Table of Contents

 

 

 

**UNITED STATES********SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30, 2010**

 

**or**

 

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

 

**For the transition period from                    to                    **

 

**Commission File Number 001-33291**

 

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**OPTIMER PHARMACEUTICALS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

| **10110 Sorrento Valley Road,  Suite C  San Diego, CA**

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

(zip code) |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------|

 

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days:  Yes x    No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post suchfiles):  Yes  o    No  o

 

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

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act):  Yeso  No x

 

The number of shares of the registrant’s common stock,par value $0.001 per share, outstanding as of July 30, 2010 was 38,942,753shares.

 

 

 

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Table ofContents

 

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

**TABLE OF CONTENTS**

 
| ** **                                                                                                   | **Page** |
|--------------------------------------------------------------------------------------------------------------|----------|
| ** **                                                                                                   |     |
| **PART I — FINANCIAL  INFORMATION**                                                                |     |
|                                                                                                         |     |
| Item 1. Financial Statements  (unaudited)                                                               |     |
|                                                                                                         |     |
| Consolidated  Balance Sheets — June 30, 2010 and December 31, 2009                            | 3        |
|                                                                                                         |     |
| Consolidated  Statements of Operations — Three months and six months ended June 30,  2010 and 2009 | 4        |
|                                                                                                         |     |
| Consolidated  Statements of Cash Flows — Six months ended June 30, 2010 and 2009                   | 5        |
|                                                                                                         |     |
| Notes to Consolidated  Financial Statements                                                                  | 6        |
|                                                                                                         |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations    | 21       |
|                                                                                                         |     |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                     | 29       |
|                                                                                                         |     |
| Item 4. Controls and Procedures                                                                         | 31       |
|                                                                                                         |     |
| **PART II  — OTHER INFORMATION**                                                                   |     |
|                                                                                                         |     |
| Item 1A. Risk Factors                                                                                   | 31       |
|                                                                                                         |     |
| Item 6. Exhibits                                                                                        | 63       |
|                                                                                                         |     |
| SIGNATURE                                                                                                    |     |

 

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**PART I — FINANCIALINFORMATION**

 

**Item 1.  Financial Statements**

 

**Optimer Pharmaceuticals, Inc.**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                            |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                  |       | $                 | 31,377,616 |                  | $          | 17,054,328 |   |
| Short-term investments                                                                                                                                                                     |       | 35,180,463        |       | 21,131,145            |       |
| Research grant and  contract receivables                                                                                                                                                   |       | 65,482            |       | 84,164                |       |
| Prepaid expenses and other  current assets                                                                                                                                                 |       | 751,501           |       | 332,695               |       |
| Total current assets                                                                                                                                                                       |       | 67,375,062        |       | 38,602,332            |       |
| Property and equipment,  net                                                                                                                                                               |       | 803,989           |       | 672,896               |       |
| Long-term investments                                                                                                                                                                      |       | 882,000           |       | 882,000               |       |
| Other assets                                                                                                                                                                               |       | 503,741           |       | 498,762               |       |
| Total assets                                                                                                                                                                               |       | $                 | 69,564,792 |                  | $          | 40,655,990 |   |
|                                                                                                                                                                                       |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                             |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                       |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                           |       | $                 | 3,447,820  |                  | $          | 2,625,240 |   |
| Accrued expenses                                                                                                                                                                           |       | 2,113,604         |       | 5,025,669             |       |
| Total current liabilities                                                                                                                                                                  |       | 5,561,424         |       | 7,650,909             |       |
| Deferred rent                                                                                                                                                                              |       | 200,179           |       | 253,474               |       |
| Commitments and  contingencies                                                                                                                                                             |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                 |       |              |       |                  |       |
| Preferred stock, par value  $0.001, 10,000,000 shares authorized, no shares issued andoutstanding at June 30, 2010 and December 31, 2009,  respectively                          |       | —            |       | —                |       |
| Common stock, $0.001 par  value, 75,000,000 shares authorized, 38,356,991 sharesand 33,139,373 shares issued and outstanding at June 30, 2010 andDecember 31, 2009, respectively |       | 38,357            |       | 33,139                |       |
| Additional paid-in capital                                                                                                                                                                 |       | 260,035,131       |       | 205,114,914           |       |
| Accumulated other  comprehensive income                                                                                                                                                    |       | 302,681           |       | 38,063                |       |
| Accumulated deficit                                                                                                                                                                        |       | (199,031,315      | )          | (175,474,665          | )          |
| Total Optimer  Pharmaceuticals, Inc. stockholders’ equity                                                                                                                        |       | 61,344,854        |       | 29,711,451            |       |
| Noncontrolling interest                                                                                                                                                                    |       | 2,458,335         |       | 3,040,156             |       |
| Total stockholders’ equity                                                                                                                                                            |       | 63,803,189        |       | 32,751,607            |       |
| Total liabilities and  stockholders’ equity                                                                                                                                           |       | $                 | 69,564,792 |                  | $          | 40,655,990 |   |

 

See accompanyingnotes.

 

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**Optimer Pharmaceuticals, Inc.**

**Consolidated Statements of Operations**

**(unaudited)**

 
| ** **                                                                                                   | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|----------------------|------------|
| ** **                                                                                                   | ** ** | **June 30,**      | ** **  | **June 30,**    | ** ** |
| ** **                                                                                                   | ** ** | **2010**               | ** **  | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                                   | ** ** | ** **             | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                                                    |       |                   |        |                 |       |   |   |   |   |
| Research grants                                                                                              |       | $                      | 357,436     |                 | $          | 324,778 |   | $ | 654,873 |   | $ | 407,790 |   |
| Collaborative research  agreements                                                                           |       | —                 |        | 100,000              |       | — |   | 100,000 |   |
| Total revenues                                                                                               |       | 357,436                |        | 424,778              |       | 654,873 |   | 507,790 |   |
| Operating expenses:                                                                                          |       |                   |        |                 |       |   |   |   |   |
| Research and development                                                                                     |       | 6,419,251              |        | 10,737,277           |       | 17,780,830 |   | 19,651,349 |   |
| Marketing                                                                                                    |       | 656,464                |        | 266,267              |       | 925,058 |   | 461,063 |   |
| General and administrative                                                                                   |       | 3,686,442              |        | 1,871,309            |       | 6,075,154 |   | 3,919,809 |   |
| Total operating expenses                                                                                     |       | 10,762,157             |        | 12,874,853           |       | 24,781,042 |   | 24,032,221 |   |
| Loss from operations                                                                                         |       | (10,404,721            | )           | (12,450,075          | )          | (24,126,169 | ) | (23,524,431 | ) |
| Interest income and other,  net                                                                              |       | 53,719                 |        | 88,070               |       | 78,497 |   | 275,038 |   |
| Consolidated net loss                                                                                        |       | $                      | (10,351,002 | )                    | $          | (12,362,005 | ) | $ | (24,047,672 | ) | $ | (23,249,393 | ) |
| Net loss attributable to  noncontrolling interest                                                            |       | 290,105                |        | —               |       | 491,020 |   | — |   |
| Net loss attributable to  Optimer Pharmaceuticals, Inc.                                                 |       | $                      | (10,060,897 | )                    | $          | (12,362,005 | ) | $ | (23,556,652 | ) | $ | (23,249,393 | ) |
| Basic and diluted net loss  per share attributable toOptimer  Pharmaceuticals, Inc. common stockholders |       | $                      | (0.27       | )                    | $          | (0.37 | ) | $ | (0.66 | ) | $ | (0.73 | ) |
| Shares used to compute  basic and diluted netloss  per share attributable to common stockholders             |       | 38,306,910             |        | 33,083,447           |       | 36,663,380 |   | 31,816,553 |   |

 

See accompanyingnotes.

 

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**Optimer Pharmaceuticals, Inc.**

**Consolidated Statements of Cash Flows**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------------|-------------|
| ** **                                                                   | ** ** | **2010**                            | ** **  | **2009** | ** ** |
| ** **                                                                   | ** ** | ** **                          | ** **  | ** ** | ** ** |
| **Operating  activities**                                                    |       |                                |        |   |   |
| Net loss                                                                     |       | $                                   | (24,047,672 | ) | $ | (23,249,393 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                                |        |   |   |
| Depreciation and  amortization                                               |       | 141,869                             |        | 120,907 |   |
| Stock based compensation                                                     |       | 2,349,167                           |        | 1,343,348 |   |
| Stock awards                                                                 |       | 802,100                             |        | — |   |
| Deferred rent                                                                |       | (53,295                             | )           | 33,324 |   |
| Changes in operating  assets and liabilities:                                |       |                                |        |   |   |
| Prepaids expenses and  other current assets                                  |       | (418,806                            | )           | 47,794 |   |
| Research grant and  contract receivables                                     |       | 18,682                              |        | (113,680 | ) |
| Other assets                                                                 |       | (4,979                              | )           | 79 |   |
| Accounts payable and  accrued expenses                                       |       | (2,089,485                          | )           | 376,756 |   |
| Net cash used in operating  activities                                       |       | (23,302,419                         | )           | (21,440,865 | ) |
|                                                                         |       |                                |        |   |   |
| **Investing  activities**                                                    |       |                                |        |   |   |
| Purchases of short-term  investments                                         |       | (35,058,358                         | )           | (22,681,668 | ) |
| Sales or maturity of  short-term investments                                 |       | 21,000,000                          |        | 20,453,000 |   |
| Purchases of property and  equipment                                         |       | (272,965                            | )           | (50,615 | ) |
| Net cash provided (used)  by investing activities                            |       | (14,331,323                         | )           | (2,279,283 | ) |
|                                                                         |       |                                |        |   |   |
| **Financing  activities**                                                    |       |                                |        |   |   |
| Proceeds from sale of  common stock                                          |       | 51,774,170                          |        | 33,159,511 |   |
| Net cash provided by  financing activities                                   |       | 51,774,170                          |        | 33,159,511 |   |
| Effect of exchange rate  changes on cash and cash equivalents                |       | 182,860                             |        | (1,115 | ) |
| Net increase in cash and  cash equivalents                                   |       | 14,323,288                          |        | 9,438,248 |   |
| Cash and cash equivalents  at beginning of period                            |       | 17,054,328                          |        | 16,778,880 |   |
| Cash and cash equivalents  at end of period                                  |       | $                                   | 31,377,616  |   | $ | 26,217,128 |   |

 

See accompanying notes.

 

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**Optimer Pharmaceuticals, Inc.**

**Notes toConsolidated Financial Statements**

**(unaudited)**

 

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

 

*Organization and BusinessActivities*

 

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

 

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

 

*Basis of Presentation*

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements. In the opinion of management, all adjustments, consistingof normal recurring accruals, considered necessary for a fair presentation ofthe results of these interim periods have been included. The results ofoperations for the three months and six months ended June 30, 2010 are notnecessarily indicative of the results that may be expected for the full year.These unaudited consolidated financial statements should be read in conjunctionwith the audited financial statements and related notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2009, which was filed with the Securities and ExchangeCommission (“SEC”) on March 11, 2010.

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the amounts reported in the consolidated financial statements andaccompanying notes. Actual results could differ materially from thoseestimates.

 

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

* *

*Cash, Cash Equivalents and Investments*

 

Investmentswith original maturities of less than 90 days at the date of purchase areconsidered to be cash equivalents. Except for one auction rate preferred security, all other investmentsare classified as short-term investments which are deemed by management to be available-for-saleand are reported at fair value with net unrealized gains or losses reportedwithin other comprehensive loss in the consolidated statement of stockholders’equity.  Realized gains and losses, anddeclines in value judged to be other than temporary, are included in investmentincome or interest expense.  The cost ofsecurities sold is computed using the specific identification method.

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(Unaudited)**

 

The Company’s auction rate preferred security (“ARPS”)is classified as a noncurrent available-for-sale security in the consolidatedbalance sheet because of the Company’s intent and ability to hold this securityuntil the market for ARPSs returns or until the issuer refinances theunderlying security.

 

*Revenue Recognition*

 

The Company’s license and collaboration agreementscontain multiple elements, including non-refundable upfront fees, payments forreimbursement of third-party research costs, payments for research, paymentsassociated with achieving specific development milestones and royalties basedon specified percentages of net product sales, if any.  Agreements containing multiple elements aredivided into separate units of accounting if certain criteria are met,including whether the delivered element has stand-alone value to thecollaborator and whether there is objective and reliable evidence of the fair valueof the undelivered obligation(s). The consideration received is allocated amongthe separate units either on the basis of each unit’s fair value or using theresidual method, and the applicable revenue recognition criteria are applied toeach of the separate units.

 

When a payment is specifically tied to a separateearnings process, revenues are recognized when the specific performanceobligation associated with the payment is completed.  Performance obligations typically consist ofsignificant and substantive milestones pursuant to the related agreement.  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 payments are allowed to be recognized as revenue if and when theperformance milestone is achieved if they represent separate earnings.

 

In connection with certain research collaborationagreements, revenues are recognized from non-refundable upfront fees, which theCompany does not believe are specifically tied to a separate earnings process,ratably over the term of the agreement. Research fees are recognized as revenue as the related researchactivities are performed.

 

With respect to revenues derived from reimbursement ofdirect out-of-pocket expenses for research costs associated with grants, wherethe Company acts as a principal, with discretion to choose suppliers, bearscredit risk and performs part of the services required in the transaction, theCompany records revenue for the gross amount of the reimbursement. The costsassociated with these reimbursements are reflected as a component of researchand development expense in the consolidated statements of operations. None ofthe payments that the Company has received from collaborators to date, whetherrecognized as revenue or deferred, are refundable even if the related programis not successful.

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

*Research and Development Expenses*

 

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

 

Whennonrefundable payments for goods or services to be received in the future foruse in research and development activities are made, the Company defers andcapitalizes these types of payments. The capitalized amounts are expensed whenthe related goods are delivered or the services are performed.

 

In the statement of operations for the three monthsand six months ended June 30, 2009 included in this filing, the Companyreclassified $209,000 and $324,000, respectively, of medical affairs departmentexpenses from marketing expenses to research and development expenses to beconsistent with the classification in the three months and six months ended June 30,2010.

 

*Comprehensive Income (Loss)*

 

Comprehensiveincome (loss) is defined as the change in equity during a period fromtransactions and other events and circumstances from non-owner sources.  Net income (loss) and other comprehensiveincome (loss), including foreign currency translation adjustments andunrealized gains and losses on investments, is required to be reported, net oftheir related tax effect, to arrive at comprehensive income (loss).  Consolidated comprehensive loss was $10.3 millionand $12.4 million for the three months ended June 30, 2010 and 2009,respectively.  Consolidated comprehensiveloss was $23.9 million and $23.2 million for the six months ended June 30,2010 and 2009, respectively. As of June 30, 2010, the unrealized gain oninvestments and the gain on foreign currency translation adjustment was $4,919and $297,762, respectively. As of December 31, 2009, the unrealized gainon investments and the cumulative loss on foreign currency adjustment was$13,959 and $52,022, respectively.

 

*Net Loss Per Share Attributable to Common Stockholders*

 

Basic net loss per common share is computed bydividing net loss by the weighted-average number of common shares outstanding.Diluted net loss per common share is computed by dividing net loss by theweighted-average number of common shares and dilutive common share equivalentsoutstanding. Common equivalent shares consist of common shares issuable uponthe 

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

exercise of stock options and warrants. Since theCompany has a net loss for all periods presented, the effect of all potentiallydilutive securities is anti-dilutive. Accordingly, basic and diluted net lossper share is the same for all periods presented. As of June 30, 2010 and2009, there were 3,898,024 and 2,543,383 shares of common stock, respectively,issuable upon the exercise of stock options and warrants which were excludedfrom the calculation, as their effect would have been antidilutive.

