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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q





(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2011



| ̈ | 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: 001-33415





OREXIGEN THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 65-1178822                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3344 North Torrey Pines Court, Suite 200, La Jolla, CA         |  | 92037                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(858) 875-8600

(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) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



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

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ̈  Yes    x  No

As of May 4, 2011, the registrant had 48,079,968 shares of Common Stock ($0.001 par value) outstanding.









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OREXIGEN THERAPEUTICS, INC.

TABLE OF CONTENTS



|                                                                                                |  |  |    | 
|----------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I. FINANCIAL INFORMATION                                                                   |  |  |    | 
|Item 1. Financial Statements                                                                    |  |  | 3  | 
|Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010                           |  |  | 3  | 
|Unaudited Statements of Operations for the three months ended March 31, 2011 and March 31,
2010 |  |  | 4  | 
|Unaudited Statements of Cash Flows for the three months ended March 31, 2011 and March 31,
2010 |  |  | 5  | 
|Notes to Unaudited Financial Statements                                                         |  |  | 6  | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations   |  |  | 12 | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                              |  |  | 17 | 
|Item 4. Controls and Procedures                                                                 |  |  | 18 | 
|PART II. OTHER INFORMATION                                                                      |  |  | 18 | 
|Item 1. Legal Proceedings                                                                       |  |  | 18 | 
|Item 1A. Risk Factors                                                                           |  |  | 19 | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                             |  |  | 48 | 
|Item 3. Defaults Upon Senior Securities                                                         |  |  | 48 | 
|Item 4. (Removed and Reserved)                                                                  |  |  | 48 | 
|Item 5. Other Information                                                                       |  |  | 48 | 
|Item 6. Exhibits                                                                                |  |  | 49 | 
|SIGNATURES                                                                                      |  |  | 50 | 
|EXHIBIT 31.1                                                                                    |  |  |    | 
|EXHIBIT 31.2                                                                                    |  |  |    | 
|EXHIBIT 32.1                                                                                    |  |  |    | 
|EXHIBIT 32.2                                                                                    |  |  |    | 



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PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

Orexigen Therapeutics, Inc.

Balance Sheets

(In thousands, except share and
par value amounts)



|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                    |  | March 31,2011 |          |   | December 31,2010 |  
|                                                                                                                                                                                                                    |  | (Unaudited)   |          |   |                  |  
|Assets                                                                                                                                                                                                              |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                           |  | $             | 39,634   |   |                  | $ | 24,926   |  
|Investment securities, available-for-sale                                                                                                                                                                           |  |               | 36,946   |   |                  |   | 67,440   |  
|Prepaid expenses and other current assets                                                                                                                                                                           |  |               | 1,056    |   |                  |   | 2,502    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                                |  |               | 77,636   |   |                  |   | 94,868   |  
|Property and equipment, net                                                                                                                                                                                         |  |               | 774      |   |                  |   | 894      |  
|Restricted cash                                                                                                                                                                                                     |  |               | 881      |   |                  |   | 881      |  
|Other assets                                                                                                                                                                                                        |  |               | 107      |   |                  |   | 203      |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                        |  | $             | 79,398   |   |                  | $ | 96,846   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Accounts payable and accrued expenses                                                                                                                                                                               |  | $             | 5,047    |   |                  | $ | 10,355   |  
|Deferred revenue, current portion                                                                                                                                                                                   |  |               | 3,429    |   |                  |   | 3,517    |  
|Long-term debt, current portion                                                                                                                                                                                     |  |               | 1,067    |   |                  |   | 2,416    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                           |  |               | 9,543    |   |                  |   | 16,288   |  
|Deferred revenue, less current portion                                                                                                                                                                              |  |               | 44,571   |   |                  |   | 46,311   |  
|Other long-term liabilities                                                                                                                                                                                         |  |               | 428      |   |                  |   | 459      |  
|Commitments and contingencies                                                                                                                                                                                       |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Preferred stock, $.001 par value, 10,000,000 shares authorized at March 31, 2011 and December 31, 2010; no shares
issued and outstanding at March 31, 2011 and December 31, 2010                                    |  |               |         |   |                  |   |         |  
|Common stock, $.001 par value, 100,000,000 shares authorized at March 31, 2011 and December 31, 2010; 48,078,553 and
47,767,313 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively |  |               | 48       |   |                  |   | 48       |  
|Additional paid-in capital                                                                                                                                                                                          |  |               | 355,056  |   |                  |   | 352,401  |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                       |  |               | 7        |   |                  |   | (9       | )
|Accumulated deficit                                                                                                                                                                                                 |  |               | (330,255 | ) |                  |   | (318,652 | )
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                          |  |               | 24,856   |   |                  |   | 33,788   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                          |  | $             | 79,398   |   |                  | $ | 96,846   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  

See accompanying notes.



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Orexigen Therapeutics, Inc.

Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



|                                                                |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                |  | Three Months EndedMarch 31, |        
|                                                                |  | 2011                        |         |   | 2010 |  
|Revenues:                                                       |  |                             |         |   |      |   |         |  
|Collaborative agreement                                         |  | $                           | 857     |   |      | $ |        |  
|License revenue                                                 |  |                             | 971     |   |      |   | 22      |  
|                                                                |  |                             |         |   |      |   |         |  
|Total revenues                                                  |  |                             | 1,828   |   |      |   | 22      |  
|Operating expenses:                                             |  |                             |         |   |      |   |         |  
|Research and development                                        |  |                             | 6,567   |   |      |   | 7,981   |  
|General and administrative                                      |  |                             | 6,759   |   |      |   | 6,021   |  
|                                                                |  |                             |         |   |      |   |         |  
|Total operating expenses                                        |  |                             | 13,326  |   |      |   | 14,002  |  
|                                                                |  |                             |         |   |      |   |         |  
|Loss from operations                                            |  |                             | (11,498 | ) |      |   | (13,980 | )
|Other income (expense):                                         |  |                             |         |   |      |   |         |  
|Interest income                                                 |  |                             | 15      |   |      |   | 46      |  
|Interest expense                                                |  |                             | (120    | ) |      |   | (145    | )
|                                                                |  |                             |         |   |      |   |         |  
|Total other income (expense)                                    |  |                             | (105    | ) |      |   | (99     | )
|                                                                |  |                             |         |   |      |   |         |  
|Net loss                                                        |  | $                           | (11,603 | ) |      | $ | (14,079 | )
|                                                                |  |                             |         |   |      |   |         |  
|Net loss per share  basic and diluted                          |  | $                           | (0.24   | ) |      | $ | (0.30   | )
|                                                                |  |                             |         |   |      |   |         |  
|Shares used in computing net loss per share  basic and diluted |  |                             | 47,867  |   |      |   | 47,216  |  
|                                                                |  |                             |         |   |      |   |         |  

See accompanying notes.



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Orexigen Therapeutics, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                            |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Three Months EndedMarch 31, |        
|                                                                            |  | 2011                        |         |   | 2010 |  
|Operating activities                                                        |  |                             |         |   |      |   |         |  
|Net loss                                                                    |  | $                           | (11,603 | ) |      | $ | (14,079 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |         |   |      |   |         |  
|Depreciation                                                                |  |                             | 120     |   |      |   | 117     |  
|Amortization of premium on securities available-for-sale                    |  |                             | 236     |   |      |   | 226     |  
|Amortization of debt issuance costs                                         |  |                             | 95      |   |      |   | 9       |  
|Stock-based compensation                                                    |  |                             | 2,216   |   |      |   | 2,237   |  
|Deferred revenue                                                            |  |                             | (1,828  | ) |      |   | (22     | )
|Changes in operating assets and liabilities:                                |  |                             |         |   |      |   |         |  
|Prepaid expenses and other current assets                                   |  |                             | 1,446   |   |      |   | (479    | )
|Accounts payable and accrued expenses                                       |  |                             | (5,308  | ) |      |   | (2,967  | )
|Other assets                                                                |  |                             |        |   |      |   | 50      |  
|Other long-term liabilities                                                 |  |                             |        |   |      |   | 500     |  
|Deferred rent                                                               |  |                             | (31     | ) |      |   | (18     | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                             | (14,657 | ) |      |   | (14,426 | )
|Investing activities                                                        |  |                             |         |   |      |   |         |  
|Purchases of securities available-for-sale                                  |  |                             | (28,705 | ) |      |   | (29,775 | )
|Maturities of securities available-for-sale                                 |  |                             | 58,980  |   |      |   | 26,555  |  
|Purchases of property and equipment                                         |  |                             |        |   |      |   | (14     | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                             | 30,275  |   |      |   | (3,234  | )
|Financing activities                                                        |  |                             |         |   |      |   |         |  
|Proceeds from issuance of common stock                                      |  |                             | 439     |   |      |   | 5       |  
|Payments on borrowings on long-term debt                                    |  |                             | (1,349  | ) |      |   | (2,169  | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash used in financing activities                                       |  |                             | (910    | ) |      |   | (2,164  | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                        |  |                             | 14,708  |   |      |   | (19,824 | )
|Cash and cash equivalents at beginning of period                            |  |                             | 24,926  |   |      |   | 37,658  |  
|                                                                            |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                           | 39,634  |   |      | $ | 17,834  |  
|                                                                            |  |                             |         |   |      |   |         |  

See accompanying notes.



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OREXIGEN THERAPEUTICS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. The Company and Basis of Presentation

Organization

Orexigen Therapeutics, Inc. (the Company), a Delaware corporation, is a biopharmaceutical company focused on the development
of pharmaceutical product candidates for the treatment of obesity. The Company was incorporated in September 2002 and commenced operations in 2003.

The Companys primary activities since incorporation have been organizational activities, including recruiting personnel, conducting research and development, including clinical trials, and raising
capital. In addition, the Company has experienced losses since its inception, and as of March 31, 2011, had an accumulated deficit of $330.3 million. The Company expects to continue to incur losses for at least the next several years.
Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Companys cost structure, and until that time, the Company will need to continue to raise additional equity or debt
financing. Management believes that it has sufficient capital to fund operations through at least the next 12 months.

Basis of
Presentation

The Company has prepared the accompanying unaudited financial statements in accordance with accounting
principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, which include only normal recurring adjustments, necessary
to present fairly the Companys interim financial information.

The balance sheet as of December 31, 2010 has been
derived from the audited financial statements as of December 31, 2010 but does not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For more complete financial
information, the accompanying unaudited financial statements and notes thereto should be read in conjunction with the audited financial statements for the year ended December 31, 2010 included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2010.

2. Summary of Significant Accounting Policies

Research and Development Costs

All research and development costs are charged to expense as incurred and consist principally of costs related to clinical trials managed by the Companys contract research organizations, license
fees and salaries and related benefits. Clinical trial costs are a significant component of research and development expenses. These costs are accrued based on estimates of work performed, and require estimates of total costs incurred based on
patients enrolled, progress of patient studies and other events. Clinical trial costs are subject to revision as the trials progress and revisions are charged to expense in the period in which they become known.

Revenue Recognition

The Company has entered into agreements with Takeda Pharmaceutical Company Limited (Takeda) and Cypress Bioscience, Inc. (Cypress) which contain multiple elements, including
nonrefundable upfront fees, payments for reimbursement of research costs, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. When determining the revenue
recognition, the Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there
is a unique earnings process associated with each element of a contract. If the required ongoing obligations involve minimal or no cost effort, nonrefundable upfront fees would be recognized upon receipt. Otherwise, nonrefundable upfront fees are
recognized over the period the related services are provided or over the period the Company has significant involvement. Revenue from milestones is recognized as certain anniversary, regulatory and sales-based events are achieved, as long as the
event is substantial and was not readily assured at the beginning of the collaboration.

