**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM10-Q**

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

 

**Forthe quarterly period ended June 30, 2007**

**or**

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

 

**Forthe transition period from                    to                    **

**CommissionFile Number 001-33291**

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**OPTIMERPHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days:

Yes x      No o

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

Large AcceleratedFiler o           Accelerated Filer o           Non-acceleratedFiler x

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

Yes o      No x

The number of shares ofthe registrant’s Common Stock, no par value, outstanding as of August 1, 2007was 23,139,127 shares.

 

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**OPTIMERPHARMACEUTICALS, INC.FORM 10-QFor the Quarterly Period Ended June 30, 2007**

**TABLEOF CONTENTS**
| **PART I – FINANCIAL INFORMATION**                                                                      |   |
|--------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                         |   |
| Item 1.  Financial Statements (unaudited)                                                               |   |
|                                                                                                         |   |
| Consolidated Balance  Sheets – June 30, 2007 and December 31, 2006                                 |   |
|                                                                                                         |   |
| Consolidated  Statements of Operations – Three months and six months ended June 30, 2007  and 2006 |   |
|                                                                                                         |   |
| Consolidated  Statements of Cash Flows – Six months ended June 30, 2007 and 2006                   |   |
|                                                                                                         |   |
| Notes to  Consolidated Financial Statements                                                                  |   |
|                                                                                                         |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations    |   |
|                                                                                                         |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                     |   |
|                                                                                                         |   |
| Item 4.  Controls and Procedures                                                                        |   |
|                                                                                                         |   |
| **PART II – OTHER  INFORMATION**                                                                        |   |
|                                                                                                         |   |
| Item 1. Risk Factors                                                                                    |   |
|                                                                                                         |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                    |   |
|                                                                                                         |   |
| Item 6. Exhibits                                                                                        |   |
|                                                                                                         |   |
| SIGNATURE                                                                                                    |   |
| EXHIBIT 31.1                                                                                                 |   |
| EXHIBIT 31.2                                                                                                 |   |
| EXHIBIT 32                                                                                                   |   |

 

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**Optimer Pharmaceuticals, Inc.Consolidated Balance Sheets**
| ** **                                                                                                                                                                                                                                                                                                                                                                | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                                                                |       | $                       | 14,795,570 |                        | $          | 6,122,438 |   |
| Short-term  investments                                                                                                                                                                                                                                                                                                                                                   |       | 23,256,272              |       | 15,218,860                  |       |
| Research grant  and contract receivables                                                                                                                                                                                                                                                                                                                                  |       | 49,486                  |       | 163,502                     |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                                                                                                                |       | 693,271                 |       | 1,549,062                   |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                                      |       | 38,794,599              |       | 23,053,862                  |       |
| Property and equipment,  net                                                                                                                                                                                                                                                                                                                                              |       | 779,258                 |       | 744,564                     |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                              |       | 302,257                 |       | 315,490                     |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                              |       | $                       | 39,876,114 |                        | $          | 24,113,916 |   |
| **LIABILITIES, REDEEMABLE  CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                    | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                          |       | $                       | 2,444,033  |                        | $          | 1,753,394 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                                          |       | 5,272,100               |       | 3,310,199                   |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                |       | 7,716,133               |       | 5,063,593                   |       |
| Deferred rent                                                                                                                                                                                                                                                                                                                                                             |       | 288,147                 |       | 292,384                     |       |
| Commitments and  contingencies                                                                                                                                                                                                                                                                                                                                            |       |                    |       |                        |       |
| Redeemable preferred  stock, $0.001 par value:                                                                                                                                                                                                                                                                                                                            |       |                    |       |                        |       |
| Series B  redeemable convertible, no shares and 6,461,439 shares authorized at June 30,  2007 and December 31, 2006, respectively; no shares and 4,132,736 shares  issued and outstanding at June 30, 2007 and December 31, 2006, respectively                                                                                                                            |       | —                  |       | 32,198,929                  |       |
| Series C  redeemable convertible, no shares and 1,615,359 shares authorized at June 30,  2007 and December 31, 2006, respectively; no shares and 1,538,437 shares  outstanding at June 30, 2007 and December 31, 2006, respectively                                                                                                                                       |       | —                  |       | 11,494,052                  |       |
| Series D  redeemable convertible, no shares and 3,923,016 shares authorized at June 30,  2007 and December 31, 2006, respectively; no shares and 2,861,277 shares  issued and outstanding at June 30, 2007 and December 31, 2006, respectively                                                                                                                            |       | —                  |       | 21,766,662                  |       |
| Stockholders’ equity  (deficit):                                                                                                                                                                                                                                                                                                                                     |       |                    |       |                        |       |
| Series A  convertible preferred stock, par value $0.001, no shares and 2,307,656 shares  authorized at June 30, 2007 and December 31, 2006, respectively; no shares  and 1,523,051 shares issued and outstanding at June 30, 2007 and December 31,  2006, respectively; liquidation preference of $0 and $3,300,000 at June 30,  2007 and December 31, 2006, respectively |       | —                  |       | 1,523                       |       |
| Common stock,  $0.001 par value, 75,000,000 shares and 25,384,225 shares authorized at June  30, 2007 and December 31, 2006, respectively; 23,185,280 and 2,704,476 shares  issued and outstanding at June 30, 2007 and December 31, 2006 respectively;  46,153 held in treasury                                                                                          |       | 23,185                  |       | 2,704                       |       |
| Treasury stock,  at cost; 46,153 shares                                                                                                                                                                                                                                                                                                                                   |       | (100,000                | )          | (100,000                    | )          |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                               |       | 116,133,089             |       | 4,997,421                   |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                                                                                     |       | 6,211                   |       | (44,971                     | )          |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                      |       | (84,190,651             | )          | (51,558,381                 | )          |
| Total stockholders’  equity (deficit)                                                                                                                                                                                                                                                                                                                                |       | 31,871,834              |       | (46,701,704                 | )          |
| Total liabilities, redeemable convertible preferred stock and stockholders’  equity (deficit)                                                                                                                                                                                                                                                                        |       | $                  | 39,876,114 |                        | $     | 24,113,916 |   |

 

Seeaccompanying notes.

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**Optimer Pharmaceuticals, Inc**

**ConsolidatedStatements of Operations**

**(unaudited)**
| ** **                                                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Revenues:                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Research grants                                                                                  |       | $                                               | 51,002     |                                          | $          | 178,113 |   | $ | 197,300 |   | $ | 382,172 |   |
| Collaborative research agreements                                                                |       | 160,000                                         |       | 39,163                                        |       | 160,000 |   | 256,326 |   |
| Total revenues                                                                                   |       | 211,002                                         |       | 217,276                                       |       | 357,300 |   | 638,498 |   |
| Operating  expenses:                                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Research and development                                                                         |       | 7,022,093                                       |       | 3,625,701                                     |       | 30,468,360 |   | 5,723,686 |   |
| Marketing                                                                                        |       | 299,071                                         |       | —                                        |       | 851,068 |   | — |   |
| General and administrative                                                                       |       | 1,513,175                                       |       | 672,057                                       |       | 2,607,643 |   | 1,291,176 |   |
| Total operating expenses                                                                         |       | 8,834,339                                       |       | 4,297,758                                     |       | 33,927,071 |   | 7,014,862 |   |
| Loss from  operations                                                                            |       | (8,623,337                                      | )          | (4,080,482                                    | )          | (33,569,771 | ) | (6,376,364 | ) |
| Interest income  and other, net                                                                  |       | 495,280                                         |       | 358,002                                       |       | 937,501 |   | 649,275 |   |
| Net loss                                                                                         |       | (8,128,057                                      | )          | (3,722,480                                    | )          | (32,632,270 | ) | (5,727,089 | ) |
| Accretion to  redemption amount of redeemable convertible preferred stock                        |       | —                                          |       | (82,302                                       | )          | — |   | (164,604 | ) |
| Net loss  allocable to common stockholders                                                       |       | $                                               | (8,128,057 | )                                             | $          | (3,804,782 | ) | $ | (32,632,270 | ) | $ | (5,891,693 | ) |
|                                                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Basic and  diluted net loss per share attributable to common stockholders                        |       | $                                               | (0.35      | )                                             | $          | (1.53 | ) | $ | (1.75 | ) | $ | (2.37 | ) |
|                                                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Shares used to compute  basic and diluted net loss per share attributable to common stockholders |       | 23,136,754                                      |       | 2,517,314                                     |       | 18,613,135 |   | 2,481,765 |   |

 

Seeaccompanying notes.

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**
| ** **                                                                    | ** ** | **Six Months Ended June 30,** | ** **  |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                    | ** ** | **2007**                                          | ** **  | **2006** | ** ** |
|                                                                          |       |                                              |        |   |   |
| **Operating  activities**                                                     | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| Net loss                                                                      |       | $                                                 | (32,632,270 | ) | $ | (5,727,089 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:  |       |                                              |        |   |   |
| Depreciation and amortization                                                 |       | 148,945                                           |        | 272,256 |   |
| Stock based compensation                                                      |       | 607,965                                           |        | 166,870 |   |
| Non-cash compensation related to forgiveness of note  receivable from officer |       | —                                            |        | 37,500 |   |
| Loss on disposal of assets                                                    |       | —                                            |        | 264 |   |
| Deferred rent                                                                 |       | (4,237                                            | )           | 7,459 |   |
| Changes in operating assets and liabilities:                                  |       |                                              |        |   |   |
| Prepaids expenses and other current assets                                    |       | 855,791                                           |        | 38,137 |   |
| Research grant and contract receivables                                       |       | 114,016                                           |        | 191,504 |   |
| Other assets                                                                  |       | 13,233                                            |        | 3,174 |   |
| Accounts payable and accrued expenses                                         |       | 2,652,540                                         |        | 1,014,167 |   |
| Net cash used in  operating activities                                        |       | (28,244,017                                       | )           | (3,995,758 | ) |
|                                                                          |       |                                              |        |   |   |
| **Investing  activities**                                                     | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| Purchases of  short-term investments                                          |       | (39,177,453                                       | )           | (5,133,473 | ) |
| Sales or  maturity of short-term investments                                  |       | 31,160,000                                        |        | — |   |
| Purchase of  property and equipment                                           |       | (183,639                                          | )           | (60,845 | ) |
| Net cash used in  investing activities                                        |       | (8,201,092                                        | )           | (5,194,318 | ) |
|                                                                          |       |                                              |        |   |   |
| **Financing  activities**                                                     | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| Proceeds from  sale of preferred stock, net of issuance costs                 |       | —                                            |        | 86,010 |   |
| Proceeds from  sale of common stock                                           |       | 43,716,750                                        |        | — |   |
| Proceeds from  exercise of warrants                                           |       | 1,370,267                                         |        | — |   |
| Net cash  provided by financing activities                                    |       | 45,087,017                                        |        | 86,010 |   |
| Effect of  exchange rate changes on cash and cash equivalents                 |       | 31,224                                            |        | 11,181 |   |
| Net increase  (decrease) in cash and cash equivalents                         |       | 8,673,132                                         |        | (9,092,885 | ) |
| Cash and cash  equivalents at beginning of period                             |       | 6,122,438                                         |        | 19,943,959 |   |
| Cash and cash  equivalents at end of period                                   |       | $                                                 | 14,795,570  |   | $ | 10,851,074 |   |
|                                                                          |       |                                              |        |   |   |
| **Supplemental  disclosure of cash flow information:**                        | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| Conversion of  redeemable convertible preferred stock to common stock         |       | 65,461,166                                        |        | — |   |

 

See accompanyingnotes.

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**OptimerPharmaceuticals, Inc.**

**Notesto Consolidated Financial Statements**

**(unaudited)**

**1.     Interim Financial Information**

**Organization and BusinessActivities**

Optimer Pharmaceuticals,Inc. (“Optimer” or the “Company”) was incorporated in Delaware onNovember 18, 1998 and has three subsidiaries.  Optimer Biotechnology, Inc. is a wholly ownedsubsidiary of the Company and is incorporated in Taiwan while Optimer SingaporePTE LTD and Optimer Asia PTE LTD are incorporated in Singapore and are whollyowned subsidiaries of Optimer Biotechnology, Inc.  During the year ended December 31, 2006, theCompany ceased operations of Optimer Asia PTE LTD and Optimer Singapore PTE LTDand neither had a material impact on the Company’s consolidated financialstatements.

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

Optimer is subject torisks common to companies in the biotechnology industry including, but notlimited to, risks and uncertainties related to drug discovery, development andcommercialization, obtaining regulatory approval of any products it or itscollaborators may develop, competition from other biotechnology andpharmaceutical companies, its effectiveness at managing its financialresources, difficulties or delays in its clinical trials, difficulties ordelays in manufacturing its clinical trial materials, implementation of itscollaborations, the level of efforts that its collaborative partners devote todevelopment and commercialization of its product candidates, its ability tosuccessfully market and sell any products it develops, the scope and validityof patent protection for its products and proprietary technology, dependence onkey personnel, product liability, litigation, its ability to comply with U.S. Foodand Drug Administration (“FDA”) and other government regulations and itsability to obtain additional funding to support its operations.

***Basis of Presentation***

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments, consisting of normal recurring accruals, considered necessary fora fair presentation of the results of these interim periods have been included.The results of operations for the three months and six months endedJune 30, 2007 are not necessarily indicative of the results that may beexpected for the full year. These unaudited consolidated financial statementsshould be read in conjunction with the audited financial statements and relatednotes thereto included in the Company’s Annual Report on Form 10-K for 

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the fiscal year endedDecember 31, 2006, which was filed with the Securities and ExchangeCommission (“SEC”) on March 30, 2007.

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. Actual results could differmaterially from those estimates.