 

*Income Taxes*

 

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

 

*Recently Issued AccountingPronouncements*

 

In April 2010, the Financial Accounting StandardsBoard (“FASB”) issued amendments related to the revenue recognition method formilestone payments in research and development agreements.  Under theseamendments, entities can make an accounting policy election to recognize apayment that is contingent upon the achievement of a substantive milestone inits entirety in the period in which the milestone is achieved.  The amendmentsare effective on a prospective basis for milestones achieved in fiscal years,and interim periods within those years, beginning on or after June 15,2010. The adoption of this standard is not expected to have a material impacton the Company’s financial position, cash flow or results of operations.

 

**3.   Fair Value of Financial Instruments**

 

The following table summarizes the Company’s financial assets measuredat fair value on a recurring basis as of June 30, 2010:

 
| ** **                        | ** ** | **Quoted Prices in  Active Markets********(Level 1)** | ** ** | **Other  Observable  Inputs********(Level 2)** | ** ** | **Unobservable  Inputs********(Level 3)** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Cash equivalents                  |       | $                                                                         | 31,377,616 |                                                | $          | —                                         |       | $         | —     |   | $ | 31,377,616 |   |
| Marketable securities             |       | $                                                                         | 35,180,463 |                                                | $          | —                                         |       | $         | —     |   | $ | 35,180,463 |   |
| Auction rate preferred securities |       | $                                                                         | —     |                                                | $          | —                                         |       | $         | 882,000    |   | $ | 882,000 |   |

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

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

 

A reconciliation of the beginning and ending balancesof assets measured at fair value on a recurring basis using Level 3 inputs isas follows:

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

 

All of the Company’s investments in available-for-salesecurities are recorded at fair value based on quoted market prices. As of June 30,2010, the Company held one ARPS valued at $882,000 with a perpetual maturitydate that resets every 28 days.  Althoughas of June 30, 2010, this ARPS continued to pay interest according to itsstated terms, the market in these securities continues to be illiquid. Based ona discounted cash flow model used to determine the estimated fair value of itsinvestment in the ARPS, the Company has previously recognized in theconsolidated statement of operations an unrealized loss of approximately$118,000 in investment income since the Company had determined that the declinein value was other than temporary. The assumptions used for the discontinuedcash flow model include estimates for interest rates, timing and amount of cashflows and expected holding period of the ARPS. The Company’s ARPS is classified as a long-term investment on theconsolidated balance sheets, as the Company does not believe it could liquidatethis security in the near term.

 

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

 

Thefollowing is a summary of the Company’s short-term investment securities, allof which are classified as available-for-sale. The determination of estimatedfair value is based upon quoted market prices as of the dates presented.

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 
| ** **          | ** ** | **June 30, 2010**      | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **Gross  Amortized********Cost** | ** ** | **Gross  Unrealized********Gains** | ** ** | **Gross  Unrealized********Losses** | ** ** | **Market Value** | ** ** |
| Government agencies |       | $                                | 33,175,548 |   | $ | 7,774 |   | $ | (2,859 | ) | $ | 35,180,463 |   |
|                     |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

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

 

Investments in net unrealized loss positions as of June 30,2010 are as follows:

 
| ** **          | ** ** | ** **                      | ** ** | **Less Than 12 Months of  Temporary Impairment** | ** ** | **Greater Than 12 Months of  Temporary Impairment** | ** ** | **Total Temporary  Impairment** | ** ** |
|---------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **          | ** ** | **Number of  Investments** | ** ** | **Fair Value**                                                       | ** ** | **Unrealized  Losses**                                                       | ** ** | **Fair Value**                  | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Government agencies |       | 9                               |       | $                                                                         | 10,152,039 |                                                                         | $          | (2,859                               | )          | $ | — |   | $ | — |   | $ | 10,152,039 |   | $ | (2,859 | ) |
|                     |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theamortized cost and estimated fair value of securities available-for-sale at June 30,2010, by contractual maturity, are as follows:

 
| ** **              | ** ** | **Amortized Cost** | ** ** | **Estimated Fair Value** | ** ** |
|-------------------------|------------|-------------------------|------------|------------------------------------|------------|
| Due in one year or less |       | $                       | 35,175,548 |                               | $          | 35,180,463 |   |
|                         |            |                         |            |                                    |            |  |  |

 

The weighted-average maturity of our short-terminvestments as of June 30, 2010 and 2009, was approximately four monthsand five months, respectively.

 

*EvaluatingInvestments for Other-than Temporary Impairments*

 

TheCompany considered a number of factors to determine whether the decline invalue in its investments was other than temporary, including the length of timeand the extent to which the market value has been less than cost, the financialcondition of the issuer and the Company’s intent to hold and ability to retainthese short-term investments.  Based onthese factors, except for the ARPS which the Company recorded as an othertemporary impairment in 2008, the Company believes that the decline in value ofits short-term investments is temporary and primarily related to the change inmarket interest rates since purchase. The Company determined that it does not intend to sell its short-terminvestments and it is not more likely than not that the Company will berequired to sell its short-term investments before recovery of their amortizedcost bases, which may not occur until maturity. The Company anticipates fullrecovery of amortized cost with respect to these securities at maturity orsooner in the event of a change in the market interest rate environment.

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

**5.     Stockholders’ Equity**

 

*Noncontrolling Interest*

 

In October 2009, the Company sold 40% of itsequity interest in OBI.  Pursuant toauthoritative guidance, the Company accounts and reports for minorityinterests, the portion of OBI not owned by the Company, as noncontrollinginterests and classifies them as a component of stockholders’ equity on theconsolidated balance sheets of the Company. The Company includes the net loss attributable to noncontrollinginterests as part of its consolidated net loss.

 

Thefollowing table reconciles equity attributable to noncontrolling interest:

 
| ** **                                       | ** ** | **For the Six Months Ended  June 30, 2010** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Noncontrolling interest, January 1, 2010    |       | $                                                | 3,040,156  |   |
| Net loss attributable to noncontrolling interest |       | (491,021                                         | )          |
| Translation adjustments                          |       | (90,800                                          | )          |
| Noncontrolling interest, June 30, 2010      |       | $                                                | 2,458,355  |   |

 

*Warrants*

 

Inconnection with a registered direct offering which occurred in March 2009,the Company sold warrants to purchase up to an aggregate of 91,533 shares ofits common stock. The warrants are exercisable at an exercise price of $10.93per share and will expire five years from March 9, 2009.

 

**6.****             ****Stock Based Compensation**

 

*Optimer Pharmaceuticals, Inc.*

 

*Stock Options*

 

Optimer has in effect the 2006 Equity Incentive Plan (“2006Plan”) which became effective upon the effectiveness of the Optimer’s initialpublic offering in 2007. Optimer’s 1998 Stock Plan (“1998 Plan”) was terminatedupon the effectiveness of Optimer’s initial public offering after which Optimerceased granting options under the 1998 Plan. Options granted under both the1998 Plan and the 2006 Plan generally expire no later than ten years from thedate of grant (five years for a 10% stockholder) and vest over a period of fouryears. The exercise price of options granted must at least be equal to the fairmarket value of Optimer’s common stock on the date of grant.

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

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

 

On May 5, 2010, the Company’s Board of Directorsappointed Pedro Lichtinger as its President and CEO and as a member of itsBoard of Directors.  Pursuant to Mr. Lichtingeroffer letter, he received performance-based stock options to purchase up to anaggregate of 480,000 shares of common stock and performance-based restrictedstock units covering up to an aggregate of 120,000 shares of common stock,which vest over time beginning on the dates the Company achieves specifieddevelopment and commercialization goals.

 

Simultaneously with Mr. Lichtinger’s appointment,Michael Chang resigned as the Company’s President and CEO.  The Company entered into a consulting agreementwith Dr. Chang to provide general consulting services. Pursuant to hisconsulting agreement and as part of his compensation, Dr. Chang receivedperformance-based stock options to purchase up to an aggregate of 400,000shares of common stock which vest over time beginning on the dates certainregulatory filings are accepted and approved. Dr. Chang has continued toserve as a member of the Company’s Board of Directors as Chairman and followingDr. Chang’s appointment as Chairman, Dr. Chang received a grant of65,000 fully-vested shares of common stock.

 

The performance-based stock options, performance-basedrestricted stock units and stock grant were made under the 2006 Plan.

 

*Employee Stock Purchase Plan*

 

Optimer also grants stock awards under its employeestock purchase plan (“ESPP”). Under the terms of the ESPP, eligible employeesmay purchase shares of Optimer’s common stock at the lesser of 85% of the fairmarket value of Optimer’s common stock on the offering date or the purchasedate.

 

*Valuations*

 

The Black-Scholes option-pricing model was developedfor use in estimating the fair value of traded options and stock awards, whichhave no vesting restrictions and are fully transferable.  In addition, the Black-Scholes option-pricingmodel requires the input of subjective assumptions, including the expectedstock price volatility of the underlying stock. The following table shows the assumptions used to compute stock-basedcompensation expense for the stock options, performance based stock options,performance based restricted stock units, and ESPP purchase rights during thethree months and six months ended June 30, 2010 and 2009, using theBlack-Scholes option pricing model:

 
| ** **                        | ** ** | **Three months ended********June 30,** | ** ** | **Six months ended********June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| **Stock Options**                 | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free interest rate           |       | 2.66-3.53                                   | %          | 2.00                                      | %          | 2.66-3.53 | % | 2.00 | % |
| Dividend yield                    |       | 0.00                                        | %          | 0.00                                      | %          | 0.00 | % | 0.00 | % |
| Expected  life of options (years) |       | 6.05-10.00                                  |       | 6.08                                      |       | 5.02-10.00 |   | 5.27-6.08 |   |
| Volatility                        |       | 71.24-79.07                                 | %          | 69.93                                     | %          | 71.24%-79.07 | % | 69.93 | % |

 

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**Optimer Pharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 
| ** **                        | ** ** | **Three months ended********June 30,** | ** ** | **Six months ended********June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| **ESPP**                          | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free interest rate           |       | 0.19-0.20                                   | %          | 0.30-0.31                                 | %          | 0.17-0.20 | % | 0.30-0.43 | % |
| Dividend yield                    |       | 0.00                                        | %          | 0.00                                      | %          | 0.00 | % | 0.00 | % |
| Expected  life of options (years) |       | 6  months                                   |       | 6  months                                 |       | 6  months |   | 6  months |   |
| Volatility                        |       | 34.23 -39.62                                | %          | 62.93 -68.27                              | %          | 34.08% - 39.62 | % | 62.93-74.94 | % |

 

The risk-free interest rate assumption was based onthe United States Treasury’s rates for U.S. Treasury zero-coupon bonds withmaturities similar to those of the expected term of the award beingvalued.  The assumed dividend yield wasbased on Optimer’s expectation of not paying dividends in the foreseeablefuture.  The weighted-average expectedlife of options was calculated using the simplified method.  This decision was based on the lack ofrelevant historical data due to the Company’s limited history.  In addition, due to the Company’s limitedhistorical data, the Company used the historical volatility of comparablecompanies whose share prices are publicly available to estimate the Company’soptions volatility rate.

 

During the quarter ended June 30, 2010, Optimerrecorded stock-based compensation expense of $190,253 related to bothperformance based and non-performance based stock options issued to consultants.

 

Total stock-based compensation expense related to allof Optimer’s stock options, restricted stock units, stock awards issued toemployees and employee stock purchases, recognized for the three months and sixmonths ended June 30, 2010 and 2009, was comprised as follows:

 
| ** **                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **2010**                              | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Research and development          |       | $                                     | 406,145    |                               | $          | 293,570 |   | $ | 790,142 |   | $ | 520,417 |   |
| Marketing                         |       | 94,997                                |       | 92,580                             |       | 188,308 |   | 185,755 |   |
| General and administrative        |       | 1,623,761                             |       | 319,043                            |       | 2,091,006 |   | 637,176 |   |
| Stock-based compensation  expense |       | $                                     | 2,124,903  |                               | $          | 705,173 |   | $ | 3,069,456 |   | $ | 1,343,348 |   |

 

As of June 30, 2010, the total unrecognizedcompensation expense related to unvested stock options and restricted stockunits issued to employees was approximately $10.9 million and the relatedweighted-average period over which it is expected to be recognized isapproximately 3.7 years.

* *

*Optimer Biotechnology, Inc.*

 

*Stock Options*

 

In March 2010, OBI’s board of directors approveda Stock Option Plan and reserved 8.0 million shares of OBI common stock forissuance of equity awards thereunder. The Stock Option Plan provides for theissuance of stock options, restricted stock awards and stock appreciationrights to employees, directors and consultants of OBI. The options generallyvest over four years and have a maximum contractual term of ten years.

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

*Valuations*

 

The following table shows the assumptions used tocompute stock-based compensation expense for the stock options granted by OBIduring the three and six months ended June 30, 2010 and 2009, using theBlack-Scholes option pricing model:

 
| ** **                        | ** ** | **Three months ended********June 30, 2010** | ** ** | **Six months ended********June 30, 2010** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| Risk-free interest rate           |       | 1.375                                            | %          | 1.25-1.375                                     | %          |
| Dividend yield                    |       | 0.00                                             | %          | 0.00                                           | %          |
| Expected life of options  (years) |       | 6.08                                             |       | 6.08                                           |       |
| Volatility                        |       | 92.14                                            | %          | 91.65-92.14                                    | %          |

 

The risk-free interest rate assumption was based onthe Central Bank of China interest rates. The assumed dividend yield was based on OBI’s expectation of not payingdividends in the foreseeable future.  Theweighted-average expected life of options was calculated using the simplifiedmethod.  This decision was based on thelack of relevant historical data due to OBI’s limited history.  Due to OBI’s limited historical data, OBIused the historical volatility of OBI’s peers whose share prices are publiclyavailable to estimate the volatility rate of OBI options.

 

The following table summarizes the stock-basedcompensation expense for OBI included in each operating expense line item in Optimer’sconsolidated statements of operations:

 
| ** **                        | ** ** | **Three months ended********June 30, 2010** | ** ** | **Six months ended********June 30, 2010** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| Research and development          |       | $                                                | 11,592     |                                           | $          | 19,026 |   |
| General and administrative        |       | 30,325                                           |       | 62,785                                         |       |
| Stock-based  compensation expense |       | $                                                | 41,917     |                                           | $          | 81,811 |   |

 

At June 30, 2010, the total unrecognizedstock-based compensation expense relating to OBI’s unvested stock-based awardsgranted to employees, net of forfeitures, was $506,161, which OBI anticipatesrecognizing as a charge against income over a weighted average period of 3.4years.

 

**7.     Revenue and OtherCollaborative Agreements**

 

*Revenues from Research Grants*

 

TheCompany has one active grant from the National Institute of Allergy andInfectious Diseases (“NIAID”). This grant was awarded in September 2007and is renewable for $1 million each year until August 2010, up to amaximum of $3 million. The award is being used to conduct supplementary studiesto the ongoing fidaxomicin trials to confirm narrow spectrum activity andpotency of fidaxomicin against hypervirulent epidemic strains, to supportadditional toxicology and microbiological studies to demonstrate the safety andefficacy of the fidaxomicin compound 

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

andits major metabolite in CDI patients and to support a surveillance study of *C. difficile* isolates across North Americato compare activity of fidaxomicin with existing CDI treatments.  For the three months ended June 30, 2010and 2009, the Company recognized revenues related to research grants of$357,436, and $324,778, respectively. For the six months ended June 30,2010 and 2009, the Company recognized revenues related to research grants of$654,873, and $407,790, respectively.

 

*Other Collaborative Agreements*

 

*ParPharmaceutical, Inc.*

 

TheCompany holds worldwide rights to fidaxomicin. In February 2007, the Company repurchased the rights to develop andcommercialize fidaxomicin in North America and Israel from ParPharmaceutical, Inc. (“Par”) under a prospective buy-back agreement.  The Company paid Par a one-time $5.0 millionmilestone payment in the quarter ended June 30, 2010 for the successfulcompletion by the Company of its second pivotal Phase 3 trial forfidaxomicin.  The Company may beobligated to pay Par a 5% royalty on net sales by the Company, its affiliatesor its licensees of fidaxomicin in North America and Israel, and a 1.5% royaltyon net sales by the Company or its affiliates of fidaxomicin in the rest of theworld.  In addition, in the event theCompany licenses its right to market fidaxomicin in the rest of the world, theCompany will be required to pay Par a 6.25% royalty on net revenues received byit related to fidaxomicin.  The Companyis obligated to pay each of these royalties, if any, on a country-by-countrybasis for seven years commencing on the applicable commercial launch in eachsuch country.