Advance payments received in excess
of amounts earned are classified as deferred revenue until earned.



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New Accounting Standards

In October 2009, the Financial Accounting Standards Board (FASB) issued an amendment to the accounting standards related to
the accounting for revenue in arrangements with multiple deliverables including how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminates the use of the
residual method for allocating arrangement consideration and requires an entity to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in the arrangement in the absence of having
vendor-specific objective evidence or other third party evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-deliverable revenue arrangement and
expands the disclosure requirements about the judgments made in applying the estimated selling price method and how those judgments affect the timing or amount of revenue recognition. The Company adopted this guidance as of January 1, 2011. The
adoption did not have a material impact on the Companys financial statements.

In April 2010, the FASB issued ASU
No. 2010-17, Revenue Recognition-Milestone Method (ASU No. 2010-17). ASU No. 2010-17 establishes a revenue recognition method for contingent consideration that is payable upon the achievement of an uncertain
future event, referred to as a milestone. The scope of the milestone method is limited to research and development agreements and is applicable to milestones in multiple-deliverable arrangements involving research and development transactions. The
guidance does not preclude the application of any other applicable revenue guidance. The Company adopted this guidance as of January 1, 2011. The adoption did not have a material impact on the Companys financial statements.

3. Net Loss per Share

Basic earnings per share (EPS) is calculated by dividing the net income or loss available to common stockholders by the
weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common
shares outstanding for the period and the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method.

For purposes of this calculation, options are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

(In thousands, except per share amounts)



|                                                                                                                               |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                               |  | Three Months EndedMarch 31, |        
|                                                                                                                               |  | 2011                        |         |   | 2010 |  
|Numerator:                                                                                                                     |  |                             |         |   |      |   |         |  
|Net loss attributable to common stockholders                                                                                   |  | $                           | (11,603 | ) |      | $ | (14,079 | )
|                                                                                                                               |  |                             |         |   |      |   |         |  
|Denominator:                                                                                                                   |  |                             |         |   |      |   |         |  
|Basic and diluted weighted average shares of common stock outstanding                                                          |  |                             | 47,867  |   |      |   | 47,216  |  
|                                                                                                                               |  |                             |         |   |      |   |         |  
|Basic and diluted net loss per share                                                                                           |  | $                           | (0.24   | ) |      | $ | (0.30   | )
|                                                                                                                               |  |                             |         |   |      |   |         |  
|Potentially outstanding anti-dilutive securities not included in diluted net loss per share calculation include the
following: |  |                             |         |   |      |   |         |  
|Common stock options                                                                                                           |  |                             | 7,833   |   |      |   | 8,429   |  
|                                                                                                                               |  |                             |         |   |      |   |         |  



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4. Investment Securities, Available-for-Sale

The Company invests its excess cash in investment securities, principally debt instruments of financial institutions, corporations with
investment grade credit ratings and government agencies. A summary of the estimated fair value of investment securities, available-for-sale, is as follows at March 31, 2011 and December 31, 2010 (in thousands):



|                                  |  |                   |       |               |        |        |            |   |   |            |  |   |    |   |  |   |        | 
|--------------------------------- |  | ----------------- | ----- | ------------- | ------ | ------ | ---------- | - | - | ---------- |  | - | -- | - |  | - | ------ | 
|March 31, 2011                    |  | Maturity in Years |       | AmortizedCost |        |        | Unrealized |   |   | Fair Value | 
|                                  |  |                   | Gains |               |        | Losses |            |  
|Corporate debt obligations        |  | Less than 1       |       | $             | 9,461  |        |            | $ | 3 |            |  | $ |   |   |  | $ | 9,464  | 
|U.S. Treasury securities          |  | Less than 1       |       |               | 7,819  |        |            |   | 2 |            |  |   |   |   |  |   | 7,821  | 
|U.S. government agency securities |  | Less than 1       |       |               | 19,659 |        |            |   | 3 |            |  |   | (1 | ) |  |   | 19,661 | 
|                                  |  |                   |       |               |        |        |            |   |   |            |  |   |    |   |  |   |        | 
|Total investment securities       |  |                   |       | $             | 36,939 |        |            | $ | 8 |            |  | $ | (1 | ) |  | $ | 36,946 | 
|                                  |  |                   |       |               |        |        |            |   |   |            |  |   |    |   |  |   |        | 



|                                  |  |                   |       |               |        |        |            |   |   |            |  |   |     |   |  |   |        | 
|--------------------------------- |  | ----------------- | ----- | ------------- | ------ | ------ | ---------- | - | - | ---------- |  | - | --- | - |  | - | ------ | 
|December 31, 2010                 |  | Maturity in Years |       | AmortizedCost |        |        | Unrealized |   |   | Fair Value | 
|                                  |  |                   | Gains |               |        | Losses |            |  
|Corporate debt obligations        |  | Less than 1       |       | $             | 755    |        |            | $ |  |            |  | $ |    |   |  | $ | 755    | 
|U.S. Treasury securities          |  | Less than 1       |       |               | 12,825 |        |            |   | 1 |            |  |   | (1  | ) |  |   | 12,825 | 
|U.S. government agency securities |  | Less than 1       |       |               | 53,869 |        |            |   | 2 |            |  |   | (11 | ) |  |   | 53,860 | 
|                                  |  |                   |       |               |        |        |            |   |   |            |  |   |     |   |  |   |        | 
|Total investment securities       |  |                   |       | $             | 67,449 |        |            | $ | 3 |            |  | $ | (12 | ) |  | $ | 67,440 | 
|                                  |  |                   |       |               |        |        |            |   |   |            |  |   |     |   |  |   |        | 

Gross realized gains and losses on available-for-sale securities were immaterial during the three months ended
March 31, 2011 and 2010.

5. Fair Value Measurements

The fair values of the Companys financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and
liabilities. The following table presents information about the Companys financial assets measured at fair value on a recurring basis as of March 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized
by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. The Company
classifies money market funds and U.S. Treasury securities as Level 1 assets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at
commonly quoted intervals. The Company classifies commercial paper holdings, U. S. government agency securities and asset-backed security holdings as Level 2 assets. Level 3 inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or liability. The Company does not hold any Level 3 assets. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its
entirety. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.



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Assets that have recurring measurements are shown below (in thousands):



|                                                 |  |                             |        |  |                                                             |   |        |                                             |  |   |                                         |  |  |   |   | 
|------------------------------------------------ |  | --------------------------- | ------ |  | ----------------------------------------------------------- | - | ------ | ------------------------------------------- |  | - | --------------------------------------- |  |  | - | - | 
|                                                 |  |                             |        |  | Fair Value Measurement at Reporting Date Using              |  
|Description                                      |  | Balance as ofMarch 31, 2011 |        |  | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   |        | Significant OtherObservableInputs (Level 2) |  |   | SignificantUnobservableInputs (Level 3) | 
|Financial instruments owned:                     |  |                             |        |  |                                                             |   |        |                                             |  |   |                                         |  |  |   |   | 
|Cash/money market funds/U.S. Treasury securities |  | $                           | 47,455 |  |                                                             | $ | 47,455 |                                             |  | $ |                                        |  |  | $ |  | 
|Corporate debt obligations                       |  |                             | 9,464  |  |                                                             |   |       |                                             |  |   | 9,464                                   |  |  |   |  | 
|U.S. government agency securities                |  |                             | 19,661 |  |                                                             |   |       |                                             |  |   | 19,661                                  |  |  |   |  | 
|                                                 |  |                             |        |  |                                                             |   |        |                                             |  |   |                                         |  |  |   |   | 
|Total financial instruments owned                |  | $                           | 76,580 |  |                                                             | $ | 47,455 |                                             |  | $ | 29,125                                  |  |  | $ |  | 
|                                                 |  |                             |        |  |                                                             |   |        |                                             |  |   |                                         |  |  |   |   | 

6. Property and Equipment

Property and equipment consist of the following (in thousands):



|                                               |  |                     |  |               |        |   |                  |   |        |  
|---------------------------------------------- |  | ------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                               |  | Useful LifeIn Years |  | March 31,2011 |        |   | December 31,2010 |  
|Furniture and fixtures                         |  | 5                   |  | $             | 1,102  |   |                  | $ | 1,102  |  
|Computer equipment and software                |  | 3 to 5              |  |               | 533    |   |                  |   | 533    |  
|Leasehold improvements                         |  | 5                   |  |               | 597    |   |                  |   | 597    |  
|Laboratory equipment                           |  | 5                   |  |               | 44     |   |                  |   | 44     |  
|                                               |  |                     |  |               |        |   |                  |   |        |  
|                                               |  |                     |  |               | 2,276  |   |                  |   | 2,276  |  
|Less accumulated depreciation and amortization |  |                     |  |               | (1,502 | ) |                  |   | (1,382 | )
|                                               |  |                     |  |               |        |   |                  |   |        |  
|                                               |  |                     |  | $             | 774    |   |                  | $ | 894    |  
|                                               |  |                     |  |               |        |   |                  |   |        |  

7. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in thousands):



|                                                |  |               |       |  |                  |   |        | 
|----------------------------------------------- |  | ------------- | ----- |  | ---------------- | - | ------ | 
|                                                |  | March 31,2011 |       |  | December 31,2010 |  
|Accounts payable                                |  | $             | 1,431 |  |                  | $ | 3,109  | 
|Accrued compensation related expenses           |  |               | 1,802 |  |                  |   | 5,383  | 
|Accrued debt exit fee                           |  |               | 1,190 |  |                  |   | 1,190  | 
|Accrued preclinical and clinical trial expenses |  |               | 188   |  |                  |   | 202    | 
|Accrued legal and professional expenses         |  |               | 256   |  |                  |   | 291    | 
|Other accrued liabilities                       |  |               | 180   |  |                  |   | 180    | 
|                                                |  |               |       |  |                  |   |        | 
|                                                |  | $             | 5,047 |  |                  | $ | 10,355 | 
|                                                |  |               |       |  |                  |   |        | 

8. Comprehensive Income (Loss)

Comprehensive income (loss) consists of the following components (in thousands):



|                                                   |  |                             |         |   |      |   |         |  
|-------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                   |  | Three Months EndedMarch 31, |        
|                                                   |  | 2011                        |         |   | 2010 |  
|Net loss, as reported                              |  | $                           | (11,603 | ) |      | $ | (14,079 | )
|Unrealized gains (losses) on marketable securities |  |                             | 16      |   |      |   | (14     | )
|                                                   |  |                             |         |   |      |   |         |  
|Comprehensive loss                                 |  | $                           | (11,587 | ) |      | $ | (14,093 | )
|                                                   |  |                             |         |   |      |   |         |  



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##### Table of Contents

9. Stock-Based Compensation

Total stock-based compensation expense recognized during the three months ended March 31, 2011 and 2010 was comprised of the following (in thousands):



|                           |  |                             |       |  |      |   |       | 
|-------------------------- |  | --------------------------- | ----- |  | ---- | - | ----- | 
|                           |  | Three Months EndedMarch 31, |      
|                           |  | 2011                        |       |  | 2010 |  
|General and administrative |  | $                           | 1,606 |  |      | $ | 1,289 | 
|Research and development   |  |                             | 610   |  |      |   | 948   | 
|                           |  |                             |       |  |      |   |       | 
|                           |  | $                           | 2,216 |  |      | $ | 2,237 | 
|                           |  |                             |       |  |      |   |       | 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option
valuation model. The following weighted-average assumptions were utilized for the calculations during each period:



|                         |  |                             |      |   |      |  |      |  
|------------------------ |  | --------------------------- | ---- | - | ---- |  | ---- | -
|                         |  | Three Months EndedMarch 31, |     
|                         |  | 2011                        |      |   | 2010 | 
|Expected life (in years) |  |                             | 6.0  |   |      |  | 6.0  |  
|Expected volatility      |  |                             | 72.9 | % |      |  | 60.0 | %
|Risk-free interest rate  |  |                             | 2.4  | % |      |  | 2.7  | %
|Expected dividend yield  |  |                             |     |   |      |  |     |  

On March 2,
2011, to provide incentive to the employees of Orexigen to continue their employment with the Company while its management and Board work to update its corporate strategy, the Compensation Committee of the Companys Board of Directors approved
an amendment to certain outstanding option grants to provide for a one-time repricing of the exercise price of such options to purchase shares of Orexigen common stock held by the Companys employees (the Repricing). The Repricing
affected an aggregate of 1,443,150 shares of Orexigens common stock subject to outstanding option grants (the Affected Grants). An aggregate of 492,357 shares subject to the Affected Grants had an original exercise price of $5.89
(the September 2010 Grant) and the remaining 950,793 shares had an exercise price of $9.31 (the January 2011 Grant). The vesting commencement date for both the September 2010 Grants and the January 2011 Grants was
January 18, 2011. The Compensation Committee chose to amend the September 2010 Grants and the January 2011 Grants because they believed that the amendment of these grants would achieve the desired retentive affect for the Companys
employees given the circumstances around the Companys recent corporate realignment. The exercise price of all Affected Grants was amended in the Repricing to $2.94, the closing price of Orexigens common stock on March 2, 2011. As a
result of the Repricing, the Company will recognize additional stock-based compensation expense of $819,000 over the 4 year vesting period of the Affected Grants.

