used in hedging activities. It is effective for fiscal yearsand interim periods beginning after November 15, 2008. The Company

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

has not determined theimpact, if any, that adopting this standard may have on its financial position,cash flows, and results of operations.

 

In April 2008,the FASB issued FASB Staff Position (“FSP”) FAS 142-3, *Determination of the Useful Life of Intangible Assets*.FSP FAS 142-3 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under FASB Statement No. 142, *Goodwill and Other Intangible Assets*. FSPFAS 142-3 is effective for fiscal years beginning after December 15,2008 and early adoption is prohibited. The Companydoes not currently expect the adoption of FSP FAS 142-3 to have a materialimpact on its consolidated financial statements.

 

In May 2008,the FASB issued SFAS No. 162 (“SFAS 162”), *The Hierarchy of Generally Accepted Accounting Principles*.This new standard is intended to improve financial reporting by identifying aconsistent framework, or hierarchy, for selecting accounting principles to beused in preparing financial statements that are presented in conformity withU.S. generally accepted accounting principles for nongovernmental entities.SFAS 162 is effective 60 days following the SEC’s approval of thePublic Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,*The Meaning of Present Fairly in Conformitywith Generally Accepted Accounting Principles*. The Companydoes not currently expect the adoption of SFAS 162 to have a material impact onits consolidated financial statements.

 

**3.             Fair Value of Financial Instruments**

 

TheCompany adopted SFAS 157 effective January 1, 2008 for financial assetsand liabilities measured on a recurring basis. SFAS 157 applies to allfinancial assets and financial liabilities that are being measured and reportedon a fair value basis. As defined in SFAS 157, fair value isbased on the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date.  SFAS 157requires disclosure that establishes a framework for measuring fair value andexpands disclosure about fair value measurements. The statement requires fairvalue measurement be classified and disclosed in one of the following threecategories:

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

 

Thefollowing table summarizes the Company’s assets measured at fair value on arecurring basis subject to the disclosure requirements of SFAS 157 as of June 30,2008:

 
| ** **             | ** ** | **Quoted Prices in  Active Markets  (Level 1)** | ** ** | **Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** | **Total** | ** ** |
|------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------|------------|
| Marketable  securities |       | $                                                                   | 26,177,939 |                                          | $          | —                                   |       | $         | 1,150,000  |   | $ | 27,327,939 |   |
|                        |            |                                                                     |            |                                               |            |                                          |            |           |            |  |  |  |  |

 

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**Optimer Pharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

A reconciliation of the beginning and ending balances of assetsmeasured at fair value on a recurring basis using Level 3 inputs is as follows:

 
| ** **                                                                               | ** ** | **Auction Rate  Preferred Securities** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Beginning balance at January 1, 2008                                                |       | $                                                | —     |   |
| Total gains and losses                                                                   |       |                                             |       |
| Realized net income                                                                      |       | —                                           |       |
| Unrealized in accumulated other  comprehensive income                                    |       | —                                           |       |
| Purchases, sales, issuances and settlements                                              |       | —                                           |       |
| Transfers in (out) of Level 3                                                            |       | 1,150,000                                        |       |
| Ending balance at June 30, 2008                                                     |       | $                                                | 1,150,000  |   |
| Change in unrealized gains (losses)  included in net income related to assets still held |       | $                                                | —     |   |

 

All of the Company’s investments in available-for-sale securities arerecorded at fair value based on quoted market prices. At June 30, 2008,the Company held two auction rate preferred securities valued at $1.2 millionwith perpetual maturity dates that reset every 28 days.  Since February 2008, the auctions forthese securities have failed, and the interest rates were reset in June to3.70% and 4.90%, from their previous rates in May of 3.78% and 4.84%. TheCompany does not believe there is any impairment of the auction rate preferredsecurities at June 30, 2008, but has classified these securities tolong-term investments on the consolidated balance sheet because the Company hasthe intent and ability to hold these securities until the market for auctionrate preferred securities stabilizes or until the issuer refinances theunderlying security.

 

**4.             Short-TermInvestments**

 

The following is a summaryof the Company’s investment securities, all of which are classified asavailable-for-sale. Determination of estimated fair value is based upon quotedmarket prices.

 
| ** **                | ** ** | **June 30, 2008** | ** ** |
|---------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **Gross  Amortized  Cost**  | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Market Value** | ** ** |
| Certificates of deposits  |       | $                           | 1,000,949  |   | $ | 81 |   | $ | — |   | $ | 1,001,030 |   |
| Corporate debt securities |       | 22,674,017                  |       | 23,570 |   | (40,337 | ) | 22,657,250 |   |
| Foreign debt securities   |       | 2,512,150                   |       | 7,556 |   | (47 | ) | 2,519,659 |   |
|                      |       | $                           | 26,187,116 |   | $ | 31,207 |   | $ | (40,384 | ) | $ | 26,177,939 |   |

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

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

 

Investments in net unrealized loss positions as of June 30, 2008are as follows:

 
| ** **                | ** ** | ** **                      | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **Number of  Investments** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Corporate debt securities |       | 15                              |       | $                                                                         | 11,295,740 |                                                                         | $          | (40,384                              | )          | $ | — |   | $ | — |   | $ | 11,295,740 |   | $ | (40,384 | ) |
|                           |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**5.             StockBased Compensation**

 

Effective January 1,2006, the Company adopted the provisions of SFAS No. 123(R) using themodified prospective-transition-method and therefore, prior period results willnot be restated.  SFAS No. 123(R) supersedesAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, and related interpretations,and revises guidance in SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”).  Under this transition method, thecompensation costs related to all equity instruments granted prior to, but notyet vested as of, the adoption date of SFAS 123(R) are recognizedbased on the grant-date fair value which is estimated in accordance with theoriginal provisions of SFAS 123. Compensation costs related to all equity instruments granted after January 1,2006 are recognized at the grant-date fair value of the awards in accordancewith the provisions of SFAS 123(R). Additionally, under the provisions of SFAS 123(R), the Company isrequired to include an estimate of the value of the awards that will beforfeited in calculating compensation costs, which is recognized over therequisite service period of the awards on a straight-line basis.

 

The Black-Scholes option-pricing model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  In addition,the Black-Scholes option-pricing model requires the input of subjectiveassumptions, including the

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

expected stock price volatility. The following table shows the assumptions used to compute stock-basedcompensation expense for the stock options granted during the six months ended June 30,2008 and 2007, using the Black-Scholes option pricing model:

 
| ** **                       | ** ** | **Three months ended****June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                          | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free interest rate          |       | 2.96                                              | %          | 4.72                                          | %          | 2.96 | % | 4.72-4.80 | % |
| Dividend yield                   |       | 0.00                                              | %          | 0.00                                          | %          | 0.00 | % | 0.00 | % |
| Expected life of options (years) |       | 6.08                                              |       | 6.08                                          |       | 6.02-6.08 |   | 6.08 |   |
| Volatility                       |       | 64.95                                             | %          | 60.92                                         | %          | 64.95 | % | 60.92-65.82 | % |

 

The risk-free interest rate assumption was based on the United StatesTreasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar tothose of the expected term of the award being valued.  The assumed dividend yield was based on theCompany’s expectation of not paying dividends in the foreseeable future.  The weighted average expected life of optionswas calculated using the simplified method as prescribed SAB No. 107, *Share-Based Payment* (“SAB 107”).  This decision was based on the lack ofrelevant historical data due to the Company’s limited history.  In addition, due to the Company’s limitedhistorical data, the estimated volatility also reflects the application ofSAB 107, incorporating the historical volatility of comparable companieswhose share prices are publicly available.

 

Based on these assumptions, the weighted average grant-date fair valuesof stock options granted during the****three monthsand six months ended June 30, 2008 was $7.37****pershare and $6.84 per share, respectively.

 

As of June 30, 2008, the total unrecognized compensation expenserelated to unvested stock options was approximately $3,371,993 and the relatedweighted-average period over which it is expected to be recognized isapproximately 2.8 years.

 

Total stock-based compensation expense, related to all of the Company’sstock options, stock awards and employee stock purchases, recognized for thethree months and six months ended June 30, 2008 and 2007 was comprised asfollows:

 
| ** **                       | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and development         |       | $                                               | 119,960    |                                          | $          | 78,665 |   | $ | 230,506 |   | $ | 139,613 |   |
| Marketing                        |       | 74,811                                          |       | 56,838                                        |       | 153,296 |   | 110,144 |   |
| General and administrative       |       | 223,553                                         |       | 227,195                                       |       | 464,200 |   | 358,208 |   |
| Stock-based compensation expense |       | $                                               | 418,324    |                                          | $          | 362,698 |   | $ | 848,002 |   | $ | 607,965 |   |

 

Tax benefits recognized andrelated to stock-based compensation and related cash flow impacts were notmaterial during the six months ended June 30, 2008.

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

**6.             Stockholders’ Equity**

** **

*Stock Option*

* *

In November 1998, the Company adopted the 1998 Stock Plan (“1998Plan”).  The Company terminated andceased granting options under the 1998 Plan upon the effectiveness of theCompany’s initial public offering in February 2007.

 

In December 2006, the Company’s board of directors approved the2006 Equity Incentive Plan (“2006 Plan”). The 2006 Plan became effective upon the effectiveness of the Company’sinitial public offering. A total of 2,000,000 shares of the Company’s commonstock were initially made available for sale under the 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. Pursuant to this provision, 750,000 additional shares of theCompany’s common stock were reserved for issuance under the 2006 Plan on January 1,2008.

 

Options granted under both the 1998 Plan and the 2006 Plan generallyexpire no later than ten years from the date of grant (five years for a 10%stockholder) and vest over a period of four years. The exercise price ofoptions granted must at least be equal to the fair market value of theCompany’s common stock on the date of grant. The 2006 Plan is administered by the Compensation Committee of theCompany’s Board of Directors.