**2.     Summary of Significant Accounting Policies**

*Cash, Cash Equivalents andShort-Term Investments*

Investments with originalmaturities of less than 90 days at the date of purchase are considered to becash equivalents.  All other investmentsare classified as short-term investments which are deemed by management to beavailable-for-sale and are reported at fair value with net unrealized gains orlosses reported within accumulated other comprehensive loss in the consolidatedbalance sheets.  Realized gains andlosses, and declines in value judged to be other than temporary, are includedin investment income or interest expense. The cost of securities sold iscomputed using the specific identification method.

*Revenue Recognition*

The Company’scollaboration 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.  The Companyapplies the revenue recognition criteria outlined in Staff Accounting Bulletin(“SAB”) No. 104, *Revenue Recognition*and Emerging Issues Task Force (“EITF”) Issue 00-21, *Revenue Arrangements 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 advanceof services being performed is recorded as deferred revenue and recognized asrevenue as services are performed over the applicable term of the agreement.

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

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In connection withcertain research collaboration agreements, revenues are recognized fromnon-refundable upfront fees, which the Company does not believe arespecifically tied to a separate earnings process, ratably over the term of theagreement.  Research fees are recognizedas revenue as the related research activities are performed.

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

None of the payments thatthe Company has received from collaborators to date, whether recognized asrevenue or deferred, are refundable even if the related program is notsuccessful.

*Research and DevelopmentExpenses*

The Company accounts forresearch and development costs in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 2, *Accounting for Researchand Development Costs*.  SFAS 2specifies that research and development costs should be charged to expenseuntil technological feasibility has been established for the product.  Once technological feasibility isestablished, all product costs should be capitalized until the product isavailable for general release to customers. The Company has determined that technological feasibility for itsproduct candidates will be reached when the requisite regulatory approvals areobtained to make the product available for sale, or approval of the new drugapplication (“NDA”) for such product. The Company’s research and development expenses consist primarily oflicense fees, salaries and related employee benefits, costs associated with clinicaltrials managed by the Company’s contract research organizations, or CROs, andcosts associated with non-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.

*Comprehensive Income (Loss)*

The Company has appliedSFAS No. 130, *Reporting ComprehensiveIncome*, which requires that all components of comprehensive income(loss), including net income (loss), be reported in the financial statements inthe period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during aperiod from transactions and other events and circumstances from non-ownersources.  Net income (loss) and othercomprehensive income (loss), including foreign currency translation adjustmentsand unrealized gains and losses on investments, shall be reported, net of theirrelated tax effect, to arrive at comprehensive income (loss).  The Company’s comprehensive loss was $8.1million and $3.7 million for the three 

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months ended June 30,2007 and 2006, respectively. The Company’s comprehensive loss was $32.6 millionand $5.8 million for the six months ended June 30, 2007 and 2006, respectively.

*Net Loss Per ShareAttributable to Common Stockholders*

The Company computes netloss per share in accordance with SFAS No. 128, *Earnings per Share*. Under the provisions of SFAS 128, basicnet loss per common share is computed by dividing net loss by theweighted-average number of common shares outstanding. Diluted net loss percommon share is computed by dividing net loss by the weighted-average number ofcommon shares and dilutive common share equivalents then outstanding. Commonequivalent shares consist of the incremental common shares issuable upon theconversion of preferred stock, and common shares issuable upon the exercise ofstock options and warrants. Since the Company has a net loss for all periodspresented, the effect of all potentially dilutive securities is anti-dilutive.Accordingly, basic and diluted net loss per share is the same.

*Income Taxes*

In July 2006, theFinancial Accounting Standards Board  (“FASB”)issued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109, Accounting forIncome Taxes* (“FIN 48”). FIN 48 creates a single model to addressaccounting for uncertainty in income tax positions. FIN 48 prescribes a minimumthreshold that an income tax position is required to meet before beingrecognized in the financial statements. The interpretation also providesguidance on derecognition and measurement criteria in addition toclassification, interest and penalties and interim period accounting, and itsignificantly expands disclosure provisions for uncertain tax positions thathave been or are expected to be taken in a company’s tax return. FIN 48 iseffective for fiscal years beginning after December 15, 2006 and the Company,accordingly, adopted this statement as of January 1, 2007.

As a result of theadoption of FIN 48, the Company has not recorded any change to accumulateddeficit at January 1, 2007.  At June 30,2007 the Company had no unrecognized tax benefits or liabilities that, ifrecognized, would affect the Company’s effective income tax rate in futureperiods. The Company’s continuing practice is to recognize interest and/orpenalties related to income tax matters in income tax expense. The Company hadno accrued interest or penalties at January 1, 2007 and no accrued interest orpenalties at June 30, 2007.

The Company has completed an analysis to assesswhether a change in control has occurred and whether there have been multiplechanges of control since the Company’s formation.  It was determined that a greater than 50%change in ownership occurred on May 9, 2001, which might limit the futureutilization of the Company’s net operating loss (“NOL”) and research anddevelopment (“R&D”) credits incurred prior to that date.  No subsequent change in ownership hasoccurred.  If the Company experienced agreater than 50 percentage point change or shift in ownership over a 3-year timeframe since its formation, utilization of its NOL or R&D credit carryforwardswould be subject to an annual limitation under Sections 382 and 383.  The annual limitation generally is determinedby multiplying the value of the Company’s stock at the time of the ownershipchange (subject to certain adjustments) by the applicable long-term tax-exemptrate.  Any limitation may result inexpiration of a portion of the NOL or R&D credit 

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carryforwards before utilization. The Company has notdone a formal calculation of the limitation related to the May 9, 2001ownership change.  As such, no amountsare being presented as an uncertain tax position under FIN 48.

*Recent AccountingPronouncements*

In September 2006, theFASB issued FASB Statement No. 157, “*Fair Value Measurements*”(“SFAS 157”), which defines fair value, establishes a framework formeasuring fair value under generally accepted accounting principles, andexpands disclosures about fair value measurements.  SFAS 157 applies to other accountingpronouncements that require or permit fair value measurements.  The new guidance is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andfor interim periods within those fiscal years. The Company is currently evaluating the requirements of SFAS 157,if any, on its consolidated financial statements.

In February 2007, theFASB issued SFAS No. 159 (“SFAS 159”), *TheFair Value Option for Financial Assets and Liabilities.* SFAS 159permits entities to choose to measure many financial instruments and certainother items at fair value. SFAS 159 will be effective for our fiscal yearbeginning after November 15, 2007. Early adoption is permitted. We have notdetermined the impact, if any, that adopting this standard may have on ourfinancial position, cash flows, and results of operations.

***3.     ReverseStock Split***

The Company’s board ofdirectors and stockholders authorized a 1-for-2.1667 reverse stocksplit in December 2006 and January 2007, respectively, for all outstandingpreferred and common shares.  All shareinformation has been retroactively restated to reflect the reverse stock split.

**4.     Initial Public Offering**

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

**5.****              Short-TermInvestments**

The following is asummary of the Company’s investment securities, all of which are classified asavailable-for-sale and all of which are due within one year by contractualmaturity with the exception of the other securities which are taxable auction ratesecurities.  Determination of estimatedfair value is based upon quoted market prices.

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| ** **                                        | ** ** | **June 30, 2007**    | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **Gross  Amortized Cost** | ** ** | **Gross  Unrealized Gains** | ** ** | **Gross  Unrealized Losses** | ** ** | **Market Value** | ** ** |
| Certificates of  deposits                         |       | $                              | 2,401, 359 |   | $ | — |   | $ | (1,806 | ) | $ | 2,399,553 |   |
| Commercial paper                                  |       | 998,670                        |       | — |   | (770 | ) | 997,900 |   |
| Corporate debt  securities                        |       | 7,789,966                      |       | 28 |   | (10,558 | ) | 7,779,436 |   |
| Foreign debt  securities                          |       | 1,788,402                      |       | — |   | (3,840 | ) | 1,784,562 |   |
| U.S. securities  and other government obligations |       | 3,502,318                      |       | — |   | (7,497 | ) | 3,494,821 |   |
| Other securities                                  |       | 6,800,000                      |       | — |   | — |   | 6,800,000 |   |
|                                              |       | $                              | 23,280,715 |   | $ | 28 |   | $ | (24,471 | ) | $ | 23,256,272 |   |

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

 

Investments in anet unrealized loss position as of June 30, 2007 are as follows:
| ** **                                        | ** ** | ** **                      | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **Number of  Investments** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Certificates of  deposits                         |       | 4                               |       | $                                                                         | 2,399,553  |                                                                         | $          | (1,806                               | )          | $ | — |   | $ | — |   | $ | 2,399,553 |   | $ | (1,806 | ) |
| Commercial paper                                  |       | 1                               |       | 997,900                                                                   |       | (770                                                                         | )          | —                               |       | — |   | 997,900 |   | (770 | ) |
| Corporate debt  securities                        |       | 10                              |       | 6,655,989                                                                 |       | (10,558                                                                      | )          | —                               |       | — |   | 6,655,989 |   | (10,558 | ) |
| Foreign debt  securities                          |       | 2                               |       | 1,784,562                                                                 |       | (3,840                                                                       | )          | —                               |       | — |   | 1,784,562 |   | (3,840 | ) |
| U.S. securities  and other government obligations |       | 3                               |       | 3,494,821                                                                 |       | (7,497                                                                       | )          | —                               |       | — |   | 3,494,821 |   | (7,497 | ) |
|                                              |       | 20                              |       | $                                                                         | 15,332,825 |                                                                         | $          | (24,471                              | )          | $ | — |   | $ | — |   | $ | 15,332,825 |   | $ | (24,471 | ) |

 

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

**6.****              Stock BasedCompensation**

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

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SFAS 123(R), theCompany is required to include an estimate of the value of the awards that willbe forfeited in calculating compensation costs, which is recognized over therequisite service period of the awards on a straight-line basis.

The Black-Scholesoption-pricing model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fullytransferable.  In addition, theBlack-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected stock price volatility.  The following table shows the assumptionsused to compute stock-based compensation expense for the stock options grantedduring the three months and six months ended June 30, 2007 and 2006, using theBlack-Scholes option pricing model:
| ** **                        | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Risk-free  interest rate          |       | 4.72-4.80                                     | %          | 4.80 | % |
| Dividend yield                    |       | 0.00                                          | %          | 0.00 | % |
| Expected life of  options (years) |       | 6.08                                          |       | 6.08 |   |
| Volatility                        |       | 60.92-65.82                                   | %          | 65.82 | % |

 

The risk-free interestrate assumption was based on the United States Treasury’s rates for U.S.Treasury zero-coupon bonds with maturities similar to those of the expectedterm of the award being valued.  Theassumed dividend yield was based on the Company’s expectation of not payingdividends in the foreseeable future.  Theweighted average expected life of options was calculated using the simplifiedmethod as prescribed SAB No. 107, *Share-Based Payment*(“SAB 107”).  This decision wasbased on the lack of relevant historical data due to the Company’s limitedhistory.  In addition, due to the Company’slimited historical data, the estimated volatility also reflects the applicationof SAB 107, incorporating the historical volatility of comparablecompanies whose share prices are publicly available.

Based on theseassumptions, the per share weighted-average grant-date fair values of stockoptions granted during the****three monthsand six months ended June 30, 2007 was $9.62****pershare and $9.20 per share, respectively.

At June 30, 2007, thetotal unrecognized compensation expense related to non-vested stock options wasapproximately $2,867,240 and the related weighted-average period over which itis expected to be recognized is approximately 2.9 years.

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Total stock-basedcompensation expense, related to all of the Company’s stock-based optionsgranted, recognized for the three months and six months ended June 30, 2007 and2006 was comprised as follows:
| ** **                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and  development         |       | $                                               | 78,665     |                                          | $          | 77,927 |   | $ | 139,613 |   | $ | 142,031 |   |
| Marketing                         |       | 56,838                                          |       | —                                        |       | 110,144 |   | — |   |
| General and  administrative       |       | 227,195                                         |       | 12,473                                        |       | 358,208 |   | 24,839 |   |
| Stock-based  compensation expense |       | $                                               | 362,698    |                                          | $          | 90,400 |   | $ | 607,965 |   | $ | 166,870 |   |

 

No related tax benefitsof the stock-based compensation expense have been recognized since theinception of the Company.

**7.     Collaboration Agreement**

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

In February 2007,the Company elected to terminate the collaboration agreement with Par, andexercised the rights under the prospective buy-back agreement to repurchase Par’sright to develop and commercialize OPT-80 in North America and Israel.  The Company paid Par a one-time $20.0 milliontermination fee and recorded the payment as research and developmentexpense.  The Company now holds worldwiderights to OPT-80. The Company is also obligated to pay Par a one-time $5.0million milestone payment, an accrued expense for a payment due to Par ofapproximately $1.9 million for OPT-80 clinical supply material and activepharmaceutical ingredient, a 5% royalty on net sales by the Company, itsaffiliates or its licensees of OPT-80 in North America and Israel, and a 1.5%royalty on net sales by the Company or its affiliates of OPT-80 in the rest ofthe world.  In addition, the Companyassumed Par’s obligation to make a potential prepayment to Biocon Limited, orBiocon, subject to future set offs as a result of such assumption andassignment, pursuant to Par’s agreement with Biocon.  The one-time $5.0 million milestone paymentmust be paid after the earliest to occur of (i) the successful completionby the Company of its pivotal Phase 3 trial for OPT-80, (ii) theCompany’s grant to a third party of the rights to OPT-80 or (iii) the submissionto the FDA of an NDA for OPT-80.  Inaddition, in the event the Company licenses its right to market OPT-80 in therest of the world, the Company will be required to pay Par a 6.25% royalty onnet revenues received by it related to OPT-80. The Company is obligated to pay each of these royalties, if any, on acountry-by-country 

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basis for seven yearscommencing on the applicable commercial launch in each such country.