10. Commitments and Contingencies

Credit and Security Agreement

In December 2006, the Company entered into a credit and security agreement with Merrill Lynch Capital. The Company is required to make
monthly payments of principal and interest and all amounts outstanding under the credit and security agreement will become due and payable on the earlier of July 1, 2011 or three years after the funding of any amounts under the agreement.
Interest accrues on amounts outstanding at a base rate set forth in the agreement plus an applicable margin, which ranges from 3.75% to 4.25% based on the date of borrowing (average of 5.8% on amounts outstanding at March 31, 2011). The loan is
collateralized by substantially all of the Companys assets other than, subject to certain limited exceptions, intellectual property. Subject to certain limited exceptions, amounts prepaid under the credit and security agreement are subject to
a prepayment fee equal to 3% of the amount prepaid. In addition, upon repayment of the total amounts borrowed for any reason, the Company will be required to pay an exit fee of approximately $1.2 million. Under the terms of the agreement, the
Company is subject to operational covenants, including limitations on the Companys ability to incur liens or additional debt, pay dividends, redeem stock, make specified investments and engage in merger, consolidation or asset sale
transactions, among other restrictions. GE Healthcare Financial Services acquired a portfolio of loans from Merrill Lynch Capital in 2008, and the credit and security agreement, as amended, was subsequently assigned to GE Healthcare Financial
Services. As of March 31, 2011, $1.1 million is outstanding under this agreement. The fair value of the outstanding debt approximates its carrying value as of March 31, 2011.



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At March 31, 2011, future minimum principal payments under the credit and security
agreement, as amended, with GE Healthcare Financial Services are as follows (in thousands):



|           |  |   |       | 
|---------- |  | - | ----- | 
|Due in:    |  |   |      
|2011       |  | $ | 1,067 | 
|Thereafter |  |   |      | 
|           |  |   |       | 
|Total due  |  | $ | 1,067 | 
|           |  |   |       | 

Takeda Pharmaceutical Company Limited

In September 2010, the Company entered into a collaboration agreement with Takeda to develop and commercialize
Contrave® in the United States, Canada and Mexico. Under the terms of the collaboration agreement, the Company
received a nonrefundable upfront cash payment of $50.0 million from Takeda and is eligible to receive additional payments of over $1.0 billion upon achieving certain anniversary, regulatory and sales-based milestones, including $100.0 million that
can be achieved between the execution of the collaboration agreement and the first commercial sale of Contrave in the United States. The Company is also eligible to receive tiered royalty payments ranging from a minimum of 20% to a maximum of 35%,
subject to customary reductions, on increasing levels of net sales in the United States, Canada and Mexico. In accordance with the Companys continuing performance obligation of the collaboration, the upfront payment of $50.0 million is being
deferred and recognized over 14.5 years, the estimated term of the agreement. For the three months ended March 31, 2011 and 2010, the Company recognized revenues under this agreement of $857,000 and $0, respectively. At March 31,
2011, deferred revenue under this agreement totaled $48.0 million.

Cypress Bioscience, Inc.

In January 2005, the Company entered into a license agreement with Cypress whereby the Company sublicensed certain of its rights under a
patent license agreement with Duke to Cypress for specified uses. As consideration for this license, Cypress paid the Company non-refundable upfront fees of $1.5 million. Cypress can require the Company to provide clinical support for any of the
specified uses over the term of the agreement. Accordingly, this $1.5 million was initially recognized over 17 years, the estimated life of the sublicensed patent.

In January 2011, Cypress exercised its right to terminate the agreement. The remaining deferred revenue was recognized in the quarter ending March 31, 2011. For the three month periods ended
March 31, 2011 and 2010, the Company recognized revenues under this agreement of $971,000 and $22,000, respectively. At March 31, 2011 and December 31, 2010, deferred revenue under this agreement totaled $0 and $971,000, respectively.

Corporate Realignment

In February 2011, the Company implemented a corporate realignment of its workforce, resulting in a reduction in staff of approximately 40%, or 23 employees. The Company took these steps due to the
complete response letter it received from the U.S. Food and Drug Administration on January 31, 2011 regarding the New Drug Application for Contrave, the Companys lead product candidate for the treatment of obesity. The Company incurred
charges in the first quarter of 2011 of approximately $2.6 million in connection with one-time employee termination costs, including severance and other benefits. For the three months ended March 31, 2011, research and development costs
included $1.7 million and general and administrative costs included $865,000 in one-time termination costs.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, Risk Factors. The interim financial statements and this
Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2010 and the related Managements
Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2010. Except as required by law, we assume no obligation to update these
forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Background

We are a biopharmaceutical company focused on the development of pharmaceutical product candidates for the treatment of obesity. Our lead combination product candidates targeted for obesity are Contrave®, which has completed Phase III clinical trials, and Empatic, which has completed Phase II clinical
trials. Each of these product candidates is a combination of generic drugs, which we have systematically screened for synergistic central nervous system, or CNS, activity. Each of the components of our product candidates has already received
regulatory approval and has been commercialized previously. We are developing these combinations in an effort to demonstrate adequate efficacy and safety for potential regulatory approval. We have not yet received regulatory approval for either
product candidate.

Our primary activities since incorporation have been organizational activities, including recruiting
personnel, conducting research and development, including clinical trials, and raising capital. We have incurred significant net losses since our inception. As of March 31, 2011, we had an accumulated deficit of $330.3 million. These losses
have resulted principally from costs incurred in connection with research and development activities, primarily costs of clinical trial activities associated with our current product candidates, and general and administrative expenses. We expect to
continue to incur losses for the next several years. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure, and until that time, we will need to continue to
raise additional equity or debt financing.

In January 2011, we received a complete response letter, or CRL, from the U.S.
Food and Drug Administration, or FDA, concerning our previously-submitted New Drug Application, or NDA, for Contrave. A CRL is issued by the FDA when the review of an NDA is completed and questions remain that precludes the approval of the NDA in
its current form. The CRL for Contrave indicated that the FDA could not approve the NDA in its present form primarily due to concerns regarding the cardiovascular safety profile of Contrave when used long term in a population of overweight and obese
subjects. The CRL stated that before our NDA could be approved, we must conduct a randomized, double-blind, placebo-controlled trial of sufficient size and duration to demonstrate that the risk of major adverse cardiovascular events in overweight
and obese subjects treated with Contrave does not adversely affect the drugs benefit-risk profile. We intend to work closely with the FDA and our partner, Takeda Pharmaceuticals Company Limited, or Takeda, to assess the appropriate next steps
for the Contrave NDA, and our management will update our corporate strategy following input from the FDA on our CRL, which we intend to receive later this quarter. At this time, we cannot quantify the development expenses associated with the trial
contemplated by the CRL.

In February 2011, we implemented a corporate realignment of our workforce, resulting in a reduction
in staff of approximately 40%, or 23 employees. We incurred charges in the first quarter of 2011 of approximately $2.6 million in connection with one-time employee termination costs, including severance and other benefits.

Revenues

We
generated approximately $1.8 million in revenue in three months ending March 31, 2011, resulting from the sublicensing of technology and amounts earned under a collaborative agreement. In September 2010, we entered into a collaboration
agreement with Takeda to develop and commercialize Contrave in the United States, Canada and Mexico. Under the collaboration agreement, we received an upfront, nonrefundable cash payment of $50.0 million from Takeda and this amount is being
recognized ratably over the estimated life of the agreement. For the three months ended March 31, 2011, we recognized revenue of $857,000 related to the Takeda agreement.



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During 2005, we sublicensed technology to Cypress Bioscience, Inc., or Cypress, for an
upfront payment of $1.5 million, and this amount was being recognized ratably over the estimated life of the sublicensed patent. In January 2011, Cypress exercised its right to terminate the agreement. The remaining deferred revenue of $971,000 was
recognized in the quarter ending March 31, 2011.

Other than the amortization of the upfront payment of $50.0 million
from Takeda, we do not expect to generate any significant revenues from licensing, achievement of milestones or product sales unless and until we are able to obtain regulatory approval of, and commercialize, our product candidates.

Research and Development Expenses

The majority of our operating expenses to date have been incurred in research and development activities. Our research and development expenses consist primarily of costs associated with clinical trials
managed by our contract research organizations, or CROs, product development efforts and manufacturing costs. License fees, salaries and related employee benefits for certain personnel, and costs associated with certain non-clinical activities such
as regulatory expenses, are also included in this amount. Our most significant costs to date are expenses incurred in connection with the clinical trials for Contrave and Empatic. The clinical trial expenses include payments to vendors such as CROs,
investigators, suppliers of clinical drug materials and related consultants. We charge all research and development expenses to operations as incurred because the underlying technology associated with these expenditures relates to our research and
development efforts and has no alternative future uses.

Our internal research and development resources are not directly tied
to any individual research project and are primarily deployed across our Contrave and Empatic programs, both of which target the obesity market. We are developing our two obesity product candidates in parallel and, due to the fact that we use shared
resources across projects, we do not maintain information regarding our internal costs incurred for our research and development programs on a program-specific basis. We use external service providers to manage our clinical trials, to manufacture
the product supplies used in these trials and for formulations development, consulting and other activities.