 

Following is a summary of stock option activity for the six monthsended June 30, 2008:

 
| ** **                           | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|--------------------------------------|------------|-------------|------------|--------------------------------------------|------------|
| Balance as of December 31, 2007 |       | 1,615,317   |       | $                                          | 2.65       |   |
| Granted                              |       | 412,250     |       | $                                          | 6.84       |   |
| Exercised                            |       | (22,794     | )          | $                                          | 1.22       |   |
| Canceled                             |       | (9.808      | )          | $                                          | 7.74       |   |
| Balance as of June 30, 2008     |       | 1,994,965   |       | $                                          | 3.50       |   |

 

As of June 30, 2008, options were outstanding under the 1998 Planand the 2006 Plan as follows:

 
| ** **          | ** ** | **June 30, 2008**  | ** ** |
|---------------------|------------|------------------------------|------------|
| ** **          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
| **Exercise  Price** | ** ** | **Number  Outstanding**      | ** ** | **Weighted Average  Remaining  Contractual  Life (in years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.22 - $0.65       |       | 432,792                      |       | 3.33 |   | $ | 0.59 |   | 432,792 |   | $ | 0.59 |   |
| $1.08 - $1.08       |       | 528,933                      |       | 6.73 |   | $ | 1.08 |   | 434,685 |   | $ | 1.08 |   |
| $2.17 - $6.90       |       | 731,240                      |       | 8.87 |   | $ | 4.67 |   | 173,680 |   | $ | 2.27 |   |
| $7.10 - $10.00      |       | 302,000                      |       | 8.94 |   | $ | 9.11 |   | 80,780 |   | $ | 9.33 |   |
| $0.22 - $10.00      |       | 1,994,965                    |       | 7.11 |   | $ | 3.50 |   | 1,121,937 |   | $ | 1.67 |   |

 

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**OptimerPharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements (continued)**

**(unaudited)**

 

Of the options outstanding, options to purchase 1,121,937 shares werevested as of June 30, 2008, with a weighted average remaining contractuallife of 5.75 years and a weighted average exercise price of $1.67 per share,while options to purchase 873,028 shares were unvested.

 

*EmployeeStock Purchase Plan*

* *

Concurrent with the Company’s initial public offering in February 2007,the Company’s board 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. Pursuantto this provision, 300,000 additional shares of the Company’s common stock werereserved for issuance under the ESPP on January 1, 2008.

 

At June 30, 2008, therewere 48,226 shares of common stock issued and 451,774 shares were available forissuance under the purchase plan.

 

During the three and six months ended June 30, 2008, the Companyrecorded stock-based compensation expense of approximately $23,737 and $49,687,respectively, related to the purchase plan.

 

**7.**                                      SubsequentEvent

** **

In July 2008, the Company received approximately $14.8 million ingross proceeds from the sale of 1,743,396 million shares of its commonstock at $8.48 per share in a registered direct offering to institutionalinvestors. These shares were sold pursuant to a shelf registration statementwhich allows the Company to raise up to $100 million from the sale of common orpreferred stock, debt securities, warrants or any combination of thesesecurities.

 

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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. This discussion and other parts of this report may containforward-looking statements based upon current expectations that involve risksand uncertainties. Our actual results and the timing of selected events coulddiffer materially from those anticipated in these forward-looking statements asa result 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 initial development efforts address products that treat gastrointestinalinfections and related diseases where current therapies have limitations,including limited efficacy, serious adverse side effects, drug-to-druginteractions, difficult patient compliance and bacterial resistance.

 

We currently have two late-stage anti-infectiveproduct candidates, OPT-80 and Prulifloxacin. OPT-80, our lead productcandidate, is an antibiotic currently in two Phase 3 registration trialsfor the treatment of *Clostridium difficile*-infection,or CDI, the most common nosocomial, or hospital acquired, diarrhea. We havecompleted enrollment in the first trial and expect to report data in the fourthquarter of 2008. We anticipate completing enrollment and reporting data fromthe second trial in 2009. In April 2005, we entered into a collaborationagreement with Par Pharmaceutical, Inc., or Par, pursuant to which we andPar, exclusively collaborated in the clinical development and commercializationof OPT-80. In February 2007, we elected to terminate the collaborationagreement with Par, exercised our right under a prospective buy-back agreementto repurchase Par’s rights to develop and commercialize OPT-80 in North Americaand Israel and paid Par a one-time $20.0 million termination fee. As a result,we now hold worldwide rights to OPT-80. The Food and Drug Administration, orFDA, has granted Fast Track status for OPT-80 in the treatment of CDI. FastTrack designation indicates that OPT-80 has the potential to treatlife-threatening diseases with unmet medical needs. The FDA also chose OPT-80to be the only investigational new drug in the Continuous MarketingApplications, or CMA, Pilot 2 Program in the Division of Anti-Infectiveand Ophthalmology Products. The CMA designation offers several potentialbenefits, including a program of continuous FDA feedback designed to streamlinethe development process. Participation in these programs will not eliminate anyphase of clinical development.

 

Prulifloxacin is an antibiotic being developed for thetreatment of infectious diarrhea in travelers. We recently reported top-linedata from the first of two Phase 3 trials and anticipate completing enrollmentand reporting data from the second trial in the second half of 2008. We intendto conduct a Phase 4 trial of Prulifloxacin subsequent to the NDAsubmission to compare Prulifloxacin to ciprofloxacin for the treatment ofinfectious diarrhea. We will seek a label for Prulifloxacin and initially planto focus commercialization efforts for the treatment of infectious diarrhea intravelers. Prulifloxacin is a prodrug in the fluoroquinolone class of antibiotics,a

 

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widely-used class of broad-spectrum antibiotics. Weare developing additional product candidates using our proprietary technology,including our OPopS drug discovery platform.

 

We were incorporated in November 1998. Sinceinception, we have focused on developing our product candidates, includingOPT-80 and Prulifloxacin. We have never been profitable and have incurredsignificant net losses since our inception. As of June 30, 2008, we had anaccumulated deficit of $113.7 million. These losses have resulted principallyfrom costs incurred in connection with research and development activities,including the costs of clinical trial activities associated with our currentlead product candidates, license fees and general and administrative expenses.We expect to continue to incur operating losses for the next several years aswe pursue the clinical development and commercialization of our productcandidates, as well as acquire or in-license additional products or productcandidates, technologies or businesses that are complementary to our own.

 

**CriticalAccounting 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 these consolidated financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets, liabilities, expenses and related disclosures. Actual results coulddiffer from those estimates. While our significant accounting policies aredescribed in more detail in Note 2 of the Notes to Consolidated FinancialStatements appearing elsewhere in this report, we believe the followingaccounting policies to be critical to the judgments and estimates used in thepreparation of our consolidated financial statements.

 

*RevenueRecognition*

* *

Ourcollaboration agreements contain multiple elements, including non-refundableupfront fees, payments for reimbursement of third-party research costs,payments for ongoing research, payments associated with achieving specificdevelopment milestones and royalties based on specified percentages of netproduct sales, if any. We apply the revenue recognition criteria outlined inStaff Accounting Bulletin, or SAB, No. 104, *RevenueRecognition* and Emerging Issues Task Force, or EITF,Issue 00-21, *Revenue Arrangements with MultipleDeliverables*, or EITF 00-21. In applying these revenuerecognition criteria, we consider a variety of factors in determining theappropriate method of revenue recognition under these arrangements, such aswhether the elements are separable, whether there are determinable fair valuesand whether there is a unique earnings process associated with each element ofa contract.

 

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

 

Whena payment is specifically tied to a separate earnings process, revenues arerecognized when the specific performance obligation associated with the paymentis completed. Performance obligations typically consist of significant andsubstantive milestones. Revenues from milestone payments may be consideredseparable from funding for research services because of the uncertaintysurrounding the achievement of milestones for products in early

 

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stagesof development. Accordingly, these milestone payments are allowed to berecognized as revenue if and when the performance milestone is achieved if theyrepresent a substantive earnings process as described in EITF 00-21.

 

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 recognized as revenue as the related researchactivities are performed.

 

Revenuesderived from reimbursement of direct out-of-pocket expenses for research costsassociated with grants are recorded in compliance with EITF Issue 99-19, *Reporting Revenue Gross as a Principal Versus Net as an Agent*,and EITF Issue 01-14, *Income Statement Characterizationof Reimbursements Received for “Out-of-Pocket” Expenses Incurred*.According to the criteria established by these EITF Issues, in transactionswhere we act as a principal, with discretion to choose suppliers, bear creditrisk and perform part of the services required in the transaction, we recordrevenue for the gross amount of the reimbursement. The costs associated withthese reimbursements are reflected as a component of research and developmentexpense in the consolidated statements of operations.

 

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

 

*Research and Development*

 

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

 

When nonrefundable payments for goods or services tobe received in the future for use in research and development activities aremade, we apply the criteria outlined in EITF Issue 07-3, or EITF 07-3, *Accounting for Non-Refundable Advance Payments forGoods or Services to be Used in Future Research and Development Activities .*Inaccordance with EITF 07-3, these types of payments are deferred andcapitalized. The capitalized amounts are expensed when the related goods aredelivered or the services are performed.

 

*AccruedClinical 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. We accrue the costs incurred under thesecontracts based on factors such as estimates of work performed, milestonesachieved, patient enrollment and costs historically incurred for similarcontracts. As actual costs become known, we adjust our accruals. To date, ouraccruals have been within management’s estimates, and no material adjustmentsto research and development expenses have been recognized. We expect tosignificantly expand the level of research and

 

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developmentactivity to be performed by external service providers and our estimatedaccruals will be more material to our future operations. Subsequent changes inestimates may result in a material change in our accruals, which could alsomaterially affect our results of operations.

 

*Stock-BasedCompensation*

* *

Effective January 1, 2006, we adopted Statementof Financial Accounting Standards, or SFAS, No. 123(R), *Share-Based Payment*, which revises SFAS No. 123,*Accounting for Stock-Based Compensation*and supersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*.SFAS No. 123(R) requires 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 themodified prospective method when we adopted SFAS No. 123(R) andaccordingly we did not restate the results of operations for the prior periods.Compensation expense of $418,000 and $363,000 was recognized in the threemonths ended June 30, 2008 and 2007, respectively. Compensation expense of$848,000 and $608,000 was recognized in the six months ended June 30, 2008and 2007, 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 value for stock options requiresjudgment, including estimating stock-price volatility, expected term, expecteddividends and risk-free interest rates. The expected volatility rates are basedon the historical fluctuation in the stock price since inception. The averageexpected term is calculated using SAB No. 107, “*Simplified Method for Estimating the Expected Term*.”Expected dividends are estimated based on our dividend history as well as ourcurrent projections. The risk-free interest rate for periods approximating theexpected terms of the options is based on the U.S. Treasury yield curve ineffect at the time of grant. These assumptions are updated on an annual basisor sooner if there is a significant change in circumstances that could affectthese assumptions.

 

Equity instruments issued to non-employees arerecorded at their fair value as determined in accordance with SFAS No.123(R) andEITF Issue 96-18, *Accounting for Equity InstrumentsThat are Issued to Other Than Employees for Acquiring, or in Conjunction withSelling Goods and Services*, and are periodically revalued as theequity instruments vest and are recognized as expense over the related serviceperiod.

 

**Resultsof Operations**

** **

***Comparison of***Three Months Ended June 30,2008 and 2007

*** ***

*Collaborationand Grant Revenues*. Collaboration and grant revenues of $169,000 forthe three months ended June 30, 2008 were relatively consistent with the$211,000 for the three months ended June 30, 2007.