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

*Stock Options*

In November 1998, theCompany adopted the 1998 Stock Plan (the “1998 Plan”).  Upon the completion of the Company’s initialpublic offering in February 2007, the 1998 Plan was terminated and noadditional grants will be issued from this plan. In December 2006, the Company’sboard of directors approved the 2006 Equity Incentive Plan (the “2006 Plan”).  The 2006 Plan provides for the grant ofincentive stock options, within the meaning of Section 422 of the InternalRevenue Code of 1986, as amended, to the Company’s employees and any parent andsubsidiary corporations’ employees, and for the grant of nonstatutory stockoptions, restricted stock, restricted stock units, stock appreciation rights,performance units and performance shares to the Company’s employees, directorsand consultants and any parent and subsidiary corporations’ employees andconsultants. The Company has reserved a total of 2,000,000 shares of its commonstock for issuance pursuant to the 2006 Plan. In addition, the 2006 Plan provides for annual increases in the numberof shares available for issuance thereunder on the first day of each fiscalyear, beginning with the Company’s 2008 fiscal year, equal to the lesser of (i)5% of the outstanding shares of the Company’s common stock on the last day ofthe immediately preceding fiscal year; (ii) 750,000 shares; or (iii) such otheramount as the board of directors may determine. Under the 2006 Plan, theexercise price of options granted must at least be equal to the fair marketvalue of the Company’s common stock on the date of grant.  The term of an incentive stock option may notexceed ten years from the date of grant (five years for a 10%stockholder).  Options generally vestover a period of four years.  The 2006Plan is administered by the compensation committee of the Company’s board ofdirectors.

Following is asummary of stock option activity for the six months ended June 30, 2007:
| ** **                            | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-------------|------------|---------------------------------------------|------------|
| Balance as of  December 31, 2006 |       | 1,496,945   |       | $                                           | 1.17       |   |
| Granted                               |       | 243,253     |       | $                                           | 9.20       |   |
| Exercised                             |       | (104,213    | )          | $                                           | 0.92       |   |
| Canceled                              |       | (600        | )          | $                                           | 9.70       |   |
| Balance as of June 30,  2007          |       | 1,635,385   |       | $                                           | 2.37       |   |

 

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As of June 30, 2007,options were outstanding under the 1998 Plan and the 2006 Plan as follows:
| ** **                | ** ** | **June 30, 2007**  | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
| **Exercise   Price** | ** ** | **Number  Outstanding**      | ** ** | **Weighted Average  Remaining  Contractual  Life (in years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.22 - $0.22             |       | 67,690                       |       | 3.53 |   | $ | 0.22 |   | 67,690 |   | $ | 0.22 |   |
| $0.65 - $0.65             |       | 409,596                      |       | 4.49 |   | $ | 0.65 |   | 409,596 |   | $ | 0.65 |   |
| $1.08 - $1.08             |       | 567,969                      |       | 7.70 |   | $ | 1.08 |   | 360,464 |   | $ | 1.08 |   |
| $2.17 - $2.17             |       | 363,630                      |       | 9.08 |   | $ | 2.17 |   | 67,386 |   | $ | 2.17 |   |
| $9.27 - $10.00            |       | 226,500                      |       | 9.76 |   | $ | 9.70 |   | — |   | $ | — |   |
| $0.22 - $10.00            |       | 1,635,385                    |       | 7.31 |   | $ | 2.37 |   | 905,136 |   | $ | 0.90 |   |

 

Of the optionsoutstanding, options to purchase 905,136 shares were vested as of June 30,2007, with a weighted average remaining contractual life of 6.0 years and aweighted average exercise price of $0.90 per share, while options to purchase730,249 shares were unvested.

*Employee Stock Purchase Plan*

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

The offering date of the purchase plan was February15, 2007 and the first purchase is scheduled to occur on November 15,2007.  During the quarter ended June 30,2007, there were no shares of common stock issued and 200,000 shares remainedavailable for issuance under the purchase plan.

During the six months ended June 30, 2007, the Companyrecorded stock-based compensation expense of approximately $30,183 related tothe purchase plan.

*Warrants*

In connection with theCompany’s building lease agreement signed in 2000, the Company issued a warrantto purchase 13,845 shares of common stock at a purchase price of $10.83 per share,which expires June 2010.  The estimatedfair value of the warrant at the date of grant was not material using theBlack-Scholes valuation model. As of June 30, 2007, no shares have been issuedpursuant to this warrant.

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

*The following discussion andanalysis should be read in conjunction with our consolidated financialstatements and accompanying notes appearing elsewhere in this report.  This discussion and other parts of thisreport may contain forward-looking statements based upon current expectationsthat involve risks and uncertainties. Our actual results and the timing of selected events could differmaterially from those anticipated in these forward-looking statements as aresult of several factors, including those set forth under “Risk Factors” andelsewhere in this report.*

**Overview**

We are abiopharmaceutical company focused on discovering, developing andcommercializing innovative anti-infective products.  Our initial development efforts addressproducts that treat gastrointestinal infections and related diseases wherecurrent therapies have limitations, including diminished efficacy, seriousadverse side effects, drug-to-drug interactions, difficult patient complianceand bacterial resistance.

We currently have twolate-stage anti-infective product candidates, OPT-80 and Prulifloxacin.  OPT-80, our lead product candidate, is anantibiotic currently in a Phase 3 registration trial for the treatment of *Clostridium difficile*-associated diarrhea, or CDAD, the mostcommon nosocomial diarrhea.  In April2005, we entered into a collaboration agreement with Par pursuant to which weand Par, exclusively collaborated in the clinical development andcommercialization of OPT-80.  In February2007, we elected to terminate the collaboration agreement with Par, exercisedour right under a prospective buy-back agreement to repurchase Par’s rights todevelop and commercialize OPT-80 in North America and Israel and paid Par aone-time $20.0 million termination fee. As a result, we now hold worldwiderights to OPT-80.  The FDA has grantedFast Track status for OPT-80 in the treatment of CDAD.  Fast Track designation indicates that OPT-80has the potential to treat life-threatening diseases with unmet medicalneeds.  OPT-80 was also chosen to be theonly investigational new drug in the Continuous Marketing Applications, or CMA,Pilot 2 Program in the Division of Anti-Infective and OphthalmologyProducts.  The CMA designation offersseveral potential benefits, including a program of continuous FDA feedbackdesigned to streamline the development process. Participation in these programs will not eliminate any phase of clinicaldevelopment.  Prulifloxacin is anantibiotic currently in two Phase 3 trials for the treatment of infectiousdiarrhea, including travelers’ diarrhea, a community-acquired infection whichcan be caused by a broad range of bacteria. We will seek a label for Prulifloxacin for the treatment of infectiousdiarrhea and initially plan to focus commercialization efforts on the treatmentof travelers’ diarrhea.  Prulifloxacin isa prodrug in the fluoroquinolone class of antibiotics, a widely-used class ofbroad-spectrum antibiotics.   We aredeveloping additional product candidates using our proprietary technology,including our OPopS drug discovery platform.

We were incorporated inNovember 1998.  Since inception, we havefocused on hiring our management team and initial operating employees and ondeveloping our product candidates, including OPT-80 and Prulifloxacin.  We have never been profitable and haveincurred significant net losses since our inception.  As of June 30, 2007, we had an accumulateddeficit of 

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$84.2 million.  These losses have resulted principally fromcosts incurred in connection with research and development activities,including the costs of clinical trial activities associated with our currentlead product candidates, license fees and general and administrative expenses.  We expect to continue to incur operatinglosses for the next several years as we pursue the clinical development andcommercialization of our product candidates, as well as acquire or in-licenseadditional products or product candidates, technologies or businesses that arecomplementary to our own.

**Critical Accounting Policies**

Our Management’sDiscussion and Analysis of our Financial Condition and Results of Operations isbased on our consolidated financial statements, which have been prepared inconformity with generally accepted accounting principles in the UnitedStates.  The preparation of theseconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, expenses and relateddisclosures.  Actual results could differfrom those estimates. While our significant accounting policies are describedin more detail in Note 2 of the Notes to Consolidated Financial Statementsappearing elsewhere in this report, we believe the following accountingpolicies to be critical to the judgments and estimates used in the preparationof our consolidated financial statements.

*Revenue Recognition*

Our collaborationagreements contain multiple elements, including non-refundable upfront fees,payments for reimbursement of third-party research costs, payments for ongoingresearch, payments associated with achieving specific development milestonesand royalties based on specified percentages of net product sales, if any.  We apply the revenue recognition criteriaoutlined in Staff Accounting Bulletin (“SAB”) No. 104, *Revenue Recognition* and Emerging Issues Task Force, or EITF,Issue 00-21, *Revenue Arrangements withMultiple Deliverables*, or EITF 00-21.  In applying these revenue recognitioncriteria, we consider a variety of factors in determining the appropriatemethod of revenue recognition under these arrangements, such as whether theelements are separable, whether there are determinable fair values and whetherthere is a unique earnings process associated with each element of a contract.Cash received in advance of services being performed is recorded as deferredrevenue and recognized as revenue as services are performed over the applicableterm of the agreement.

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

In connection withcertain research collaboration agreements, revenues are recognized fromnon-refundable upfront fees, which we do not believe are specifically tied to aseparate earnings process, ratably over the term of the agreement or the periodover which we have significant 

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involvement or performservices.  Research fees are recognizedas revenue as the related research activities are performed.

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

None of the payments thatwe have received from collaborators to date, whether recognized as revenue ordeferred, are refundable even if the related program is not successful.

*Accrued Clinical Trial Costs*

A substantial portion ofour on-going research and development activities are performed underagreements we enter into with external service providers, including CROs, whoconduct many of our research 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 to significantly expand the levelof research and development activity to be performed by external serviceproviders and our estimated accruals will be more material to our futureoperations.  Subsequent changes inestimates may result in a material change in our accruals, which could alsomaterially affect our results of operations.

*Stock-Based Compensation*

Effective January 1,2006, we adopted SFAS 123(R), *Share-Based Payment*,which revises SFAS 123, *Accounting for Stock-BasedCompensation* and supersedes APB Opinion 25, *Accounting for Stock Issued to Employees*.  SFAS 123(R) requires that share-based paymenttransactions with employees be recognized in the financial statements based ontheir fair value and recognized as compensation expense over the vestingperiod.  Prior to SFAS 123(R), wedisclosed the pro forma effects of applying SFAS 123 under the Black-Scholesmethod.  We adopted SFAS 123(R) effectiveJanuary 1, 2006, prospectively for new equity awards issued subsequent toDecember 31, 2005. Under SFAS 123(R), we calculate the fair value of stockoption grants using the Black-Scholes option-pricing model.  The assumptions used in the Black-Scholesmodel were 6.1 years for the expected term, 60.9%-65.8% for the expectedvolatility, 4.7%-4.8% for the risk free rate and 0.0% for dividend yield forthe six months ended June 30, 2007. Future expense amounts for any particular quarterly or annual periodcould be affected by changes in our assumptions.

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The weighted averageexpected option term for 2007 reflects the application of the simplified methodset out in SAB No. 107 which was issued in March 2005.  The simplified method defines the life as theaverage of the contractual term of the options and the weighted average vestingperiod for all option tranches.

Estimated volatility forfiscal 2007 also reflects the application of SAB No. 107 interpretiveguidance and, accordingly, incorporates historical volatility of similar publicentities.

As of June 30, 2007, wehad approximately $2.9 million of unrecognized stock-based compensation costsrelated to non-vested equity awards.  Asof June 30, 2007, we had outstanding vested options to purchase 905,136 sharesof our common stock and unvested options to purchase 730,249 shares of ourcommon stock.

Equity instruments issuedto non-employees are recorded at their fair value as determined in accordancewith SFAS 123(R) and EITF 96-18, *Accounting for EquityInstruments That are Issued to Other Than Employees for Acquiring, or inConjunction with Selling Goods and Services*, and are periodicallyrevalued as the equity instruments vest and are recognized as expense over therelated service period.

**Results of Operations**

***Three Months Ended June 30, 2007 and 2006***

*Collaboration and Grant Revenues*.  Collaboration and grant revenues of $211,000for the three months ended June 30, 2007 was relatively consistent with the$217,000 for the three months ended June 30, 2006.

*Research and Development Expense*.  Research and development expense for thethree months ended June 30, 2007 and 2006 was $7.0 million and $3.6 million,respectively.  The increase of $3.4million is primarily due to the progress on our OPT-80 and Prulifloxacinclinical trials.  In addition, weexpensed $1.9 million of OPT-80 clinical supply material and activepharmaceutical ingredient from Par for the OPT-80 clinical study.

*Marketing. *The Company incurred$299,000 of marketing expense in the three months ended June 30, 2007 and nosuch expense in the three months ended June 30, 2006.  The expenses in three months ended June 30,2007 were related to salaries and pre-launch activities which include medicaleducation, scientific conferences and public relations services.

*General and AdministrativeExpense*.  General andadministrative expense for the three months ended June 30, 2007 and 2006 was$1.5 million and $672,000, respectively. The increase of $841,000 was due to higher legal expenses, patentsservices, insurance and compensation expenses, including a $215,000 increase instock compensation expense.

*Interest Income and Other, net*.  Net interest income and other for the threemonths ended June 30, 2007 and 2006 was $495,000 and $358,000,respectively.  The increase was primarilydue to higher cash and short-term investment balances as a result of theinitial public offering which closed on February 14, 2007.

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***SixMonths Ended June 30, 2007 and 2006***

*Collaboration and Grant Revenues*.  Collaboration and grant revenues for the sixmonths ended June 30, 2007 and 2006 were $357,000 and $638,000,respectively.  The decrease of $281,000,or 44%, was due to a decrease in revenue from a National Institute of Healthgrant and the conclusion of a development and license agreement.