The following
table summarizes our research and development expenses for the three months ended March 31, 2011. Costs that are not attributable to a specific research program are included in the Other category (in thousands):



|                                        |  |                             |       |  |      |   |       | 
|--------------------------------------- |  | --------------------------- | ----- |  | ---- | - | ----- | 
|                                        |  | Three Months EndedMarch 31, |      
|                                        |  | 2011                        |       |  | 2010 |  
|Costs of external service providers:    |  |                             |       |  |      |   |       | 
|Obesity                                 |  | $                           | 2,125 |  |      | $ | 3,915 | 
|Other                                   |  |                             | 48    |  |      |   | 62    | 
|                                        |  |                             |       |  |      |   |       | 
|Subtotal                                |  |                             | 2,173 |  |      |   | 3,977 | 
|Internal costs                          |  |                             | 3,784 |  |      |   | 3,056 | 
|Stock-based compensation                |  |                             | 610   |  |      |   | 948   | 
|                                        |  |                             |       |  |      |   |       | 
|Total research and development expenses |  | $                           | 6,567 |  |      | $ | 7,981 | 
|                                        |  |                             |       |  |      |   |       | 

At this time, due to the risks inherent in the drug development process, we are unable to estimate with any
certainty the costs we will incur in the continued development of our product candidates for potential commercialization. Clinical development timelines, the probability of success and development costs can differ materially from expectations. While
we are currently focused on advancing each of our product development programs, our future research and development expenses will depend on the requirements for further clinical research, the clinical success of each product candidate, as well as
ongoing assessments as to each product candidates commercial potential. In addition, we cannot forecast with any degree of certainty which product candidates will be subject to future collaborations, when such arrangements will be secured, if
at all, and to what degree such arrangements would affect our development plans and capital requirements.

At this time, we
cannot quantify the development expenses associated with the trial for Contrave contemplated by the CRL. Future development expenses will depend on the scope and timing of the additional clinical trials for Contrave, our financial resources, as well
as decisions made with respect to our Empatic program. The lengthy process of completing our clinical trials and seeking regulatory approval for our product candidates requires the expenditure of substantial resources. Any failure by us or delay in
completing our clinical trials, or in obtaining regulatory approvals, could cause a delay in the commencement of product revenues and cause our research and development expenses to increase and, in turn, have a material adverse effect on our results
of operations. We do not expect any of our current product candidates to be commercially available in major markets for several years, if at all.



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General and Administrative

Our general and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting
and internal support functions. In addition, general and administrative expenses include professional fees for legal, consulting and accounting services. We anticipate general and administrative expenses to remain unchanged or decrease as we
determine whether a viable regulatory path exits for Contrave and Empatic.

Other Income (Expense)

Other income consists of interest earned on our cash, cash equivalents and investment securities. Interest expense consists of interest
incurred in connection with the $25.0 million credit and security agreement, as amended, with GE Healthcare Financial Services.

Critical Accounting Policies and Estimates

Managements discussion and analysis of our financial condition and results of operations are based upon our financial statements, which are prepared in accordance with accounting principles that are
generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to accounting for research and
development expenses and stock-based compensation costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances
change and additional information becomes known.

There were no significant changes during the three months ended
March 31, 2011 to the items that we disclosed as our critical accounting policies and estimates in Note 2 to our audited financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010.

Results of Operations

Comparison
of three months ended March 31, 2011 to three months ended March 31, 2010

Revenues.Revenues for
the three months ended March 31, 2011 and 2010 were $1.8 million and $22,000, respectively. The increase of $1.8 million was due to the revenue recognized under the collaboration agreement with Takeda of $857,000 and the recognition of the
remaining deferred revenue of $971,000 due to the termination of the license agreement with Cypress in January 2011.

Research and Development Expenses.Research and development expenses decreased to $6.6 million for the three months
ended March 31, 2011 from $8.0 million for the comparable period during 2010. This decrease of approximately $1.4 million was due primarily to a decrease in expenses related to the reduction in costs incurred in connection with the
preparation for our NDA filing for Contrave in the first quarter of 2011 as compared to same period in 2010. Research and development expenses for the three months ended March 31, 2011 included employee termination costs of $1.7 million as a
result of the corporate realignment.

General and Administrative Expenses.General and administrative expenses
increased to $6.8 million for the three months ended March 31, 2011 from $6.0 million for the comparable period during 2010. This increase of approximately $738,000 was due primarily to an increase in salaries and personnel related costs.
General and administrative expenses for the three months ended March 31, 2011 included employee termination costs of $865,000 as a result of the corporate realignment.

Interest and Other Income.Interest income decreased to $15,000 for the three months ended March 31, 2011 from $46,000 for the comparable period during 2010. This decrease of $31,000 was
due to lower interest rates as compared to the same period in 2010.

Interest Expense.Interest expense decreased
to $120,000 for the three months ended March 31, 2011 from $145,000 for the comparable period during 2010. This decrease of $25,000 was primarily due to a decrease in interest expense resulting from a lower average interest rate and a lower
average outstanding balance on the amounts borrowed under the credit and security agreement with GE Healthcare Financial Services as of March 31, 2011.



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Liquidity and Capital Resources

Since inception, our operations have been financed primarily through the sale of equity securities. Through March 31, 2011, we
received net proceeds of approximately $320.2 million from the sale of shares of our preferred and common stock as follows:



| |  |  | from September 12, 2002 to December 31, 2006, we issued and sold a total of 1,053,572 shares of common stock for aggregate net proceeds
of $14,801;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in March 2004, we issued and sold a total of 9,322,035 shares of Series A redeemable convertible preferred stock for aggregate net proceeds
of $9.2 million and the conversion of promissory notes and interest thereon totaling $1.7 million;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | from April 2005 to May 2005, we issued and sold 14,830,509 shares of Series B redeemable convertible preferred stock for aggregate net
proceeds of $34.9 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in November 2006, we issued and sold a total of 8,771,930 shares of Series C convertible preferred stock for aggregate net proceeds of
$29.9 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in May 2007, we issued and sold a total of 8,050,000 shares of common stock for aggregate net proceeds of $87.9 million;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | in January and February 2008, we issued and sold a total of 7,326,435 shares of common stock for aggregate net proceeds of $74.9 million; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in July 2009, we issued and sold a total of 11,500,000 shares of common stock for aggregate net proceeds of $81.6 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

As of March 31, 2011, we had $39.6 million in cash and cash equivalents and an additional
$36.9 million in investment securities, available-for-sale. As of March 31, 2011, our holdings primarily consisted of treasury-backed money market funds, treasuries and other instruments that are insured, guaranteed or supported by the
U.S. federal government and some high quality corporate debt obligations. We maintain established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity.

Net cash used in operating activities was $14.7 million and $14.4 million for the three months ended March 31, 2011 and 2010,
respectively. Net cash used in each of these periods was primarily a result of external research and development expenses, clinical trial costs, personnel-related costs, third-party supplier expenses and professional fees.

Net cash provided by investing activities was $30.3 million for the three months ended March 31, 2011 and net cash used in
investing activities was $3.2 million for the three months ended March 31, 2010. These amounts are primarily the result of the net purchases and maturities of investment securities.

Net cash used in financing activities was $910,000 and $2.2 million for the three months ended March 31, 2011 and 2010,
respectively. The net cash used in financing activities was a result of the payments of principal towards our credit and security agreement with GE Healthcare Financial Services, as amended and was partially offset by proceeds from the issuance of
common stock due to exercises of stock options.

We cannot be certain if, when or to what extent we will receive cash inflows
from the commercialization of our product candidates. We may incur substantial additional development expenses to conduct the trial contemplated by the FDAs CRL for Contrave. Specifically, the CRL for Contrave indicated that the FDA could not
approve the NDA in its present form primarily due to concerns regarding the cardiovascular safety profile of Contrave when used long term in a population of overweight and obese subjects. The CRL stated that before our NDA could be approved, we must
conduct a randomized, double-blind, placebo-controlled trial of sufficient size and duration to demonstrate that the risk of major adverse cardiovascular events in overweight and obese subjects treated with Contrave does not adversely affect the
drugs benefit-risk profile. We intend to work closely with the FDA and our partner, Takeda, to assess the appropriate next steps for the Contrave NDA, and our management will update our corporate strategy following input from the FDA on our
CRL, which we intend to receive later this quarter. At this time, we cannot quantify the development expenses associated with the trial contemplated by the CRL.



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We have entered into license agreements to acquire the rights to develop and commercialize
Contrave and Empatic. Pursuant to these agreements, we obtained exclusive and non-exclusive licenses to the patent rights and know-how for selected indications and territories. Under our license agreement with Duke University, we issued
442,624 shares of our common stock in March 2004 and may be required to make future milestone payments totaling up to $1.7 million upon the achievement of various milestones related to regulatory or commercial events. Under our license
agreement with Lee Dante, M.D., we issued an option to purchase 73,448 shares of our common stock in April 2004. We also paid Dr. Dante an upfront fee of $100,000 and, in September 2010, we paid him an additional $1.0 million
upon the execution of the collaboration agreement with Takeda. In the future, we may be obligated to pay royalties to Dr. Dante related to certain revenues we receive in connection with any sublicense agreements we enter into, including our
collaboration agreement with Takeda. Under our license agreement with Oregon Health & Science University, we issued 76,315 shares of our common stock in December 2003 and paid an upfront fee of $65,000. Under these three agreements, we
are also obligated to pay royalties on any net sales of the licensed products. Under our license agreement with SmithKline Beecham Corporation and Glaxo Group Limited, we paid an upfront payment and may be required to make a future milestone payment
upon the earliest achievement of certain milestones primarily relating to regulatory or commercial events.

Our future capital
uses and requirements depend on numerous factors. These factors include but are not limited to the following:



| |  |  | the timing of potential approval of our NDA for Contrave;
| | - |  | ---------------------------------------------------------



| |  |  | the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish with respect to Contrave or Empatic;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the rate of progress and cost of our clinical trials and other product development programs for Contrave, to the extent additional clinical trials need
to be conducted, and Empatic, including expenses to support the trials and milestone payments that may become payable;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of establishing sales, marketing and distribution capabilities in order to commercialize Contrave, should we elect to do so;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs involved in enforcing or defending patent claims or other intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of regulatory approvals for Empatic;
| | - |  | ---------------------------------------------------------



| |  |  | the successful commercialization of our products; and
| | - |  | -----------------------------------------------------



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

In December 2006, we entered into a credit and security agreement with Merrill Lynch Capital providing for potential borrowing until
June 30, 2007 of up to $17.0 million. In July 2007, we entered into a first amendment to the credit and security agreement with Merrill Lynch Capital. The first amendment provided for, among other things, the extension of the period during
which Merrill Lynch Capital was obligated to make advances under the credit and security agreement to us from June 30, 2007 to December 31, 2007. In November 2007, we entered into a second amendment to the credit and security agreement
with Merrill Lynch Capital. The second amendment provided for, among other things, the increase of the total amount available for advances under the credit and security agreement from $17.0 million to $25.0 million, our obligation to
request an advance of $8.0 million on or before December 31, 2007, and the extension of the period during which Merrill Lynch Capital was obligated to make advances to us under the credit and security agreement from December 31, 2007
to December 31, 2008. GE Healthcare Financial Services acquired a portfolio of loans from Merrill Lynch Capital in 2008, and the credit and security agreement, as amended, was subsequently assigned to GE Healthcare Financial Services.

We drew down $10.0 million, $8.0 million and $5.8 million under the credit and security agreement in March
2007, December 2007 and December 2008, respectively. Under the credit and security agreement, we are required to make monthly payments of principal and interest and all amounts then outstanding will become due and payable upon the earlier to
occur of July 1, 2011 or three years from the funding of any amounts under the agreement. Interest accrues on amounts outstanding under the agreement at a base rate set forth in the agreement plus an applicable margin, which ranges from 3.75%
to 4.25% based on the date of borrowing. Amounts outstanding under the credit and security agreement at March 31, 2011 bear interest at an average rate of 5.8%. The loan is collateralized by substantially all of our assets other than, subject
to certain limited exceptions, intellectual property. Subject to certain limited exceptions, amounts prepaid under the credit and security agreement are subject to a prepayment fee equal to 3% of the amount prepaid. In addition, upon repayment of
the amounts borrowed for any reason, we will be required to pay an exit fee of approximately $1.2 million. Under the terms of the agreement, we are subject to operational covenants, including limitations on our ability to incur liens or additional
debt, pay dividends, redeem our stock, make specified investments and engage in merger, consolidation or asset sale transactions, among other restrictions. As of March 31, 2011, $1.1 million is outstanding under this agreement.