 

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*Researchand Development Expense*. Research and development expense for thethree months ended June 30, 2008 and 2007 was $6.2 million and $7.0million, respectively, a decrease of $802,000 or 11%. The decrease is primarilydue to the purchase of $1.9 million of clinical supply material and activepharmaceutical ingredient in the second quarter of the prior year that waspartially offset by an increase in expenses related to our OPT-80 andPrulifloxacin Phase 3 clinical trials in the current year.

 

*MarketingExpense*. Marketing expense for the three months ended June 30, 2008 and2007 was $914,000 and $299,000, respectively. The increase of $615,000, or206%, was primarily due to an increase in medical education and pre-launchmarketing efforts related to OPT-80.

 

*Generaland Administrative Expense*. General and administrativeexpense of $1.5 million for the three months ended June 30, 2008 wasconsistent with the $1.5 million for the three months ended June 30, 2007.

 

*InterestIncome and Other, net*. Net interest income and other for the threemonths ended June 30, 2008 and 2007 was $434,000 and $495,000,respectively. The decrease was a result of a lower rate of earnings on our cashand short-term investment balances.

 

***Comparison of***Six Months Ended June 30,2008 and 2007

*** ***

*Collaborationand Grant Revenues*. Collaboration and grant revenues for the sixmonths ended June 30, 2008 and 2007 were $655,000 and $357,000,respectively. The increase of $298,000, or 83%, was primarily due to revenuefrom a NationalInstitutes of Health grant.

 

*Researchand Development Expense*. Research and development expense for thesix months ended June 30, 2008 and 2007 was $13.1 million and $30.5million, respectively, a decrease of $17.4 million or 57%. The decrease wasprimarily due to a one-time $20.0 million payment to Par to regain the NorthAmerican rights to OPT-80 and the purchase of $1.9 million of clinical supplyand active pharmaceutical ingredient. The decrease was partially offset by anincrease in expenses related to our OPT-80 and Prulifloxacin Phase 3 clinicaltrials in the current year.

 

*MarketingExpense*. Marketing expense for the six months ended June 30, 2008 and2007 was $1.3 million and $851,000, respectively. The increase of $428,000, or50%, was primarily due to an increase in medical education and pre-launchmarketing efforts related to OPT-80.

 

*Generaland Administrative Expense*. General and administrativeexpense for the six months ended June 30, 2008 and 2007 was $3.3 millionand $2.6 million, respectively. The increase of $651,000, or 25%, was due tohigher compensation expenses, including $464,000 of stock compensation expense,an increase of $106,000 over the same period in the prior year.

 

*InterestIncome and Other, net*. Net interest income and other for the six monthsended June 30, 2008 and 2007 was $1.0 million and $938,000, respectively.The increase was primarily due to higher cash and short-term investmentbalances as a result of our private placement offering in October 2007,offset by a lower rate of earnings on those balances.

 

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**Liquidityand Capital Resources**

** **

*Sourcesof Liquidity*

* *

Sinceinception, our operations have been financed primarily through the sale ofequity securities. Through June 30, 2008, we received gross proceeds ofapproximately $154.8 million from the sale of shares of our preferred andcommon stock as follows:

 

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

 

·                  from March 2001to December 2001, we sold a total of 4.1 million shares of Series B preferredstock 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; and

 

·                  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, wesold 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 commonstock in a registered direct offering in which we raised gross proceeds ofapproximately $14.8 million. These shares were sold pursuant to a shelf registration statement whichallows us to raise up to $100 million from the sale of common or preferredstock, debt securities, warrants or any combination of these securities.

 

Untilrequired for operations, we have invested a substantial portion of ouravailable funds in money market funds, corporate debt securities, United Statesgovernment instruments and other readily marketable debt instruments, all ofwhich are investment-grade quality. We have established guidelines relating todiversification and maturities of our investments to preserve principal andmaintain liquidity.

 

*CashFlows*

* *

Asof June 30, 2008, cash, cash equivalents and short-term investmentstotaled approximately $43.1 million as compared to $58.8 million as of December 31,2007, a decrease of approximately $15.7 million. The decrease in our cash, cashequivalents and short-term investments was primarily due to day-to-dayoperating expenses and the reclassification of $1.2 million of auction ratesecurities to long-term investments.

 

Wecannot be certain if, when or to what extent we will receive cash inflows fromthe commercialization of our product candidates. We expect our developmentexpenses to be

 

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substantialand to increase over the next few years as we advance the development of ourproduct candidates.

 

In February 2007, we repurchased the rights todevelop and commercialize OPT-80 in North America and Israel under theprospective buy-back agreement. Under the term of the prospective buy-back agreement,we are obligated to pay Par a one-time $5.0 million milestone payment, a 5%royalty on net sales by us or our affiliates of OPT-80 in North America andIsrael, and a 1.5% royalty on net sales by us or our affiliates of OPT-80 inthe rest of the world. In addition, in the event we license our right to marketOPT-80 in the rest of the world, we will be required to pay Par a 6.25% royaltyon net revenues we receive related to OPT-80. We are obligated to pay each ofthese royalties, if any, on a country-by-country basis for seven yearscommencing on the applicable commercial launch in each such country.

 

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

 

*FundingRequirements*

* *

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

 

·                  the progress ofour clinical trials, including expenses to support the trials and the milestonepayments that may become payable to Par and Nippon Shinyaku;

 

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

 

·                  the costsinvolved in enforcing or defending patent claims or other intellectual propertyrights;

 

·                  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.

 

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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 may finance future cash needs through thesale of additional equity securities, strategic collaboration agreements anddebt financing. However, we may not be successful in completing future equityfinancings, in entering into additional collaboration agreements, in receivingmilestone or royalty payments under new or existing collaboration agreements,in obtaining new government grants or in obtaining debt financing. In addition,we cannot be sure that our existing cash and investment resources will beadequate, that financing will be available when needed or that, if available,financing will be obtained on terms favorable to us or our stockholders. Havinginsufficient funds may require us to delay, scale-back or eliminate some or allof our development programs, relinquish some or even all of our rights toproduct candidates at an earlier stage of development or renegotiate lessfavorable terms than we would otherwise choose. Failure to obtain adequatefinancing also may adversely affect our ability to operate as a going concern.If we raise funds by issuing equity securities, substantial dilution toexisting stockholders would likely result. If we raise funds by incurringadditional debt financing, the terms of the debt may involve significant cashpayment obligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

 

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

** **

Ourcash and cash equivalents and short-term investments as of June 30, 2008consisted primarily of money market funds, corporate debt securities, UnitedStates government instruments and other readily marketable debt instruments.Our primary exposure to market risk is interest income sensitivity, which isaffected by changes in the general level of 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 without significantlyincreasing risk. A hypothetical ten percent change in interest ratesduring the quarter ended June 30, 2008 would have resulted inapproximately a $45,000 change in net loss. Accordingly, we would notexpect our operating results or cash flows to be affected to any significantdegree by the effect of a sudden change in market interest rates applicable toour securities portfolio. In general, money market funds are not subject tomarket risk because the interest paid on such funds fluctuates with the prevailinginterest rate.

 

**Item 4. Controls and Procedures**

** **

Asof the end of the period covered by this report, an evaluation was performedunder the supervision and with the participation of our management, includingour chief executive officer and chief financial officer (collectively, our “certifyingofficers”), of the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on their evaluation, our certifying officersconcluded that these disclosure controls and procedures are effective inproviding reasonable assurance that the information required to be disclosed byus in our periodic reports filed with the Securities and Exchange Commission,or SEC, is recorded, processed, summarized and reported within the time periodsspecified by the SEC’s rules and SEC reports.

 

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Webelieve that a controls system, no matter how well designed and operated, isbased in part upon certain assumptions about the likelihood of future events,and therefore can only provide reasonable, not absolute, assurance that theobjectives of the controls system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within a company have been detected.

 

Inaddition, we have reviewed our internal controls over financial reporting andhave made no changes during the quarter ended June 30, 2008, that ourcertifying officers concluded materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

** **

**PART II – OTHER INFORMATION**

** **

**Item 1A. Risk Factors**

** **

The risk factors set forth below with an asterisk (*) next to the titleare new risk factors or risk factors containing changes, including any materialchanges, from the risk factors previously disclosed in Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2007, as filedwith the SEC.

 

**Risks Related to Our Business**

** **

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

 

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

 

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

 

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

 

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

 

Our product candidates will require extensiveadditional clinical study and evaluation, regulatory approval in multiplejurisdictions, substantial investment and significant marketing efforts beforewe generate any revenues from product sales. We are not permitted to market orpromote our product candidates before we receive regulatory approval from theFDA or comparable foreign regulatory authorities. We have not submitted an NDA,or received marketing approval for either OPT-80 or Prulifloxacin, and wecannot be certain that either of these product candidates will be successful inclinical trials or receive regulatory approval. If we do not receive regulatoryapproval for and successfully commercialize OPT-80 and Prulifloxacin, we willnot

 

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generate any revenues from product sales for severalyears, if at all, and we may not be able to continue our operations.

 

We believe our initial success will be more dependenton OPT-80 than Prulifloxacin, because we believe that our market for thetreatment of CDI is larger than our market for the treatment of infectiousdiarrhea. Even if we successfully obtain regulatory approval to market OPT-80or Prulifloxacin, our revenues for either drug candidate will be dependent uponthe size of the markets in the territories for which we have commercial rights.If the markets for the treatment of CDI or infectious diarrhea are not as significantas we estimate, our business and prospects will be harmed.

 

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

 

We have experienced significant operating losses sinceour inception in 1998. As of June 30, 2008, we had an accumulated deficitof approximately $113.7 million. We have generated no revenues from productsales to date. We have funded our operations through June 30, 2008 from thesale of approximately $154.8 million of our securities and through researchfunding pursuant to collaborations with partners or government grants. Weexpect to continue to incur substantial additional operating losses for thenext several years as we advance our clinical trials and research anddevelopment initiatives and build our marketing and sales capabilities. Becauseof the numerous risks and uncertainties associated with developing andcommercializing antibiotics, we are unable to predict the extent of any futurelosses. We may never successfully commercialize our product candidates and thusmay never have any significant future revenues or achieve and sustainprofitability.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We currently plan to build our own marketing and salesforce for OPT-80 in North America and Prulifloxacin in the United States, andwe may also seek one or more partners for the commercialization of OPT-80outside of North America. We cannot be certain that we would be successful inattracting any such partners. If we were not able to find appropriate partnersfor the continued development and commercialization of OPT-80, we would eitherhave to delay these initiatives which would harm our business and prospects, orraise significant additional funds to develop clinical and commercializationcapabilities internally.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We need FDA approval prior to marketing our productcandidates in the United States. If 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 and approval process, whichincludes evaluation of pre-clinical studies and clinical trials of our productcandidates as well as the evaluation of our manufacturing processes and ourthird-party contract manufacturers’ facilities, is lengthy, expensive anduncertain. To receive approval for a product candidate, we must, among otherthings, demonstrate with substantial evidence from well-controlled clinicaltrials that the product candidate is both safe and effective for eachindication for which approval is sought. Satisfaction of the approvalrequirements typically takes several years and the time needed to satisfy themmay vary substantially, based on the type, complexity and novelty of thepharmaceutical product. We cannot predict if or when we might receiveregulatory approvals for any of our product candidates currently underdevelopment. Moreover, any approvals that we obtain may not cover all of theclinical indications for which we are seeking approval, or could containsignificant limitations in the form of narrow indications, warnings,precautions or contra-indications with respect to conditions of use. In such anevent, our ability to generate revenues from such products would be greatlyreduced and our business would be harmed.