 

*BioconLimited*

 

In May 2010, the Company entered into a long-termsupply agreement with Biocon Limited (“Biocon”) for the commercial manufactureof fidaxomicin’s active pharmaceutical ingredient (“API”).   Pursuant to the agreement, Biocon agreed tomanufacture and supply the Company up to certain limits, fidaxomicin API andsubject to certain conditions, the Company agreed to purchase from Biocon atleast a portion of its requirements for fidaxomicin API in the United Statesand Canada.  The Company previously paid to Biocon $2.5 million forcertain equipment purchases and manufacturing scale-up activities, and theCompany may be entitled to recover up to $1.5 million of this amount under thesupply agreement in the form of discounted prices for fidaxomicin API. The Company expensed the entire $2.5 million in the second quarter of 2009because at the time of payment the recovery of up to $1.5 million could not beassured.  The Company may be obligated tomake additional payments to Biocon if it fails to meet the minimum purchaserequirements after Biocon has dedicated certain manufacturing capacity to theproduction of fidaxomicin API and if Biocon is unable to manufacturealternative products with the dedicated capacity.  Unless both the Companyand Biocon agree to extend the term of the supply agreement, it will terminateseven and a half years from the date the Company obtains marketingauthorization for fidaxomicin in the United States or Canada.  The supplyagreement will be terminated earlier in the event that the Company does notobtain marketing authorization for fidaxomicin in the United States or Canadaprior to December 31, 2013.  In addition, the supply agreement may beearlier terminated (i) by either party by giving two and a half years 

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

notice after the fifth anniversary of the EffectiveDate or upon a material breach of the supply agreement by the other party,(ii) by the Company upon the occurrence of certain events, includingBiocon’s failure to supply requested amounts of fidaxomicin API, or(iii) by Biocon upon the occurrence of certain events, including theCompany’s failure to purchase amounts of fidaxomicin API that it indicates inbinding forecasts.  The supply agreement terminated and supersede theprior supply agreement with Biocon, dated August 29, 2005, which wasassigned to the Company by Par in February 2007.

 

*Nippon Shinyaku, Co., Ltd.*

 

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

 

*CempraPharmaceuticals, Inc.*

 

InMarch 2006, the Company entered into a collaborative research anddevelopment and license agreement with Cempra Pharmaceuticals, Inc. (“Cempra”).  The Company granted to Cempra an exclusiveworldwide license, except in Association of Southeast Asian Nations (“ASEAN”)countries, with the right to sublicense, to the Company’s patent and know-howrelated to the Company’s macrolide and ketolide antibacterial program.  As partial consideration for granting Cemprathe license, the Company obtained equity of Cempra and the Company assigned novalue to such equity.   Pursuant to theterms of the agreement, in July 2010, the Company received a $500,000milestone payment from Cempra for the continuing development of a nextgeneration macrolide, CEM-101, for the treatment of respiratory infections. TheCompany may receive additional milestone payments as product candidates aredeveloped and/or co-developed by Cempra, in addition to milestone paymentsbased on certain sublicense revenue.  Theaggregate potential amount of such milestone payments is not capped and, basedin part on the number of products developed under the agreement, may exceed$24.5 million.  The 

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

Companywill also receive royalty payments based on a percentage of net sales oflicensed products.  The milestonepayments will be triggered upon the completion of certain clinical developmentmilestones and in certain instances, regulatory approval of products.  In consideration of the foregoing, Cempra mayreceive milestone payments from the Company in the amount of $1.0 million foreach of the first two products the Company develops under the agreement whichreceive regulatory approval in ASEAN countries, as well as royalty payments onthe net sales of such products.  Theresearch term of the agreement was completed in March 2008.  Subject to certain exceptions, on acountry-by-country basis, the general terms of this agreement continue untilthe later of: (i) the expiration of the last to expire patent rights of acovered product in the applicable country or (ii) ten years from the firstcommercial sale of a covered product in the applicable country.  Either party may terminate the agreement inthe event of a material breach by the other party, subject to prior notice andthe opportunity to cure.  Either partymay also terminate the agreement for any reason upon 30 days prior writtennotice provided that all licenses granted by the terminating party to the non-terminatingparty will survive upon the express election of the non-terminating party.

 

*MemorialSloan-Kettering Cancer Center*

 

InJuly 2002, the Company entered into a license agreement with MemorialSloan-Kettering Cancer Center (“MSKCC”) to acquire, together with certainnonexclusive licenses, exclusive, worldwide licensing and sublicensing rightsto certain patented and patent-pending carbohydrate-based cancerimmunotherapies.  As partialconsideration for the licensing rights, the Company paid to MSKCC a one-timefee consisting of both cash and 55,383 shares of its common stock.  In anticipation of the various transactionsinvolving OBI which the Company completed in October 2009, the Companyassigned its rights and obligations under this agreement to OBI. Under theagreement, which was amended in June 2005, OBI owes MSKCC milestonepayments in the following amounts for each licensed product: (i) $500,000upon the commencement of Phase 3 clinical studies, (ii) $750,000 uponthe filing of the first NDA, (iii) $1.5 million upon obtaining marketingapproval in the United States and (iv) $1.0 million upon obtainingmarketing approval in each and any of Japan and certain European countries, butonly to the extent that OBI, and not a sublicensee, achieves such milestones.  OBI may owe MSKCC royalties based on netsales generated from the licensed products and income OBI receives from itssublicensing activities, which royalty payments are credited against a minimumannual royalty payment OBI owes to MSKCC during the term of the agreement.

 

*ScrippsResearch Institute*

 

In July 1999, the Company acquired exclusive,worldwide rights to its OPopS technology from the Scripps Research Institute (“TSRI”).  This agreement includes the license to theCompany of patents, patent applications and copyrights related to OPopStechnology.  The Company also acquired,pursuant to three separate license agreements with TSRI, exclusive, worldwiderights to over 20 TSRI patents and patent applications related to otherpotential drug compounds and technologies, including HIV/FIV proteaseinhibitors, aminoglycoside antibiotics, polysialytransferase, selectininhibitors, nucleic acid binders, carbohydrate mimetics andosteoarthritis.  Under the fouragreements with TSRI, the Company paid TSRI license fees 

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

consisting of an aggregate of 239,996 shares of itscommon stock with a deemed aggregate fair market value of $46,400, asdetermined on the dates of each such payment. Additionally, under each agreement, the Company may owe TSRI royaltiesbased on net sales by the Company, its affiliates and sublicensees of thecovered products and royalties based on revenue the Company generates fromsublicenses granted pursuant to the agreements. For the first licensed product under each of the four agreements, theCompany will also owe TSRI payments upon achievement of certainmilestones.  In three of the four TSRIagreements, the milestones are the initiation of a Phase 2 trial or itsforeign equivalent, the filing of an NDA or its foreign equivalent and governmentmarketing and distribution approval.  Inthe remaining TSRI agreement, the milestones are the successful completion of aPhase 3 trial or its foreign equivalent, the filing of an NDA or itsforeign equivalent and government marketing and distribution approval.  The aggregate potential amount of milestonepayments the Company may be required to pay TSRI under all four TSRI agreementsis approximately $14.0 million.  Inanticipation of the various transactions involving OBI which the Companycompleted in October 2009, the Company assigned its rights and obligationsunder one of these agreements related to osteoarthritis to OBI.

 

*OptimerBiotechnology, Inc.*

 

In October 2009, the Company assigned to OBIcertain of its patents and know how related to OPT-88 and OPT-822/821 and alsoassigned to OBI its rights and obligation under license agreements with MSKCCand TSRI.  Under the agreement with OBI,the Company is eligible to receive up to $10 million in milestone payments foreach product developed under the development programs and is also eligible toreceive royalties on net sales of any product which is commercialized under theprograms.  The term of the IntellectualProperty Assignment and License Agreement continues until the last to expire ofthe patents assigned by the Company to OBI and the patents licensed to OBIunder the TSRI and MSKCC agreements.

 

To provide capital for OBI’s product developmentefforts, the Company and OBI also entered into a financing agreement with agroup of new investors.  Simultaneously, the Company sold 40 percent ofits existing OBI shares to the same group of new investors, and the Company andthe new investors also purchased new OBI shares.  Also under the financingagreement, if OBI achieves certain development milestones in the future, theCompany and the new investors will be obligated to invest approximately anadditional $8.6 million and $5.7 million, respectively, in exchange for new OBIshares.  Following the sale of its existing OBI shares and the initialinvestments in exchange for new OBI shares, the Company currently maintains a60 percent ownership interest in OBI.

 

**8.     Subsequent Event**

 

In July 2010, the Company received a $500,000milestone payment from Cempra under the terms of a licensing agreement betweenthe companies.  The milestone payment was made as a result of Cempra’scontinuing development of a next-generation macrolide (CEM-101) for thetreatment of respiratory infections. Cempra licensed CEM-101 from Optimer andhas successfully completed a Phase 1 study.

 

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**OptimerPharmaceuticals, Inc.**

**Notes to Consolidated FinancialStatements (continued)**

**(unaudited)**

 

In July 2010, the Company issued 585,762 shares ofcommon stock to AFOS, LLC as consideration for the engagement of an affiliateof AFOS to provide certain services to the Company and the affiliate’sobligation to provide such services.  Theshares are subject to various lock-up periods during which AFOS may nottransfer such shares, except under certain exceptions.

 

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

* *

*The following discussion and analysis should be read in conjunctionwith our consolidated financial statements and accompanying notes appearingelsewhere in this report, as well as the audited financial statements andaccompanying notes included in our annual report on Form 10-K for thefiscal year ended December 31, 2009, as filed with the Securities andExchange Commission, or SEC.  Thisdiscussion and other parts of this report may contain forward-lookingstatements based upon current expectations that involve risks and uncertainties.  Our actual results and the timing of selectedevents could differ materially from those anticipated in these forward-lookingstatements as a result of several factors, including those set forth under “RiskFactors” and elsewhere in this report.*

** **

**Overview**

 

Weare a biopharmaceutical company focused on discovering, developing andcommercializing innovative hospital specialty products. Our current developmentefforts are focused on products that treat gastrointestinal infections****and related diseases where currenttherapies have limitations, including limited efficacy, serious adverse sideeffects, drug-to-drug interactions, difficult patient compliance and bacterialresistance. We currently have two late-stage anti-infective product candidates,fidaxomicin and PruvelTM (prulifloxacin).

 

Fidaxomicin, our lead product candidate, is a narrowspectrum antibiotic with minimal systemic absorption. We are developingfidaxomicin for the treatment of CDI, the most common nosocomial, or hospital acquired,diarrhea. We have completed two fidaxomicin Phase 3 trials which showed thatfidaxomicin achieved the primary endpoint of clinical cure and demonstrated asignificantly lower recurrence rate and significantly higher global cure rate(defined as cure with no recurrence within four weeks of completing therapy)compared to Vancocin, the only FDA-approved antibiotic for the treatment ofCDI. The data also indicated that treatment with fidaxomicin significantlyimproved the recurrence rate and global cure rate in CDI patients requiringconcomitant antibiotics, compared to vancomycin.  Fidaxomicin was also well-tolerated in thetrials. We have also reported additional data from the second Phase 3 trialshowing a clinically meaningful reduction in recurrence rates and higher globalcure rates compared to Vancocin in both the hyper-virulent BI/NAP1/027 and thenon-BI strain type subgroups. Clinical cure rates for fidaxomicin and Vancocinwere similar in these two strain type subgroups. We expect to report additionaldata from our second fidaxomicin Phase 3 trial at scientific and medicalconferences throughout the second half of 2010.

 

We currently hold worldwide rights to fidaxomicin andintend to seek one or more partners for the commercialization of fidaxomicinoutside of the United States. We have submitted a Marketing AuthorizationApplication, or MAA, to the European Medicines Agency, or EMA. We plan tosubmit a New Drug Application, or NDA, to the FDA in the second half of 2010.

 

Pruvelis a prodrug in the fluoroquinolone class of antibiotics, a widely-used classof broad-spectrum antibiotics. We are developing Pruvel as a treatment forinfectious diarrhea.  In July 2008,we reported positive top-line data from the first Phase 3 trial conducted inMexico and

 

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Peruand in February 2009, we reported positive top-line data from the secondPhase 3 trial conducted in India, Guatemala and Mexico. The top-line analysisof data from these studies showed that Pruvel met the primary endpoint of timeto last unformed stool compared to placebo. Based upon the results of these twoPhase 3 trials we intend to submit an NDA for Pruvel in the first quarter of2011. We plan to initially seek approval for Pruvel for the treatment ofinfectious diarrhea.

 

We are developing additional product candidates usingour proprietary technology, including our Optimer One-Pot Synthesis, or OPopSTMdrug discovery platform. OPopS is a computer-aided technology that allows thedevelopment of potential drug candidates through carbohydrate mediatedmedicinal chemistry and enables the rapid synthesis of a wide variety ofproprietary molecules. It includes GlycoOptimization, which enables themodification of a carbohydrate group on an existing drug to improve itsproperties, and De Novo Glycosylation, which introduces new carbohydrate groupson existing drugs to create new patentable compounds with improvement ofpharmacokinetics.

 

We previously acquired exclusive rights to two otherproduct candidates: OPT-88, a disease-modifying intra-articular therapy forosteoarthritis which we licensed from the Scripps Research Institute, or TSRI,and OPT-822/821, a novel carbohydrate-based cancer immunotherapy which welicensed from Memorial Sloan-Kettering Cancer Center, or MSKCC.  InOctober 2009, we assigned to OBI certain of our patent rights and know-howrelated to OPT-88 and OPT-822/821 and also assigned to OBI our rights andobligations under the TSRI and MSKCC agreements. OBI recently filed an INDin Taiwan for OPT-822/821 and plans to initiate a Phase 2/3 clinical trial inAsia in the second half of 2010.  Otherpotential indications for OPT-822/821 are being evaluated.  After further evaluation, OBI has determinednot to pursue additional development of OPT-88. We maintain a 60% equity interest in OBI and have the right to receiveup to $10 million in future milestone payments for OPT-822/821 as well as royaltieson net sales of this product.

 

We were incorporated in November 1998.  Since inception, we have focused ondeveloping our product candidates, including fidaxomicin and Pruvel.  We have never been profitable and haveincurred significant net losses since our inception.  As of June 30, 2010, we had anaccumulated deficit of $199.0 million. These losses have resulted principally from costs incurred in connectionwith research and development activities, including the costs of clinical trialactivities associated with our current lead product candidates, license feesand general and administrative expenses. We expect to continue to incur operating losses for the next severalyears as we pursue the clinical development, regulatory approval and commercializationof our product candidates, as well as acquire or in-license additional productsor product candidates, technologies or businesses that are complementary to ourown.

 

**Critical Accounting Policies**

 

Our Management’s Discussion and Analysis of FinancialCondition and Results of Operations is based on our consolidated financialstatements, which have been prepared in conformity with generally acceptedaccounting principles in the United States. The preparation of these consolidated financial statements requires usto make estimates and assumptions that affect the reported amounts of assets,liabilities, expenses and related disclosures. Actual results could

 

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differ from those estimates. While our significantaccounting policies are described in more detail in Note 2 of the Notes toConsolidated Financial Statements appearing elsewhere in this report, we believethe following accounting policies to be critical to the judgments and estimatesused in the preparation of our consolidated financial statements.

* *

*Revenue Recognition*

 

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

 

Cash received in advance of services being performedis recorded as deferred revenue and recognized as revenue as services areperformed over the applicable term of the agreement.