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We believe that our existing cash and cash equivalents will be sufficient to meet our
projected operating requirements through at least the next 12 months.

Until we can generate significant cash from our
operations, we expect to continue to fund our operations with existing cash resources, proceeds of potential offerings of our equity securities, debt, receivables or royalty financings and potential corporate collaborations and licensing
arrangements. However, we cannot be sure that our existing cash and investment resources will be adequate, that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our
stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our development programs and/or our pre-commercialization and commercialization activities, relinquish some or even all rights to product
candidates or renegotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities,
substantial dilution to existing stockholders would likely result. Debt, receivables and royalty financings may be coupled with an equity component, such as warrants to purchase stock, which could also result in dilution of our existing
stockholders ownership. If we raise additional funds through debt, receivables or royalty financings, the terms of such financings may involve significant cash payment obligations as well as covenants and specific financial requirements that
may restrict our ability to operate our business.

Continued turbulence in the U.S. and international markets and economies
may adversely affect our ability to obtain additional financing on terms acceptable to us, or at all. If these market conditions continue, they may limit our ability to access the capital markets to meet liquidity needs.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities as defined in Regulation S-K 303(a)(4)(ii).



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Our cash and cash equivalents and investment securities, available-for-sale, as of March 31, 2011 consisted primarily of money market funds, U.S. government agency securities and corporate debt
obligations. We do not have any auction rate securities on our balance sheet, as they are not permitted by our investment policy. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level
of U.S. interest rates, particularly because the majority of our investments are in short-term marketable debt securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income
we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate.
For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment will probably decline. To minimize this risk, we intend to continue to maintain our portfolio
of cash equivalents and short-term investments in a variety of securities including commercial paper, money market funds and government and non-government debt securities, all with various maturities. In general, money market funds are not subject
to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

Our cash is invested in
accordance with an investment policy approved by our board of directors which specifies the categories, allocations, and ratings of securities we may consider for investment. We do not believe our cash, cash equivalents and investment securities
have significant risk of default or illiquidity. We made this determination based on discussions with our investment advisors and a review of our holdings. While we believe our cash, cash equivalents and investment securities are well diversified
and do not contain excessive risk, we cannot provide assurance that in the future our investments will not be subject to adverse changes in market value.

In addition, domestic and international equity markets have experienced and may continue to experience heightened volatility and turmoil based on domestic and international economic conditions and
concerns. In the event these economic conditions and concerns continue and the markets continue to remain volatile, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to
raise funds if necessary and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents that are not federally insured. If economic instability continues, we cannot provide assurance that we will
not experience losses on these investments.



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Disclosure
Controls and Procedures

We maintain disclosure controls and procedures and internal controls that are designed to provide
reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that
such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures and internal controls, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control
objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures and internal controls.

As required by the Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision of and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based
on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no
change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We are
not currently a party to any material legal proceedings.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

You
should carefully consider the following risk factors, as well as the other information in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our
business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You
should consider all of the factors described when evaluating our business.

We have marked with an asterisk
(*) those risk factors that reflect substantive changes from the risk factors included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2010.

Risks Related to Our Business and Industry

Our success depends substantially on our product candidates,
Contrave® (naltrexone/bupropion, each in a sustained release, or SR, formulation) and Empatic
(zonisamide/bupropion, each in a SR formulation). We cannot be certain that either product candidate will receive regulatory approval or be successfully commercialized.

We currently have only a limited number of product candidates in development, and our business currently depends entirely on their
successful development and commercialization. We currently have no drug products approved for sale and we may never be able to develop marketable drug products. The research, testing, manufacturing, labeling, approval, sale, marketing and
distribution of drug products are subject to extensive regulation by the U.S. Food and Drug Administration, or FDA, and other regulatory authorities in the United States and other countries, whose regulations differ from country to country.
Neither we nor our collaborative partner for Contrave, Takeda Pharmaceutical Company Limited, or Takeda, are permitted to market our product candidates in the United States until we receive approval of a New Drug Application, or NDA, from the FDA,
or in any foreign countries until we receive the requisite approval from the regulatory authorities of such countries. We have not received marketing approval for any of our product candidates. In January 2011, we received a complete response
letter, or CRL, from the FDA regarding our NDA for Contrave. The CRL indicated that the FDA could not approve the NDA in its present form primarily due to concerns regarding the cardiovascular safety profile of Contrave when used long-term in a
population of overweight and obese subjects. The CRL stated that before our NDA could be approved, we must conduct a randomized, double-blind, placebo-controlled trial of sufficient size and duration to demonstrate that the risk of major adverse
cardiovascular events in overweight and obese subjects treated with Contrave does not adversely affect the drugs benefit-risk profile. Our near-term success is substantially dependent on the approval of this NDA and the CRL will delay and
could prevent the approval of Contrave for the treatment of obesity. Conducting the randomized, double-blind, placebo-controlled trial that is requested in the CRL and performing any additional development activities that the FDA may require in
connection with the Contrave NDA will be a lengthy, expensive, complex and uncertain process that could require the expenditure of substantial resources. We plan to work closely with the FDA to determine the appropriate next steps for the Contrave
NDA. If we were to conduct the type of trial requested in the CRL, we can provide no assurance the results of such trial would support approval of the NDA. If we do address the issues identified in the CRL, we will need to resubmit the NDA to the
FDA, which would typically result in a additional six month review cycle by the FDA.

The FDA has substantial discretion in
the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. For example:



| |  |  | the FDA may not deem a product candidate safe and effective;
| | - |  | ------------------------------------------------------------



| |  |  | the FDA may not find the data from preclinical studies and clinical trials sufficient to support approval;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the FDA may not agree with our interpretation and characterization of efficacy and safety data from our clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | the FDA may require additional preclinical or clinical studies;
| | - |  | ---------------------------------------------------------------



| |  |  | the FDA may not approve of our third-party manufacturers processes and facilities;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the FDA may not approve of the formulation and/or the specifications of a product candidate; or
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the FDA may change its approval policies, adopt new regulations or provide new guidance.
| | - |  | ----------------------------------------------------------------------------------------



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There can be no assurance we will be able to conduct the activities necessary to re-submit
our NDA for Contrave and that the FDA will approve such resubmission as a result of the factors identified. Our other product candidate, Empatic, has been evaluated in Phase II clinical trials and it will need to successfully complete two or more
pivotal trials, as well as potential additional non-pivotal clinical trials we may be required to conduct based on feedback we may receive from the FDA. Similar to Contrave, obtaining approval of an NDA for Empatic will be a lengthy, expensive,
complex and uncertain process that will require the expenditure of substantial resources. In addition, Empatic contains bupropion, the same active ingredient that gave rise to the FDAs concerns regarding the cardiovascular safety profile of
Contrave, which depending on the result of the NDA for Contrave and any additional studies we conduct for it, may adversely affect the development and regulatory approval prospects of Empatic. Even if we eventually receive approval of an NDA for
Contrave, the FDA may grant approval contingent on the performance of costly additional clinical trials which may be required after approval. The FDA also may approve Contrave for fewer or more limited indications than we request, and the FDA may
not approve the labeling that we and our collaborative partner believe is necessary or desirable for the successful commercialization of Contrave. Any failure to obtain regulatory approval of Contrave would limit our ability to ever generate
revenues (and any failure to obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenue), would potentially harm the development prospects of Empatic and would have a material and adverse
impact on our business.

Our clinical trials may fail to demonstrate acceptable levels of safety or efficacy of our product candidates,
which could prevent or significantly delay their regulatory approval.*

Our product candidates are prone to the risks
of failure inherent in drug development. Before obtaining regulatory approvals for the commercial sale of Contrave, Empatic or any other product candidate for a target indication, we must demonstrate with substantial evidence gathered in
well-controlled clinical trials, and, with respect to approval in the United States, to the satisfaction of the FDA and, with respect to approval in other countries, similar regulatory authorities in those countries, that the product candidate is
safe and effective for use for that target indication. The CRL we received from the FDA in January 2011 indicated that the FDA could not approve the Contrave NDA in its present form primarily due to concerns regarding the cardiovascular safety
profile of Contrave when used long-term in a population of overweight and obese subjects. The CRL stated that before our NDA could be approved, we must conduct a randomized, double-blind, placebo-controlled trial of sufficient size and duration to
demonstrate that the risk of major adverse cardiovascular events in overweight and obese subjects treated with Contrave does not adversely affect the drugs benefit-risk profile. If we conduct such a cardiovascular outcomes trial for Contrave,
the evidence we gather from this trial may not demonstrate that Contrave is safe and effective for use in our target indication and, moreover, may demonstrate that the risk of adverse cardiovascular events in overweight and obese patients treated
with Contrave adversely affects the drugs benefit-risk profile. Such a result could delay or terminate our development program for Contrave.

The FDA issued draft guidance on developing products for weight management in February 2007. The draft guidance provides recommendations on the design of studies evaluating the efficacy and safety of
products intended to treat obesity. It also provides guidance on the general efficacy benchmarks required in pivotal trials for comparison against placebo. While we believe the design of our pivotal clinical trials for Contrave is consistent with
the recommendations made by the FDA in the draft guidance and that the pivotal clinical trials have met the efficacy and safety requirements, the FDA may not agree with our interpretation of the results from the Contrave pivotal Phase III clinical
trials. It is also possible that the FDA will change its guidance, which could require us to conduct additional clinical trials for Contrave (in addition to the pre-approval cardiovascular outcomes trial requested in the CRL), or create other
requirements that could have the effect of preventing or delaying approval.

With respect to Empatic, in September 2009, we
announced the results of our latest Phase IIb clinical trial which we believe established that the combination of Empatics components is more effective than the individual components. It is not clear what magnitude of superiority the FDA will
require Empatic to demonstrate versus the most active individual component in order to agree that Phase III clinical trials may be conducted against placebo only. In addition, Empatic contains bupropion, the same active ingredient that gave rise to
the FDAs concerns regarding the cardiovascular safety profile of Contrave, which depending on the result of the NDA for Contrave and any additional studies we conduct for it, may adversely affect the development of Empatic. Based on the
outcome of discussions with the FDA regarding the Contrave NDA and as part of our updated corporate strategy, we plan to evaluate next steps for the Empatic program. We have not yet commenced any Phase III clinical trials for this product candidate.

In addition, we may need to complete additional preclinical testing of our product candidates to evaluate safety and toxicity
and the FDA may require us to conduct additional clinical trials. The results from the preclinical and clinical trials that we have completed for Contrave and Empatic may not be replicated in future trials, or we may be unable to demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approvals for either product candidate. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. If our drug candidates are not shown to be safe and effective in clinical trials, our clinical development programs could be delayed or terminated. Any delays could also result in the need for additional
financing, and our failure to adequately demonstrate the efficacy and safety of Contrave, Empatic or any other product candidates that we may develop, in-license or acquire would prevent receipt of regulatory approval and, ultimately, the
commercialization of that product candidate.



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The CRL we received for the Contrave NDA may also materially and adversely affect our Empatic
development program.