 

The FDA has substantialdiscretion in the approval process and may either refuse to consider ourapplication for substantive review or may form the opinion after review of ourdata that our application is insufficient to allow approval of our productcandidates. If the FDA does not consider or approve an application that wesubmit, it may require that we conduct additional clinical, pre-clinical ormanufacturing validation studies and submit that data before it will reconsiderour application. Depending on the extent of these or any other studies,approval of any applications that we submit may be delayed by several years, ormay require us to expend more resources than we have available. For example, anNDA for Prulifloxacin will require us to obtain certain legacy data from athird party. If we are unable to obtain this data in a timely manner, it maydelay our filing of an NDA for Prulifloxacin and could require us to completeadditional clinical trials.It is also possible that additional studies, ifperformed and completed, may not be successful or considered sufficient by theFDA for approval or even to make our applications approvable. If any of theseoutcomes occur, we may be forced to abandon one or

 

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more of our futureapplications for approval, which might significantly harm our business andprospects.

 

It is possible that none of our existing productcandidates or any product candidates we may seek to develop in the future willever obtain the appropriate regulatory approvals necessary for us or ourcollaborators to commence product sales. Moreover, recent events, includingcomplications arising from FDA-approved drugs such as Vioxx and Ketek, haveraised questions about the safety of marketed drugs and may result in increasedcautiousness by the FDA and comparable foreign regulatory authorities inreviewing new drugs based on safety, efficacy or other regulatory approvals.This increased scrutiny by regulatory authorities may result in significantdelays in obtaining regulatory approvals, as well as more stringent productlabeling and post-marketing testing requirements.

 

Although the FDA has granted Fast Track status toOPT-80 and selected it for participation in a CMA Pilot 2 Program, wecannot be certain that we will receive any benefits from these designations orthat the designations will expedite regulatory review or approval of OPT-80.Participation in these programs will not eliminate any phase of clinicaldevelopment. Moreover, our participation in the CMA Pilot 2 Program willinvolve frequent scientific discussions and other interactions with the staffof the FDA during the investigational new drug phase of our development ofOPT-80. These frequent discussions could subject OPT-80 to a greater level ofscrutiny than it might otherwise have received or require us to make morefrequent submissions and endure other burdens that would have been avoided ifwe had not participated in the program. Therefore, despite any potentialbenefits of OPT-80’s Fast Track and CMA Pilot 2 Program designations,significant uncertainty remains regarding the clinical development andregulatory approval process for OPT-80.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We may experience delays in clinical trials of ourproduct candidates. OPT-80 is currently in two Phase 3 clinical trials forthe treatment of CDI. We recently completed enrollment in the first trial andexpect to report data in the fourth quarter of 2008. We anticipate completingenrollment and reporting data from the second trial in 2009. If both trials aresuccessful, we intend to file an NDA as soon as practicable thereafter. Inaddition, we are planning to conduct a registration study for otherformulations and proof-of-concept clinical trials for other indications ofOPT-80. We recently reported top-line data from the first of two Phase 3 trialsevaluating Prulifloxacin for the treatment of infectious diarrhea in travelers.We anticipate completing enrollment andreporting data of the second trial in the second half of 2008. We intend toconduct a Phase 4 trial of Prulifloxacin subsequent to the NDA submissionto compare Prulifloxacin to ciprofloxacin for the treatment of infectiousdiarrhea. Results from the first Prulifloxacin Phase 3 trial, while positive,may not predict results from the second trial. We do not know whether plannedclinical trials will begin on time, will need to be redesigned or will becompleted on schedule, if at all. Clinical trials can be delayed for a varietyof reasons, including delays in obtaining regulatory approval to commence atrial, in reaching agreement on acceptable terms with prospective clinicalresearch organizations, or CROs, and clinical trial sites, in obtaininginstitutional review board approval at each site, in recruiting suitablepatients to participate in a trial, in having patients complete a trial orreturn for post-treatment follow-up, in adding new sites or in obtainingsufficient supplies of clinical trial materials. Many factors affect patientenrollment, including the size and nature of the patient population, theproximity of patients to clinical sites, the eligibility criteria for thetrial, the design of the clinical trial, competing clinical trials, clinicians’and patients’ perceptions as to the potential advantages of the drug beingstudied in relation to other available therapies, including any new drugs thatmay

 

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be approved for the indications we are investigatingand whether the clinical trial design involves comparison to placebo. Severalof our principal investigators have stated that the enrollment rate in the clinicaltrials for OPT-80 has often been less than projected. Our original projectionswere based on enrollment rates for our Phase 2a trial of OPT-80. If wecontinue to experience lower than expected enrollment in the second trial, thistrial may not be completed as currently scheduled and we may incur delays inobtaining regulatory approval as well as additional significant expenses.Furthermore, with respect to the clinical trials conducted by third parties, wewill have no control over their timing or success.

 

We could encounter delays if prescribing physiciansencounter unresolved ethical issues associated with enrolling patients inclinical trials of our product candidates in lieu of prescribing existingantibiotics that have established safety and efficacy profiles or withadministering placebo to patients in our placebo-controlled trials. Further, aclinical trial may be suspended or terminated by us, our collaborators, the FDAor other regulatory authorities due to a number of factors, including failureto conduct the clinical trial in accordance with regulatory requirements or ourclinical protocols, inspection of the clinical trial operations or trial siteby the FDA or other regulatory authorities resulting in the imposition of aclinical hold, unforeseen safety issues or adverse side effects, failure todemonstrate a benefit from using a drug, changes in governmental regulations oradministrative actions or lack of adequate funding to continue the clinicaltrial. In addition, our Prulifloxacin product candidate treats bacterialinfections which tend to peak during high travel seasons. As a result, duringcertain times of the year, it is more difficult to enroll patients in ourtrials for Prulifloxacin. If we experience delays in the completion of, or terminationof, any clinical trial of our product candidates, the commercial prospects ofour product candidates will be harmed, and our ability to generate productrevenues from any of these product candidates will be delayed. In addition, anydelays in completing our clinical trials will increase our costs, slow down ourproduct development and approval process and jeopardize our ability to commenceproduct sales and generate revenues. Any of these occurrences may significantlyharm our business, financial condition and prospects.

 

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

 

Our clinical trials may be suspended at any time for anumber of reasons. We may voluntarily suspend or terminate our clinical trialsif at any time we believe that they present an unacceptable risk toparticipants. In addition, regulatory agencies may order the temporary orpermanent discontinuation of our clinical trials at any time if they believethat the clinical trials are not being conducted in accordance with applicableregulatory requirements or that they present an unacceptable safety risk toparticipants. In previous clinical trials of OPT-80, certain patientsexperienced non-drug related adverse events. Patients treated withPrulifloxacin have experienced drug-related side effects including abdominalpain, diarrhea, nausea, renal toxicities, cardiac arrhythmias,photosensitivity, rash, excessive flushing of the skin and central nervoussystem effects, such as seizures. The FDA recommended that we conduct a studyto determine the effect, if any, of Prulifloxacin on the prolongation of the QTinterval, a condition that is associated with potentially life-threateningcardiac arrhythmias. In such event, our trials would be interrupted, delayed orhalted and the FDA or comparable foreign regulatory authorities could order usto cease further development of or deny approval of our product candidates forany or

 

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all targeted indications. Even if we believe ourproduct candidates are safe, our data is subject to review by the FDA, whichmay disagree with our conclusions and delay or deny approval of our productcandidates which would significantly harm the commercial prospects of suchproduct candidates. Moreover, we could be subject to significant liability ifany volunteer or patient suffers, or appears to suffer, adverse side effects asa result of participating in our clinical trials. Any of these occurrences maysignificantly harm our business and prospects.

 

**We rely on third parties to conductour clinical trials. If these third parties do not successfully carry out theircontractual duties or meet expected deadlines, we and our collaborators may notbe able to obtain regulatory approval for or commercialize our productcandidates. (*)**

 

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

 

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

 

Typically, the CROs conducting clinical trials of ourproduct candidates have the right to terminate their agreements with us or ourcollaborators upon notice in the event of an uncured material breach. Inaddition, some CROs have an ability to terminate their respective agreementswith us if we fail to perform our obligations, if it can be reasonablydemonstrated that the safety of the subjects participating in our clinicaltrials warrants such termination, if we make a general assignment for thebenefit of our creditors or if we are liquidated. INC Research has been heavilyinvolved in the clinical development and regulatory approval process for ourlead product candidates and possesses significant experience with theregulatory process. We substantially rely on INC Research to conduct theclinical trials for OPT-80 and Prulifloxacin. INC Research has alsosubcontracted with other third-party CROs for various aspects of the clinicaltrials. If any relationships with INC Research or these other third-party CROsterminate, we or our collaborators may not be able to enter into arrangementswith alternative CROs or we may enter into arrangements with alternative CROsthat do not have the expertise or relationships that INC Research has withgovernment agencies. For example, a third party service provider previouslyterminated their clinical trial agreement regarding the enrollment of patientsin our Prulifloxacin trial in Guatemala. As a result, we are unable to recruitnew patients in Guatemala and have added additional sites to supplementexisting ones in Mexico.

 

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In addition, these third-party CROs are not ouremployees, and we cannot control whether or not they devote sufficient time andresources to our on-going clinical programs. These CROs may also haverelationships with other commercial entities, including our competitors, forwhom they may also be conducting clinical studies or other drug developmentactivities, which could harm our competitive position. If CROs do notsuccessfully carry out their contractual duties or obligations or meet expecteddeadlines, if they need to be replaced, or if the quality or accuracy of theclinical data they obtain is compromised due to the failure to adhere to our clinicalprotocols, regulatory requirements, or for other reasons, our clinical trialsmay be extended, delayed or terminated, and we may not be able to obtainregulatory approval for or successfully commercialize our product candidates.As a result, our financial results and the commercial prospects for our productcandidates would be harmed, our costs could increase and our ability togenerate revenues could be delayed.