*Research and Development Expense*.  Research and development expense for the sixmonths ended June 30, 2007 and 2006 was $30.5 million and $5.7 million,respectively.  The increase of $24.8million was due primarily to the $20.0 million payment to Par to reacquire theNorth American rights to OPT-80, the advancement of our OPT-80 andPrulifloxacin clinical trials, including the May 2007 initiation of thesecond pivotal Phase 3 trial for OPT-80 and the purchase of $1.9 millionof OPT-80 clinical supply material and active pharmaceutical ingredient for theOPT-80 clinical study.

*Marketing. *We incurred $851,000 ofmarketing expense in the six months ended June 30, 2007 and no such expense inthe six months ended June 30, 2006.  Theexpenses in the six months ended June 30, 2007 were related to salaries andpre-launch activities which include medical education, scientific conferences,and public relations services.

*General and AdministrativeExpense*.  General andadministrative expense for the six months ended June 30, 2007 and 2006 was $2.6million and $1.3 million, respectively. The increase of $1.3 million was due to higher legal expenses, insuranceand compensation expenses, including a $333,000 increase in stock compensationexpense.

*Interest Income and Other, net*.  Net interest income and other for the sixmonths ended June 30, 2007 and 2006 were $938,000 and $649,000, respectively.  The increase was primarily due to higher cashand short-term investment balances as a result of the initial public offeringwhich closed on February 14, 2007.

**Liquidity and Capital Resources**

*Sources of Liquidity*

Since inception,our operations have been financed primarily through the sale of equitysecurities.  Through June 30, 2007, wereceived gross proceeds of approximately $118.9 million from the sale of sharesof our preferred and common stock as follows:

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

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

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

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·                  from April 2005 to November 2005, we sold atotal of 2.9 million shares of Series D preferred stock for proceeds of$22.3 million.

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

Until required foroperations, we have invested a substantial portion of our available funds inmoney market funds, corporate debt securities, United States governmentinstruments and other readily marketable debt instruments, all of which areinvestment-grade quality.  We haveestablished guidelines relating to diversification and maturities of ourinvestments to preserve principal and maintain liquidity.

*Cash Flows*

As of June 30, 2007,cash, cash equivalents and short-term investments totaled approximately $38.1million as compared to $21.3 million as of December 31, 2006, an increaseof approximately $16.7 million.  We raised$43.6 million in net proceeds from our initial public offering which closed onFebruary 14, 2007.  We paid Par $20.0million of the net proceeds to reacquire the North American rights to OPT-80.

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

In April 2005, we enteredinto a collaboration agreement with Par pursuant to which we and Parexclusively collaborated to develop and commercialize OPT-80.  We had granted to Par an exclusiveroyalty-bearing license, with the right to sublicense, promote, market,distribute and sell OPT-80 in a territory composed of the United States, Canadaand Puerto Rico, with an option to extend the territory to include Israel.  We retained all other rights to OPT-80 in therest of the world.  In January 2007, weentered into a prospective buy-back agreement with Par which provided us withan option to terminate the collaboration and repurchase the rights to developand commercialize OPT-80 in North America and Israel.

In February 2007, weelected to terminate the collaboration agreement pursuant to the prospectivebuy-back agreement with Par and we repurchased the rights to develop andcommercialize OPT-80 in North America and Israel.  We now hold worldwide rights to OPT-80.  Under the terms of the prospective buy-backagreement, we paid Par a one-time $20.0 million termination fee and we are alsoobligated to pay Par a one-time $5.0 million milestone payment, a 5% royalty onnet sales by us or our affiliates of OPT-80 in North America and Israel, and a1.5% royalty on net sales by us or our affiliates of OPT-80 in the rest of theworld.  In addition, in the event welicense our right to market OPT-80 in the rest of the world, we will berequired to pay Par a 6.25% royalty on net revenues we receive related toOPT-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**.**

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In connection with theexercise of our rights under the prospective buy-back agreement, Par assignedto us a supply agreement with Biocon regarding the active pharmaceuticalingredient, or API, for OPT-80.  Underthis agreement, Biocon shall supply to us our requirements of API for certainmarkets.  We may elect to pay to Biocon a$3.0 million prepayment for capital investments made by Biocon, which would besubject to set-offs against future purchases by us of the API for OPT-80.  The supply agreement will terminate upon thetenth anniversary of the commercial launch of OPT-80 unless earlier terminatedby mutual agreement or material default of either party.

*Funding Requirements*

Our future capitaluses and requirements depend on numerous factors including, but not limited to,the following:

·                  the progress of our clinicaltrials, including expenses to support the trials and the milestone payment thatmay become payable to Par and Nippon Shinyaku Co., Ltd.;

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

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

·                  the costs and timing ofregulatory approvals;

·                  the costs of establishingsales or distribution capabilities;

·                  the success of thecommercialization of our products; and

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

We believe that ourexisting cash and cash equivalents will be sufficient to meet our capitalrequirements for at least the next 12 months.

Until we can generatesignificant cash from our operations, we expect to continue to fund ouroperations with existing cash resources that were primarily generated from theproceeds of offerings of our equity securities and collaborations andgovernment grants.  In addition, we mayfinance future cash needs through the sale of additional equity securities,strategic collaboration agreements and debt financing.  However, we may not be successful in enteringinto additional collaboration agreements, in receiving milestone or royaltypayments under new or existing collaboration agreements, in obtaining newgovernment grants or in obtaining debt financing.  In addition, we cannot be sure that ourexisting cash and investment resources will be adequate, that financing will beavailable when needed or that, if available, financing will be obtained onterms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale-back oreliminate some or all of our development programs, relinquish some or even allof our rights to product candidates at an earlier stage of development orrenegotiate less favorable terms than we would otherwise choose.  Failure to obtain adequate financing also mayadversely affect 

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our ability to operate asa going concern.  If we raise funds byissuing equity securities, substantial dilution to existing stockholders wouldlikely result.  If we raise funds byincurring additional debt financing, the terms of the debt may involvesignificant cash payment obligations as well as covenants and specific financialratios that may restrict our ability to operate our business.

**Contractual Obligations**

The followingtable describes our long-term contractual obligations and commitments as ofJune 30, 2007:
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-2 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| ** **                  | ** ** | **(in thousands)**                   | ** ** |
| Operating lease  obligation |       | $                                         | 3,271      |   | $ | 775 |   | $ | 1,528 |   | $ | 968 |   | $ | — |   |
|                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We have contracted with aCRO for clinical research services for the OPT-80 Phase 3 clinical trialsand Prulifloxacin Phase 3 clinical trials. As of June 30, 2007, we had issued purchase orders totaling $24.2million for these services and expect to issue an additional purchase order forapproximately $9.4 million for increasing the level of services on the OPT-80trials.  We can terminate the serviceagreement at any time upon 60 days’ written notice to the CRO.  We have not included any amounts related tothe CRO contract in the table above.

The contractualobligations table does not include (a) a potential future milestonepayment in the amount of $1.0 million to Nippon Shinyaku Co., Ltd. (“NipponShinyaku”)due upon filing our first  NDAin the United States for Prulifloxacin, (b) potential future milestonepayments to Cempra Pharmaceuticals, Inc. in the amount of $1.0 million due uponthe regulatory approval of each of the first two products we develop under ourlicensing agreement with Cempra in any country which is a member of theAssociation of Southeast Asian Nations, or ASEAN, (c) potential futuremilestone payments to Sloan-Lettering Institute for Cancer Research (“SKI”) foreach product licensed under our agreement with SKI as follows:(i) $500,000 upon the commencement of Phase 3 clinical studies,(ii) $750,000 upon the filing of the first NDA, (iii) $1.5 millionupon marketing approval in the United States and (iv) $1.0 million uponmarketing approval in each and any of Japan and certain European countries,(d) potential future milestone payments of up to $14.0 million to TheScripps Research Institute (“TSRI”) due upon achievement of certain clinicalmilestones, the filing of NDAs or their foreign equivalents and governmentmarketing and distribution approval, (e) a future $5.0 million milestonepayment and an accrued expense of approximately $1.9 million for a payment toPar for OPT-80 clinical supply material and active pharmaceutical ingredient or(f) a potential $3.0 million prepayment to Biocon, subject to futureset-offs, from the assignment by Par to us of its supply agreement withBiocon.  We may also be required to payroyalties on any net sales of Prulifloxacin, OPT-80 and other licensed productcandidates.  The milestone and royaltypayments under our license agreements are not included in the table abovebecause we cannot, at this time, determine when or if the related milestoneswill be achieved or the events triggering the commencement of paymentobligations will occur.

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**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

Our cash and cashequivalents and short-term investments as of June 30, 2007 consisted primarilyof money market funds, corporate debt securities, United States governmentinstruments and other readily marketable debt instruments.  Our primary exposure to market risk isinterest income sensitivity, which is affected by changes in the general levelof U.S. interest rates.  The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk.  Ahypothetical ten percent change in interest rates during the quarter endedJune 30, 2007 would have resulted in approximately a $52,000 change in netloss. Accordingly, we would not expect our operating results or cash flowsto be affected to any significant degree by the effect of a sudden change inmarket interest rates applicable to our securities portfolio.  In general, money market funds are notsubject to market risk because the interest paid on such funds fluctuates withthe prevailing interest rate.

**Item4. Controls and Procedures**

As ofthe end of the period covered by this report, an evaluation was performed underthe supervision and with the participation of our management, including ourchief executive officer and chief financial officer whom we refer to as ourcertifying officers, of the effectiveness of the design and operation of ourdisclosure controls and procedures. Based on their evaluation, our certifyingofficers concluded that as of the end of the period covered by this reportthese disclosure controls and procedures are effective in providing reasonable assurancethat the information required to be disclosed by us in our periodic reportsfiled with the Securities and Exchange Commission, or SEC, is recorded,processed, summarized and reported within the time periods specified by the SEC’srules and SEC reports.

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 three months ended June 30, 2007, that ourcertifying officers concluded materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II – OTHER INFORMATION**

**Item 1A.Risk Factors**

**Risks Related to Our Business**

**We are a company with limitedsources of revenue, and we are largely dependent on the success of our leadproduct candidate OPT-80 and, to a lesser degree, our other lead productcandidate Prulifloxacin.**

We are abiopharmaceutical company with no products approved for commercial sale and, todate, we have not generated any revenues from product sales.  Our ability to generate future revenuesdepends heavily on our success in:

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

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

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

Our product candidateswill require extensive additional clinical study and evaluation, regulatoryapproval in multiple jurisdictions, substantial investment and significantmarketing efforts before we generate any revenues from product sales.  We are not permitted to market or promote ourproduct candidates before we receive regulatory approval from the FDA orcomparable foreign regulatory authorities. We have not submitted an NDA, or received marketing approval for eitherOPT-80 or Prulifloxacin, and we cannot be certain that either of these productcandidates will be successful in clinical trials or receive regulatoryapproval.  If we do not receiveregulatory approval for and successfully commercialize OPT-80 andPrulifloxacin, we will not generate any revenues from product sales for severalyears, if at all, and we may not be able to continue our operations.

We believe our initialsuccess will be more dependent on OPT-80 than Prulifloxacin, because we believethat our market for the treatment of CDAD is larger than our market for thetreatment of infectious diarrhea.  Evenif we successfully obtain regulatory approval to market OPT-80 or Prulifloxacin,our revenues for either drug candidate will be dependent upon the size of themarkets in the territories for which we have commercial rights.  If the markets for the treatment of CDAD orinfectious diarrhea are not as significant as we estimate, our business andprospects will be harmed.

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

We have experiencedsignificant operating losses since our inception in 1998.  As of June 30, 2007, we had an accumulateddeficit of approximately $84.2 million. We have generated no revenues from product sales to date.  We have funded our operations to date fromthe sale of 

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approximately $118.9million of our securities and through research funding pursuant tocollaborations with partners or government grants.  We expect to continue to incur substantialadditional operating losses for the next several years as we advance ourclinical trials and research and development initiatives and build ourmarketing and sales capabilities. Because of the numerous risks and uncertainties associated withdeveloping and commercializing antibiotics, we are unable to predict the extentof any future losses.  We may neversuccessfully commercialize our product candidates and thus may never have anysignificant future revenues or achieve and sustain profitability.

**If we fail to obtain additional financing, we may beunable to complete the development and commercialization of OPT-80,Prulifloxacin and other product candidates, or continue our other research anddevelopment programs.**

We will requireadditional capital to complete the development and commercialization of ourcurrent lead product candidates OPT-80 and Prulifloxacin.  We cannot be certain that additional fundingwill be available on acceptable terms, or at all.  To the extent that we raise additional fundsby issuing equity securities, our stockholders may experience significantdilution.  Any debt financing, ifavailable, may require us to pledge our assets as collateral or involverestrictive covenants, such as limitations on our ability to incur additionalindebtedness, limitations on our ability to acquire or license intellectualproperty rights and other operating restrictions that could negatively impactour ability to conduct our business.  Ifwe are unable to raise additional capital when required or on acceptable terms,we may have to significantly delay, scale back or discontinue the developmentor commercialization of one or more of our product candidates or one or more ofour other research and development initiatives. We also could be required to:

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

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

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

**We do notcurrently have sufficient resources to develop and commercialize OPT-80 on ourown. If we are unable to raise additional capital or we are unable to find acollaboration partner or are unable to effectively collaborate with one or morepartners for the development and commercialization of OPT-80 or Prulifloxacin,we will not generate revenues from sales of OPT-80 and our business will bematerially 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 tobuild our own marketing and sales force for OPT-80 in North America andPrulifloxacin in the United States. However, we may also seek one or more partners for the commercializationof OPT-80 outside of North America.  Wecannot be certain that we would be 

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successful in attractingany such partners.  If we were not ableto find appropriate partners for the continued development andcommercialization of OPT-80, we would either have to delay these initiatives,or raise significant additional funds to develop clinical and commercializationcapabilities internally.  In either case,our business and prospects would be harmed.