 

When a payment is specifically tied to a separateearnings process, revenues are recognized when the specific performanceobligation associated with the payment is completed.  Performance obligations typically consist ofsignificant and substantive milestones. Revenues from milestone payments may be considered separable fromfunding for research services because of the uncertainty surrounding theachievement of milestones for products in early stages of development.  Accordingly, these milestone payments areallowed to be recognized as revenue if and when the performance milestone isachieved if they represent a substantive earnings process.

 

In connection with certain research collaborationagreements, revenues are recognized from non-refundable upfront fees, which wedo not believe are specifically tied to a separate earnings process, ratablyover the term of the agreement or the period over which we have significantinvolvement or perform services. Research fees are recognized as revenue as the related research activitiesare performed.

 

With respect to revenues derived from reimbursement ofdirect out-of-pocket expenses for research costs associated with grants, wherewe act as a principal, with discretion to choose suppliers, bear credit riskand perform part of the services required in the transaction, we record revenuefor the gross amount of the reimbursement. The costs associated with thesereimbursements are reflected as a component of research and development expensein the consolidated statements of operations.

 

None of the payments that we have received fromcollaborators to date, whether recognized as revenue or deferred, arerefundable even if the related program is not successful.

 

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*Research and Development*

 

Researchand development costs are expensed as incurred and consist primarily of costsassociated with clinical trials, compensation, including stock-basedcompensation, and other expenses related to research and development, includingpersonnel costs, facilities costs and depreciation.

 

Whennonrefundable payments for goods or services to be received in the future foruse in research and development activities are made, we defer and capitalizethese types of payments. The capitalized amounts are expensed when the relatedgoods are delivered or the services are performed.

* *

*Accrued Expenses*

 

A substantial portion of our on-going research anddevelopment activities are performed under agreements we enter into withexternal service providers, including clinical research organizations, or CROs,who conduct 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.  Subsequent changes in estimates may result ina material change in our accruals, which could also materially affect ourresults of operations.

* *

*Stock-Based Compensation*

 

TheFinancial Accounting Standards Board, or FASB, authoritativeguidance requires that share-based payment transactions with employees berecognized in the financial statements based on their fair value and recognizedas compensation expense over the vesting period.  We used the modified prospectivemethod and accordingly we did not restate the results of operations forthe prior periods.

 

Totalconsolidated compensation expense of $2.2 million and $705,000 was recognizedin the three months ended June 30, 2010 and 2009, respectively.  Total consolidated compensation expense of$3.2 million and $1.3 million was recognized in the six months ended June 30,2010 and 2009, respectively. The stock-based compensation expense recognizedduring the three months and six months ended June 30, 2010 include expensefrom performance-based stock options and restricted stock units granted toPedro Lichtinger and Michael Chang in May 2010.

 

Stock-basedcompensation expense is estimated as of the grant date based on the fair valueof the award and is recognized as expense over the requisite service period,which generally represents the vesting period. We estimate the fair value ofour stock options using the Black-Scholes option-pricing model and the fairvalue of our stock awards and restricted stock units based on the quoted marketprice of our common stock.

 

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

 

Equityinstruments issued to non-employees are recorded at their fair value and areperiodically revalued as the equity instruments vest and are recognized asexpense over the related service period.

** **

**Results of Operations**

*** ***

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

* *

*Collaboration Research and Grant Revenues*.  Collaboration research andgrant revenues for the three months ended June 30, 2010 and 2009 were$357,000 and $425,000, respectively. The decrease of $68,000, or 16%, wasprimarily due to a decrease in collaboration research revenue offset by an increasein research funding related to an NIH grant.

* *

*Research and Development Expense*.  Research and development expense for thethree months ended June 30, 2010 and 2009 was $6.4 million and $10.7million, respectively, a decrease of $4.3 million, or 40%.   The decrease was primarily due to a decreasein fidaxomicin and Pruvel development expenses. Additionally, the prior year’sexpenses included certain manufacturing set-up expenses that were reimbursed toBiocon Limited.

 

*Marketing Expense*. * *Marketing expense forthe three months ended June 30, 2010 and 2009 was $656,000 and $266,000,respectively.  The increase of $390,000,or 147%, was primarily due to increased market research efforts on ourfidaxomicin program.

 

*General and Administrative Expense*.  General and administrative expense for thethree months ended June 30, 2010 and 2009 was $3.7 million and $1.9million, respectively.  The increase of$1.8 million, or 95%, was due to higher compensation expenses, including $1.6million of stock compensation expense, an increase of $1.3 million over thesame period in the prior year.

 

*Interest Income and Other, net*.  Net interest income and other for the threemonths ended June 30, 2010 and 2009 was $54,000 and $88,000,respectively.  The decrease was primarilydue to lower interest rates on cash, cash equivalents and investments.

*** ***

***Comparison of*** S***ix Months Ended June 30, 2010 and 2009***

* *

*Collaboration Research and Grant Revenues*.  Collaboration research andgrant revenues for the six months ended June 30, 2010 and 2009 were$655,000 and $508,000, respectively. The increase of $147,000, or 29%, wasprimarily due to an increase in research funding related to an NIH grant.

 

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*Research and Development Expense*.  Research and development expense for the sixmonths ended June 30, 2010 and 2009 was $17.8 million and $19.7 million,respectively, a decrease of $1.9 million, or 10%.   The decrease was primarily due to a decreasein fidaxomicin and Pruvel development expenses and manufacturing set-upexpenses reimbursable to Biocon Inc. incurred in the prior year.  The decrease was offset by a $5.0 millionmilestone paid to Par for the successful completion of the second fidaxomicinPhase 3 trial.

* *

*Marketing Expense*. * *Marketing expense forthe six months ended June 30, 2010 and 2009 was $925,000 and $461,000,respectively.  The increase of $464,000,or 101%, was primarily due to increased market research efforts on ourfidaxomicin program.

* *

*General and Administrative Expense*.  General and administrative expense for thesix months ended June 30, 2010 and 2009 was $6.1 million and $3.9 million,respectively.  The increase of $2.2million, or 56%, was due to higher compensation expenses, including $2.1million of stock compensation expense, an increase of $1.5 million over thesame period in the prior year, as well as higher consulting expenses.

* *

*Interest Income and Other, net*.  Net interest income and other for the sixmonths ended June 30, 2010 and 2009 was $78,000 and $278,000,respectively.  The decrease was primarilydue to lower interest rates on cash, cash equivalents and investments.

** **

**Liquidity and Capital Resources**

* *

*Sources of Liquidity*

 

Since inception, our operations have been financedprimarily through the sale of equity securities.  Through June 30, 2010, we received grossproceeds of approximately $256.2 million from the sale of shares of ourpreferred and common stock as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  in July 2008, we sold a total of 1.7 million shares of our commonstock in a registered direct offering for proceeds of $14.7 million;

 

·      in March 2009, we sold a total of 3.3million shares of our common stock and warrants to purchase up to an aggregateof 91,533 shares of our common stock in a registered direct offering forproceeds of $32.9 million; and

 

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

 

Until required for operations, we invest a substantialportion of our available funds in money market funds, corporate debt securities,United States government instruments and other readily marketable debtinstruments, all of which are investment-grade quality.  We have established guidelines relating todiversification and maturities of our investments to preserve principal and maintainliquidity.

 

*Cash Flows*

 

As of June 30, 2010, cash, cash equivalents andshort-term investments totaled approximately $66.6 million as compared to $38.2million as of December 31, 2009, an increase of approximately $28.4million.  The increase in our cash, cashequivalent and short-term investments was primarily due to the $51.2 millionraised in a follow-on offering of our common stock in March 2010, offsetby the use of cash for our operating expenses. Of the $66.6 million, $5.0 million was held by OBI as of June 30,2010.

 

We cannot be certain if, when or to what extent wewill receive cash inflows from the commercialization of our productcandidates.  We expect our developmentexpenses to be substantial and to increase over the next few years as weadvance the development of our product candidates and prepare for regulatorysubmissions and commercialization.

 

In February 2007, we regained worldwide rights tofidaxomicin from Par under a prospective buy-back agreement.  We paid Par a one-time $5.0 million milestonepayment in the quarter ended June 30, 2010 for our successful completionof the second pivotal Phase 3 trial for fidaxomicin.  We are also obligated to pay Par a 5% royaltyon net sales by us or our affiliates of fidaxomicin in North America andIsrael, and a 1.5% royalty on net sales by us or our affiliates of fidaxomicinin the rest of the world.  In addition,in the event we license our right to market fidaxomicin in the rest of theworld, we will be required to pay Par a 6.25% royalty on net revenues wereceive related to fidaxomicin.  We areobligated to pay each of these royalties, if any, on a country-by-country basisfor seven years commencing on the applicable commercial launch in each such country.

 

In May 2010, we entered into a long-term supplyagreement with Biocon for the commercial manufacture of fidaxomicin’s activepharmaceutical ingredient, or API. Pursuant to the agreement, Biocon agreed tomanufacture and supply to us, up to certain limits, fidaxomicin API

 

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and, subject to certain conditions, we agreed topurchase from Biocon at least a portion of our requirements for fidaxomicin APIin the United States and Canada.  We previously paid to Biocon $2.5million for certain equipment purchases and manufacturing scale-up activities,and we may be entitled to recover up to $1.5 million of this amount under theSupply Agreement in the form of discounted prices for fidaxomicin API.  Wemay be obligated to make additional payments to Biocon if we fail to meetminimum purchase requirements after Biocon has dedicated certain manufacturingcapacity to the production of fidaxomicin API and if Biocon is unable tomanufacture alternative products with the dedicated capacity.

 

InJune 2004, we entered into a license agreement with Nippon Shinyaku towhich we acquired the non-exclusive right to import and purchase Pruvel, andthe exclusive right (with the right to sublicense), within the United States,to develop, make, use, offer to sell, sell and license products suitable forconsumption by humans containing Pruvel. Under the terms of the agreement, we will be required to pay NipponShinyaku a milestone payment in the amount of $1.0 million upon the submission,if any, of a NDA for Pruvel in the United States.

 

InOctober 2008, our Compensation Committee adopted a Severance Benefit Plancovering certain eligible employees of the Company, including executiveofficers.  In May 2010, theSeverance Benefit Plan was amended and restated.  Pursuant to the plan, upon an involuntarytermination other than for cause or a constructive termination, an eligibleemployee may be entitled to receive specified severance benefits. The benefitsmay include cash severance payments and acceleration of stock awardvesting.  The level of benefits providedunder the plan depends upon an eligible employee’s position and years ofservice, and whether the termination is related to a change in control.

 

InOctober 2009, we entered into certain transactions with our subsidiary,OBI, pursuant to which we assigned certain intellectual property rights andlicense agreements to OBI related to our OPT-88 and OPT-822/821 product candidates. In connection with these transactions, we entered into a financing agreementwith OBI and a group of new investors.  Under the terms of the financingagreement, if OBI achieves certain development milestones with respect toOPT-88 and OPT-822/821, we and the group of new investors may be required topurchase approximately an additional $8.6 million and $5.7 million,respectively, of new OBI common shares. In light of OBI’s decision tonot pursue further development of OPT-88, we do not expect that we will berequired to purchase the additional OBI common shares until such time, if ever,that we and the group of new investors agree to waive the milestonerequirements with respect to OPT-88.

 

*Funding Requirements*

 

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

 

·                  the costs ofpreparing applications for regulatory approvals and the timing of suchapprovals;

 

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

 

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·                  our decision to conduct future clinical trials, including the timing andprogress of such clinical trials;

 

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

 

·                  the costs involved in prosecuting, enforcing or defending patent claimsor other intellectual property rights;

 

·                  the success of the commercialization of our products; and

 

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

 

We believe that our existing cash and cash equivalentswill be sufficient to meet our capital requirements for at least the next 12months.

 

Until we can generate significant cash from ouroperations, we expect to continue to fund our operations with existing cashresources that were primarily generated from the proceeds of offerings of ourequity securities and collaborations and government grants.  In addition, we may finance future cash needsthrough the sale of additional equity securities, strategic collaborationagreements and debt financing.  However,we may not be successful in completing future equity financings, 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. The credit markets and the financial services industry have beenexperiencing a period of unprecedented turmoil which has generally made equityand debt financing more difficult to obtain, and may negatively impact ourability to complete financing transactions. Having insufficient funds may require us to delay, scale-back oreliminate some or all of our development programs, relinquish some or even allof our rights to product candidates at an earlier stage of development orrenegotiate less favorable terms than we would otherwise choose.  Failure to obtain adequate financing also mayadversely affect our ability to operate as a going concern.  If we raise funds by issuing equitysecurities, substantial dilution to existing stockholders would likely result.  If we raise funds by incurring additionaldebt financing, the terms of the debt may involve significant cash paymentobligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

 

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

 

*Cash Equivalents and MarketableSecurities Risk*

 

Our cash and cash equivalents and short-terminvestments as of June 30, 2010 consisted primarily of money market fundsand United States government instruments and other readily marketable debt instruments.  Our primary exposure to market risk isinterest income sensitivity, which is affected by changes in the general levelof U.S. interest rates.  The primaryobjective of

 

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our investment activities is to preserve principalwhile at the same time maximizing the income we receive from our investmentswithout significantly increasing risk.  Ahypothetical ten percent change in interest rates during the quarter endedJune 30, 2010 would have resulted in approximately a $11,000 change in netloss. Accordingly, we would not expect our operating results or cash flowsto be affected to any significant degree by a sudden change in market interestrates applicable to our securities portfolio. In general, money market funds are not subject to market risk becausethe interest paid on such funds fluctuates with the prevailing interest rate.

 

*Fair Value Measurements*

 

All of our investment securities areavailable-for-sale securities and are reported on the consolidated balancesheet at market value except for one auction rate preferred security, or ARPS,with a par value of approximately $1.0 million. As a result of thenegative conditions in the global credit markets, our ARPS is currently notliquid.  In the event we need to accessthe funds that are in an illiquid state, we will not be able to do so without aloss of principal, until the security is redeemed by the issuer or it matures.

 

*Foreign Currency Risk*

 

We have operated primarily in the United States ofAmerica and most transactions during the three months and six months endedJune, 2010 have been made in U.S. dollars. Accordingly, we have not had anymaterial exposure to foreign currency rate fluctuations. We do not have any foreigncurrency hedging instruments in place.

 

We have conducted clinical trials in Europe inconjunction with INC Research, our CRO, where we had clinical sites beingmonitored by clinical research associates. While invoices relating to theseclinical trials are generally denominated in U.S. dollars, our financialresults could be affected by factors such as inflation in foreign currencies,in relation to the U.S. dollar, in markets where these vendors have assisted usin conducting these clinical trials.

 

Certain transactions related to us and our subsidiary,OBI, are denominated primarily in Taiwan dollars.  As a result, ourfinancial results could be affected by factors such as changes in foreigncurrency exchange rates or weak economic conditions in foreign markets where weconduct business, including the impact of the existing crisis in the globalfinancial markets in such countries and the impact on both the U.S. dollar andthe Taiwan dollar.

 

We do not use derivative financial instruments forspeculative purposes. We do not engage in exchange rate hedging or hold orissue foreign exchange contracts for trading purposes. Currently, we do notexpect the impact of fluctuations in the relative fair value of othercurrencies to be material.

 

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**Item 4. Controls and Procedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in our reportsunder the Securities Exchange Act of 1934, as amended, or the Exchange Act, andthe rules and regulations thereunder, is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating our disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

* *

*Evaluation of disclosure controlsand procedures.*As required by Exchange ActRule 13a-15(b), we carried out an evaluation, under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer, of the effectiveness of the design and operationof our disclosure controls and procedures as of the end of the period coveredby this report. Based on the foregoing, our chief executive officer and chieffinancial officer concluded that our disclosure controls and procedures wereeffective at the reasonable assurance level.