 

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

 

Sales of our product candidates outside of the UnitedStates will be subject to foreign regulatory requirements governing clinicaltrials and marketing approval. Even if the FDA grants marketing approval for aproduct candidate, comparable regulatory authorities of foreign countries mustalso approve the manufacturing and marketing of the product candidate in thosecountries. This is important for the commercialization of OPT-80 for which wecurrently have exclusive worldwide marketing rights. Obtaining foreignregulatory approvals could result in significant delays, difficulties and costsfor us and require additional pre-clinical studies or clinical trials whichwould be costly and time consuming. Regulatory requirements can vary widelyfrom country to country and could delay the introduction of our products inthose countries. Clinical trials conducted in one country may not be acceptedby regulatory authorities in other countries, and regulatory approval in onecountry does not mean that regulatory approval will be obtained in any othercountry. In addition, our failure to obtain regulatory approval in any countrymay delay or have negative effects on the process for regulatory approval inothers. Other than Prulifloxacin, which is sold by other parties in Japan,Italy and certain other European countries, none of our product candidates areapproved for sale in any international market for which we have rights, and wedo not have experience in obtaining regulatory approval in internationalmarkets. If we fail to comply with regulatory requirements in our internationalmarkets or to obtain and maintain required approvals, our target market will bereduced and our ability to generate revenues will be diminished, which wouldsignificantly harm our business, results of operations and prospects.

 

**We currently have no salesorganization and have no experience in marketing drug products as a company. Ifwe are unable to expand our marketing capabilities and establish salescapabilities or enter into agreements with third parties to market and sell ourproduct candidates, we may not be able to generate product revenues.**

 

We currently have a limited marketing organization anddo not have a sales organization for the marketing, sales and distribution ofpharmaceutical products. In order to commercialize any products, we must buildour marketing, sales, distribution, managerial and other non-technical

 

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capabilities or make arrangements with third partiesto perform these services. We plan to build our own marketing and sales forceto commercialize OPT-80 in North America and will seek third-party partnersoutside North America. We own exclusive rights to commercialize Prulifloxacinin the United States, and we contemplate establishing our own sales force orseeking third-party partners to sell Prulifloxacin in the United States. Theestablishment and development of our own sales force to market any products wemay develop will be expensive and time consuming and could delay any productlaunch, and we cannot be certain that we will be able to successfully developthis capability. We will also have to compete with other pharmaceutical andbiotechnology companies to recruit, hire, train and retain marketing and salespersonnel. To the extent we rely on third parties to commercialize ourproducts, if any, we may receive less revenues than if we commercialized theseproducts ourselves. In addition, we may have little or no control over thesales efforts of any third parties involved in commercializing our products. Inthe event we are unable to develop and expand our own marketing and sales forceor collaborate with a third-party marketing and sales organization, we wouldnot be able to commercialize our product candidates which would negativelyimpact our ability to generate product revenues.

 

**We may not be able to enter intoacceptable agreements to market and commercialize OPT-80 outside of North Americaor if, needed, adequately build our own marketing and sales capabilities.**

 

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

 

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

 

If approved, our lead product candidates will competeagainst both branded antibiotic therapies, such as Vancocin Pulvules withrespect to OPT-80 and Xifaxan®/rifaximin with respect to Prulifloxacin, andgeneric antibiotics such as metronidazole and vancomycin with respect to OPT-80and ciprofloxacin with respect to Prulifloxacin. In addition, we anticipatethat OPT-80 will compete with other antibiotic and anti-infective productcandidates currently in development for the treatment of CDI, such asXifaxan®/rifaximin and AliniaTM/nitazoxanide. Many of these productshave been or will be developed and marketed by major pharmaceutical companies,who

 

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have significantly greater financial resources andexpertise in research and development, pre-clinical testing, conductingclinical trials, obtaining regulatory approvals, manufacturing and marketingapproved products than we do. As a result, these companies may obtainregulatory approval more rapidly than we are able to and may be more effectivein selling and marketing their products as well. Smaller or early-stagecompanies may also prove to be significant competitors, particularly throughcollaborative arrangements with large, established companies.

 

We anticipate that, if approved, OPT-80 andPrulifloxacin will face increasing competition in the form of generic versionsof branded products of competitors that will lose their patent exclusivity. Forexample, OPT-80, if approved, will immediately face steep competition from aninexpensive generic form of metronidazole. OPT-80 would currently face genericoral vancomycin competition in Europe and may face competition from genericoral vancomycin in the United States in 2008. Generic antibiotic therapiestypically are sold at lower prices than branded antibiotics and are generallypreferred by managed care providers of health services. For example, becausemetronidazole is sold at such a low price, we believe it will be difficult tosell OPT-80 as a first-line therapy for the treatment of CDI. If we are unableto demonstrate to physicians and patients that, based on experience, clinicaldata, side-effect profiles and other factors, our products are preferable tothese generic antibiotic therapies, we may never generate meaningful productrevenues. In addition, many antibiotics experience bacterial resistance overtime because of their continued use. There can be no guarantee that bacteriawould not develop resistance to OPT-80, Prulifloxacin or any of our otherproduct candidates. Our commercial opportunity would also be reduced oreliminated if our competitors develop and commercialize generic or brandedantibiotics that are safer, more effective, have fewer side effects or are lessexpensive than our product candidates.

 

**We currently depend, and will in thefuture continue to depend, on third parties to manufacture our productcandidates, including OPT-80 and Prulifloxacin. If these manufacturers fail toprovide us and our collaborators with adequate supplies of clinical trialmaterials and commercial product or fail to comply with the requirements ofregulatory authorities, we may be unable to develop or commercialize ourproducts. (*)**

 

We outsource all manufacturing of clinical trialsupplies of our product candidates to third parties. We seek to establishlong-term supply arrangements with third-party contract manufacturers. Weintend to continue outsourcing the manufacture of our product candidates tothird parties for any future clinical trials and large-scale commercializationof any product candidates that receive regulatory approval and becomecommercial drugs.

 

Our ability to develop and commercialize OPT-80 andPrulifloxacin and any other product candidates depends in part on our abilityto arrange for collaborators or other third parties to manufacture our productsat a competitive cost, in accordance with strictly enforced regulatoryrequirements and in sufficient quantities for clinical testing and eventualcommercialization. We have not yet manufactured commercial batches of OPT-80,Prulifloxacin or any of our other product candidates. Collaborators orthird-party manufacturers that we select to manufacture our product candidatesfor clinical testing or on a commercial scale may encounter difficulties withthe small- and large-scale formulation and manufacturing processes required forsuch manufacture. Such difficulties could result in delays in clinical trials,regulatory submissions, or

 

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commercialization of our product candidates. Theinability of us or our collaborators to enter into and maintain agreements withthird-party manufacturers on acceptable terms would cause shortages of clinicaltrial supplies of our product candidates, thereby delaying or preventingregulatory approval and/or commercialization of the affected product candidate,and adversely affecting our ability to generate revenues. Further, developmentof large-scale manufacturing processes will require additional validationstudies, which the FDA must review and approve. Even if we are able toestablish additional or replacement manufacturers, identifying these sourcesand entering into definitive supply agreements and obtaining regulatoryapprovals may take a substantial amount of time and cost and such supplyarrangements may not be available on acceptable economic terms.

 

In addition, we, our collaborators and otherthird-party manufacturers of our products must comply with current strictlyenforced cGMP requirements enforced by the FDA through its facilitiesinspection program. These requirements include quality control, qualityassurance and the maintenance of records and documentation. We rely on Bioconto manufacture OPT-80 API and rely on Patheon, Inc. to manufacture thedrug product supplies. As such, Biocon and Patheon will be subject to ongoingperiodic unannounced inspections by the FDA and other agencies for compliancewith current cGMP, and similar foreign standards. We also rely on NipponShinyaku, which contracts with Juzen, and Angelini and Patheon to manufacturePrulifloxacin drug supplies. The manufacturing facilities of Biocon, Juzen andPatheon have been inspected by the FDA for other companies’ drug products;however, none of Biocon’s, Juzen’s nor Patheon’s facilities have yet beeninspected by the FDA for the manufacture of our drug supplies. Angelini’sfacilities have not been inspected or approved by the FDA. We or otherthird-party manufacturers of our products may be unable to comply with cGMPrequirements and with other FDA, state, local and foreign regulatoryrequirements. We and our collaborators have little control over third-partymanufacturers’ compliance with these regulations and standards. A failure tocomply with these requirements by our third-party manufacturers, includingBiocon, Juzen, Angelini, and Patheon could result in the issuance of untitledletters and/or warning letters from authorities, as well as sanctions beingimposed on us, including fines and civil penalties, suspension of production,suspension or delay in product approval, product seizure or recall orwithdrawal of product approval. In addition, we have no control over thesemanufacturers’ ability to maintain adequate quality control, quality assuranceand qualified personnel. If the safety of any quantities supplied by thirdparties is compromised due to their failure to adhere to applicable laws or forother reasons, we may not be able to obtain or maintain regulatory approval foror successfully commercialize one or more of our product candidates, whichwould significantly harm our business and prospects.

 

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

 

Even if our product candidates are approved by theappropriate regulatory authorities for marketing and sale, physicians may not prescribeour product candidates, which would prevent us from generating revenues orbecoming profitable. Market acceptance of OPT-80, Prulifloxacin and any of ourfuture product candidates by physicians, patients and healthcare payors willdepend on a number of factors, many of which are beyond our control, including:

 

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·                  the clinical indications for which theproduct candidate is approved;

 

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

 

·                  perceived advantages over alternativetreatments;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  relative convenience and ease ofadministration; and

 

·                  prevalence and severity of adverse sideeffects.

 

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

 

We plan to target our marketing of Prulifloxacinprimarily to high-prescribing physicians of antibiotics for travelers’diarrhea, including those at travel clinics. Because of the number of thesephysicians in the United States, we will be required to expend significant timeand resources to obtain broad market acceptance of Prulifloxacin among thesephysicians. We do not have experience in marketing to this population ofphysicians and do not currently have the resources to be able to conduct suchmarketing efforts on our own. As such, we may not be successful in any of thesemarketing efforts which would limit the commercial success of Prulifloxacin.

 

In addition, in July 2008 the FDA notified makersof fluoroquinolone antimicrobial drugs that a boxed warning is necessary forthose products due to the risk of tendinitis and tendon rupture. AsPrulifloxacin is a fluoroquinolone antibiotic it may be required to carry ablack box warning.