Empatic contains bupropion, the same active ingredient that gave rise to the FDAs concerns
regarding the cardiovascular safety profile of Contrave. We are unable to predict whether the FDA may extend the requirement to conduct a cardiovascular outcomes trial to Empatic as well. If we do conduct such a trial for Contrave, the evidence we
gather from this trial may not demonstrate that Contrave is safe and effective for use in our target indication and, moreover, may demonstrate that the risk of adverse cardiovascular events in overweight and obese patients treated with Contrave
adversely affects the drugs benefit-risk profile. Such a result could not only delay or terminate our development program for Contrave, but Empatic as well, which could result in our inability to continue operations because we currently have
no additional product candidates in development.

Our product candidates may cause undesirable side effects or have other properties
that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical
trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. Contrave has been evaluated in four completed Phase III clinical trials, which we refer to collectively as
the Contrave Obesity Research, or COR, program. Across the entire COR program, seven patients experienced serious adverse events that were attributed by investigators as possibly related or related to Contrave treatment. These include cholecystitis
(gallbladder inflammation) (2), seizure (2), palpitations (1), paresthesia (1) and vertigo (1). The most frequently observed treatment-emergent adverse events were nausea, constipation, vomiting and dizziness. Nausea was the leading adverse
event resulting in discontinuation; however, for the majority of patients experiencing nausea, it was mild to moderate, transient and manageable. In September 2009, we announced the results from our latest Phase IIb clinical trial for Empatic. The
most frequent side effects observed in this clinical trial were headache, nausea and insomnia. Adverse events and laboratory findings appeared to be consistent with the individual components of Empatic, bupropion and zonisamide.

The safety data we have disclosed to date represents our interpretation of the data at the time of disclosure and it is subject to our
further review and analysis. Serious adverse events have been reported to the FDA and study investigators as required in accordance with current guidelines and standards. Serious adverse events that are not characterized by clinical investigators as
possibly related to our study drug or adverse events that occur in small numbers may not be disclosed to the public until such time the various documents submitted to the FDA as part of the approval process are made public. We are unable to
determine if the subsequent disclosure of adverse events will have an adverse effect on our stock price. In addition, our interpretation of the safety data from our clinical trials is contingent upon the review and ultimate approval of the FDA. The
FDA may not agree with our methods of analysis or our interpretation of the results.

In addition, the constituent drugs of
each of our product candidates each has its own side effect profile that is included in the respective current product label. If our product candidates are approved by the FDA, we would anticipate that their labels would include the side effect
profiles of each of the constituent drugs. Moreover, patients in our clinical trials may experience side effects that are indicated in the constituent drugs labels, as was the case with the side effects experienced by patients in our clinical
trials of Contrave and Empatic to date. In addition, while the constituent drugs that make up Contrave and Empatic have post-marketing safety records and while we have tested these constituent drugs in combination in our clinical trials of Contrave
and Empatic to date, the safety of the combined use of the constituents of Contrave and Empatic is not yet fully known, and any future trials may produce side effects not observed to date. For example, the cardiovascular outcomes trial the FDA has
requested us to conduct may demonstrate that the risk of major adverse cardiovascular events in overweight and obese subjects treated with Contrave adversely affect the drugs benefit-risk profile and could delay or prevent the regulatory
approval of Contrave. The approvability and eventual labeling of Contrave and Empatic will be determined by the safety experience with the drugs in the context of their relative merits (efficacy) in an obese population. Any of the side effects of
Contrave or Empatic, or their individual constituent drugs, could delay or prevent their regulatory approval or limit the commercial profile of an approved label.

Further, if any of our product candidates receives marketing approval and we or others, including our collaborative partner, identify undesirable side effects caused by the product (or any other similar
product) after the approval, a number of potentially significant negative consequences could result, including:



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| |  |  | regulatory authorities may withdraw or limit their approval of the product;
| | - |  | ---------------------------------------------------------------------------



| |  |  | regulatory authorities may require the addition of labeling statements, such as a boxed warning with Contrave or Empatic or a
contraindication;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of the
product;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we or our collaborative partner may decide to remove the products from the marketplace;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | we could be sued and held liable for injury caused to individuals exposed to or taking our product candidates; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | our reputation may suffer.
| | - |  | --------------------------

Any of these events could prevent us and our collaborative partner from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of
commercializing our product candidates and significantly impact our ability and our collaborative partners ability to successfully commercialize our product candidates and generate revenues.

There are known adverse side effects to the individual use of bupropion, naltrexone and zonisamide.*

A key constituent of Contrave and Empatic is bupropion, which has been approved by the FDA for the treatment of
depression and to assist smoking cessation. The FDA has directed manufacturers of all antidepressant drugs to include in their product labels a boxed warning and expanded warning statements regarding an increased risk of suicidal
thinking and behavior in children and adolescents being treated with these drugs. The package insert for bupropion includes such a boxed warning statement. In December 2006, the FDA held an advisory committee meeting regarding suicidal
thinking and behavior in adults being treated with antidepressant drugs. The advisory committee recommended that the boxed warning be extended to cover adults up to their mid-20s. To the extent that any additional warnings or
labeling changes related to suicidal thinking and behavior in adults are required, we expect that any such additional warnings or other labeling changes will also be required on labeling for both Contrave and Empatic, if approved. In July 2009, the
FDA issued a news release announcing that it was requiring manufacturers to put a boxed warning on the prescribing information for smoking cessation drugs including Zyban®, which is a branded form of bupropion. The warning highlights the risk of serious mental health events including changes in behavior, depressed mood, hostility, and
suicidal thoughts. Although neither Contrave nor Empatic is intended to be promoted for or used in the treatment of major depression or smoking cessation, we expect that a similar warning statement will be required on labeling for both Contrave and
Empatic, particularly because it is likely that there will be obese patients who smoke or depressed obese patients who will use these product candidates, if approved.

The FDA has also directed manufacturers of antidepressant drugs to create Medication Guides to be distributed to patients regarding the risk of suicidal thinking and behavior in children and adolescents.
Although we have not designed either the Contrave or Empatic programs for the treatment of children or adolescents, it is possible that the FDA will require a Medication Guide for both Contrave and Empatic. These warnings and other requirements may
have the effect of limiting the market acceptance by our current and any future collaborative partners targeted physicians and patients of Contrave and Empatic, if these product candidates are approved.

The other constituent of Contrave, naltrexone, has been approved by the FDA for the treatment of alcohol and opioid dependence. The FDA
has directed the manufacturers of naltrexone for these indications to include in their product labels a boxed warning and expanded warnings statements regarding hepatotoxicity, or liver toxicity. A similar warning statement may be
required on labeling for Contrave, if approved.

In addition, each of the constituent drugs included in the Contrave and
Empatic combinations has in its package insert a Category C pregnancy precaution. This means that animal studies have shown that each of these constituent drugs has the potential to cause birth defects and that there have been no
adequate and well-controlled studies of the constituent drugs in pregnant women, but that the FDA has determined that the benefits from the use of such drugs in pregnant women may be acceptable despite the potential risks.

Zonisamide, a constituent drug of Empatic, also has a warning that women of childbearing age should be advised to use contraception due
to the teratogenicity seen in animal studies. In addition, because of published concerns in academic journals regarding the possible developmental effects of zonisamide in animals as well as reports from Japan in which women receiving zonisamide
combined with other anticonvulsants had children with birth defects, it is likely that Empatic, if approved, will receive a Category X pregnancy precaution and thus, would be contraindicated for use by pregnant or nursing women with
warnings about use of Empatic in women of childbearing age. This means that there could be a labeling limitation or risk evaluation and mitigation strategy, or REMS, on the use of Empatic without adequate contraception or perhaps a prohibition on
the use of Empatic by all women of childbearing age. Although we have designed our clinical trials to educate women about the necessity of using adequate contraception while taking, and for a period of time after taking, our product candidates,
women may not take the necessary precautions to prevent pregnancy and as a result, women taking our product candidates may risk bearing children with birth defects. For example, during the first Phase IIb trial, four women on Empatic became pregnant
and carried the pregnancies to term. Three of the pregnancies resulted in normal infants at birth. In the fourth case there were birth abnormalities, one of which, a cardiac abnormality, was corrected surgically. Although this case is a complicated
one with a number of plausible, alternative etiologies, it has been reported by the investigator as a serious adverse event and possibly related to Empatic.



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The FDA has issued an alert based on updated clinical data that treatment with zonisamide
can cause metabolic acidosis in some patients. Metabolic acidosis is a disturbance in the bodys acid-base balance that results in excessive acidity in the blood. The FDA recommended that healthcare professionals monitor for metabolic acidosis
at the start of treatment with zonisamide and periodically during treatment with zonisamide even in the absence of symptoms. We have been monitoring for metabolic acidosis in all of our Empatic clinical trials, and we have not observed any
clinically meaningful cases of metabolic acidosis. A warning statement about metabolic acidosis may be required in the labeling for Empatic.

The FDA has analyzed reports of suicidal behavior or ideation from placebo-controlled clinical studies of eleven anticonvulsants (including zonisamide). In the FDAs analysis, patients receiving
anticonvulsants had approximately twice the risk of suicidal behavior or ideation compared to patients receiving placebo. The relative risk for suicidal behavior or ideation was higher in the patients with epilepsy compared to patients who were
given one of the anticonvulsants for conditions other than epilepsy. The FDA has indicated that it will be working with manufacturers of marketed anticonvulsants to include this new information in the labeling of these products. It is possible that
any changes related to suicidal behavior or ideation that occur to the labels of these anticonvulsants will be required on the labeling for Empatic, if approved.

Notwithstanding the existing labeling for the constituents of our drugs in development, the FDA may choose to apply more stringent warning statements or stronger classifications or categorizations of risk
in the labeling for Contrave or Empatic, if approved, based on the different risk-benefit profile of our product candidates in the context of unmet need in the treatment of obesity, as compared to the approved indications for the constituent drugs
of Contrave and Empatic. For example, the label ultimately approved for Contrave or Empatic, if any, may include restrictions on use that may not appear in the existing labeling for the constituent drugs in Contrave or Empatic, including
restrictions based on pregnancy status, level of obesity and duration of treatment or a boxed warning consistent with those for antidepressants, anticonvulsants, products for smoking cessation, naltrexone or otherwise.

Any of these known side effects and any associated warning statements or classification or categorization of risk may limit the
commercial profile of an approved label for our product candidates and prevent us or our collaborative partner from achieving or maintaining market acceptance of our product candidates.

We are dependent on our collaboration with Takeda to commercialize Contrave in the United States, Canada and Mexico, and, if our NDA for Contrave is approved by the FDA, to further develop Contrave.
This collaboration may place the commercialization and, if applicable, the development outside our control, and poor performance under or failure to maintain the collaboration agreement between us and Takeda could have a material and adverse impact
on our business.