* *

*Changes in internal control overfinancial reporting.* There was no change in ourinternal control over financial reporting that occurred during the periodcovered by this report that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

** **

**Item 1a. Risk Factors**

 

The risk factors set forth below with an asterisk (*)next to the title are new risk factors or risk factors containing changes,including any material changes, from the risk factors previously disclosed inItem 1A of our Annual Report on Form 10-K for the year ended December 31,2009, as filed with the SEC.

 

**Risks Related to Our Business**

 

**We are a company with limited sources of revenue, and we arelargely dependent on the success of our lead product candidate****fidaxomicin****and, to a lesser degree, our other lead product candidate Pruvel.**

 

Weare a biopharmaceutical company with no products approved for commercial saleand, to date, 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 fidaxomicin and Pruvel and, to a lesserextent, other product candidates;

 

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

 

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

 

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Ourproduct candidates will generally require extensive clinical study andevaluation, regulatory approval in multiple jurisdictions, substantialinvestment and significant marketing efforts before we generate any revenuesfrom product sales.  We are not permittedto market or promote our product candidates before we receive regulatoryapproval from the FDA or comparable foreign regulatory authorities.  We have not submitted an NDA, or received marketingapproval for either fidaxomicin or Pruvel, and we cannot be certain that eitherof these product candidates will receive regulatory approval or be successfulin any future clinical trials.  If we donot receive regulatory approval for and successfully commercialize fidaxomicinand Pruvel, we will not generate any revenues from product sales for severalyears, if at all, and we may not be able to continue our operations.

 

Webelieve our initial success will be more dependent on fidaxomicin than Pruvel,because we believe that the market for the treatment of CDI is larger than themarket for the treatment of infectious diarrhea.  Even if we successfully obtain regulatoryapproval to market fidaxomicin or Pruvel, our revenues for either drugcandidate will be dependent upon the size of the markets in the territories forwhich we have commercial rights and our ability to successfully commercializeour drug candidates in those markets, either alone or with a partner.  If the markets for the treatment of CDI orinfectious diarrhea are not as significant as we estimate or we are otherwiseunsuccessful in commercializing our drug candidates, our business and prospectswill be harmed.

 

**We have incurred significant operating losses since inceptionand anticipate that we will incur continued losses for the foreseeable future.***

 

Wehave experienced significant operating losses since our inception in 1998.  As of June 30, 2010, we had anaccumulated deficit of approximately $199.0 million.  We have generated no revenues from productsales to date.  We have funded ouroperations through June 30, 2010 from the sale of approximately $256.2million 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 preparesubmissions for regulatory approval of our lead product candidates, build ourmarketing and sales capabilities and continue our clinical trial and researchand development initiatives.  Because ofthe numerous risks and uncertainties associated with developing, obtainingregulatory approval for and commercializing our product candidates, we areunable to predict the extent of any future losses.  We may never successfully commercialize ourproduct candidates and thus may never have any significant future revenues orachieve and sustain profitability.

 

**If we fail to obtain additional financing, we may be unableto commercialize****fidaxomicin****and Pruvel or develop and commercialize other productcandidates, or continue our other research and development programs.***

 

Wewill require additional capital to commercialize our current lead productcandidates, fidaxomicin and Pruvel.  Wecannot be certain that additional funding will be available on acceptableterms, or at all.  Since 2008, the creditmarkets and the financial services industry have been experiencing a period ofunprecedented turmoil which has generally made equity and debt financing moredifficult to obtain, and may negatively impact our ability to complete

 

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financingtransactions.  To the extent that weraise additional funds by issuing equity securities, our stockholders mayexperience significant dilution.  Anydebt financing, if available, may require us to pledge our assets as collateralor involve restrictive covenants, such as limitations on our ability to incuradditional indebtedness, limitations on our ability to acquire or licenseintellectual property rights and other operating restrictions that couldnegatively impact our ability to conduct our business.  If we are unable to raise additional capitalwhen required or on acceptable terms, we may have to significantly delay, scaleback or discontinue the development or commercialization of one or more of ourproduct candidates or one or more of our other research and developmentinitiatives.  We also could be requiredto:

 

·      seek collaborators for one or more of ourcurrent or future product candidates at an earlier stage than otherwise wouldbe desirable or on terms that are less favorable than might otherwise beavailable; or

 

·      relinquish or license on unfavorable termsour rights to technologies or product candidates that we otherwise would seekto develop or commercialize ourselves.

 

Anyof the above events could significantly harm our business and prospects andcould cause our stock price to decline.

 

Wedo not currently have sufficient resources to commercialize fidaxomicin andPruvel on our own. If we are unable to raise additional capital or are unableto effectively collaborate with one or more partners for the commercializationof fidaxomicin or Pruvel, we will not generate significant revenues from salesof these products and our business will be materially harmed.

 

**We are dependent on third party collaborators and we may beunable to enter into future collaboration agreements or we may have disagreementswith these collaborators.**

 

Wecurrently plan to build our own marketing and sales force for fidaxomicin inthe United States and are evaluating our commercialization options for Pruvelin the United States, and we are seeking one or more partners for thecommercialization of fidaxomicin outside of the United States.  We cannot be certain that we will besuccessful in attracting any such partners. If we were not able to find appropriate partners for the continueddevelopment and commercialization of fidaxomicin, or our other productcandidates, we would either have to delay further development andcommercialization initiatives,  whichwould harm our business and prospects, or raise significant additional funds todevelop clinical and commercialization capabilities internally.

 

Weare subject to a number of additional risks associated with our dependence oncollaborations with third parties.** **Conflicts may arise between us andcollaborators, such as conflicts concerning the payment or reimbursement of developmentand commercialization costs, the strategies for developing and commercializingproduct candidates subject to the collaboration, the achievement of milestones,the interpretation of financial provisions, the ownership of intellectualproperty developed during the collaboration or the interpretation of clinicaldata.  If any such conflicts arise, acollaborator could act in its own self-interest, which may be adverse to ourbest interests.  Any such disagreementbetween us and a collaborator could result in one or

 

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moreof the following, each of which could delay or prevent the development orcommercialization of fidaxomicin, and our other product candidates, and in turnprevent us from generating sufficient revenues to achieve or maintainprofitability:

 

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

 

·      uncertainties regarding ownership ofintellectual property rights arising from our collaborative activities, whichcould prevent us from entering into additional collaborations andcommercializing such rights;

 

·      delays in further development orcommercialization activities by us or a collaborator if we and a collaboratorare unable to agree on development or commercialization activities or theassociated costs of these activities;

 

·      actions taken by a collaborator inside oroutside our collaboration which could negatively impact our rights or benefitsunder our collaboration; or

 

·      unwillingness on the part of acollaborator to keep us informed regarding the progress of its development andcommercialization activities or to permit public disclosure of the results ofthose activities.

 

Inaddition, a collaborator may not have or devote sufficient resources to developand commercialize our product candidates, may elect to underfund, discontinueor may not properly perform pre-clinical studies or clinical trials, or maydivert resources to other programs that are potentially competitive with ourproduct candidates.

 

**If we are unable to obtain FDA approval of our productcandidates, we will not be able to commercialize them in the United States.***

 

Weneed FDA approval prior to marketing our product candidates in the UnitedStates.  If we fail to obtain FDAapproval to market our product candidates, we will be unable to sell ourproduct candidates in the United States, which will significantly impair ourability to generate any revenues.

 

Thisregulatory review and approval process, which includes evaluation ofpre-clinical studies and clinical trials of our product candidates as well asthe evaluation of our manufacturing processes and our third-party contractmanufacturers’ facilities, is lengthy, expensive and 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.

 

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We may alsoexperience delays in submitting NDAs to the FDA and/or delays in the FDA reviewof our NDA submissions.  If we experiencedifficulty or delays in acquiring and assembling the extensive informationneeded to support an NDA filing for fidaxomicin or Pruvel, our NDA submissionswith respect to these product candidates may be impaired or delayed, whichcould negatively impact our or a collaborator’s ability to successfully commercializethese product candidates.  After wesubmit an NDA filing with the FDA, we may also experience delays in the FDA’sreview process.  As part of thePrescription Drug User Fee Act, or PDUFA, the FDA has a goal to review and acton a percentage of all submissions in a given time frame. The FDA has missed aportion of their PDUFA goals, and it is unknown whether the review of an NDAfiling for fidaxomicin or Pruvel, or for any of our other drug candidates, willbe completed within the FDA review goals or will be delayed. Moreover, theduration of the FDA’s review may depend on the number and type of other NDAsthat are submitted with the FDA around the same time period.

 

Even if our product candidates receive regulatoryapproval, any approvals that we obtain may not cover all of the clinicalindications for which we are seeking approval, or could contain significantlimitations in the form of narrow indications, warnings, precautions orcontra-indications with respect to conditions of use.  In such an event, our ability to generaterevenues from such products would be greatly reduced and our business would beharmed.

 

The FDA has substantial discretion in the approvalprocess and may either refuse to consider our applications for substantivereview or may form the opinion after review of our data that our applicationsare insufficient to allow approval of our product candidates.  If the FDA does not consider or approve anapplication that we submit, it may require that we conduct additional clinical,pre-clinical or manufacturing validation studies and submit that data before itwill reconsider our application. Depending on the extent of these or any other studies, approval of anyapplications that we submit may be delayed by several years, or may require usto expend more resources than we have available.  For example, we intend to rely in part oncertain legacy data from a third party to support an NDA for Pruvel. If the FDAdeems this data to be insufficient, it may delay our submission of a NDA forPruvel and could require us to complete additional studies.  It is also possible that additional studies,if performed and completed, may not be successful or considered sufficient bythe FDA for approval or even to make our applications approvable.  If any of these outcomes occur, we may beforced to abandon one or more of our future applications for approval, whichmight significantly harm our business and prospects.

 

Evenafter completing clinical trials and other studies, our product candidatescould fail to receive regulatory approval for many reasons, including thefollowing:

 

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

 

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

 

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

 

·      the results of our clinical trials orother studies 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 comparable foreign regulatoryauthorities may disagree with our interpretation of data from clinical trialsor other studies;

 

·      the data collected from clinical trialsand other studies of our product candidates may not be sufficient to supportthe submission of an NDA or other submission or to obtain regulatory approvalin the United States or elsewhere; and

 

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

 

Althoughthe FDA has granted Fast Track status to fidaxomicin and selected it forparticipation in a CMA Pilot 2 Program, we cannot be certain that we willreceive any benefits from these designations or that the designations willexpedite regulatory review or approval of fidaxomicin.  Participation in these programs has noteliminated any phase of clinical development. Moreover, our participation in the CMA Pilot 2 Program has involvedand will continue to involve frequent discussions and other interactions withthe staff of the FDA.  These frequentdiscussions could subject fidaxomicin to a greater level of scrutiny than itmight otherwise have received or require us to make more frequent submissionsand endure other burdens that would have been avoided if we had notparticipated in the program.  Therefore,despite any potential benefits of fidaxomicin’s Fast Track and CMA Pilot 2Program designations, significant uncertainty remains regarding the clinicaldevelopment and regulatory approval process for fidaxomicin.

 

**If we fail to gain and/or maintain marketing approvals fromregulatory authorities in international markets for****fidaxomicin****andany future product candidates for which we have rights in internationalmarkets, our market opportunities will be limited.**

 

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

 

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delayor have negative effects on the process for regulatory approval in others.  For example, if our MAA filing forfidaxomicin is rejected or unanticipated concerns are raised by the EMA duringits review, a subsequent NDA submission for fidaxomicin could be negativelyimpacted. Other than Pruvel, which is sold by other parties in Japan, Italyand certain other European countries, none of our product candidates is approvedfor sale in any international market for which we have rights. If we fail tocomply with regulatory requirements in our international markets or to obtainand maintain required approvals, our target market will be reduced and ourability to generate revenues will be diminished, which would significantly harmour business, results of operations and prospects.

 

**We currently have no sales organization and have noexperience as a company in marketing drug products.  If we are unable to expand our marketing capabilitiesand establish sales capabilities or enter into agreements with third parties tomarket and sell our product candidates, we may not be able to generate productrevenues.**

 

Wecurrently have a limited marketing organization and do not have a salesorganization for marketing, sales and distribution of pharmaceutical products.In order to commercialize any products, we must build our marketing, sales,distribution, managerial and other non-technical capabilities or makearrangements with third parties to perform these services. We plan to build ourown marketing and sales force to commercialize fidaxomicin in the United Statesand are seeking third-party partners outside of the United States. We ownexclusive rights to commercialize Pruvel in the United States, and areevaluating our commercialization options for Pruvel in the United States. Theestablishment and development of our own sales force to market any products wemay develop will be expensive and time consuming and could delay any product launch,and we cannot be certain that we will be able to successfully develop thiscapability. We do not currently have sufficient funds to develop a sales forceand other resources that we believe would be necessary to adequately marketfidaxomicin and Pruvel in the United States. We will also have to compete withother pharmaceutical and biotechnology companies to recruit, hire, train andretain marketing and sales personnel. To the extent we rely on third parties tocommercialize our products, if any, we may receive less revenues than if wecommercialized these products ourselves. In addition, we may have little or nocontrol over the sales efforts of any third parties involved in commercializingour products. In the event we are unable to develop our own marketing and salesforce or collaborate with a third-party marketing and sales organization, wewould not be able to commercialize our product candidates which wouldnegatively impact our ability to generate product revenues.

 

**We may not be able to enter into acceptable agreements tocommercialize****fidaxomicin****outside of the United States or if, needed, adequatelybuild our own marketing and sales capabilities.**

 

Ifappropriate regulatory approvals are obtained, we intend to commercializefidaxomicin outside of the United States through collaboration arrangementswith third parties.  We may be unable toenter into collaboration arrangements in international markets.  In addition, there can be no guarantee thatif we enter into these collaboration arrangements with other parties that theywill be successful or result in more revenues than we could obtain by marketingfidaxomicin on our own. If we are unable to enter into collaborationarrangements for our products or develop an 

 

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effectiveinternational sales force, our ability to generate product revenues would belimited, which would adversely affect our business, financial condition,results of operations and prospects. If we are unable to enter into suchcollaboration arrangements, we may need to develop our own marketing and salesforce to market fidaxomicin in a number of countries in Europe and LatinAmerica to hospital-based and long-term care physicians.  These efforts may not be successful as wehave no relationships among such hospital-based and long-term care physiciansand do not currently have sufficient funds to develop an adequate sales forcein these regions.  There is no guaranteethat we will be able to develop an effective international sales force tosuccessfully commercialize our products in these international markets.  If we cannot commercialize fidaxomicin, wewill have to rely solely on Pruvel and earlier stage product candidates for anyfuture revenues, and our ability to achieve and sustain profitability will bematerially harmed.

 

**If our product candidates are unable to compete effectivelywith branded and generic antibiotics, our commercial opportunity would bereduced or eliminated.**

 

Ifapproved, our lead product candidates will compete against both brandedantibiotic therapies, such as Vancocin Pulvules with respect to fidaxomicin andXifaxan®/rifaxaminwith respect to Pruvel, and generic antibiotics such as metronidazole and oralvancomycin with respect to fidaxomicin and ciprofloxacin with respect toPruvel.  In addition, we anticipate thatfidaxomicin will compete with other antibiotic and anti-infective productcandidates currently in development for the treatment of CDI. Many of theseproducts have been or will be developed and marketed by major pharmaceuticalcompanies, who have significantly greater financial resources and expertise inresearch and development, pre-clinical testing, conducting clinical trials,obtaining regulatory approvals, manufacturing and marketing approved productsthan we do.  As a result, these companiesmay obtain regulatory approval more rapidly than we are able to and may be moreeffective in selling and marketing their products as well.  Smaller or early-stage companies may alsoprove to be significant competitors, particularly through collaborativearrangements with large, established companies.