 

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Although these risks have been described for years onthe product label of many fluoroquinolones the increased awareness of this riskmay impact the market potential for the fluoroquinolone class of antibiotics.Furthermore, because Prulifloxacin has already been marketed by other companiesto treat a wide range of bacterial infections, including infectious diarrhea,urinary tract infections and respiratory tract infections, patients may be ableto obtain Prulifloxacin from these other companies, and not from us, ifPrulifloxacin is approved in the market where the patient is located. We haverights to Prulifloxacin only in the United States. These patients may obtainPrulifloxacin in these other markets from other companies even if thesepatients are from the United States.

 

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

 

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

 

Any product candidate we identify may requireadditional development efforts prior to commercial sale, including pre-clinicalstudies, extensive clinical testing and approval by the FDA and applicableforeign regulatory authorities. All product candidates are prone to the risksof failure that are inherent in pharmaceutical product development, includingthe possibility that the product candidate will not be shown to be sufficientlysafe and/or effective for approval by regulatory authorities. In addition, wecannot assure you that any such products that are approved will be manufacturedor produced economically, successfully commercialized or widely accepted in themarketplace or be more effective than other commercially available alternatives.

 

A significant portion of the research that we areconducting involves new and unproven technologies. Research programs toidentify new disease targets and product candidates require substantialtechnical, financial and human resources whether or not we ultimately identifyany candidates. Our research programs may initially show promise in identifyingpotential product candidates, yet fail to yield product candidates for clinicaldevelopment.

 

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

 

Our focus on drug discovery and development using ourtechnology platform, including our patented proprietary OPopS drug discoveryplatform, 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 technologyplatform has yielded only a small number of anti-infective product candidates.In addition, we do not have significant clinical data with respect to any ofthese potential product candidates. Even if we are

 

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successful in completing clinical development andreceiving regulatory approval for one commercially viable drug for thetreatment of one disease using our technology platform and carbohydratechemistry focus, we cannot be certain that we will also be able to develop andreceive regulatory approval for other drug candidates for the treatment ofother forms of that disease or other diseases. If we fail to develop andcommercialize viable drugs using our platform and specialized focus, we willnot be successful in developing a pipeline of potential product candidates to followOPT-80 and Prulifloxacin, and our business prospects would significantly beharmed.

 

**Our future growth depends on ourability to identify and acquire or in-license products. If we do notsuccessfully identify and acquire or in-license related product candidates orintegrate them into our operations, we may have limited growth opportunities.**

 

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

 

·                  exposure to unknown liabilities;

 

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

 

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

 

·                  higher than expected acquisition and integrationcosts;

 

·                  increased amortization expenses;

 

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

 

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

 

·                  inability to retain key employees of any acquiredbusinesses.

 

We have limited resources to identify and execute theacquisition or in-licensing of third-party products, businesses andtechnologies and integrate them into our current infrastructure. In particular,we may compete with larger pharmaceutical companies and other competitors inour efforts to establish new collaborations and in-licensing opportunities.These competitors likely will have access to greater financial resources thanus and may have greater expertise in identifying and evaluating newopportunities. Moreover, we may devote resources to potential

 

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acquisitions or in-licensing opportunities that arenever completed, or we may fail to realize the anticipated benefits of suchefforts.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Even if we successfully establish collaborations orcommercial agreements, these relationships may never result in the successfuldevelopment or commercialization of any product candidates or the generation ofsales or royalty revenues.

 

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

 

Our license agreement with Nippon Shinyaku provides uswith an exclusive license to develop and commercialize Prulifloxacin for anyindication in the United States, with a right to sublicense to third parties.In the event Nippon Shinyaku is not able to supply us with

 

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Prulifloxacin, the license agreement provides us witha non-exclusive, worldwide right and license to manufacture or havePrulifloxacin manufactured for us. Either we or Nippon Shinyaku may terminatethe license agreement immediately upon the bankruptcy or dissolution of theother party or upon a breach of any material provision of the agreement if thebreach is not cured within 60 days following written notice. In addition, weare entitled to terminate the agreement in the event that the FDA compels us tocease sales of Prulifloxacin in the United States. If our license agreementwith Nippon Shinyaku terminates, we will lose our rights to develop,manufacture and commercialize Prulifloxacin and our potential revenues would belimited. Similarly, if our agreement with TSRI for the license of our OPopStechnology is terminated, we will not be able to further develop future productcandidates using our OPopS technology.

 

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

 

We face an inherent risk of product liability lawsuitsrelated to the testing of our product candidates, and will face an even greaterrisk if product candidates are introduced commercially. An individual may bringa liability claim against us if one of our product candidates causes, or merelyappears to have caused, an injury. If we cannot successfully defend ourselvesagainst the product liability claim, we may incur substantial liabilities.Regardless of merit or eventual outcome, liability claims may result in:

 

·                  decreased demand for our product candidates;

 

·                  injury to our reputation;

 

·                  termination of clinical trial sites or entire clinicaltrial programs;

 

·                  withdrawal of clinical trial participants;

 

·                  significant litigation costs;

 

·                  substantial monetary awards to or costly settlementwith patients;

 

·                  product recalls;

 

·                  loss of revenues; and

 

·                  the inability to commercialize our product candidates.

 

We may become dependent upon consumer perceptions ofus and the safety and quality of our product candidates. We could be adverselyaffected if we or our product candidates are subject to negative publicity. Wecould also be adversely affected if any of our potential products or anysimilar products distributed by other companies prove to be, or are asserted tobe, harmful to consumers. Also, because of our dependence upon consumerperceptions, any adverse publicity associated with illness or other adverseeffects resulting from consumers’ use or misuse of our

 

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potential products or any similar products distributedby other companies could have a material adverse impact on our results ofoperations.

 

We have global clinical trial liability insurance thatcovers our clinical trials up to a $10.0 million annual aggregate limit. Ourcurrent or future insurance coverage may prove insufficient to cover anyliability claims brought against us. We intend to expand our insurance coverageto include the sale of commercial products if marketing approval is obtainedfor our product candidates, which would increase our insurance premiums.Because of the increasing costs of insurance coverage, we may not be able tomaintain insurance coverage at a reasonable cost or obtain insurance coveragethat will be adequate to satisfy any liability that may arise.

 

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

 

Even if we receive regulatory approval to sell ourproduct candidates, the FDA and foreign regulatory authorities will likelyimpose significant restrictions on the indicated uses or marketing of suchproducts, or impose ongoing requirements for potentially costly post-approvalstudies. In addition, following 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 our products.If we or our collaborators become aware of previously unknown problems with anyof our product candidates in the United States or overseas or at our third-partymanufacturers’ facilities, a regulatory agency may impose restrictions on ourproducts, our third-party manufacturers or on us, including requiring us toreformulate our products, conduct additional clinical trials, make changes inthe labeling of our products, implement changes to, or obtain re-approvals of,our third-party manufacturers’ facilities, or withdraw the product from themarket. In addition, we or our collaborators may experience a significant dropin the sales of the affected products and our product revenues will be reduced,our reputation in the marketplace may suffer and we may become the target oflawsuits, including class action suits. Moreover, if we or our collaborators orthird-party manufacturers fail to comply with applicable regulatoryrequirements, we may be 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 could harm or prevent sales of the affectedproducts and reduce our related revenues or could substantially increase thecosts and expenses of commercializing and marketing these products, which wouldsignificantly harm our business, financial condition and prospects.

 

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

 

Our success depends in part on our continued abilityto attract, retain and motivate highly qualified management, clinical andscientific personnel and on our ability to develop and maintain importantrelationships with leading academic institutions, clinicians and scientists. Weare highly dependent upon our senior management and scientific staff,particularly

 

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Michael N. Chang, Ph.D., our President and ChiefExecutive Officer, Tessie M. Che, Ph.D., our Senior Vice President andChief Operating Officer, Youe-Kong Shue, Ph.D., our Vice President, ClinicalDevelopment, Sherwood L. Gorbach, MD, our Vice President of Medical Affairs andChief Medical Officer, and Kevin P. Poulos, our Chief Commercial Officer.The loss of services of any of Dr. Chang, Dr. Che, Dr. Shue, Dr. Gorbachor Mr. Poulos or one or more of our other members of senior managementcould delay or prevent the successful completion of our planned clinical trialsor the commercialization of our product candidates. Replacing key employees maybe difficult and costly and may take an extended period of time because of thelimited number of individuals in our industry with the breadth of skills andexperience required to develop and commercialize products successfully. We donot maintain “key person” insurance policies on the lives of these individualsor the lives of any of our other employees. We employ these individuals on anat-will basis and their employment can be terminated by us or them at any time,for any reason and with or without notice.

 

We will need to hire additional personnel as we expandour clinical development and commercial activities. We may not be able toattract or retain qualified management and scientific personnel on acceptableterms in the future due to the intense competition for qualified personnelamong biotechnology, pharmaceutical and other businesses, particularly in theSan Diego, California area. If we are not able to attract and retain thenecessary personnel to accomplish our business objectives, we may experienceconstraints that will impede significantly the achievement of our research anddevelopment objectives, our ability to raise additional capital and our abilityto implement our business strategy. In particular, if we lose any members ofour senior management team, we may not be able to find suitable replacements,and our business and prospects may be harmed as a result.

 

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

 

We are a small company with 48 employees as of August 1,2008. To continue our clinical trials and commercialize our product candidates,we will need to expand our employee base for managerial, operational,marketing, sales, financial and other resources. 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 performanceand our ability to commercialize our product candidates and to competeeffectively will depend, in part, on our ability to manage any future growtheffectively. To that end, we must be able to:

 

·                  manage our development efforts effectively;

 

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

 

·                  integrate additional management, administrative andmanufacturing personnel;

 

·                  build a marketing and sales organization; and

 

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

 

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

 

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

 

Market acceptance and sales of our product candidateswill depend on reimbursement policies and may be affected by future healthcarereform measures. Government third-party payors, such as the Medicare andMedicaid programs, and private payors, including health maintenanceorganizations, decide which drugs they will pay for and establish reimbursementlevels for these drugs. Because third-party payors increasingly are challengingprices charged and the cost-effectiveness of medical products, significantuncertainty exists as to the ability of our product candidates to receiveadequate coverage and reimbursement. We cannot be sure that third-party payorswill place our product candidates on approved formularies or that reimbursementwill be available in whole or in part for any of our product candidates. Forexample, the Deficit Reduction Act of 2005 requires an adjustment in Medicarepayments for reimbursement of certain-hospital acquired conditions. The Centersfor Medicare and Medicaid Services, or CMS, is likely to expand its list ofnon-payment for preventable hospital acquired infections. Both CDI and MRSAinfections have been discussed but CMS has determined that further analysis isrequired before considering these conditions for non-reimbursement. Also, wecannot be sure that insufficient reimbursement amounts will not reduce thedemand for, or require us to reduce the price of our products, if approved.