In September 2010, we entered into a collaboration agreement with Takeda for the development and
commercialization of Contrave in the United States, Canada and Mexico. Our dependence on Takeda and the collaboration agreement between us will subject us to a number of risks, including:



| |  |  | Takeda may not perform as expected and we may not be able to control the amount and timing of resources that Takeda may devote to the post-approval
development or commercialization of Contrave;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we and Takeda could disagree as to pre-approval or post-approval development plans and Takeda may delay clinical trials or stop a clinical trial;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there may be disputes between us and Takeda, including disagreements regarding the collaboration agreement, that may result in (1) the delay of
(or prevent entirely) the achievement of regulatory and commercial objectives that would result in milestone payments, (2) the delay or termination of the development or commercialization of Contrave, and/or (3) costly litigation or
arbitration that diverts our managements attention and resources;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Takeda may not comply with applicable regulatory guidelines with respect to developing or commercializing Contrave, which could adversely impact the
development of or sales of Contrave and could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension
of production and refusal to approve any new drug applications;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Takeda may not provide us with timely and accurate information regarding sales activities and supply forecasts, which could adversely impact our
ability to comply with our manufacturing and supply obligations under the collaboration agreement and our and Takedas ability to launch and commercialize Contrave, if approved;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Takeda may experience financial difficulties;
| | - |  | ---------------------------------------------



| |  |  | business combinations or significant changes in Takedas business strategy may also adversely affect Takedas ability to perform its
obligations under our collaboration agreement;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Takeda may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite
litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | notwithstanding the non-competition requirements in the collaboration agreement, Takeda could independently move forward with a competing product
candidate developed either independently or in collaboration with others, including our competitors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Furthermore, both Takeda and we have the right to terminate the collaboration agreement, in certain circumstances, prior to its
expiration, including a right by Takeda to terminate the agreement upon specified prior written notice. If the agreement is terminated prior to its expiration, we may not be able to find another collaborator for the development and commercialization
of Contrave, and even if we elected to pursue further development and commercialization of Contrave on our own, we might not be able to do so successfully and would experience substantially increased capital requirements that we might not be able to
fund. Any failure of Takeda to adequately perform its obligations under our collaboration agreement or the termination of such agreement could have a material and adverse impact on our business.

Delays in the commencement or completion of clinical trials, or the requirement to conduct additional clinical trials could result in increased
costs to us and delay or limit our ability to continue development programs and/or generate revenues.

Delays in the
commencement or completion of clinical trials could significantly affect our product development costs. We do not know whether clinical trials will begin on time or be completed on schedule, if at all. In addition, clinical trials may not be
completed on schedule, or at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:



| |  |  | obtaining regulatory approval to commence a clinical trial, including regulatory approval of the design of a clinical trial;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and trial sites, the terms of which can be subject to
extensive negotiation and may vary significantly among different CROs and trial sites;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | manufacturing sufficient quantities of a product candidate for use in clinical trials;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | obtaining institutional review board, or IRB, approval to conduct a clinical trial at a prospective site;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs
for the treatment of obesity or similar indications and the restrictions imposed by the design and length of a clinical trial;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | retaining patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal
issues, or who are lost to further follow-up;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the status of our collaborative relationship with Takeda with respect to any additional clinical trials required for Contrave; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | collecting, reviewing and analyzing our clinical trial data.
| | - |  | ------------------------------------------------------------

Clinical trials may also be delayed as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended
or terminated by us, a collaborative partner, the FDA, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:



| |  |  | failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | lack of adequate funding or other resources to continue the clinical trial;
| | - |  | ---------------------------------------------------------------------------



| |  |  | inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen safety issues; and
| | - |  | -----------------------------



| |  |  | logistical and operational challenges inherent in complex clinical trials.
| | - |  | --------------------------------------------------------------------------

Additionally, changes in regulatory requirements and guidance for developing products for weight management may occur and we may need to
initiate new clinical trials to account for these changes. For instance, the FDA may issue final guidance on developing products for weight management. While we believe the designs of our pivotal clinical trials for Contrave are consistent with the
current recommendations made by the FDA in the draft guidance, we cannot guarantee that the FDA will not require different or additional clinical trials or studies to support regulatory approval in addition to the cardiovascular outcomes trial the
FDA requested we conduct prior to approval in the CRL. We may not have the resources necessary to conduct a pre-approval cardiovascular outcomes trial or any other such clinical trials, and our ability to generate product revenues, if ever, will be
delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the termination of a development program and/or the denial of regulatory approval of a product
candidate, including the denial of the Contrave NDA.

We rely primarily on third parties to assist us in the preparation of our
regulatory applications and conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product
candidates within our expected timeframes or at all.

We currently rely on Octagon Research Solutions, Inc., or
Octagon, to assist us with a variety of matters related to the preparation of our regulatory applications. In addition, we utilize the services of inVentiv Clinical Solutions LLC to conduct our data management in connection with our clinical trials,
as well as the preparation of our regulatory applications. In the future we may depend on CROs and independent clinical investigators to conduct our clinical trials, including any cardiovascular outcomes trial we may conduct. The third parties with
which we contract for preparation of our regulatory applications and execution of our clinical trials play a significant role in the preparation of regulatory applications, the conduct of our clinical trials and the subsequent collection, review and
analysis of data. These third parties, including CROs and investigators, are not our employees, and we have limited ability to control the amount or timing of resources that they devote to our programs. If Octagon, inVentiv, other CROs, consultants
or independent investigators fail to devote sufficient time and resources to our drug development programs and related regulatory applications, or if their performance is substandard, it may delay the potential approval of our regulatory
applications and the commercialization of our product candidates. In addition, the execution of clinical trials; the subsequent compilation, review and analysis of the data produced and the preparation of regulatory applications requires
coordination among various parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties provide the necessary resources and communicate and coordinate with one another. If these third
parties are unable to provide the necessary resources or coordinate and communicate with one another, our clinical trials may be delayed or the completion and analysis of the data and the related regulatory applications may be delayed or
compromised. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete with us. If these third parties also contract to provide services for our competitors, it could adversely affect our
business.

Even if our product candidates receive regulatory approval, they may still face future development and regulatory
difficulties.

Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on
a products indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. For example, the label ultimately approved for Contrave or Empatic, if any, may include restrictions on use, including
restrictions based on pregnancy status, level of obesity and duration of treatment or a boxed warning consistent with those for antidepressants, anticonvulsants, products for smoking cessation, naltrexone or otherwise. We submitted a
REMS to the FDA as part of our NDA for Contrave that includes a Medication Guide that would be distributed to patients. The FDA may require a more restrictive REMS. Our product candidates will also be subject to ongoing FDA requirements governing
the labeling, packaging, storage, advertising, promotion, recordkeeping and submission of safety and other post-market information. In addition, the FDA confirmed in the CRL for Contrave that they will require a cardiovascular outcomes trial for
Contrave prior to approving the drug. We are unable to predict whether the FDA may extend this requirement to Empatic or if the FDA will request additional clinical trials be conducted after either product candidates receives regulatory approval. We
may not have the resources to conduct such additional clinical trials, including the cardiovascular outcomes trial for Contrave or for Empatic, if required, and our ability to comply with the FDA requirements may be negatively impacted.



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Manufacturers of drug products and their facilities are also subject to continual review and
periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices, or cGMP, regulations. If we, a collaborative partner or a regulatory agency discover previously unknown problems with a
product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured (including a change or revision to the specifications set forth in the facilitys drug master file, or DMF),
a regulatory agency may impose restrictions on that product, the manufacturer, our collaborative partner or us, including requiring withdrawal of the product from the market or suspension of manufacturing. If we, a collaborative partner, our product
candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:



| |  |  | issue Warning Letters or untitled letters;
| | - |  | ------------------------------------------



| |  |  | impose civil or criminal penalties;
| | - |  | -----------------------------------



| |  |  | suspend regulatory approval;
| | - |  | ----------------------------



| |  |  | suspend any ongoing clinical trials;
| | - |  | ------------------------------------



| |  |  | refuse to approve pending applications or supplements to applications filed by us;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | impose restrictions on operations, including costly new manufacturing requirements; or
| | - |  | --------------------------------------------------------------------------------------



| |  |  | seize or detain products or require us or our collaborative partner to initiate a product recall.
| | - |  | -------------------------------------------------------------------------------------------------

If the suppliers upon whom we rely for active pharmaceutical ingredients, or API, fail to produce such ingredients in the volumes that we or our
collaborative partner require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we or our collaborative partner may face delays in the development or commercial launch of our product
candidates.

We do not manufacture any of our API nor do we plan to develop any capacity to do so. Instead, we rely on
suppliers of API to provide component materials to our other contract manufacturers, who produce finished pharmaceutical products incorporating the API. The failure or inability of our API suppliers to satisfy our API requirements on a timely basis
could delay our development programs or commercial launch of our product candidates, if approved.

Although naltrexone itself
is not addictive, synthesis of naltrexone is a multi-step process with a natural opiate starting material that has the potential for abuse and is therefore regulated as a controlled substance under the federal Controlled Substances Act. As such,
manufacturers of naltrexone API must be registered with the Drug Enforcement Administration, or DEA. Manufacturers making naltrexone also must obtain annual quotas from the DEA for the opiate starting material. Because of the DEA-related
requirements and modest current demand for naltrexone API, there exist few current manufacturers of this API. Therefore, API costs for naltrexone are greater than for the other constituents of our product candidates. Demand for Contrave may require
amounts of naltrexone greater than the currently available worldwide supply. Any lack of sufficient quantities of naltrexone would limit our or our collaborative partners ability to complete any additional required clinical trials for and
launch and continue to commercialize Contrave. Although we are evaluating additional possible manufacturers to supplement our current naltrexone manufacturing capacity, including those in the United States, Europe and Asia, we may not be successful
in accessing additional manufacturing supply of naltrexone API or other necessary components of our product candidates at the appropriate quantities, quality or price.



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We have entered into long-term supply agreements for the supply of
naltrexone and bupropion API. In January 2009, we entered into a supply agreement with Cilag GmbH International, or Cilag, pursuant to which Cilag will manufacture commercial supplies of naltrexone for use in our drug products. The supply agreement
shall continue in effect until four years from the period beginning on the first December 31stfollowing marketing approval by the FDA for a drug product of ours containing naltrexone. Either party may terminate the supply agreement effective immediately upon written notice to the other in the
event that (a) the other party dissolves, is declared insolvent or bankrupt by a court of competent jurisdiction, (b) a voluntary or involuntary petition of bankruptcy is filed in any court of competent jurisdiction, or (c) the supply
agreement is assigned for the benefit of creditors. In addition, we may terminate the supply agreement effective immediately upon written notice in the event that (a) any regulatory agency takes any action, or raises any objection that prevents
us from importing, exporting, purchasing or selling a finished product containing naltrexone, (b) the product containing naltrexone fails during clinical trials and we withdraw our NDA, (c) we determine, in our sole discretion, to no
longer pursue the development and/or commercialization of a product containing naltrexone, or (d) a legal proceeding shall be instituted against Cilag, which is reasonably likely to materially adversely affect Cilags ability to properly
perform under the supply agreement or subject us to any material risk of liability or loss. Moreover, either party may terminate the agreement upon specified written notice of a failure by the other party to perform or observe any material covenant,
condition or agreement to be performed or observed by it under the supply agreement, unless such breach has been cured within the specified notice period.

In December 2009, we entered into a supply agreement with Chemi, S.p.A, or Chemi, pursuant to which Chemi will manufacture commercial supplies of bupropion for use in our drug products. The initial term
of the supply agreement commenced retroactively in November 2009 and shall continue in effect until the date that is four years from the date we first received marketing approval for from the FDA or other governmental agency, or similar regulatory
agency or commission in any foreign state or territory for our drug product containing bupropion. This initial term shall be automatically renewed for additional two year terms unless we provide specified written notice of our intent to terminate to
Chemi prior to the expiration of the initial term or any extension term, as applicable. Either party may terminate the supply agreement effective immediately upon written notice to the other in the event that (a) the other party dissolves, is
declared insolvent or bankrupt by a court of competent jurisdiction, (b) a voluntary or involuntary petition of bankruptcy is filed in any court of competent jurisdiction, (c) the supply agreement is assigned for the benefit of creditors,
(d) any regulatory agency takes any action, or raises any objection that prevents us from importing, exporting, purchasing or selling bupropion or our drug product containing bupropion, (e) our drug product containing bupropion fails
during clinical trials and we withdraw our NDA, (f) we determine, in our sole discretion, to no longer pursue the development and/or commercialization of our drug product containing bupropion, or (g) a legal proceeding shall be instituted
against Chemi, which is reasonably likely to materially adversely affect Chemis ability to properly perform under the supply agreement or subject us to any material risk of liability or loss. Moreover, either party may terminate the supply
agreement upon specified written notice to the other party of a failure by that party to perform or observe any material covenant, condition or agreement to be performed or observed by it under the supply agreement, unless such breach has been cured
within the specified notice period.