We are subject to anumber of additional risks associated with our dependence on collaborationswith 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 thecollaboration.  If any such conflictsarise, a collaborator could act in its own self-interest, which may be adverseto our best interests.  Any suchdisagreement between us and a collaborator could result in one or more of thefollowing, each of which could delay or prevent the development orcommercialization of OPT-80, and in turn prevent us from generating sufficientrevenues to achieve or maintain profitability:

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

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

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

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

In addition, acollaborator may shift its research, development, manufacturing andcommercialization resources to other product opportunities including those thatmight be competitive with OPT-80.

If we cannotcommercialize OPT-80, we will have to rely solely on Prulifloxacin and earlierstage product candidates for any future revenues, and our ability to achieveand sustain profitability will be materially and adversely harmed.

**If we are unable to obtain FDA approval of ourproduct candidates, we will not be able to commercialize them in the UnitedStates.**

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

This regulatory reviewand approval process, which includes evaluation of pre-clinical studies andclinical trials of our product candidates as well as the evaluation of ourmanufacturing processes and our third-party contract manufacturers’ facilities,is lengthy, expensive and 

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uncertain.  To receive approval for a product candidate,we must, among other things, demonstrate with substantial evidence fromwell-controlled clinical trials that the product candidate is both safe andeffective for each indication for which approval is sought.  Satisfaction of the approval requirementstypically takes several years and the time needed to satisfy them may varysubstantially, based on the type, complexity and novelty of the pharmaceuticalproduct.  We cannot predict if or when wemight receive regulatory approvals for any of our product candidates currentlyunder development.  Moreover, anyapprovals that we obtain may not cover all of the clinical indications forwhich we are seeking approval, or could contain significant limitations in theform of narrow indications, warnings, precautions or contra-indications withrespect to conditions of use.  In such anevent, our ability to generate revenues from such products would be greatlyreduced and our business would be harmed.

The FDA has substantialdiscretion in the approval process and may either refuse to consider ourapplication for substantive review or may form the opinion after review of ourdata that our application is insufficient to allow approval of our productcandidates.  If the FDA does not consideror approve an application that we may submit, it may require that we conductadditional clinical, pre-clinical or manufacturing validation studies andsubmit that data before it will reconsider our application.  Depending on the extent of these or any otherstudies, approval of any applications that we submit may be delayed by severalyears, or may require us to expend more resources than we have available.  It is also possible that additional studies,if performed and completed, may not be successful or considered sufficient bythe FDA for approval or even to make our applications approvable.  If any of these outcomes occur, we may beforced to abandon one or more of applications for approval that we may submit,which might significantly harm our business and prospects.

It is possible that noneof our existing product candidates or any product candidates we may seek to developin the future will ever obtain the appropriate regulatory approvals necessaryfor us or our collaborators 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 regulatoryauthorities may result in significant delays in obtaining regulatory approvals,as well as more stringent product labeling and post-marketing testingrequirements.

Although the FDA hasgranted Fast Track status to OPT-80 and selected it for participation in a CMAPilot 2 Program, we cannot be certain that we will receive any benefitsfrom these designations or that the designations will expedite regulatoryreview or approval of OPT-80. Participation in these programs will not eliminate any phase of clinicaldevelopment.  Moreover, our participationin the CMA Pilot 2 Program will involve frequent scientific discussionsand other interactions with the staff of the FDA during the investigational newdrug phase of our development of OPT-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 potential benefits of OPT-80’s Fast Track and CMAPilot 2 Program designations, significant uncertainty remains regardingthe clinical development and regulatory approval process for OPT-80.

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**Clinical trials involve a lengthyand expensive process with an uncertain outcome, and results of earlier studiesand trials may not be predictive of future trial results.**

Clinical testing isexpensive and can take many years to complete, and its outcome isuncertain.  Failure can occur at any timeduring the clinical trial process.  Theresults of pre-clinical studies and early clinical trials of our productcandidates may not be predictive of the results of later-stage clinical trials.  Product candidates in later stages ofclinical trials may fail to show the desired safety and efficacy traits despitehaving progressed through pre-clinical studies and initial clinicaltesting.  In addition, the type andamount of clinical data necessary to gain regulatory approval for our productcandidates may change.  We have notobtained regulatory approval for any product candidate.

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

·                  the result of our clinicaltrials may not demonstrate to the satisfaction 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 comparableforeign regulatory authorities may disagree with the design or implementationof our clinical trials;

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

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

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

·                  the data collected fromclinical trials of our product candidates may not be sufficient to support thesubmission of a new drug application or other submission or to obtainregulatory approval in the United States or elsewhere;

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

**Delays in clinical trials are common and have manycauses, and any such delays could result in increased costs to us andjeopardize or delay our ability to achieve regulatory approval and commenceproduct sales as currently contemplated.**

We may experience delaysin clinical trials of our product candidates. OPT-80 is currently in a Phase 3 clinical trial for the treatmentof CDAD.  We initiated a secondPhase 3 pivotal trial of the same design in the second quarter of2007.  We anticipate completing both ofthese trials in 2008.  If both trials aresuccessful, we intend to file an NDA as soon as practical thereafter. In 

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addition, we are planningto conduct clinical and proof of concept clinical trials for other indicationsof OPT-80.  Prulifloxacin is in twoPhase 3 trials for the treatment of travelers’ diarrhea.  We intend to conduct a Phase 4 trial ofPrulifloxacin subsequent to NDA submission to compare Prulifloxacin tociprofloxacin.  We do not know whetherplanned clinical trials will begin on time, will need to be redesigned or willbe completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, includingdelays in obtaining regulatory approval to commence a trial, in reachingagreement on acceptable terms with prospective CROs and clinical trial sites,in obtaining institutional review board approval at each site, in recruitingsuitable patients to participate in a trial, in having patients complete atrial or return for post-treatment follow-up, in adding new sites or inobtaining sufficient supplies of clinical trial materials.  Many factors affect patient enrollment,including the size and nature of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, the designof the clinical trial, competing clinical trials, clinicians’ and patients’perceptions as to the potential advantages of the drug being studied inrelation to other available therapies, including any new drugs that may beapproved for the indications we are investigating and whether the clinicaltrial design involves comparison to placebo. Several of our principal investigators have stated that the enrollmentrate in the clinical trials for OPT-80 has been less than projected.  Our original projections were based onenrollment rates for our Phase 2a trial of OPT-80.  We continue to experience lower than expectedenrollment in the trials and as a result, the trials may not be completed ascurrently scheduled and we may incur delays in obtaining regulatory approval aswell as additional significant expenses. Furthermore, with respect to the clinical trials conducted by thirdparties, we will have no control over their timing or success.

We could encounter delaysif prescribing physicians encounter unresolved ethical issues associated withenrolling patients in clinical trials of our product candidates in lieu ofprescribing existing antibiotics that have established safety and efficacyprofiles or with administering placebo to patients in our placebo-controlledtrials.  Further, a clinical trial may besuspended or terminated by us, our collaborators, the FDA or other regulatoryauthorities due to a number of factors, including failure to conduct theclinical trial in accordance with regulatory requirements or our clinicalprotocols, inspection of the clinical trial operations or trial site by the FDAor other regulatory authorities resulting in the imposition of a clinical hold,unforeseen safety issues or adverse side effects, failure to demonstrate a benefitfrom using a drug, changes in governmental regulations or administrativeactions or lack of adequate funding to continue the clinical trial.  In addition, our Prulifloxacin productcandidate treats bacterial infections which tend to peak during high travelseasons.  As a result, during certaintimes of the year, it is more difficult to enroll patients in our trials forPrulifloxacin.  If we experience delaysin the completion of, or termination of, any clinical trial of our productcandidates, the commercial prospects of our product candidates will be harmed,and our ability to generate product revenues from any of these productcandidates will be delayed.  In addition,any delays in completing our clinical trials will increase our costs, slow downour product development and approval process and jeopardize our ability tocommence product sales and generate revenues. Any of these occurrences may significantly harm our business, financialcondition and prospects.

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

Our clinical trials maybe suspended at any time for a number of reasons.  We may voluntarily suspend or terminate ourclinical trials if at any time we believe that they present an unacceptablerisk to participants.  In addition,regulatory agencies may order the temporary or permanent discontinuation of ourclinical trials at any time if they believe that the clinical trials are notbeing conducted in accordance with applicable regulatory requirements or thatthey present an unacceptable safety risk to participants.  In previous clinical trials of OPT-80,certain patients experienced non-drug related adverse events.  Patients treated with Prulifloxacin haveexperienced drug-related side effects including abdominal pain, diarrhea,nausea, renal toxicities, cardiac arrhythmias, photosensitivity, rash,excessive flushing of the skin and central nervous system effects, such asseizures.  The FDA recommended that weconduct a study to determine the effect, if any, of Prulifloxacin on theprolongation of the QT interval, a condition that is associated withpotentially life-threatening cardiac arrhythmias.  Our future clinical trials will involvetesting in larger patient populations, which could reveal a high prevalence ofthese or other side effects.  In suchevent, our trials would be interrupted, delayed or halted and the FDA or comparableforeign regulatory authorities could order us to cease further development ofor deny approval of our product candidates for any or all targetedindications.  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 couldbe subject to significant liability if any volunteer or patient suffers, orappears to suffer, adverse side effects as a result of participating in ourclinical trials.  Any of theseoccurrences may significantly harm our business and prospects.

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

We have entered intoagreements with third-party CROs, such as INC Research, Inc. formerly known asAdvanced Biologics, LLC, to provide monitors and manage data for our on-goingclinical programs.

We and the CROsconducting clinical trials for our product candidates are required to complywith current good clinical practices, or GCPs, regulations and guidelinesenforced by the FDA for all of our products in clinical development.  The FDA enforces GCPs through periodicinspections of trial sponsors, principal investigators and trial sites.  If we or the CROs conducting clinical trialsof our product candidates fail to comply with applicable GCPs, the clinicaldata generated in the clinical trials may be deemed unreliable and the FDA mayrequire additional clinical trials before approving any marketingapplications.  We cannot assure you that,upon inspection, the FDA will determine that any clinical trials of our productcandidates comply with GCPs.  Inaddition, our clinical trials must be conducted with product produced undergood manufacturing practices regulations, or cGMP, and will require a largenumber of test subjects.  Our failure tocomply with these regulations may require us to repeat clinical trials, whichwould 

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be costly and delay theregulatory approval process and commercialization of our product candidates.

Typically, the CROsconducting clinical trials of our product candidates have the right toterminate their agreements with us or our collaborators upon notice in theevent 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 heavily involved in theclinical development and regulatory approval process for our lead productcandidates and possesses significant experience with the regulatoryprocess.  We substantially rely on INCResearch to conduct the clinical trials for OPT-80 and Prulifloxacin.  INC Research has also subcontracted withother third-party CROs for various aspects of the clinical trials.  If any relationships with INC Research orthese other third-party CROs terminate, we or our collaborators may not be ableto enter into arrangements with alternative CROs or we may enter intoarrangements with alternative CROs that do not have the expertise orrelationships that INC Research has with government agencies.  In addition, these third-party CROs are notour employees, and we cannot control whether or not they devote sufficient timeand resources to our on-going clinical programs.  These CROs may also have relationships withother commercial entities, including our competitors, for whom they may also beconducting clinical studies or other drug development activities, which couldharm our competitive position.  If CROsdo not successfully carry out their contractual duties or obligations or meetexpected deadlines, if they need to be replaced, or if the quality or accuracyof the clinical data they obtain is compromised due to the failure to adhere toour clinical protocols, regulatory requirements, or for other reasons, ourclinical trials may be extended, delayed or terminated, and we may not be ableto obtain regulatory approval for or successfully commercialize our productcandidates.  As a result, our financialresults and the commercial prospects for our product candidates would beharmed, our costs could increase and our ability to generate revenues could bedelayed.

**If we fail to gain and maintain approval fromregulatory authorities in international markets for OPT-80 and any futureproduct candidates for which we have rights in international markets, ourmarket opportunities will be limited.**

Sales of our productcandidates outside of the United States will be subject to foreign regulatoryrequirements governing clinical trials and marketing approval.  Even if the FDA grants marketing approval fora product candidate, comparable regulatory authorities of foreign countriesmust also approve the manufacturing and marketing of the product candidate inthose countries.  This is important for thecommercialization of OPT-80 for which we currently have exclusive worldwidemarketing 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 widely from country to country andcould delay the introduction of our products in those countries.  Clinical trials conducted in one country maynot be accepted by regulatory authorities in other countries, and regulatoryapproval in one country does not mean that regulatory approval will be obtainedin any other country.  In addition, ourfailure to obtain regulatory approval in any country may delay or have negativeeffects on the process for regulatory approval in others.  Other than Prulifloxacin, which is sold byother parties in Japan, Italy and certain other European 

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countries, none of ourproduct candidates is approved for sale in any international market for whichwe have rights, and we do not have experience in obtaining regulatory approvalin international markets.  If we fail tocomply with regulatory requirements in our international markets or to obtainand maintain required approvals, our target market will be reduced and ourability to generate revenues will be diminished, which would significantly harmour business, results of operations and prospects.