 

Weanticipate that, if approved, fidaxomicin and Pruvel will face increasingcompetition in the form of generic versions of branded products of competitorsthat will lose their patent exclusivity. For example, fidaxomicin, if approved, will immediately face steepcompetition from an inexpensive generic form of metronidazole.  Fidaxomicin would currently face generic oralvancomycin competition in Europe and in the future may face competition fromgeneric oral vancomycin in the United States as well.  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 fidaxomicin as a first-line therapy forthe treatment of CDI.  If we are unableto demonstrate to physicians and patients that, based on experience, clinicaldata, side-effect profiles and other factors, our products are preferable tothese generic antibiotic therapies, we may never generate meaningful productrevenues.  In addition, many antibioticsexperience bacterial resistance over time because of their continued use.  There can be no guarantee that bacteria wouldnot develop resistance to fidaxomicin, Pruvel or any of our other productcandidates.  Our commercial opportunitywould also be reduced or eliminated if our competitors develop andcommercialize generic or branded antibiotics that are safer, more effective,have fewer side effects or are less expensive than our product candidates.

 

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**We currently depend, and will in the future continue todepend, on third parties to manufacture our product candidates, including****fidaxomicin****andPruvel.  If these manufacturers fail toprovide us and our collaborators with adequate supplies of clinical trialmaterials and commercial product or fail to comply with the requirements ofregulatory authorities, we may be unable to develop or commercialize ourproducts. ***

 

Weoutsource all manufacturing of clinical trial supplies of our productcandidates to third parties.  We seek toestablish long-term supply arrangements with third-party contractmanufacturers. For example, in May 2010, we entered into a long-termsupply agreement with Biocon for the commercial manufacturing of thefidaxomicin API.   We intend to continueoutsourcing the manufacture of our product candidates to third parties for any futureclinical trials and large-scale commercialization of any product candidatesthat receive regulatory approval and become commercial drugs.

 

Ourability to develop and commercialize fidaxomicin and Pruvel and any otherproduct candidates depends in part on our ability to arrange for collaboratorsor other third parties to manufacture our products at a competitive cost, inaccordance with strictly enforced regulatory requirements and in sufficientquantities for clinical testing and eventual commercialization.  We have not yet manufactured commercialbatches of fidaxomicin, Pruvel 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 and approvals, or commercialization ofour product candidates.  The inability ofus or our collaborators to enter into and maintain agreements with third-partymanufacturers on acceptable terms would cause shortages of clinical trialsupplies of our product candidates, thereby delaying or preventing regulatoryapproval and/or commercialization of the affected product candidate, andadversely affecting our ability to generate revenues.  Specifically, Biocon is currently our solesupplier of fidaxomicin API.  While wework closely with Biocon to try to ensure continuity of supply whilemaintaining high quality and reliability, we cannot guarantee that theseefforts will be successful.  A reductionor interruption in our supply of fidaxomicin API from Biocon, and an inabilityto develop alternative sources for such supply, could adversely affect ourability to manufacture fidaxomicin in a timely or cost effective manner to makeour related product sales. Further, development of large-scale manufacturingprocesses will require additional validation studies, which the FDA must reviewand approve, and the time it will take us or a third party manufacturer todevelop such large-scale processes and capabilities may delay any productlaunch following regulatory approval. Even if we are able to establish additional or replacement manufacturers,identifying these sources and entering into definitive supply agreements andobtaining regulatory approvals may involve a substantial amount of time andcost and such supply arrangements may not be available on acceptable economicterms.

 

Inaddition, we, our collaborators and other third-party manufacturers of ourproducts must comply with strictly enforced current good manufacturingpractices, or cGMP, requirements enforced by the FDA through its facilitiesinspection program.  These requirementsinclude

 

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qualitycontrol, quality assurance and the maintenance of records anddocumentation.  We currently rely onBiocon to manufacture fidaxomicin API and rely on Patheon, Inc. tomanufacture the drug product supplies. As such, Biocon and Patheon will be subject to ongoing periodicunannounced inspections by the FDA and other agencies for compliance withcurrent cGMP, and similar foreign standards. We also rely on Nippon Shinyaku,which contracts with Juzen, as well as Angelini and Patheon, to manufacturePruvel drug supplies.  The manufacturingfacilities of Biocon, Juzen and Patheon have been inspected and approved by theFDA for other companies’ drug products; however, none of Biocon’s, Juzen’s norPatheon’s facilities have been inspected by the FDA for the manufacture of ourdrug supplies.  Angelini’s facilitieshave not been inspected or approved by the FDA. We or other third-party manufacturers of our products may be unable tocomply with cGMP requirements and with other FDA, state, local and foreignregulatory requirements.  We and ourcollaborators have little control over third-party manufacturers’ compliancewith these regulations and standards.  Afailure to comply with these requirements by our third-party manufacturers,including Biocon, Juzen, Angelini, and Patheon could result in the issuance ofuntitled letters and/or warning letters from authorities, as well as sanctionsbeing imposed on us, including fines and civil penalties, suspension ofproduction, suspension or delay in product approval, product seizure or recallor withdrawal of product approval.  Inaddition, we have no control over these manufacturers’ ability to maintainadequate quality control, quality assurance and qualified personnel.  If the safety of any quantities supplied bythird parties is compromised due to their failure to adhere to applicable lawsor for other reasons, we may not be able to obtain or maintain regulatoryapproval for or successfully commercialize one or more of our productcandidates, which would significantly harm our business and prospects.

 

**The commercial success of our product candidates will dependupon attaining significant market acceptance of these product candidates amongphysicians, patients, healthcare payors and the medical community.**

 

Evenif our product candidates are approved by the appropriate regulatoryauthorities for marketing and sale, physicians may not prescribe our productcandidates, which would prevent us from generating revenues or becomingprofitable.  Market acceptance offidaxomicin, Pruvel and any of our future product candidates by physicians,patients and healthcare payors will depend on a number of factors, many ofwhich are beyond our control, including:

 

·      the clinical indications for which theproduct candidate is approved;

 

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

 

·      perceived advantages over alternativetreatments;

 

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

 

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

 

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

 

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

 

·      the availability of adequate reimbursementby third parties, such as insurance companies and other healthcare payors;

 

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

 

·      relative convenience and ease ofadministration; and

 

·      prevalence and severity of adverse sideeffects.

 

Becausefidaxomicin is a differentiated antibiotic for the treatment of CDI, it mayencounter additional hurdles to market acceptance by physicians, who may beskeptical about its clinical benefits, or healthcare payors, who may resistreimbursing a premium-priced therapeutic particularly in light of the availabilityof generic alternatives.

 

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

 

Inaddition, in July 2008 the FDA notified makers of fluoroquinoloneantimicrobial drugs for systemic use that a boxed warning is necessary forthose products due to the risk of tendonitis and tendon rapture.  As prulifloxacin, the generic name forPruvel, is a fluoroquinolone antibiotic it may be required to carry a black boxwarning.  Although these risks have beendescribed for years on the product label of many fluoroquinolones, theincreased awareness of this risk may impact the market potential for thefluoroquinolone class of antibiotics, including prulifloxacin.  Furthermore, because prulifloxacin hasalready been marketed by other companies outside the United States to treat awide range of bacterial infections, including infectious diarrhea, urinarytract infections and respiratory tract infections, patients may be able toobtain prulifloxacin from these other companies, and not from us, ifprulifloxacin is approved in the market where the patient is located.  We have rights to Pruvel only in the UnitedStates.  These patients may obtainprulifloxacin in these other markets from other companies even if thesepatients are from the United States.

 

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

 

Akey element of our strategy is to commercialize a portfolio of newanti-infective products in addition to fidaxomicin and Pruvel.  As a significant part of our growth strategy,we intend to develop and commercialize, independently and/or throughcollaboration partners, additional products and product candidates through ourdiscovery research program using our proprietary technology, includingOPopS.  The success of this strategy dependsupon our ability to identify, select and acquire pharmaceutical productcandidates and products that fit into our development plans on terms that areacceptable to us. To supplement this strategy, we may also obtain rights toadditional product candidates from third parties through acquisition orin-licensing transactions.

 

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

 

Asignificant portion of the research that we are conducting involves new andunproven technologies.  Research programsto identify 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.

 

Ifwe are unable to develop suitable potential product candidates through internalresearch programs or by obtaining rights to novel therapeutics from thirdparties, our business and prospects will suffer.

 

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

 

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**Our future growth depends on our ability to identify andacquire or in-license products.  If we donot successfully identify and acquire or in-license related product candidatesor integrate them into our operations, we may have limited growthopportunities.**

 

Wein-licensed the U.S. rights to Pruvel from Nippon Shinyaku who, along withMeiji-Seika Kaisha Ltd., conducted the initial development of this productcandidate.  An important part of ourbusiness strategy is to continue to develop a pipeline of product candidates byacquiring or in-licensing products, businesses or technologies that we believeare a strategic fit for our business. Future in-licenses or acquisitions, however, may entail numerousoperational and financial risks, including:

 

·      exposure to unknown liabilities;

 

·      disruption of our business and diversionof our management’s time and attention to develop acquired products ortechnologies;

 

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

 

·      higher than expected acquisition andintegration costs;

 

·      increased amortization expenses;

 

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

 

·      impairment of relationships with keysuppliers or customers of any acquired businesses due to changes in managementand ownership; and

 

·      inability to retain key employees of anyacquired businesses.

 

Wehave limited resources to identify and execute the acquisition or in-licensingof third-party products, businesses and technologies and integrate them intoour current infrastructure.  Inparticular, we may compete with larger pharmaceutical companies and othercompetitors in our efforts to establish new collaborations and in-licensingopportunities.  These competitors likelywill have access to greater financial resources than us and may have greaterexpertise in identifying and evaluating new opportunities.  Moreover, we may devote resources topotential acquisitions or in-licensing opportunities that are never completed,or we may fail to realize the anticipated benefits of such efforts.

 

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**Our ability to pursue the development and commercializationof Pruvel, our other product candidates and our future product candidatesdepends upon the continuation of our licenses from third parties.**

 

Ourlicense agreement with Nippon Shinyaku provides us with an exclusive license todevelop and commercialize Pruvel for any indication in the United States, witha right to sublicense to third parties. In the event Nippon Shinyaku is not able to supply us with Pruvel, thelicense agreement provides us with a non-exclusive, worldwide right and licenseto manufacture or have Pruvel manufactured for us.  Either we or Nippon Shinyaku may terminatethe license agreement immediately upon the bankruptcy or dissolution of theother party or upon a breach of any material provision of the agreement if thebreach is not cured within 60 days following written notice.  In addition, we are entitled to terminate theagreement in the event that the FDA compels us to cease sales of Pruvel in theUnited States.  If our license agreement withNippon Shinyaku terminates, we will lose our rights to develop, manufacture andcommercialize Pruvel and our potential revenues would be limited.  Similarly, if our agreement with TSRI, forthe license of our OPopS technology is terminated, we will not be able tofurther develop future product candidates using our OPopS technology, and ourthird party licensees may be unable to continue development of our existingout-licensed product candidates.

 

**Clinical trials involve a lengthy and expensive process withan uncertain outcome, and results of earlier studies and trials may not bepredictive of future trial results.**

 

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

 

**Delays in clinical trials are common and have many causes,and any such delays could result in increased costs to us and jeopardize ordelay our ability to achieve regulatory approval and commence product sales ascurrently contemplated.**

 

Wehave in the past experienced delays in clinical trials of our productcandidates and we may experience delays in future clinical trials.  For example, we are planning to conduct aregistration study for other formulations and proof-of-concept clinical trialsfor other indications of fidaxomicin and intend to conduct a study subsequentto NDA submission to compare fidaxomicin to metronidazole for the treatment ofCDI.  We do not know whether plannedclinical trials will begin on time, will need to be redesigned or will becompleted on schedule, if at all. Clinical trials can be delayed for a variety of reasons, includingdelays in obtaining regulatory approval to commence a trial, in reachingagreement on acceptable terms with prospective clinical research organizations,or CROs, and clinical trial sites, in obtaining institutional review boardapproval at each site, in recruiting suitable patients to participate in atrial, in having patients complete a trial or return for post-treatmentfollow-up, in adding new sites or in obtaining sufficient supplies of clinicaltrial materials.  Many factors affectpatient enrollment, including the size and nature of the patient population,the proximity of patients to clinical sites, the eligibility criteria for thetrial, the design of the clinical trial, competing clinical trials, clinicians’and patients’ perceptions as to the potential advantages of the drug being studiedin relation 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.

 

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Wecould encounter delays if prescribing physicians encounter unresolved ethicalissues associated with enrolling patients in clinical trials of our productcandidates in lieu of prescribing existing antibiotics that have establishedsafety and efficacy profiles or with administering placebo to patients in ourplacebo-controlled trials.  Further, aclinical trial may be suspended or terminated by us, our collaborators, the FDAor other regulatory authorities due to a number of factors, including failureto conduct the clinical trial in accordance with regulatory requirements or ourclinical protocols, inspection of the clinical trial operations or trial siteby the FDA or other regulatory authorities resulting in the imposition of aclinical hold, unforeseen safety issues or adverse side effects, failure todemonstrate a benefit from using a drug, changes in governmental regulations oradministrative actions or lack of adequate funding to continue the clinicaltrial.  If we experience delays in thecompletion of, or termination of, any clinical trial of our product candidates,the commercial prospects of our product candidates may be harmed, and ourability to generate product revenues from any of these product candidates willbe delayed.  In addition, any delays incompleting our clinical trials will increase our costs, slow down our product developmentand approval process and jeopardize our ability to commence product sales andgenerate revenues.  Any of theseoccurrences may significantly harm our business, financial condition andprospects.

 

**We may be required to suspend or discontinue clinical trialsdue to adverse events, adverse side effects or other safety risks that couldpreclude approval of our product candidates or negatively affect sales of anymarketed product.***

 

Ourclinical trials may be 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 our Phase 3 clinical trials offidaxomicin, the most common drug-related side effects reported were nausea,vomiting, constipation, anorexia, headache and dizziness.  Patients treated with Pruvel have experienceddrug-related side effects including abdominal pain, diarrhea, nausea, renaltoxicities, cardiac arrhythmias, photosensitivity, rash, excessive flushing ofthe skin and central nervous system effects, such as seizures.  If adverse, drug-related events areencountered or suspected, our trials would be interrupted, delayed or haltedand the FDA or comparable foreign regulatory authorities could order us tocease further development of or deny approval of our product candidates for anyor all targeted indications.  Adverseevents encountered in any post-approval studies may also harm our collaborators’efforts to market our product candidates or could result in withdrawal ofregulatory approvals.  Even if we believeour product candidates are safe, our data is subject to review by the FDA,which may disagree with our conclusions and delay or deny approval of ourproduct candidates which would significantly harm the commercial prospects ofsuch product candidates.  Moreover, wecould be subject to significant liability if any volunteer or patient suffers,or appears to suffer, adverse side effects as a result of participating in ourclinical trials.  Any of theseoccurrences may significantly harm our business and prospects.

 

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**We have relied and in the future may rely on third parties toconduct our clinical trials.  If thesethird parties do not successfully carry out their contractual duties or meetexpected deadlines, we and our collaborators may not be able to obtainregulatory approval for or commercialize our product candidates.***

 

Wehave in the past entered into agreements with third-party CROs, such as INCResearch, to provide monitors for and to manage data for our clinical programs.

 

Weand any CROs conducting clinical trials for our product candidates are requiredto comply with current good clinical practices, or GCPs, regulations andguidelines enforced by the FDA for all of our products in clinicaldevelopment.  The FDA enforces GCPsthrough periodic inspections of trial sponsors, principal investigators andtrial sites.  If we or the CROs thatconduct clinical trials of our product candidates fail to comply withapplicable GCPs, the clinical data generated in the clinical trials may bedeemed unreliable and the FDA may require additional clinical trials beforeapproving any marketing applications.  Wecannot assure you that, upon inspection, the FDA will determine that anyclinical trials of our product candidates comply with GCPs.  In addition, our clinical trials must beconducted with product produced under cGMP regulations, and require a largenumber of test subjects.  Our failure tocomply with these regulations may require us to repeat clinical trials, whichwould be costly and delay the regulatory approval process and commercializationof our product candidates.