 

Many healthcare providers, such as hospitals, receivea fixed reimbursement amount per procedure or other treatment therapy, andthese amounts are not necessarily based on the actual costs incurred. As aresult, these healthcare providers may choose only the least expensivetherapies regardless of efficacy. We cannot guarantee that our product candidateswill be the least expensive alternative and thus providers may decide not touse them or buy them for treatment.

 

We have not commenced efforts to have our productcandidates reimbursed by government or third-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.

 

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

 

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We may face competition for our products from lowerpriced products from foreign countries that have placed price controls onpharmaceutical products. The Medicare Modernization Act of 2003, or MMA,contains provisions that may change U.S. importation laws and expand consumers’ability to import lower priced versions of our and competing products fromCanada, where there are government price controls. These changes to U.S.importation laws will not take effect unless and until the Secretary of Healthand Human Services certifies that the changes will lead to substantial savingsfor consumers and will not create a public health safety issue. The Secretaryof Health and Human Services has not yet announced any plans to make therequired certification. Even if the changes do not take effect, and otherchanges are not enacted, imports from Canada and elsewhere may continue toincrease due to market and political forces, and the limited enforcementresources of the FDA, the U.S. Customs Service, and other government agencies.For example, Pub. L. No. 109-295, which was signed into law on October 4,2006 and provides appropriations for the Department of Homeland Security forfiscal year 2007, expressly prohibits the U.S. Customs Service from using fundsto prevent individuals from importing from Canada less than a 90-day supply ofa prescription drug for personal use, when the drug otherwise complies with theFederal Food, Drug and Cosmetic Act. Further, several states and localgovernments have implemented importation schemes for their citizens, and, inthe absence of federal action to curtail such activities, we expect otherstates and local governments to launch importation efforts. The importation offoreign products that compete with our own product candidates could negativelyimpact our business and prospects.

 

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

 

In both the United States and certain foreignjurisdictions, there have been, and we anticipate there will continue to be, anumber of legislative and regulatory changes to the healthcare system thatcould impact our ability to sell our products profitably. In particular, theMMA added an outpatient prescription drug benefit to Medicare, thepublicly-funded health insurance program in the United States generally for theelderly and disabled, which became effective on January 1, 2006. Drugbenefits under this new benefit are administered through private plans thatnegotiate price concessions from pharmaceutical manufacturers. We cannot becertain that OPT-80 and Prulifloxacin or other current or future drugcandidates will successfully be placed on the list of drugs covered byparticular health plan formularies, nor can we predict the negotiated price forour drug candidates, which will be determined by market factors.

 

The MMA also changed the formula for determiningpayment for certain drugs, which include drugs provided in physician officesand other outpatient settings. Further, with respect to the Medicaid program,the Deficit Reduction Act of 2005 made changes to certain formulas used tocalculate pharmacy reimbursement under Medicaid, the health insurance programin the United States generally for individuals and families with low incomesand resources, which became effective on January 1, 2007. These changescould lead to reduced payments to pharmacies. Many states have also createdpreferred drug lists and include drugs on those lists only when themanufacturers agree to pay a supplemental rebate. If OPT-80 and Prulifloxacinor other current or future drug candidates are not included on these preferreddrug lists, physicians may not be inclined to prescribe them to their Medicaidpatients, thereby diminishing the potential market for our products.

 

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As a result of legislative proposals and the trendtowards managed healthcare in the United States, third-party payors areincreasingly attempting to contain healthcare costs by limiting both coverageand the level of reimbursement of new drugs. They may also refuse to provideany coverage of uses of approved products for medical indications other thanthose for which the FDA has granted market approvals. 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 have experience in ensuring approval by applicablethird-party payors outside of the United States for reimbursement of ourproducts. The availability of numerous generic antibiotics at lower prices thanbranded antibiotics, can also be expected to substantially reduce thelikelihood of reimbursement for OPT-80 and Prulifloxacin. We also anticipatepricing pressures in connection with the sale of our products due to the trendtoward managed healthcare, the increasing influence of health maintenanceorganizations and additional legislative proposals.

 

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

 

We are subject to various federal and state lawspertaining to healthcare fraud and abuse, including anti-kickback laws andphysician self-referral laws. Violations of these laws are punishable bycriminal and civil sanctions, including, in some instances, exclusion fromparticipation in federal and state healthcare programs, including Medicare andMedicaid, and the curtailment or restructuring of operations. We believe thatour operations are in material compliance with such laws. However, because ofthe far-reaching nature of these laws, there can be no assurance that we wouldnot be required to alter one or more of our practices to be in compliance withthese laws. In addition, there can be no assurance that the occurrence of oneor more violations of these laws or regulations would not result in a materialadverse effect on our financial condition and results of operations.

 

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

 

Our third-party manufacturers’ activities and, to alesser extent, our own activities involve the controlled storage, use anddisposal of hazardous materials, including the components of our productcandidates and other hazardous compounds. We and our manufacturers are subjectto federal, state and local laws and regulations governing the use,manufacture, storage, handling and disposal of these hazardous materials.Although we believe that the safety procedures for handling and disposing ofthese materials comply with the standards prescribed by these laws andregulations, we cannot eliminate the risk of accidental contamination or injuryfrom these materials. We currently have insurance coverage in the amount ofapproximately $250,000 for damage claims arising from contamination on ourproperty. These amounts may not be sufficient to adequately protect us fromliability for damage claims relating to contamination. If we are subject toliability exceeding our insurance coverage amounts, our business and prospects

 

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would be harmed. In the event of an accident, state orfederal authorities may also curtail our use of these materials and interruptour business operations.

 

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

 

Despite the implementation of security measures, ourinternal computer systems are vulnerable to damage from computer viruses,unauthorized access, natural disasters, terrorism, war and telecommunicationand electrical failures. Any system failure, accident or security breach thatcauses interruptions in our operations could result in a material disruption ofour drug development programs. For example, the loss of clinical trialinformation from completed or ongoing clinical trials for OPT-80 orPrulifloxacin, which is maintained by our third-party CRO, could result indelays in our regulatory approval efforts and significantly increase our coststo recover or reproduce the data. To 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**

 

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

 

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

 

The patent positions of pharmaceutical andbiotechnology companies can be highly uncertain and involve complex legal andfactual questions for which important legal principles remain unresolved. Noconsistent policy regarding the breadth of claims allowed in biotechnologypatents has emerged to date in the United States. The biotechnology patentsituation outside the United States is even more uncertain. Changes in eitherthe patent laws or in interpretations of patent laws in the United States andother countries may diminish the value of our intellectual property.Accordingly, we cannot predict the breadth of claims that may be allowed or enforcedin our licensed patents, our patents or in third-party patents.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  our pending patent applications or the pending patentapplications and issued patents of our licensors may not provide us with anycompetitive advantages, may be designed around by our competitors, includinggeneric drug companies, or may be held invalid or unenforceable as a result oflegal challenges by third parties;

 

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

 

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

 

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

 

We have filed 8 patent applications related to OPT-80,one of which has resulted in the issuance of a polymorph patent from the UnitedStates Patent and Trademark Office or PTO. We do not currently have any otherissued patents related to OPT-80.

 

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

 

·                  composition of matter for OPT-80;

 

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

 

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·                  polymorphic forms;

 

·      composition comprising apolymorphic form;

 

·                  manufacturing processes;

 

·                  treatment of diseases;

 

·                  formulation; and

 

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

 

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

 

In addition, assuming our on-going clinical trials aresuccessful and completed in a timely manner, we currently plan to file a NDAfor Prulifloxacin for the treatment of infectious diarrhea in 2009. However,the patent covering Prulifloxacin is scheduled to expire in February 2009,and due to this short remaining patent life we may be forced to abandon plansto pursue development and approval of Prulifloxacin for any indications,including infectious diarrhea. Although we also currently plan to apply for anextension of this patent term up to 2014, we cannot assure you that the U.S.PTO will grant the extension for the full additional five years, or at all. Ineither event, our business and prospects would be significantly harmed.

 

We depend, in part, on our licensors and collaboratorsto protect a portion of our proprietary rights. In such cases, our licensorsand collaborators may be primarily or wholly responsible for the maintenance ofpatents and prosecution of patent applications relating to important areas ofour business. For example, Nippon Shinyaku, SKI, TSRI and Cempra areresponsible for the maintenance of patents and prosecution of patentapplications relating to Prulifloxacin, OPT-822/OPT-821 combination therapy,our OPopS technology, and OPT-1068 also known as CEM-101, respectively. We mayalso be dependent on Par to provide technical support for patent applicationsrelating to OPT-80. If any of these parties fail to adequately protect theseproduct candidates with issued patents, our business and prospects would besignificantly harmed.

 

Under our agreement with Nippon Shinyaku, in the eventNippon Shinyaku fails to take all steps necessary to seek extension of thepatents licensed to us in the United States 180 days after we request suchaction be taken, then we have the right to take all necessary actions to extendthe licensed patents. Our agreements with SKI, TSRI, Cempra 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 of these parties fails to adequatelymaintain patents and prosecute patent applications relating to technologylicensed to

 

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or from us, we may be required to take further actionon our own to protect this technology. However, we may not be successful inmaintaining such patents or prosecuting such patent applications and if so, ourbusiness and prospects would be significantly harmed.

 

We also rely on trade secrets to protect ourtechnology, especially where we do not believe patent protection is appropriateor obtainable. However, trade secrets are difficult to protect. Although we usereasonable efforts to protect our trade secrets, our employees, consultants,contractors, outside scientific collaborators and other advisors mayunintentionally or willfully disclose our information to competitors. Enforcinga claim that a third-party entity illegally obtained and is using any of ourtrade secrets is expensive and time consuming, and the outcome isunpredictable. In addition, courts outside the United States are sometimes lesswilling to protect trade secrets. Moreover, our competitors may independentlydevelop equivalent knowledge, methods and know-how.