**We currently have no marketing and salesorganization and have no experience in marketing drug products.  If we are unable to establish marketing andsales capabilities or enter into agreements with third parties to market andsell our product candidates, we may not be able to generate product revenues.**

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

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

If appropriate regulatoryapprovals are obtained, we intend to commercialize OPT-80 outside of NorthAmerica through collaboration arrangements with third parties.  We may be unable to enter into collaborationarrangements in international markets. In addition, there can be no guarantee that if we enter into thesecollaboration arrangements with other parties that they will be successful orresult in more revenues than we could obtain by marketing OPT-80 on ourown.    If we are unable to enter intocollaboration arrangements for our products or develop an effectiveinternational sales force, our ability to generate product revenues would belimited, which would adversely affect our business, financial condition,results of operations and prospects.  Ifwe are unable to enter into such collaboration arrangements, we may need todevelop our own marketing and sales force to market OPT-80 in a number ofcountries in Europe and Latin America to hospital-based and long-term carephysicians.  These efforts may not besuccessful as we have no relationships among such hospital-based and long-termcare physicians.  There is no 

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guarantee that we will beable to develop an effective international sales force to successfullycommercialize our products in these international markets.

**If our product candidates are unable to competeeffectively with branded and generic antibiotics, our commercial opportunitywould be reduced or eliminated.**

If approved, our leadproduct candidates will compete against both branded antibiotic therapies, suchas Vancocin Pulvules with respect to OPT-80 and Xifaxan® with respect toPrulifloxacin, and generic antibiotics such as metronidazole and vancomycinwith respect to OPT-80 and ciprofloxacin with respect to Prulifloxacin.  In addition, we anticipate that OPT-80 willcompete with other antibiotic and anti-infective product candidates currentlyin development for the treatment of CDAD, such as Xifaxan®, an antibiotic beingdeveloped by Salix Pharmaceuticals, Ltd. Many of these products have been or will be developed and marketed by majorpharmaceutical companies, who have significantly greater financial resourcesand expertise in research and development, pre-clinical testing, conductingclinical trials, obtaining regulatory approvals, manufacturing and marketingapproved products than we do.  As aresult, these companies may obtain regulatory approval more rapidly than we areable to and may be more effective in selling and marketing their products aswell.  Smaller or early-stage companiesmay also prove to be significant competitors, particularly throughcollaborative arrangements with large, established companies.

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

**We currently depend, and will in the future continueto depend, on third parties to manufacture our product candidates, includingOPT-80 and Prulifloxacin.  If thesemanufacturers fail to provide us and our collaborators with adequate suppliesof clinical trial materials and commercial product or fail to comply with therequirements of regulatory authorities, we may be unable to develop orcommercialize our products.**

We outsource allmanufacturing of clinical trial supplies of our product candidates to thirdparties.  We seek to establish long-termsupply arrangements with third-party contract 

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manufacturers.  We intend to continue outsourcing themanufacture of our product candidates to third parties for any future clinicaltrials and large-scale commercialization of any product candidates that receiveregulatory approval and become commercial drugs.

Our ability to developand commercialize OPT-80 and Prulifloxacin and any other product candidatesdepends in part on our ability to arrange for collaborators or other thirdparties to manufacture our products at a competitive cost, in accordance withstrictly enforced regulatory requirements and in sufficient quantities forclinical testing and eventual commercialization.  We have not yet manufactured commercialbatches of OPT-80, Prulifloxacin or any of our other product candidates.  Collaborators or third-party manufacturersthat we select to manufacture our product candidates for clinical testing or ona commercial scale may encounter difficulties with the small- and large-scaleformulation and manufacturing processes required for such manufacture.  Such difficulties could result in delays inclinical trials, regulatory submissions, or commercialization of our productcandidates.  The inability of us or ourcollaborators to enter into and maintain agreements with third-partymanufacturers on acceptable term, would cause shortages of clinical trialsupplies of our product candidates, thereby delaying or preventing regulatoryapproval and/or commercialization of the affected product candidate, andadversely affecting our ability to generate revenues.  Once a product candidate is approved andbeing marketed, such difficulties could also result in the withdrawal of theproduct from the market.  Further,development of large-scale manufacturing processes will require additionalvalidation studies, which the FDA must review and approve.  Even if we are able to establish additionalor replacement manufacturers, identifying these sources and entering intodefinitive supply agreements and obtaining regulatory approvals may take asubstantial amount of time and cost and such supply arrangements may not beavailable on acceptable economic terms.

In addition, we, ourcollaborators and other third-party manufacturers of our products must complywith current strictly enforced cGMP requirements enforced by the FDA throughits facilities inspection program.  Theserequirements include quality control, quality assurance and the maintenance ofrecords and documentation.  We rely onBiocon to manufacture OPT-80 drug supplies. Biocon is the manufacturer andsupplier of API for OPT-80 and is located in India. As such, Biocon will be subjectto ongoing periodic unannounced inspections by the FDA and other agencies forcompliance with current cGMP, and similar foreign standards.  We also rely on Nippon Shinyaku, whichcontracts with Juzen Chemical Corporation, or Juzen, and Angelini ACRAF/SpA, orAngelini, to manufacture Prulifloxacin drug supplies.  The manufacturing facilities of Biocon andJuzen have been inspected and approved by the FDA for other companies’ drugproducts; however, neither Biocon’s nor Juzen’s facilities have yet been approvedfor the manufacture of our drug supplies. Angelini’s facilities have not been inspected or approved by the FDA. Weor other third-party manufacturers of our products may be unable to comply withcGMP requirements and with other FDA, state, local and foreign regulatoryrequirements.  We and our collaboratorshave little control over third-party manufacturers’ compliance with theseregulations and standards.  A failure tocomply with these requirements by our third-party manufacturers, including Biocon,Juzen and Angelini, could result in the issuance of untitled letters and/orwarning letters from authorities, as well as sanctions being imposed on us,including fines and civil penalties, suspension of production, suspension ordelay in product approval, product seizure or recall or withdrawal of productapproval.  In addition, we have nocontrol over these manufacturers’ ability to maintain adequate quality control,quality assurance and qualified personnel. If the safety of any quantities supplied by third parties is 

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compromised due to theirfailure to adhere to applicable laws or for other reasons, we may not be ableto obtain or maintain regulatory approval for or successfully commercialize oneor more of our product candidates, which would significantly harm our businessand prospects.

**The commercial success of our product candidateswill depend upon attaining significant market acceptance of these productcandidates among physicians, patients, healthcare payors and the medicalcommunity.**

Even if our productcandidates are approved by the appropriate regulatory authorities for marketingand sale, physicians may not prescribe our product candidates, which wouldprevent us from generating revenues or becoming profitable.  Market acceptance of OPT-80, Prulifloxacinand any of our future product candidates by physicians, patients and healthcarepayors will depend on a number of factors, many of which are beyond ourcontrol, including:

·                  the clinical indications forwhich the product candidate is approved;

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

·                  perceived advantages overalternative treatments;

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

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

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

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

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

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

·                  relative convenience andease of administration; and

·                  prevalence and severity ofadverse side effects.

Because OPT-80 is a differentiatedantibiotic for the treatment of CDAD, it may encounter additional hurdles tomarket acceptance by physicians, who may be skeptical about its clinicalbenefits or healthcare payors who may resist reimbursing a premium-pricedtherapeutic particularly in light of the availability of generic alternatives.

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We plan to target ourmarketing of Prulifloxacin primarily to high-prescribing physicians ofantibiotics for travelers’ diarrhea, including those at travel clinics.  Because of the number of these physicians inthe United States, we will be required to expend significant time and resourcesto obtain broad market acceptance of Prulifloxacin among these physicians.  We do not have experience in marketing to thispopulation of physicians and do not currently have the resources to be able toconduct such marketing efforts on our own. As such, we may not be successful in any of these marketing effortswhich would limit the commercial success of Prulifloxacin.  In addition, because Prulifloxacin has alreadybeen marketed by other companies to treat a wide range of bacterial infections,including infectious diarrhea, urinary tract infections, or UTIs andrespiratory tract infections, or RTIs, patients may be able to obtainPrulifloxacin from these other companies, and not from us, if Prulifloxacin isapproved in the market where the patient is located.  We have rights to Prulifloxacin only in theUnited States.  These patients may obtainPrulifloxacin in these other markets from other companies even if thesepatients are from the United States.

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

A key element of ourstrategy is to commercialize a portfolio of new anti-infective products in additionto OPT-80 and Prulifloxacin.  As asignificant part of our growth strategy, we intend to develop and commercializeadditional products and product candidates through our discovery researchprogram using our proprietary technology, including OPopS.  The success of this strategy depends upon ourability to identify, select and acquire pharmaceutical product candidates andproducts that fit into our development plans on terms that are acceptable tous.

Any product candidate weidentify may require additional development efforts prior to commercial sale,including pre-clinical studies, extensive clinical testing and approval by theFDA and applicable foreign 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, we cannot assure you that anysuch products that are approved will be manufactured or produced economically,successfully commercialized or widely accepted in the marketplace or be moreeffective than other commercially available alternatives.

A significant portion ofthe research that we are conducting involves new and unproventechnologies.  Research programs toidentify new disease targets and product candidates require substantialtechnical, financial and human resources whether or not we ultimately identifyany candidates.  Our research programsmay initially show promise in identifying potential product candidates, yetfail to yield product candidates for clinical development.

If we are unable todevelop suitable potential product candidates through internal researchprograms or by obtaining rights to novel therapeutics from third parties, ourbusiness and prospects will suffer.

Our focus on drugdiscovery and development using our technology platform, including our patentedproprietary OPopS drug discovery platform, is novel and unique.  As a result, we cannot 

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be certain that ourproduct candidates will produce commercially viable drugs that safely andeffectively treat infectious diseases or other diseases.  To date, our technology platform has yieldedonly a small number of anti-infective product candidates.  In addition, we do not have significantclinical data with respect to any of these potential product candidates.  Even if we are successful in completingclinical development and receiving regulatory approval for one commerciallyviable drug for the treatment of one disease using our technology platform andcarbohydrate chemistry focus, we cannot be certain that we will also be able todevelop and receive regulatory approval for other drug candidates for thetreatment of other forms of that disease or other diseases.  If we fail to develop and commercializeviable drugs using our platform and specialized focus, we will not besuccessful in developing a pipeline of potential product candidates to followOPT-80 and Prulifloxacin, and our business prospects would be harmedsignificantly.

**Our future growth depends on our ability to identifyand acquire or in-license products. If we do not successfully identify and acquire or in-licenserelated product candidates or integrate them into our operations, we may havelimited growth opportunities.**

We in-licensed theU.S. rights to Prulifloxacin from Nippon Shinyaku who, along with Meiji-SeikaKaisha Ltd., conducted the initial development of this product candidate.  An important part of our business strategy isto continue to develop a pipeline of product candidates by acquiring or in-licensingproducts, businesses or technologies that we believe are a strategic fit forour business.  Future in-licensesor acquisitions, however, may entail numerous operational and financial risks,including:

·                  exposure to unknownliabilities;

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

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

·                  higher than expectedacquisition and integration costs;

·                  increased amortizationexpenses;

·                  difficulty and cost incombining the operations and personnel of any acquired businesses with ouroperations and personnel;

·                  impairment of relationshipswith key suppliers or customers of any acquired businesses due to changes inmanagement and ownership; and

·                  inability to retain keyemployees of any acquired businesses.

We have limited resourcesto identify and execute the acquisition or in-licensing of third-partyproducts, businesses and technologies and integrate them into our currentinfrastructure.  In particular, we maycompete with larger pharmaceutical companies and other competitors in our 

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efforts to establish newcollaborations and in-licensing opportunities.  These competitors likely will have access togreater financial resources than us and may have greater expertise inidentifying and evaluating new opportunities. Moreover, we may devote resources to potential acquisitions or in-licensingopportunities that are never completed, or we may fail to realize theanticipated benefits of such efforts.

**If we do not find collaborators for our futureproduct candidates, we may be required to reduce or delay our rate of productdevelopment and commercialization and/or increase our expenditures.**

Our strategy to developand commercialize our product candidates in pre-clinical studies or earlyclinical trials includes entering into relationships with pharmaceutical orbiotechnology companies to advance our programs.  We may not be able to negotiatecollaborations with these partners on acceptable terms.  If we are unable to establish collaborative arrangements,we may be required to reduce or delay further development of some of ourprograms and/or increase our expenditures and undertake the developmentactivities at our own expense.

If we are able toidentify and reach agreement with collaborators for our product candidates,those relationships will also be subject to a number of risks, including:

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

·                  collaborators may delayclinical trials, underfund a clinical trial program, stop a clinical trial orabandon a product candidate, repeat or conduct additional clinical trials orrequire the development of a new formulation of a product candidate forclinical testing;

·                  a collaborator with marketingand distribution rights to one or more of our products may not commitsufficient resources to the marketing and distribution of our products,limiting our potential revenues from the commercialization of these products;and

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

Even if we successfullyestablish collaborations or commercial agreements, these relationships maynever result in the successful development or commercialization of any productcandidates or the generation of sales or royalty revenues.

**Our ability to pursue the development andcommercialization of Prulifloxacin, our other product candidates and our futureproduct candidates depends upon the continuation of our licenses from thirdparties.**

Our license agreementwith Nippon Shinyaku provides us with an exclusive license to develop andcommercialize Prulifloxacin for any indication in the United States, with aright to 

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sublicense to thirdparties.  In the event Nippon Shinyaku isnot able to supply us with Prulifloxacin, the license agreement provides uswith a non-exclusive, worldwide right and license to manufacture or have Prulifloxacinmanufactured for us.  Either we or NipponShinyaku may terminate the license agreement immediately upon the bankruptcy ordissolution of the other party or upon a breach of any material provision ofthe agreement if the breach is not cured within 60 days following writtennotice.  In addition, we are entitled toterminate the agreement in the event that the FDA compels us to cease sales ofPrulifloxacin in the United States.  Ifour license agreement with Nippon Shinyaku terminates, we will lose our rightsto develop, manufacture and commercialize Prulifloxacin and our potentialrevenues would be limited.  Similarly, ifour agreement with TSRI for the license of our OPopS technology is terminated,we will not be able to further develop future product candidates using ourOPopS technology.