 

Inaddition, these third-party CROs are not our employees, and we cannot controlwhether or not they devote sufficient time and resources to our clinicalprograms.  These CROs may also haverelationships with other commercial entities, including our competitors, forwhom they may also be conducting clinical studies or other drug developmentactivities, which could harm our competitive position.  If CROs do not successfully carry out theircontractual duties or obligations or meet expected deadlines, if they need tobe replaced, or if the quality or accuracy of the clinical data they obtain iscompromised due to the failure to adhere to our clinical protocols, regulatoryrequirements, or for other reasons, our clinical trials may be extended,delayed or terminated or may have to be repeated, and we may not be able toobtain 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.

 

**We rely on our majority-owned subsidiary, OBI, for thedevelopment of one of our product candidates.***

 

InOctober 2009, we completed a number of transactions involving oursubsidiary, OBI, including the sale of 40% of our ownership interest in OBI tovarious third party investors.  Inconnection with these transactions, we assigned to OBI, and OBI assumed fromus, our rights and obligations under our license agreement with MSKCC relatedto our OPT-822/821 product candidate and our rights and obligations under oneof our license agreements with TSRI related to our OPT-88 productcandidate.  We also assigned to OBI certainof our intellectual property and know-how related to these two productcandidates. In exchange for these assignments, we have the right to receivecertain milestone or royalty payments relating to these product candidates.

 

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OBIsubsequently decided not to pursue further development of OPT-88, and we cannotassure you that OBI will successfully advance the development ofOPT-822/821.  In addition, if OBI doesnot comply with its obligations under the agreement with MSKCC, the agreementmay be terminated and we may not be able to re-assume our rights under theagreement.  If the agreement with MSKCCwas terminated and we were unable to re-assume our rights, we would not be ableto pursue further development of OPT-822/821. Moreover, the addition of third party investors in OBI has alsodiminished our ability to control OBI, which is now subject in some respects tothe rights of the third party minority stockholders.  In the future, additional equity financingsor other issuances of equity securities or securities convertible into equityby OBI may further reduce our ownership position in OBI and we may not maintaina controlling interest in OBI.  To the extentthat we do not maintain a controlling equity interest in OBI in the future, wewould have to rely on OBI’s contractual obligations, including under ourIntellectual Property Assignment and License Agreement, to ensure that OBIcontinues development of OPT-822/821 and complies with its obligations underthe MSKCC agreement.  Finally, OBI willneed additional funds to further develop and commercialize OPT-822/821,  and OBI may not be able to secure adequatefunding or be able to do so on terms you or we believe are favorable.  If OBI is unable to raise additional funds tocontinue operations, or otherwise fails to advance the development ofOPT-822/821, we will not receive milestone or royalty payments with respect tothis product candidate, and the value of our OBI equity position would likelydiminish.

 

**If product liability lawsuits are brought against us, we mayincur substantial liabilities and may be required to limit commercialization ofour product candidates.**

 

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

 

·      decreased demand for our productcandidates;

 

·      injury to our reputation;

 

·      termination of clinical trial sites orentire clinical trial programs;

 

·      withdrawal of clinical trial participants;

 

·      significant litigation costs;

 

·      substantial monetary awards to or costlysettlement with patients;

 

·      product recalls;

 

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·      loss of revenues; and

 

·      the inability to commercialize our productcandidates.

 

Wemay become dependent upon consumer perceptions of us and the safety and qualityof our product candidates.  We could beadversely affected if we or our product candidates are subject to negativepublicity.  We could also be adverselyaffected if any of our potential products or any similar products distributedby other companies prove to be, or are asserted to be, harmful toconsumers.  Also, because of ourdependence upon consumer perceptions, any adverse publicity associated withillness or other adverse effects resulting from consumers’ use or misuse of ourpotential products or any similar products distributed by other companies couldhave a material adverse impact on our results of operations.

 

Wehave global clinical trial liability insurance that covers our clinical trialsup to a $10.0 million annual aggregate limit. Our current or future insurance coverage may prove insufficient to coverany liability claims brought against us. We intend to expand our insurance coverage to include the sale ofcommercial products if marketing approval is obtained for our productcandidates, which would increase our insurance premiums.  Because of the increasing costs of insurancecoverage, we may not be able to maintain insurance coverage at a reasonablecost or obtain insurance coverage that will be adequate to satisfy anyliability that may arise.

 

**Even if we receive regulatory approval for our productcandidates, we will be subject to ongoing significant regulatory obligationsand oversight.**

 

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

 

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**If we fail to attract and retain senior management and keyscientific personnel, we may be unable to successfully develop our productcandidates, conduct our clinical trials and commercialize our productcandidates.**

 

Oursuccess depends in part on our continued ability to attract, retain andmotivate highly qualified management, clinical and scientific personnel and onour ability to develop and maintain important relationships with leadingacademic institutions, clinicians and scientists.  We are highly dependent on our chiefexecutive officer, and the other principal members of our executive andscientific teams. The unexpected loss of the service of any of these personsmay significantly delay or prevent the achievement of research, development,commercialization and other business objectives.  Replacing key employees may be difficult andcostly and may take an extended period of time because of the limited number ofindividuals in our industry with the breadth of skills and experience requiredto develop and commercialize pharmaceutical products successfully.  We do not maintain “key person” insurancepolicies on the lives of these individuals or the lives of any of our otheremployees.  We employ these individualson an at-will basis and their employment can be terminated by us or them at anytime, for any reason and with or without notice.

 

Wewill need to hire additional personnel as we expand our clinical developmentand commercial activities.  We may not beable to attract or retain qualified management and scientific personnel onacceptable terms in the future due to the intense competition for qualifiedpersonnel among biotechnology, pharmaceutical and other businesses,particularly in the San Diego, California area. If we are not able to attract and retain the necessary personnel toaccomplish our business objectives, we may experience constraints that willimpede significantly the achievement of our research and developmentobjectives, our ability to raise additional capital and our ability toimplement our business strategy.  Inparticular, if we lose any members of our senior management team, we may not beable to find suitable replacements, and our business and prospects may beharmed as a result.

 

**We will need to increase the size of our organization, and wemay experience difficulties in managing growth.***

 

Weare a small company with 81 employees as of July 30, 2010.  To commercialize our product candidates orcommence new clinical trials, we will need to expand our employee base formanagerial, 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 our abilityto manage any future growth effectively. To that end, we must be able to:

 

·      manage our development effortseffectively;

 

 

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·      manage our current clinical trialseffectively;

 

·      integrate additional management,administrative and manufacturing personnel;

 

·      build a marketing and sales organization;and

 

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

 

Wemay not be able to accomplish these tasks, and accordingly, may not achieve ourresearch, development and commercialization goals.  Our failure to accomplish any of these goalscould harm our financial results and prospects.

 

**Third-party payor coverage and reimbursement may beinsufficient or unavailable altogether for our product candidates, which coulddiminish our sales or affect our ability to sell our products profitably.**

 

Marketacceptance and sales of our product candidates will depend on reimbursementpolicies and may be affected by future healthcare reform measures.  Government third-party payors, such as theMedicare and Medicaid programs, and private payors, including healthmaintenance organizations, decide which drugs they will pay for and establishreimbursement levels for these drugs. Because third-party payors increasinglyare challenging prices charged and the cost-effectiveness of medical products,significant uncertainty exists as to the ability of our product candidates toreceive adequate coverage and reimbursement. We cannot be sure that third-party payors will place our productcandidates on approved formularies or that reimbursement will be available inwhole or in part for any of our product candidates.  Also, we cannot be sure that insufficientreimbursement amounts will not reduce the demand for, or the price of, ourproducts, if approved.

 

Manyhealthcare providers, such as hospitals, receive a fixed reimbursement amountper procedure or other treatment therapy, and these amounts are not necessarilybased on the actual costs incurred.  As aresult, these healthcare providers may choose only the least expensivetherapies regardless of efficacy.  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.

 

Wehave not commenced efforts to have our product candidates reimbursed bygovernment or third-party payors.  Ifreimbursement is not available or is available only to limited levels, we maynot be able to commercialize our products successfully or at all, which wouldharm our business and prospects.

 

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

 

The U.S. and some foreign jurisdictions areconsidering or have enacted a number of legislative and regulatory proposals tochange the healthcare system in ways that could affect our ability to sell ourproducts profitably. Among policy makers and payors in the U.S. and elsewhere,there is

 

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significant interest in promoting changes inhealthcare systems with the stated goals of containing healthcare costs,improving quality and/or expanding access. In the U.S., the pharmaceuticalindustry has been a particular focus of these efforts and has beensignificantly affected by major legislative initiatives.

 

In March 2010, the Patient Protection andAffordable Care Act, as amended by the Health Care and Education AffordabilityReconciliation Act, or collectively, PPACA, became law in the U.S. PPACAsubstantially changes the way healthcare is financed by both governmental andprivate insurers and significantly affects the pharmaceutical industry. Amongthe provisions of PPACA of greatest importance to the pharmaceutical industryare the following:

 

·                  an annual, nondeductible fee on anyentity that manufactures or imports certain branded prescription drugs andbiologic agents, apportioned among these entities according to their marketshare in certain government healthcare programs, beginning in 2011;

 

·                  an increase in the rebates a manufacturermust pay under the Medicaid Drug Rebate Program, retroactive to January 1,2010, to 23.1% and 13% of the average manufacturer price for branded andgeneric drugs, respectively;

 

·                  a new Medicare Part D coverage gapdiscount program, in which manufacturers must agree to offer 50% point-of-salediscounts off negotiated prices of applicable brand drugs to eligiblebeneficiaries during their overage gap period, as a condition for themanufacturer’s outpatient drugs to be covered under Medicare Part D,beginning in 2011;

 

·                  extension of manufacturers’ Medicaidrebate liability to covered drugs dispensed to individuals who are enrolled inMedicaid managed care organizations, effective March 23, 2010;

 

·                  expansion of eligibility criteria forMedicaid programs by, among other things, allowing states to offer Medicaidcoverage to additional individuals beginning in April 2010 and by addingnew mandatory eligibility categories for certain individuals with income at orbelow 133% of the Federal Poverty Level beginning in 2014, thereby potentiallyincreasing manufacturers’ Medicaid rebate liability;

 

·                  expansion of the entities eligible fordiscounts under the Public Health Service pharmaceutical pricing program,effective in January 2010;

 

·                  new requirements to report certainfinancial arrangements with physicians, including reporting any “transfer ofvalue” made or distributed to prescribers and other healthcare providers,effective March 30, 2013, and reporting any investment interests held byphysicians and their immediate family members during the preceding calendaryear;

 

·                  a new requirement to annually report drugsamples that manufacturers and distributors provide to physicians, effectiveApril 1, 2012;

 

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·                  a licensure framework for follow-onbiologic products; and

 

·                  a new Patient-Centered Outcomes ResearchInstitute to oversee, identify priorities in, and conduct comparative clinicaleffectiveness research, along with funding for such research.

 

We anticipate that the PPACA, as well as otherhealthcare reform measures that may be adopted in the future, may result inmore rigorous coverage criteria and in additional downward pressure on theprice that we receive for any approved product, and could seriously harm ourbusiness. Any reduction in reimbursement from Medicare or other governmentprograms may result in a similar reduction in payments from private payors.

 

Wealso cannot be certain that fidaxomicin and Pruvel or other current or futuredrug candidates will successfully be placed on the list of drugs covered byparticular health plan formularies, nor can we predict the negotiated price forour drug candidates, which will be determined by market factors. Many stateshave also created preferred drug lists and include drugs on those lists onlywhen the manufacturers agree to pay a supplemental rebate.  If fidaxomicin and Pruvel or other current orfuture drug candidates are not included on these preferred drug lists,physicians may not be inclined to prescribe them to their Medicaid patients,thereby diminishing the potential market for our products.

 

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

 

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

 

Weare subject to various federal and state laws pertaining to healthcare fraudand abuse, including anti-kickback laws, the False Claims Act, the ForeignCorrupt Practices Act and state laws requiring reporting and certificationunder comprehensive compliance programs governing our financial relationshipswith healthcare providers.  Violations ofthese laws are punishable by criminal and civil sanctions, including, in someinstances, exclusion from participation in federal and state healthcare programs,including Medicare and Medicaid, and the curtailment or restructuring ofoperations.  We believe that ouroperations are in material compliance with such laws and we are aware of theneed to increase our compliance resources if we begin marketing

 

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products.  However, because of the far-reaching natureof these laws, there can be no assurance that we would not be required to alterone or more of our practices to be in compliance with these laws.  In addition, there can be no assurance thatthe occurrence of one or more violations of these laws or regulations would notresult in a material adverse effect on our financial condition and results ofoperations.

 

**Our business involves the use of hazardous materials and weand our third-party manufacturers must comply with environmental laws andregulations, which can be expensive and restrict how we do business.**

 

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

 

**Our business and operations would suffer in the event ofcomputer, telecommunications or other system failure.**

 

Despitethe implementation 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 security breachthat causes interruptions in our operations could result in a materialdisruption of our drug development programs. For example, the loss of clinical trial information from completed orongoing clinical trials for fidaxomicin or Pruvel, which is maintained by ourthird-party CRO, could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data.  To the extent that any disruption or securitybreach results in a loss or damage to our data or applications, orinappropriate disclosure of confidential or proprietary information, we mayincur liability and the further development of our product candidates may bedelayed.

 

**Risks Related to Our Intellectual Property**

 

**It is difficult and costly to protect our intellectualproperty and our proprietary technologies, and we may not be able to ensuretheir protection.***

 

Ourcommercial success will depend in part on obtaining and maintaining patentprotection and trade secret protection of the use, formulation and structure ofour product candidates, and the

 

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methodsused to manufacture them, as well as successfully defending these patentsagainst third-party challenges, including those from generic drugmanufacturers.  Our ability to protectour product candidates from unauthorized making, using, selling, offering tosell or importing by third parties is dependent upon the extent to which wehave rights under valid and enforceable patents or trade secrets that coverthese activities.

 

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

 

Thedegree of future protection for our proprietary rights is uncertain, becauselegal means afford only limited protection and may not adequately protect ourrights or permit us to gain or keep our competitive advantage.  For example:

 

·                  others may be able to make compounds thatare similar to our product candidates but that are not covered by the claims ofour issued patents and pending patent applications or licensed patents andpending patent applications, or for which we are not licensed under our licenseagreements;

 

·                  others may be able to make competingpharmaceutical formulations containing our product candidates or components ofour product formulations that are either not covered by the claims of ourissued patents or licensed patents, not licensed to us under our licenseagreements or are subject to patents that expire;

 

·                  we or our licensors might not have beenthe first to make the inventions covered by our issued patents and pendingpatent applications or the pending patent applications and issued patents ofour licensors;

 

·                  we or our licensors might not have beenthe first to file patent applications for these inventions;

 

·                  others may independently develop similaror alternative technologies or duplicate any of our technologies;

 

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

 

·                  our issued patents and 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;

 

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

 

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

 

Inaddition, to the extent we are unable to obtain and maintain patent protectionfor our product candidates or in the event such patent protection expires, itmay no longer be cost effective to extend our portfolio by pursuing additionaldevelopment of a product candidate for follow-on indications.

 

Wehave filed 17 patent applications related to fidaxomicin, one of which hasresulted in the issuance of a polymorph patent and one of which has resulted ina manufacturing patent, from the United States Patent and Trademark Office, orUS PTO, and 15 of which are pending.

 

Thepatent and patent applications related to fidaxomicin encompass various topicsrelating to:

 

·                  composition of matter (issued in Taiwan);

 

·                  pharmaceutical composition and methods ofuse;

 

·                  polymorphic forms (issued in U.S. withrespect to one polymorphic form) and pharmaceutical compositions thereof;

 

·                  manufacturing processes (issued in U.S.and Australia);

 

·                  treatment of diseases;

 

·                  formulation;

 

·                  selected CDI patient profiles; and

 

·                  primary metabolites.