 

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

 

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

 

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

 

Furthermore, a third party may claim that we or ourmanufacturing or commercialization partners are using inventions covered by thethird party’s patent rights and may go to court to stop us from engaging in ournormal operations and activities, including making, using or selling ourproduct candidates. These lawsuits are costly and could affect our results ofoperations and divert the attention of managerial and technical personnel.There is a risk that a court would decide that we or our commercializationpartners are infringing the third party’s patents and would order us or ourpartners to stop the activities covered by the patents. In addition, there is arisk that a court will order us or our partners to pay the other party damagesfor having violated the other party’s patents. We have indemnified ourcommercial partners against patent infringement claims and thus would beresponsible for any of their costs associated with such claims and actions. Thebiotechnology industry has produced a proliferation of patents, and it is notalways clear to industry participants, including us, which patents covervarious types of products or methods of use. The coverage of patents is subjectto interpretation by the courts and the interpretation is not always uniform.If we are sued for patent infringement, we would need to demonstrate that ourproducts or methods of use either do not infringe the patent claims of the

 

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relevant patent and/or that the patent claims areinvalid, and we may not be able to do this. Proving invalidity, in particular,is difficult since it requires a showing of clear and convincing evidence toovercome the presumption of validity enjoyed by issued patents.

 

Although we have conducted searches of third-partypatents with respect to OPT-80 and Prulifloxacin, these searches may not haveidentified all third-party patents relevant to those products and we have notconducted an extensive search of patents issued to third parties with respectto our other product candidates. Consequently, no assurance can be given thatthird-party patents containing claims covering our products, technology ormethods do not exist, have not been filed, or could not be filed or issued.Because of the number of patents issued and patent applications filed in ourtechnical areas or fields, we believe there is a risk that third parties mayallege they have patent rights encompassing our products, technology ormethods. In addition, we have not conducted an extensive search of third-partytrademarks, so no assurance can be given that such third-party trademarks donot exist, have not been filed, could not be filed or issued, or could notexist under common trademark law. While we have filed a trademark applicationfor the names “Optimer” and “Optimer Pharmaceuticals,” we are aware that thename “Optimer” has been registered as a trademark with the PTO by more than onethird party, including one in the biotechnology space. As such, we believethere is a significant risk that third parties may allege they have trademarkrights encompassing the names for which we have applied for protection.

 

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

 

Some of our competitors may be able to sustain thecosts of complex patent litigation more effectively than we can because theyhave substantially greater resources. In addition, any uncertainties resultingfrom the initiation and continuation of any litigation could have a materialadverse effect on our ability to raise the funds necessary to continue ouroperations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  the success of our development efforts and clinicaltrials, particularly with respect to OPT-80 and Prulifloxacin;

 

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

 

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

 

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

 

·                  actual or anticipated variations in our quarterlyoperating results;

 

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

 

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

 

·                  third-party coverage or reimbursement policies;

 

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

 

·                  conditions or trends in the biotechnology andbiopharmaceutical industries;

 

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

 

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

 

·                  changes in the market valuations of similar companies;

 

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

 

·                  additions or departures of key scientific ormanagement personnel;

 

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

 

·                  trading volume of our common stock.

 

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

 

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

 

Persons who were our stockholders prior to our initialpublic offering continue to hold a substantial number of shares of our commonstock. Many of these stockholders are now able to sell their shares in thepublic market. Significant portions of these shares are held by a small numberof stockholders. Sales by such stockholders of a substantial number of shares,or the expectation that such sales may occur, could significantly reduce themarket price of our common stock. Moreover, the holders of a substantial numberof shares of our common stock have rights, subject to certain conditions, to requireus to file registration statements to permit the resale of their shares in thepublic market or to include their shares in registration statements that we mayfile for ourselves or other stockholders.

 

We have also registered all common stock that we mayissue under our employee benefits plans. As a result, these shares can befreely sold in the public market upon issuance, subject to any applicablerestrictions under the securities laws. In addition, our directors andexecutive officers may in the future establish programmed selling plans under Rule 10b5-1of the Securities

 

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Exchange Act for the purpose of effecting sales of ourcommon stock. If any of these events cause a large number of our shares to besold in the public market, the sales could reduce the trading price of ourcommon stock and impede our ability to raise future capital.

 

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

 

Our investment securities consist of high-gradeauction rate securities, money market funds, corporate debt securities andgovernment agency securities. At June 30, 2008, weheld two auction rate preferred securities valued at $1.2 million withperpetual maturity dates that reset every 28 days. The recent negative conditions in the global creditmarkets have prevented some investors from liquidating their holdings,including their holdings of auction rate securities. There was insufficientdemand at auction for these two auction rate preferred securities. As a result,these affected securities are currently not liquid, and we could be required tohold them until they are redeemed by the issuer or to maturity. In the event weneed to access the funds that are in an illiquid state, we will not be able todo so without a loss of principal, until a future auction on these investmentsis successful, the securities are redeemed by the issuer or they mature. Atthis time, management has not obtained sufficient evidence to conclude thatthese investments are impaired or that they will not be settled in the shortterm, although the market for these investments is presently uncertain. If thecredit ratings of the security issuers deteriorate and any decline in marketvalue is determined to be other-than-temporary, we would be required to adjustthe carrying value of the investment through an impairment charge.

 

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

 

As a public company, we will continue to incursignificant legal, accounting and other expenses. In addition, theSarbanes-Oxley Act, as well as rules subsequently implemented by theSecurities and Exchange Commission, or SEC, and the Nasdaq Global Market, orNasdaq, impose various requirements on public companies, including requiringestablishment and maintenance of effective disclosure and financial controlsand changes in corporate governance practices. Our management and otherpersonnel need to devote a substantial amount of time to these complianceinitiatives. Moreover, these rules and regulations will increase our legaland financial compliance costs and will make some activities moretime-consuming and costly. For example, these rules and regulations tomake 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.

 

The Sarbanes-Oxley Act requires, among other things,that we maintain effective internal controls for financial reporting anddisclosure controls and procedures. We will be required, this year, to performa system and process evaluation and testing of our internal controls over financialreporting to allow management and our independent registered public accountingfirm to report on the effectiveness of our internal controls over financialreporting, as required by Section 404 of the Sarbanes-Oxley Act. Ourtesting, or the subsequent testing by our independent registered publicaccounting firm, may reveal deficiencies in our internal controls

 

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over financial reporting that are deemed to bematerial weaknesses. Our compliance with Section 404 will require that weincur substantial accounting expense and expend significant management efforts.We currently do not have an internal audit group, and we may need to hireadditional accounting and financial staff with appropriate public companyexperience and technical accounting knowledge. We currently have five****employees dedicated full-time toaccounting and finance matters. In the future we will hire full-time employeesin the accounting and finance department, as necessary, to ensure we haveeffective internal controls over financial reporting and disclosure controlsand procedures. We also hire consultants from time to time to address thesematters. If we are unable to hire adequate accounting and finance personnel, wemay not be able to meet our public company reporting and governanceobligations, including those set forth under the Sarbanes-Oxley Act. Moreover,if we are not able to comply with the requirements of Section 404 in atimely manner, or if we or our independent registered public accounting firmidentifies deficiencies in our internal controls over financial reporting thatare deemed to be material weaknesses, the market price of our stock coulddecline and we could be subject to sanctions or investigations by Nasdaq, theSEC or other regulatory authorities, which would require additional financialand management resources.

 

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

 

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

 

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

 

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

 

·                  limiting the removal of directors by the stockholders;

 

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

 

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

 

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

 

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

 

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These provisions may frustrate or prevent any attemptsby our stockholders to replace or remove our current management by making itmore difficult for stockholders to replace members of our board of directors,which is responsible for appointing the members of our management. In addition,we are subject to Section 203 of the Delaware General Corporation Law,which generally prohibits a Delaware corporation from engaging in any of abroad range of business combinations with a stockholder owning 15% or more ofour outstanding voting stock for a period of three years following the date onwhich the stockholder became an interested stockholder, unless suchtransactions are approved by our board of directors. This provision could havethe effect 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 achange of control transaction could cause the market price of our stock todecline.

 

**ITEM 4.****    ****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Atour annual meeting of stockholders held on May 28, 2008, our stockholdersvoted on two items, the outcome of which is indicated below:

 

1.Our stockholders re-elected Michael N. Chang and Anthony E. Altig, each to holdoffice until the 2011 annual meeting of stockholders and until their respectivesuccessors have been duly elected and qualified. The following votes weretabulated with respect to the election:

 
| **Director Elected** | ** ** | **Number of Shares  Voted For** | ** ** | **Number of Shares Voted  Against or Withheld** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Michael N. Chang          |       | 15,460,390                                     |       | 23,412                                                                   |       |
| Anthony E. Altig          |       | 15,460,390                                     |       | 23,412                                                                   |       |

 

Inaddition, following the annual meeting, the terms of the directorships of MarkAuerbach, Joseph Y. Chang, Martin C. Muenchbach, and Alain B. Schreibercontinued. Dr. Muenchbach subsequently stepped-down as a directoreffective August 1, 2008. Dr. Muenchbach’s departure did not involveany disagreement with Optimer, our management or our Board of Directors.

 

2.Our stockholders ratified the selection of Ernst & Young, LLP as ourindependent auditors for the fiscal year ending December 31, 2008. Thefollowing votes were tabulated with respect to the ratification:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 15,483,459 |       | 342         |       | 0           |       |

 

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**Item 6.****          ****Exhibits**

 
| Exhibit  No. | ** ** | **Description of Document**                                                                                                                                                                                                                                    |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1          | (2)        | Certificate of  Incorporation of Optimer Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                            |
| 3.2          | (4)        | Bylaws of Optimer Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                                |
| 4.1          | (3)        | Common Stock  Certificate of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                          |
| 4.2          | (1)        | Investors’ Rights  Agreement by and among Optimer Pharmaceuticals, Inc. and certain stockholders  of Optimer Pharmaceuticals, Inc. dated November 30, 2005, as amended and  restated.                                                                               |
| 4.3          | (5)        | Registration Rights  Agreement, dated October 23, 2007, by and between Optimer Pharmaceuticals, Inc.  and the purchasers listed on the  signature pages thereto.                                                                                                         |
| 10.1         | (6)        | Common Stock  Purchase Agreement, dated July 18, 2008, by and between Optimer  Pharmaceuticals, Inc. and the purchasers listed on the  signature pages thereto.                                                                                                          |
| 10.2         | (7)        | Common Stock  Purchase Agreement, dated July 24, 2008, by and between Optimer  Pharmaceuticals, Inc. and the purchaser listed on the  signature pages thereto.                                                                                                           |
| 31.1         |       | Certification of  principal executive officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                                        |
| 31.2         |       | Certification of  principal financial officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                              |
| 32           |       | Certification by  the Chief Executive Officer and the Chief Financial Officer of the  Registrant, as required by Rule 13a-14(b) or 15d-14(b) and  Section 1350 of Chapter 63 of Title 18 of the United States  Code (18 U.S.C. 1350). |

 

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

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

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

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

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

(6)                                    Filed with Registrant’s Current Report onForm 8-K on July 21, 2008.

(7)                                    Filed with Registrant’s Current Report onForm 8-K on July 25, 2008.

 

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**SIGNATURE**

 

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

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

 

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