**If product liability lawsuits are brought againstus, we may incur substantial liabilities and may be required to limitcommercialization of our product candidates.**

We face an inherent riskof product liability lawsuits related to the testing of our product candidates,and will face an even greater risk if product candidates are introducedcommercially.  An individual may bring aliability claim against us if one of our product candidates causes, or merelyappears to have caused, an injury.  If wecannot successfully defend ourselves against the product liability claim, wemay incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

·                  decreased demand for ourproduct candidates;

·                  injury to our reputation;

·                  termination of clinicaltrial sites or entire clinical trial programs;

·                  withdrawal of clinical trialparticipants;

·                  significant litigationcosts;

·                  substantial monetary awardsto or costly settlement with patients;

·                  product recalls;

·                  loss of revenues; and

·                  the inability tocommercialize our product candidates.

We may become dependentupon consumer perceptions of us and the safety and quality of our productcandidates.  We could be adverselyaffected if we or our product candidates are subject to negativepublicity.  We could also be adverselyaffected if any of our potential products or any similar products distributedby other companies prove to be, or are asserted to be, harmful 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 anysimilar products distributed by other companies could have a material adverseimpact on our results of operations.

We have global clinicaltrial liability insurance that covers our clinical trials up to a $6.0 millionannual aggregate limit. Our current or future insurance coverage may proveinsufficient to cover any liability claims brought against us.  We intend to expand our insurance coverage toinclude the sale of commercial products if marketing approval is obtained forour product candidates, which would increase our insurance premiums.  Because of the increasing costs of insurancecoverage, we may not be able to maintain insurance coverage at a reasonablecost or obtain insurance coverage that will be adequate to satisfy anyliability that may arise.

**Even if we receive regulatory approval for ourproduct candidates, we will be subject to ongoing significant regulatoryobligations and oversight.**

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

**If we fail to attract and retain senior managementand key scientific personnel, we may be unable to successfully develop ourproduct candidates, conduct our clinical trials and commercialize our productcandidates.**

Our success depends inpart on our continued ability to attract, retain and motivate highly qualifiedmanagement, clinical and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, cliniciansand scientists.  We are highly dependentupon our senior management and scientific staff, particularly Michael N.Chang, Ph.D., our President and Chief Executive Officer, Tessie M. Che,Ph.D., our 

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Senior Vice President,Corporate Affairs, Youe-Kong Shue, Ph.D., our Vice President, ClinicalDevelopment, and Kevin P. Poulos, our Vice President, Marketing andSales.  The loss of services of any ofDr. Chang, Dr. Che, Dr. Shue or Mr. Poulos or one or moreof our other members of senior management could delay or prevent the successfulcompletion of our planned clinical trials or the commercialization of ourproduct candidates.  Replacing keyemployees may be difficult and costly and may take an extended period of timebecause of the limited number of individuals in our industry with the breadthof skills and experience required to develop and commercialize productssuccessfully.  We do not maintain “keyperson” insurance policies on the lives of these individuals or the lives ofany of our other employees.  We employthese individuals on an at-will basis and their employment can beterminated by us or them at any time, for any reason and with or withoutnotice.

We will need to hireadditional personnel as we expand our clinical development and commercialactivities.  We may not be able toattract or retain qualified management and scientific personnel on acceptableterms in the future due to the intense competition for qualified personnel amongbiotechnology, pharmaceutical and other businesses, particularly in the SanDiego, California area.  If we are notable to attract and retain the necessary personnel to accomplish our businessobjectives, we may experience constraints that will impede significantly theachievement of our research and development objectives, our ability to raiseadditional capital and our ability to implement our business strategy.  In particular, if we lose any members of oursenior management team, we may not be able to find suitable replacements, andour business and prospects may be harmed as a result.

**We will need to increase the size of ourorganization, and we may experience difficulties in managing growth.**

We are a small companywith 44 employees as of August 1, 2007. To continue our clinical trials and commercialize our productcandidates, we will need to expand our employee base for managerial,operational, marketing, sales, financial and other resources.  Future growth will impose significant addedresponsibilities on members of management, including the need to identify,recruit, maintain and integrate additional employees and may take time awayfrom running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performance and our ability to commercialize ourproduct candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively.  To that end, we must be able to:

·                  manage our development effortseffectively;

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

·                  integrate additionalmanagement, administrative and manufacturing personnel;

·                  build a marketing and salesorganization; and

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

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

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

Market acceptance andsales of our product candidates will depend on reimbursement policies and maybe affected by future healthcare reform measures.  Government third-party payors, such as theMedicare and Medicaid programs, and private payors, including health maintenanceorganizations, decide which drugs they will pay for and establish reimbursementlevels for these drugs.  Becausethird-party payors increasingly are challenging prices charged and thecost-effectiveness of medical products, significant uncertainty exists as tothe ability of our product candidates to receive adequate coverage andreimbursement.  We cannot be sure thatthird-party payors will place our product candidates on approved formularies orthat reimbursement will be available in whole or in part for any of our productcandidates.  Also, we cannot be sure thatinsufficient reimbursement amounts will not reduce the demand for, or the priceof, our products.

Many healthcareproviders, such as hospitals, receive a fixed reimbursement amount per procedureor other treatment therapy, and these amounts are not necessarily based on theactual costs incurred.  As a result,these healthcare providers may choose only the least expensive therapiesregardless of efficacy.  We cannotguarantee that our product candidates will be the least expensive alternativeand thus providers may decide not to use them or buy them for treatment.

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

**Recent proposed legislation may permit re-importationof drugs from foreign countries into the United States, including foreigncountries where the drugs are sold at lower prices than in the United States,which could materially adversely affect our operating results and our overallfinancial condition.**

We may face competitionfor our products from lower priced products from foreign countries that haveplaced price controls on pharmaceutical products.  The Medicare Modernization Act of 2003, orMMA, contains provisions that may change U.S. importation laws and expandconsumers’ ability to import lower priced versions of our and competingproducts from Canada, where there are government price controls.  These changes to U.S. importation laws willnot take effect unless and until the Secretary of Health and Human Servicescertifies that the changes will lead to substantial savings for consumers andwill not create a public health safety issue. The Secretary of Health and Human Services has not yet announced anyplans to make the required certification. Even if the changes do not takeeffect, and other changes are not enacted, imports from Canada and elsewheremay continue to increase due to market and political forces, and the limitedenforcement resources of the FDA, the U.S. Customs Service, and othergovernment

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agencies.  For example, Pub. L. No. 109-295,which was signed into law on October 4, 2006 and provides appropriationsfor the Department of Homeland Security for fiscal year 2007, expresslyprohibits the U.S. Customs Service from using funds to prevent individuals fromimporting from Canada less than a 90-day supply of a prescription drugfor personal use, when the drug otherwise complies with the Federal Food, Drugand Cosmetic Act.  Further, severalstates and local governments have implemented importation schemes for theircitizens, and, in the absence of federal action to curtail such activities, weexpect other states and local governments to launch importation efforts.  The importation of foreign products thatcompete with our own product candidates could negatively impact our businessand prospects.

**Current healthcare laws and regulations and futurelegislative or regulatory reforms to the healthcare system may affect ourability to sell our product candidates profitably.**

In both the United Statesand certain foreign jurisdictions, there have been, and we anticipate therewill continue to be, a number of legislative and regulatory changes to thehealthcare system that could impact our ability to sell our productsprofitably.  In particular, the MMA addedan outpatient prescription drug benefit to Medicare, the publicly-funded healthinsurance program in the United States generally for the elderly and disabled,which became effective on January 1, 2006. Drug benefits under this new benefit are administered through privateplans that negotiate price concessions from pharmaceutical manufacturers.  We cannot be certain that OPT-80 andPrulifloxacin or other current or future drug candidates will successfully beplaced on the list of drugs covered by particular health plan formularies, norcan we predict the negotiated price for our drug candidates, which will bedetermined by market factors.

The MMA also changed theformula for determining payment for certain drugs, which include drugs providedin physician offices and other outpatient settings.  Further, with respect to the Medicaidprogram, the Deficit Reduction Act of 2005 made changes to certain formulasused to calculate pharmacy reimbursement under Medicaid, the health insuranceprogram in the United States generally for individuals and families with lowincomes and resources, which became effective on January 1, 2007. Thesechanges could lead to reduced payments to pharmacies.  Many states have also created preferred druglists and include drugs on those lists only when the manufacturers agree to paya supplemental rebate.  If OPT-80 andPrulifloxacin or other current or future drug candidates are not included onthese preferred drug lists, physicians may not be inclined to prescribe them totheir Medicaid patients, thereby diminishing the potential market for ourproducts.

As a result oflegislative proposals and the trend towards managed healthcare in the UnitedStates, third-party payors are increasingly attempting to contain healthcarecosts by limiting both coverage and the level of reimbursement of newdrugs.  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, significant uncertainty existsas to whether and how much third-party payors will reimburse for newly-approveddrugs, which in turn will put pressure on the pricing of drugs.  Further, we do not have experience inensuring approval by applicable third-party payors outside of the United Statesfor reimbursement of our products.  Theavailability of numerous generic antibiotics at lower prices than brandedantibiotics can also be expected to substantially reduce the likelihood ofreimbursement for OPT-80 and Prulifloxacin. We also anticipate pricing pressures in connection with the sale of ourproducts 

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due to the trend towardmanaged healthcare, the increasing influence of health maintenanceorganizations and additional legislative proposals.

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

We are subject to variousfederal and state laws pertaining to healthcare fraud and abuse, includinganti-kickback laws and physician 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 that our operations are inmaterial compliance with such laws. However, because of the far-reaching nature of these laws, there can beno assurance that we would not be required to alter one or more of ourpractices to be in compliance with these laws. In addition, there can be no assurance that the occurrence of one ormore 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 of hazardous materialsand we and our third-party manufacturers must comply with environmental lawsand regulations, which can be expensive and restrict how we do business.**

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

**Our business and operations would suffer in theevent of computer, telecommunications or other system failure.**

Despite theimplementation of security measures, our internal computer systems arevulnerable to damage from computer viruses, unauthorized access, naturaldisasters, terrorism, war and telecommunication and electrical failures.  Any system failure, accident or securitybreach that causes interruptions in our operations could result in a materialdisruption of our drug development programs. For example, the loss of clinical trial information from completed orongoing clinical trials for OPT-80 or Prulifloxacin, which is maintained by ourthird-party CRO, could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data.  To the extent that any disruption or securitybreach results in a 

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loss or damage to ourdata or applications, or inappropriate disclosure of confidential orproprietary information, we may incur liability and the further development ofour product candidates may be delayed.

**Risks Related to OurIntellectual Property**

**It is difficult and costly to protect ourintellectual property and our proprietary technologies, and we may not be ableto ensure their protection.**

Our commercial successwill depend in part on obtaining and maintaining patent protection and tradesecret protection of the use, formulation and structure of our productcandidates, and the methods used to manufacture them, as well as successfullydefending these patents against third-party challenges, including those fromgeneric drug manufacturers.  Our abilityto protect our product candidates from unauthorized making, using, selling,offering to sell or importing by third parties is dependent upon the extent towhich we have rights under valid and enforceable patents or trade secrets thatcover these activities.

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

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

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

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

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

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

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

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·                  it is possible that our pending patentapplications or our licensed patent applications will not result in issuedpatents;

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

·                  we may not develop additional proprietarytechnologies that are patentable; or

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

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

While we have filed 5patent applications and acquired one U.S. application for OPT-80, we do not yethave any issued patents for OPT-80.

Thesepatent applications related to OPT-80 encompass various topics relating to:

·                  manufactureprocess;

·                  treatment ofdiseases;

·                  composition ofmatter;

·                  methods oftreating *Clostridium difficile*-associateddiarrhea and Methicillin-resistant *Staphylococcus***** and Vancomycin-resistant*Enterococcus***** infections;

·                  crystallinepolymorphs; and

·                  formulation.

If we are unable toobtain a composition of matter patent, our competitors, including generic drugcompanies, may be able to design other similar formulations of the activeingredient of OPT-80.  Furthermore, evenif these process and formulation patent applications become issued patents, ourcompetitors, including generic drug companies, may be able to design around ourmanufacturing processes or formulation for OPT-80.  As a result, our competitors may be able todevelop competing products.

In addition, assuming ourclinical trials are successful and completed in a timely manner, we plan tolaunch Prulifloxacin for the treatment of infectious diarrhea no earlier thanlate 2008.  However, the patent coveringPrulifloxacin is scheduled to expire in February 2009, and due to this shortremaining patent life we may be forced to abandon plans to pursue developmentand approval of Prulifloxacin for any indications, including infectiousdiarrhea. Although we also currently plan to apply for an extension of thispatent term until 2014, we cannot assure you that 

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the United States Patentand Trademark Office, or PTO, will grant the extension for the full additionalfive years, or at all.  In either event,our business and prospects would be significantly harmed.

We depend, in part, onour licensors and collaborators to protect a portion of our proprietaryrights.  In such cases, our licensors andcollaborators may be primarily or wholly responsible for the maintenance ofpatents and prosecution of patent applications relating to important areas of ourbusiness.  For example, Nippon Shinyaku,SKI, TSRI and Cempra are responsible for the maintenance of patents andprosecution of patent applications relating to Prulifloxacin, OPT-822/OPT-821combination therapy, our OPopS technology, and OPT-1068 and OPT-1273,respectively.  We may also be dependenton Par to provide technical support for a certain patent application relatingto OPT-80 formulation. If any of these parties fail to adequately protect theseproduct candidates with issued patents, our business and prospects would besignificantly harmed.