 

Ifwe are unable to obtain a composition of matter patent, our competitors,including generic drug companies, may be able to design other similarformulations of the active ingredient of fidaxomicin.  Furthermore, even though the manufacturingprocess patent has issued, and even if the formulation patent applicationresults in an issued patent, our competitors, including generic drug companies,may be able to design around our manufacturing processes or formulation forfidaxomicin.  As a result, ourcompetitors may be able to develop competing products.

 

In addition, we currently plan to submit an NDA forPruvel for the treatment of infectious diarrhea in the first quarter of2011.  The composition of matter patentcovering Pruvel expired in February 2009. In 2009, our licensor, Nippon Shinyaku received a patent from the US PTOwhich covers the polymorphic form of a key intermediate in the manufacturingprocess for Pruvel.  Despite itsissuance, this patent may later be challenged by a third party or fail toprevent

 

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a third party from producing and marketing a genericform of Pruvel in the United States.   Ifwe are unable to rely on the recently-issued polymorph patent, we will likelyrely on one or more regulatory marketing exclusivities for Pruvel in the UnitedStates.  Specifically, if our NDA forPruvel is approved, we expect to receive a five-year period of marketingexclusivity under the Hatch-Waxman Act. This exclusivity period is available tothe first applicant to gain approval of an NDA for a new chemical entity, orNCE, that has not previously been approved as an active ingredient underSection 505(b) of the Food Drug and Cosmetic Act, or FDCA.  While we expect that the NCE exclusivityperiod will be available for Pruvel, if the recent polymorph patent is insufficientto maintain exclusivity in the United States with respect to Pruvel, we mayface generic competition in the United States five years after our NDA forPruvel is approved by the FDA. If we are unable to obtain marketing exclusivitybeyond five years from the approval of our NDA, our potential revenues fromPruvel sales in the U.S. will be limited.

 

Wedepend, in part, on our licensors and collaborators to protect a portion of ourproprietary rights.  In such cases, ourlicensors and collaborators may be primarily or wholly responsible for themaintenance of patents and prosecution of patent applications relating toimportant areas of our business.  Forexample, Nippon Shinyaku is responsible for the maintenance of patents andprosecution of patent applications relating to Pruvel.  We may also be dependent on Par to providetechnical support for patent applications relating to fidaxomicin.  If any of these parties fail to adequatelyprotect these product candidates with issued patents, our business and prospectswould be significantly harmed.

 

Underour agreement with Nippon Shinyaku, in the event Nippon Shinyaku fails to takeall steps necessary to seek extension of the patents licensed to us in theUnited States 180 days after we request such action be taken, then we have theright to take all necessary actions to extend the licensed patents.  Our agreement with Par does not have explicitprovisions regarding our rights to take necessary action with respect to maintenanceof patents and prosecution of patent applications nor do such agreementsprovide us with any legal recourse in the event such parties do not so maintainand/or prosecute.  If any of theseparties or others on which we rely for patent maintenance and prosecution failto adequately maintain patents and prosecute patent applications relating totechnology licensed to or from us, we may be required to take further action onour own to protect this technology. However, we may not be successful in maintaining such patents orprosecuting such patent applications and if so, our business and prospectswould be significantly harmed.

 

Wealso rely on trade secrets to protect our technology, especially where we donot believe patent protection is appropriate or obtainable.  However, trade secrets are difficult toprotect.  Although we use reasonableefforts to protect our trade secrets, our employees, consultants, contractors,outside scientific collaborators and other advisors may unintentionally orwillfully disclose our information to competitors.  Enforcing a claim that a third-party entityillegally obtained and is using any of our trade secrets is expensive and timeconsuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willingto protect trade secrets.  Moreover, ourcompetitors may independently develop equivalent knowledge, methods andknow-how.

 

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Ifwe or our licensors fail to obtain or maintain patent protection or tradesecret protection for our product candidates or our technologies, third partiescould use our proprietary information, which could impair our ability tocompete in the market and adversely affect our ability to generate revenues andattain profitability.

 

**We may incur substantial costs as a result of litigation orother proceedings relating to our patent, trademark and other intellectualproperty rights, and we may be unable to protect our rights to, or use, ourtechnology.**

 

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

 

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

 

Althoughwe have conducted searches of third-party patents with respect to fidaxomicinand Pruvel, 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

 

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applicationfor the names “Optimer”, “Optimer Pharmaceuticals” and “Pruvel”, we are awarethat the name “Optimer” has been registered as a trademark with the U.S. PTO bymore than one third 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.

 

Becausesome patent applications in the United States may be maintained in secrecyuntil the patents are issued, because patent applications in the United Statesand many foreign jurisdictions are typically not published until eighteenmonths after filing, and because publications in the scientific literatureoften lag behind actual discoveries, we cannot be certain that others have notfiled patent applications for technology covered by our licensors’ issuedpatents or our pending applications or our licensors’ pending applications, orthat we or our licensors were the first to invent the technology.  Our competitors may have filed, and may inthe future file, patent applications covering technology similar to ours.  Any such patent application may have priorityover our or our licensors’ patent applications and could further require us toobtain rights to issued patents covering such technologies.  If another party has filed a U.S. patentapplication on inventions similar to ours, we may have to participate in aninterference proceeding declared by the U.S. PTO to determine priority ofinvention in the United States.  Thecosts of these proceedings could be substantial, and it is possible that suchefforts would be unsuccessful, resulting in a loss of our U.S. patent positionwith respect to such inventions.

 

Someof our competitors may be able to sustain the costs of complex patentlitigation more effectively than we can because they have substantially greaterresources.  In addition, anyuncertainties resulting from the initiation and continuation of any litigationcould have a material adverse effect on our ability to raise the funds necessaryto continue our operations.

 

**Risks Related to the Securities Market and Ownership of OurCommon Stock**

 

**The market price of our common stock may be highly volatile.**

 

Beforeour initial public offering in February 2007, there was no public marketfor our common stock.  We cannot assureyou that an active trading market will exist for our common stock. You may not be able to sell yourshares quickly or at the market price if trading in our common stock is notactive.

 

Thetrading price of our common stock is likely to be highly volatile and could besubject to wide fluctuations in price in response to various factors, many ofwhich are beyond our control, including:

 

·                  general economic and market conditionsand other factors that may be unrelated to our operating performance or theoperating performance of our competitors;

 

·                  announcement of FDA or comparable foreignregulatory agency approval or non-approval of our product candidates, orspecific label indications for their use, or delays in the FDA or comparableforeign regulatory agency review process;

 

·                  actions taken by the FDA or otherregulatory agencies with respect to our product candidates, clinical trials,manufacturing process or marketing and sales activities;

 

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·                  changes in laws or regulations applicableto our products, including but not limited to clinical trial requirements forapprovals;

 

·                  the success of our development effortsand clinical trials, particularly with respect to fidaxomicin and Pruvel;

 

·                  announcements by our collaborators withrespect to clinical trial results, regulatory submissions and communicationsfrom the FDA or comparable foreign regulatory agencies;

 

·                  the success of our efforts to acquire orin-license additional products or product candidates;

 

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

 

·                  actual or anticipated variations in our quarterlyoperating results;

 

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

 

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

 

·                  third-party coverage or reimbursement policies;

 

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

 

·                  conditions or trends in the biotechnology andbiopharmaceutical industries;

 

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

 

·                  changes in the market valuations of similar companies;

 

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

 

·                  additions or departures of key scientificor management personnel;

 

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

 

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·                  trading volume of our common stock.

 

In addition, the stock market in general and the market forbiotechnology and biopharmaceutical companies in particular have experiencedextreme price and volume fluctuations that have often been unrelated and/ordisproportionate to the operating performance of those companies.  These broad market and industry factors maysignificantly harm the market price of our common stock, regardless of ouroperating performance.  In the past,following periods of volatility in the market, securities class-actionlitigation has often been instituted against companies.  Such litigation, if instituted against us,could result in substantial costs and diversion of management’s attention andresources, which could significantly harm our business, financial condition andprospects.

 

**Future salesof our common stock in the public market could cause our stock price todecline.**

 

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

 

Wehave also registered all common stock that we have issued under our employeebenefits plans. As a result, these shares can be freely sold in the publicmarket upon issuance, subject to any applicable restrictions under thesecurities laws. 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.

 

**We may not be able to liquidate our holding in an auctionrate security.***

 

Ourinvestment securities consist of money market funds, corporate debt securitiesand government agency securities. As of June 30, 2010, we held one auctionrate preferred security valued at $882,000 with perpetual maturity dates thatreset every 28 days.  The negativeconditions in the global credit markets have prevented some investors fromliquidating their holdings, including their holdings of auction ratesecurities.  There was insufficientdemand at auction for our auction rate preferred security.  As a result, such security is currently notliquid, and we could be required to hold it until it is redeemed by the issueror to maturity.  In the event we need toaccess the funds that are in an illiquid state, we will not be able to do sowithout a loss of principal, until a future auction on this investment issuccessful, the security is redeemed

 

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bythe issuer or it matures. We have reduced the carrying value of our auctionrate security by $118,000 to reflect an estimated change in fair market valuedue primarily to a lack of liquidity. Although the auction rate securitycontinues to pay interest according to its stated terms, based on valuationmodels, we have recorded an unrealized loss for an other-than-temporary changein valuation of $118,000.  If the creditratings of the security issuer deteriorates or if uncertainties in thesemarkets continue and any decline in market value is determined to beother-than-temporary, we would be required to adjust the carrying value of theinvestment through an impairment charge, which could negatively affect ourfinancial condition, cash flow and reported earnings.

 

**We will continue to incur significant costs as a result ofoperating as a public company, and our management will be required to devotesubstantial time to new compliance initiatives.***

 

As apublic company, we will continue to incur significant legal, accounting andother expenses.  In addition, theSarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well asrules subsequently implemented by the SEC and the Nasdaq Stock Market, orNasdaq, impose various requirements on public companies, including requiringestablishment and maintenance of effective disclosure and financial controlsand changes in corporate governance practices. Our management and other personnel need to devote a substantial amountof time to these compliance initiatives. Moreover, these rules and regulations result in increased legal andfinancial compliance costs and will make some activities more time-consumingand costly.  For example, theserules and regulations make it more difficult and more expensive for us tomaintain director and officer liability insurance, and we may be required toincur substantial costs in the future to maintain the same or similar coverage.

 

TheSarbanes-Oxley Act requires, among other things, that we maintain effectiveinternal controls for financial reporting and disclosure controls andprocedures. We are required to perform an evaluation of our internal controlsover financial reporting to allow management to report on the effectiveness ofthose controls, as required by Section 404 of the Sarbanes-Oxley Act.Additionally, our independent auditors were required to perform a similarevaluation and report on the effectiveness of our internal controls over financialreporting. At June 30, 2010, management and our independent auditors didnot identify any material weaknesses in our internal controls over financialreporting. Our efforts to comply with Section 404 and related regulationshas required, and continues to require, the commitment of significant financialand managerial resources. While we anticipate maintaining the integrity of ourinternal controls over financial reporting and all other aspects ofSection 404, we cannot be certain that a material weakness will not beidentified when we test the effectiveness of our control systems in the future.If a material weakness is identified, we could be subject to sanctions orinvestigations by Nasdaq, the SEC or other regulatory authorities, which wouldrequire additional financial and management resources, costly litigation or aloss of public confidence in our internal controls, which could have an adverseeffect on the market price of our stock.

 

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**Some provisions of our charter documents and Delaware law mayhave anti-takeover effects that could discourage an acquisition of us byothers, even if an acquisition would be beneficial to our stockholders and mayprevent attempts by our stockholders to replace or remove our currentmanagement.**

 

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

 

·                  a board of directors divided into threeclasses serving staggered three-year terms, such that not all members of theboard will be elected at one time;

 

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

 

·                  limiting the removal of directors by thestockholders;

 

·                  prohibiting stockholder action by writtenconsent, thereby requiring all stockholder actions to be taken at a meeting ofour stockholders;

 

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

 

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

 

These provisions may frustrate or prevent any attemptsby our stockholders to replace or remove our current management by making itmore difficult for stockholders to replace members of our board of directors,which is responsible for appointing the members of our management.  In addition, we are subject toSection 203 of the Delaware General Corporation Law, which generallyprohibits a Delaware corporation from engaging in any of a broad range ofbusiness combinations with a stockholder owning 15% or more of our outstandingvoting stock for a period of three years following the date on which thestockholder became an interested stockholder, unless such transactions areapproved by our board of directors.  Thisprovision could have the effect of delaying or preventing a change of control,whether or not it is desired by or beneficial to our stockholders.  Such a delay or prevention of a change ofcontrol transaction could cause the market price of our stock to decline.

 

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**Item 6.  Exhibits**

 
| **Exhibit  No.** | ** ** | **Description of Document**                                                                                                                                                                                                                                              |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              | (2)        | Certificate of Incorporation of Optimer  Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                            |
| 3.2              | (4)        | Bylaws of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                               |
| 4.1              | (3)        | Common Stock Certificate of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                          |
| 4.2              | (1)        | Investors’ Rights Agreement by and among Optimer  Pharmaceuticals, Inc. and certain stockholders of Optimer  Pharmaceuticals, Inc. dated November 30, 2005, as amended and  restated.                                                                |
| 4.3              | (5)        | Registration Rights Agreement, dated  October 23, 2007, by and between Optimer Pharmaceuticals, Inc. and  the purchasers listed on the signature pages thereto.                                                                                           |
| 4.4              | (6)        | Form of Warrant to Purchase Common Stock.                                                                                                                                                                                                                           |
| 10.1             |       | Amended and Restated Severance Benefit Plan of  Optimer Pharmaceuticals, Inc.                                                                                                                                                                                       |
| 10.2             | *          | API Manufacturing and Supply Agreement between  Biocon Limited and Optimer Pharmaceuticals, Inc.                                                                                                                                                                    |
| 10.3             | (7)        | Offer Letter, dated May 5, 2010, by and between  Mr. Pedro Lichtinger and Optimer Pharmaceuticals, Inc.                                                                                                                                                   |
| 10.4             | (7)        | Separation and Consulting Agreement, dated  May 5, 2010, by and between Michael Chang and Optimer  Pharmaceuticals, Inc.                                                                                                                                       |
| 10.5             | (8)        | Compensation Agreement, dated July 22, 2010, by  and between Optimer Pharmaceuticals, Inc. and AFOS, LLC.                                                                                                                                                      |
| 31.1             |       | Certification of principal executive officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                               |
| 31.2             |       | Certification of principal financial officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                               |
| 32               |       | Certification by the Chief Executive Officer and the  Chief Financial Officer of the Registrant, as required by  Rule 13a-14(b) or 15d-14(b) and Section 1350 of  Chapter 63 of Title 18 of the United States Code (18 U.S.C.  1350). |

 

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| *   | Confidential treatment has been requested with respect to  certain portions of this exhibit. Omitted portions have been filed separately  with the Securities and Exchange Commission. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Filed with Registrant’s Registration Statement on  Form S-1 November 9, 2006.                                                                                           |
| (2) | Filed with Registrant’s Amendment No. 3 to  Registration Statement on Form S-1 January 22, 2007.                                                                   |
| (3) | Filed with Registrant’s Amendment No. 4 to  Registration Statement on Form S-1 February 5, 2007.                                                                   |
| (4) | Filed with Registrant’s Current Report on  Form 8-K on September 18, 2007.                                                                                              |
| (5) | Filed with Registrant’s Current Report on  Form 8-K on October 29, 2007.                                                                                                |
| (6) | Filed with Registrant’s Current Report on  Form 8-K on March 5, 2009.                                                                                                   |
| (7) | Filed with Registrant’s Current Report on  Form 8-K on May 6, 2010.                                                                                                     |
| (8) | Filed with Registrant’s Current Report on  Form 8-K on July 22, 2010.                                                                                                   |

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| ** **                 | **OPTIMER PHARMACEUTICALS, INC.** |
|----------------------------|----------------------------------------|
|                       |                                   |   |
| Dated: August 4, 2010 | 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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