Under our agreement withNippon Shinyaku, in the event Nippon Shinyaku fails to take all steps necessaryto seek extension of the patents licensed to us in the United States 180 daysafter we request such action be taken, then we have the right to take allnecessary actions to extend the licensed patents.  Our agreements with SKI, TSRI, Cempra and Pardo not have explicit provisions regarding our rights to take necessary actionwith respect to maintenance of patents and prosecution of patent applicationsnor do such agreements provide us with any legal recourse in the event suchparties do not so maintain and/or prosecute. If any of these parties fails to adequately maintain patents andprosecute patent applications relating to technology licensed to or from us, wemay be required to take further action on our own to protect thistechnology.  However, we may not besuccessful in maintaining such patents or prosecuting such patent applicationsand if so, our business and prospects would be significantly harmed.

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

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

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**We may incur substantial costs asa result of litigation or other proceedings relating to our patent, trademarkand other intellectual property rights, and we may be unable to protect ourrights to, or use, our technology.**

If we choose to go tocourt to stop someone else from using our inventions, that individual orcompany has the right to ask the court to rule that the underlying patents areinvalid and/or should not be enforced against that third party.  These lawsuits are expensive and wouldconsume time and other resources even if we were successful in stopping the infringementof these patents.  There is also the riskthat, even if the validity of these patents is upheld, the court will refuse tostop the other party on the ground that such other party’s activities do notinfringe our rights to these patents.

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

Although we haveconducted searches of third-party patents with respect to OPT-80 andPrulifloxacin, these searches may not have identified all third-party patentsrelevant to those products and we have not conducted an extensive search ofpatents issued to third parties with respect to our other productcandidates.  Consequently, no assurancecan be given that third-party patents containing claims covering our products,technology or methods do not exist, have not been filed, or could not be filedor issued.  Because of the number ofpatents issued and patent applications filed in our technical areas or fields,we believe there is a risk that third parties may allege they have patentrights encompassing our products, technology or methods.  In addition, we have not conducted anextensive search of third-party trademarks, so no assurance can be given thatsuch third-party trademarks do not exist, have not been filed, could not befiled or issued, or could not exist under common trademark law.  While we have filed a trademark applicationfor the names “Optimer” 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 believe there is a significantrisk that third parties may allege they have trademark rights encompassing thenames for which we have applied for protection.

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

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

**Risks Related to theSecurities Market and Ownership of Our Common Stock**

**The market price of our common stock may be highlyvolatile.**

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

The trading price of ourcommon stock is likely to be highly volatile and could be subject to widefluctuations in price in response to various factors, many of which are beyondour control, including:

·                  announcement of FDA orcomparable foreign regulatory agency approval or non-approval of our productcandidates, or specific label indications for their use, or delays in the FDAor comparable foreign regulatory agency review process;

·                  actions taken by the FDA orother regulatory agencies with respect to our product candidates, clinicaltrials, manufacturing process or marketing and sales activities;

·                  changes in laws orregulations applicable to our products, including but not limited to clinicaltrial requirements for approvals;

·                  the success of ourdevelopment efforts and clinical trials, particularly with respect to OPT-80and Prulifloxacin;

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

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

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

·                  actual or anticipatedvariations in our quarterly operating results;

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

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

·                  third-party coverage orreimbursement policies;

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

·                  conditions or trends in thebiotechnology and biopharmaceutical industries;

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

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

·                  changes in the marketvaluations of similar companies;

·                  sales of common stock orother securities by us or our stockholders in the future;

·                  additions or departures ofkey scientific or management personnel;

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

·                  trading volume of our commonstock.

In addition, the stockmarket in general and the market for biotechnology and biopharmaceuticalcompanies in particular have experienced extreme price and volume fluctuationsthat have often been unrelated and/or disproportionate to the operatingperformance of those companies.  Thesebroad market and industry factors may significantly harm the market price ofour common stock, regardless of our operating performance.  In the past, following periods of volatilityin the 

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market, securitiesclass-action litigation has often been instituted against companies.  Such litigation, if instituted against us,could result in substantial costs and diversion of management’s attention andresources, which could significantly harm our business, financial condition andprospects.

**Future sales of our commonstock in the public market could cause our stock price to decline.**

On August 7, 2007, our180-day lock-up agreements between our underwriters and our security holdersprior to our public offering expired.  Asa result, persons who were our stockholders prior to the sale of shares in ourinitial public offering continue to hold a substantial number of shares of ourcommon stock that many of them are now able to sell in the public market.Significant portions of these shares are held by a small number ofstockholders. Sales by our stockholders of a substantial number of shares, orthe expectation that such sales may occur, could significantly reduce themarket price of our common stock. Moreover, the holders of a substantial number of shares of our commonstock have rights, subject to certain conditions, to require us to fileregistration statements to permit the resale of their shares in the publicmarket or to include their shares in registration statements that we may filefor ourselves or other stockholders.

We have also registeredall common stock that we may issue under our employee benefits plans. As aresult, these shares can be freely sold in the public market upon issuance,subject to restrictions under the securities laws and any applicable lock-upagreement. In addition, our directors and executive officers may in the futureestablish programmed selling plans under Rule 10b5-1 of the SecuritiesExchange Act for the purpose of effecting sales of our common stock. If any ofthese events cause a large number of our shares to be sold in the publicmarket, the sales could reduce the trading price of our common stock and impedeour ability to raise future capital.

**Our principal stockholders and management own asignificant percentage of our stock and will be able to exercise significantinfluence over matters subject to stockholder approval.**

As of August 1, 2007, ourexecutive officers, directors and principal stockholders, together with theirrespective affiliates, currently beneficially own approximately 24.4% of ourcommon stock.  Accordingly, these stockholderswill likely be able to influence the composition of our board of directors,influence the approval of all matters requiring stockholder approval andcontinue to have significant influence over our operations.  This concentration of ownership could havethe effect of delaying or preventing a change in our control or otherwisediscouraging a potential acquirer from attempting to obtain control of us,which in turn could cause the market value of our common stock to decline.

**We will incur significant increased costs as aresult of operating as a public company, and our management will be required todevote substantial time to new compliance initiatives.**

As a public company, weare and will continue to incur significant legal, accounting and other expensesthat we did not incur as a private company. Until we are able to implement comprehensive accounting policies andprocedures, we may not be able to prepare and disclose, 

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in a timely manner, ourfinancial statements and other required disclosures or comply with existing ornew reporting requirements.  In addition,the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SECand the Nasdaq Global Market, or Nasdaq, have imposed various new requirementson public companies, including requiring establishment and maintenance ofeffective disclosure and financial controls and changes in corporate governancepractices.  Our management and otherpersonnel will need to devote a substantial amount of time to these newcompliance initiatives.  Moreover, theserules and regulations will increase our legal and financial compliance costsand will make some activities more time-consuming and costly.  For example, we expect these rules andregulations to make it more difficult and more expensive for us to maintaindirector and officer liability insurance, and we may be required to incursubstantial costs to maintain the same or similar coverage.

The Sarbanes-Oxley Actrequires, among other things, that we maintain effective internal controls forfinancial reporting and disclosure controls and procedures.  In particular, commencing in fiscal 2008, wemust perform system and process evaluation and testing of our internal controlsover financial reporting to allow management and our independent registeredpublic accounting firm to report on the effectiveness of our internal controlsover financial reporting, as required by Section 404 of the Sarbanes-OxleyAct.  Our testing, or the subsequenttesting by our independent registered public accounting firm, may revealdeficiencies in our internal controls over financial reporting that are deemedto be material weaknesses.  Ourcompliance with Section 404 will require that we incur substantialaccounting expense and expend significant management efforts.  We currently do not have an internal auditgroup, and we will need to hire additional accounting and financial staff withappropriate public company experience and technical accounting knowledge.  We currently have four****employeesdedicated full-time to accounting and finance matters.  We currently contemplate hiring at least onemore full-time employee in the accounting and finance department to assist inensuring we have effective internal controls over financial reporting anddisclosure controls and procedures.  Wealso hire consultants from time to time to address these matters.  If we are unable to hire adequate accountingand finance personnel, we may not be able to meet our public company reportingand governance obligations, including those set forth under the Sarbanes-OxleyAct.  Moreover, if we are not able tocomply with the requirements of Section 404 in a timely manner, or if weor our independent registered public accounting firm identifies deficiencies inour internal controls over financial reporting that are deemed to be material weaknesses,the market price of our stock could decline and we could be subject tosanctions or investigations by Nasdaq, the SEC or other regulatory authorities,which would require additional financial and management resources.

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**Some provisions of our charter documentsand Delaware law may have anti-takeover effects that could discourage anacquisition of us by others, even if an acquisition would be beneficial to ourstockholders and may prevent attempts by our stockholders to replace or removeour current management.**

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

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

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

·                  limiting the removal ofdirectors by the stockholders;

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

·                  a requirement of approval ofnot less than 662/3%of all outstanding shares of our capital stock entitled to vote to amend anybylaws by stockholder action, or to amend specific provisions of ourcertificate of incorporation;

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

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

These provisions mayfrustrate or prevent any attempts by our stockholders to replace or remove ourcurrent management by making it more difficult for stockholders to replacemembers of our board of directors, which is responsible for appointing themembers 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 have the effect ofdelaying or preventing a change of control, whether or not it is desired by orbeneficial to our stockholders.  Such adelay or prevention of a change of control transaction could cause the marketprice of our stock to decline.

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**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

**Use of Proceeds from the Sale ofRegistered Securities**

OnFebruary 8, 2007, our registration statement on Form S-1 (Registration No.333-138555) was declared effective for our initial public offering.  On February 14, 2007, we sold 7,000,000shares of our common stock at $7.00 per share in connection with the closing ofour initial public offering for a total of $49.0 million in grossproceeds.  On February 20, 2007, theunderwriters exercised in full their over-allotment option and purchased anadditional 1,050,000 shares of our common stock from a selling stockholder.Piper Jaffray & Co. and Jefferies & Company, Inc. acted as jointbook-running managers.  JMP SecuritiesLLC and Rodman & Renshaw, LLC acted as co-managers for the offering.

Inconnection with the initial public offering, we incurred approximately $3.4million in underwriting discounts and expenses and approximately $2.0 millionfor all other costs and expenses payable by us in connection with the sale ofour common stock pursuant to our initial public offering.

Weinvested the approximately $43.6 million in net proceeds we received pursuantto our initial public offering in short-term interest-bearing, investment gradeinstruments, money market funds, certificates of deposit or direct orguaranteed obligations of the United States government.  On February 26, 2007, we used $20.0 millionof the proceeds to repurchase Par’s rights to develop and commercializeOPT-80.  We intend to use the remainingapproximately $23.6 million of net proceeds from our initial public offeringfor the clinical trials and other research and development activities of OPT-80and Prulifloxacin; to fund commercialization activities, including conductingpre-launch preparations; to fund working capital and general corporatepurposes; and potential in-licenses and acquisitions of products or productcandidates, all as more fully described in the “Use of Proceeds” section of thefinal prospectus for our initial public offering.  There has been no material change in theplanned use of proceeds described in our final prospectus for our initialpublic offering.

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**Item6.  Exhibits**
| Exhibit   No. | ** ** | **Description of Document**                                                                                                                                                                                                                                   |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(3)        |       | Amended and Restated Certificate of Incorporation of  the registrant.                                                                                                                                                                                         |
| 3.2(2)        |       | Bylaws of the registrant.                                                                                                                                                                                                                                     |
| 4.1(4)        |       | Form of Common Stock Certificate of the registrant.                                                                                                                                                                                                           |
| 4.2(1)        |       | Warrant Agreement between the registrant and Pacific  Sorrento Technology Park dated June 1, 2000.                                                                                                                                                       |
| 4.3(1)        |       | Amended and Restated Investors’ Rights Agreement by  and among the registrant and certain stockholders of the registrant dated  November 30, 2005.                                                                                                       |
| 10.1+(5)      |       | Summary of Optimer Pharmaceuticals, Inc. 2007  Incentive Compensation Plan                                                                                                                                                                                    |
| 31.1          |       | Certification of principal executive officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                         |
| 31.2          |       | Certification of principal financial officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                         |
| 32            |       | Certification by the Chief Executive Officer and the  Chief Financial Officer of the Registrant, as required by Rule 13a-14(b)  or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the  United States Code (18 U.S.C. 1350). |

 

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  +                        Management contract orcompensatory plan or arrangement.

(1)                 Filed withRegistrant’s Registration Statement on Form S-1 on November 9, 2006.

(2)                 Filed withRegistrant’s Amendment No. 2 to Registration Statement on Form S-1 onJanuary 5, 2007.

(3)                 Filed withRegistrant’s Amendment No. 3 to Registration Statement on Form S-1 onJanuary 22, 2007.

(4)                 Filed withRegistrant’s Amendment No. 4 to Registration Statement on Form S-1 onFebruary 5, 2007.

(5)                   Filedwith Registrant’s Current Report on Form 8-K on July 17, 2007.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                         | ** **   | **OPTIMER PHARMACEUTICALS, INC.** |
|-------------------------|--------------|-----------------------------------|
|                    |         |                              |   |
| Dated: August  10, 2007 |         | By:                               | /s/ John D.  Prunty |
|                    | ** **   | **Name:**                         | **John D.  Prunty** |
|                    | ** **   | **Title:**                        | ***Chief  Financial Officer*** |
|                    | *** *** | *** ***                      | ***(Duly  Authorized Officer and Principal Financial  and Accounting Officer)*** |
|                         |              |                                   |  |  |

 

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