We have no other material long-term commitments or supply agreements with any of our
other API suppliers. Although we may seek to establish additional long-term supply commitments in the future, we may be required to agree to minimum volume requirements, exclusivity arrangements or other restrictions. We may not be able to enter
into additional long-term agreements on commercially reasonable terms, or at all. Consequently, even if and when our product candidates are approved, we and our current and any future collaborative partner may not be able to successfully
commercialize these product candidates if we are unable to secure long-term supply commitments for all of their API components.

In addition, our API suppliers must comply with cGMP requirements enforced by the FDA through its facilities inspection program and must
maintain and comply with their respective DMF on file with the FDA. These requirements include, among other things, quality control, quality assurance and the generation and maintenance of records and documentation. Suppliers of our API may be
unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers compliance with these regulations and standards. A failure to comply with these
requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any product supplied is compromised due to our
suppliers failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products, and we may be held liable for any injuries sustained as a result. Any of
these factors could cause a delay of clinical trials, regulatory submissions, approvals or commercialization of our product candidates, entail higher costs or result in our and our current and any future collaborative partner being unable to
effectively commercialize our products. Furthermore, if our suppliers fail to deliver the required commercial quantities of API on a timely basis, pursuant to the required specifications set forth in their respective DMF and at commercially
reasonable prices, and we are unable to timely secure and qualify additional suppliers with applicable regulatory authorities, we and our current or any future collaborative partner may not be able to successfully commercialize our product
candidates, any commercial launch could be delayed and/or we and such collaborative partner may be unable to meet demand for our products and would lose potential revenues.



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If the contract manufacturers upon whom we rely fail to produce our product candidates in the volumes
that we and our current and any future collaborative partner require on a timely basis, or fail to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we and such collaborative partner may face delays in the
development and commercialization of our product candidates.

We do not currently possess nor do we plan to implement
manufacturing processes internally. We currently utilize the services of contract manufacturers to manufacture our clinical supplies. These clinical supplies include the formulations of our product candidates components using the API from our
API suppliers, the tablets combining those components and the bottles used to package these tablets for use in clinical trials.

In preparation for the potential commercialization of Contrave, in March 2010, we entered into a long-term manufacturing services agreement, or manufacturing agreement, with Patheon Pharmaceuticals and
Patheon Inc., which we collectively refer to as Patheon, pursuant to which Patheon has agreed to manufacture commercial quantities of our Contrave tablet products. Under the terms of the manufacturing agreement, we are required to purchase a certain
percentage of our requirements for Contrave tablet products intended for commercial sale, provided certain terms and conditions are met. The initial term of the manufacturing agreement commenced in March 2010 and shall continue in effect until
December 31stof the year that is five years from the
date Contrave first receives approval for marketing from the FDA or any foreign regulatory agencies competent to grant marketing approvals for pharmaceutical products. Upon expiration of the initial term, the agreement will be automatically renewed
for additional two year terms. Patheon may terminate the manufacturing agreement at any time upon specified prior written notice to us and, subject to our payment of certain termination amounts, we may also terminate the manufacturing agreement with
specified prior written notice to Patheon. Either party may terminate the manufacturing agreement effective immediately upon written notice to the other in the event that (a) the other party dissolves, is declared insolvent or bankrupt by a
court of competent jurisdiction, (b) a voluntary petition of bankruptcy is filed in any court of competent jurisdiction, or (c) the manufacturing agreement is assigned for the benefit of creditors. We may terminate the manufacturing
agreement upon specified prior written notice if any governmental or regulatory authority, including, but not limited to, the FDA, takes any action, or raises any objection, that prevents us from importing, exporting, purchasing, or selling Contrave
tablet products. We are also required to give specified advance notice if we intend to no longer order commercial supplies of Contrave tablet products pursuant to the manufacturing agreement due to the products discontinuance in the market.
Patheon may terminate the manufacturing agreement upon specified prior written notice to us if we assign any of our rights under the manufacturing agreement to an assignee that, in the opinion of Patheon acting reasonably, is (a) not a credit
worthy substitute for us; or (b) a competitor of Patheon. Moreover, either party may terminate the manufacturing agreement upon written notice to the other party where the other party has failed to remedy a material breach of any of its
representations, warranties, or other obligations under the manufacturing agreement within a specified period of time following receipt of a written notice of the breach, subject to specified terms and conditions.

If we change to other manufacturers in the future, the FDA and comparable foreign regulators must approve these manufacturers
facilities and processes prior to use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for the production of our product candidates.

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development
of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up for commercial production. These problems include difficulties with production
costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations, which include
product specification requirements established by the FDA and stability requirements in other foreign countries that our current product candidate formulation may not be able to meet. If our manufacturers were to encounter any of these difficulties
in the United States or in other foreign countries or otherwise fail to comply with their obligations to us, our ability or our collaborative partners ability to provide product candidates to patients in our and our current and any future
collaborative partners clinical trials or to commercially launch a product candidate would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs
associated with maintaining a clinical trial program and, depending upon the period of delay, require us or such collaborative partner to commence new trials at significant additional expense or terminate the trials completely.

In addition, all manufacturers of our products must comply with cGMP requirements enforced by the FDA through its facilities inspection
program. These requirements include, among other things, quality control, quality assurance and the generation and maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with
other FDA, state and foreign regulatory requirements. We have little control over our manufacturers compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties,
suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any product supplied is compromised due to our manufacturers failure to adhere to applicable laws
or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay of clinical trials,
regulatory submissions, approvals or commercialization of our product candidates, entail higher costs or result in our or our current or any future collaborative partner being unable to effectively commercialize our products. Furthermore, if our
manufacturers fail to deliver the required commercial quantities on a timely basis, pursuant to provided specifications and at commercially reasonable prices, we and our current and any future collaborative partner may be unable to meet demand for
our products and would lose potential revenues.



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We expect intense competition in the obesity marketplace for Contrave and Empatic, if approved, and
new products may emerge that provide different or better therapeutic alternatives for obesity and weight loss.

If approved and commercialized, both Contrave and Empatic will compete with well established prescription drugs for the treatment of obesity, including Xenical® (orlistat), marketed by Roche Laboratories Inc. Orlistat has also been launched by GlaxoSmithKline in
over-the-counter form under the brand name allí®, which represents additional competition and potential
negative pricing pressure. Orlistat is marketed by a pharmaceutical company with substantially greater resources than we have. In addition, a number of generic pharmaceutical products are prescribed for obesity, including phentermine,
phendimetrazine, benzphetamine and diethylpropion. Some of these generic drugs, and others, are prescribed in combinations that have shown anecdotal evidence of efficacy. These products are sold at much lower prices than we or our collaborative
partner intend to charge for our product candidates, if approved. The availability of a large number of branded prescription products, including drugs that are prescribed off-label, generic products and over-the-counter products could limit the
demand for, and the price we or our collaborative partner are able to charge for, our product candidates.

Currently there are
a number of drug products in development for obesity which could become competitors against our product candidates. These include products being developed by Arena Pharmaceuticals, Inc., Amylin Pharmaceuticals, Inc., Alizyme plc, Athersys, Inc.,
Genaera Corporation, Neurosearch A/S, Novo Nordisk A/S, Sanofi-Aventis, and Vivus, Inc., as well as Arenas partner, Eisai Pharmaceuticals, Inc. and our and Amylins partner, Takeda. Arena and Vivus each filed an NDA seeking approval of
its respective product candidate in December 2009 and in October 2010, the FDA completed its reviews of these NDAs and did not approve either product. Both companies received CRLs from the FDA regarding their respective NDAs. If either Arena or
Vivus is successful at obtaining FDA approval prior to us, they may achieve a significant competitive advantage prior to the time we and our collaborative partner are able to market Contrave, if approved. In addition, Arena entered into a
partnership with Eisai to commercialize its obesity product candidate, if approved. This partnership may enable Arena to more effectively market and sell its product, if approved.

There are also surgical approaches to treat severe obesity that are becoming increasingly accepted and could become competitors against
our product candidates. Two of the most well established surgical procedures are gastric bypass surgery and adjustable gastric banding. In addition, other potential approaches which utilize various implantable devices or surgical tools are in
development, including an endoscopic approach for treating obesity. Some of these approaches are in late stage development and may be approved for marketing. Companies such as Allergan, Inc., Boston Scientific, Covidien Ltd, EnteroMedics, Inc., GI
Dynamics, Inc., Johnson & Johnson, Medtronic Inc., and Satiety, Inc. are all active in this space and may have substantially greater resources than we have.

New developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the nutritional, pharmaceutical and medical technology industries at a
rapid pace. These developments may render our product candidates less competitive. Some of our potential competitors are large pharmaceutical or device firms and have substantially greater resources than we have. These resources could be directed
toward the obesity market and include:



| |  |  | research and development resources, including personnel and technology;
| | - |  | -----------------------------------------------------------------------



| |  |  | regulatory experience;
| | - |  | ----------------------



| |  |  | drug development and clinical trial experience;
| | - |  | -----------------------------------------------



| |  |  | experience and expertise in exploitation of intellectual property rights; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | capital resources.
| | - |  | ------------------



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As a result of these factors, our competitors may obtain regulatory approval of their
products more rapidly than we do or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs or surgical approaches that are
more effective, more useful and less costly than ours and may also be more successful in manufacturing and marketing their products. In addition, our competitors may be more effective in commercializing their products. We currently outsource our
manufacturing and therefore rely on third parties for that competitive expertise. There can be no assurance that we will be able to develop or contract for these capabilities on acceptable economic terms, or at all. In addition, should both Contrave
and Empatic be approved to treat obesity, these product candidates may compete with one another. While we intend to direct each product candidate to specific segments of the obesity marketplace, the FDA does not distinguish between these types of
obesity and, if approved, any potential label for Contrave and Empatic would be expected to refer to obesity generally. There is no guarantee that we and our current and any future collaborative partner will be successful in marketing Contrave and
Empatic to their respective target markets, if approved, or minimizing competition between them.

Our product candidates are
combinations of generically-available pharmaceutical products, and our success is dependent on our ability and our collaborative partners ability to compete against off-label generic substitutes and demonstrate the advantages of our
proprietary combination products.

Off-label use occurs when physicians prescribe a drug that is approved by the FDA
for one indication for a different, unapproved indication. We believe that a practitioner seeking safe and effective therapy is not likely to prescribe such off-label generics in place of Contrave or Empatic because the dosage strengths,
pharmacokinetic profiles and titration regimens recommended for Contrave and Empatic are not available using existing generic preparations of immediate release, or IR, naltrexone, zonisamide IR and bupropion SR, and there are no oral generic SR
formulations of naltrexone or zonisamide. However, a physician could seek to prescribe off-label generics in place of Contrave or Empatic. Such off-label prescriptions could significantly diminish the market potential of our products and
significantly impact our ability and our collaborative partners ability to generate revenues.

With regard to off-label
substitution at the pharmacy level, we expect to rely on the novel dose ratios and novel pharmacokinetic properties of our product candidates, as well as the differences in their approved indications, to provide sufficient distinction such that
generic preparations are not considered therapeutic equivalents by the FDA. State pharmacy laws in many instances only permit pharmacists to substitute generic products for branded products if the products are therapeutic equivalents. Therefore, the
lack of therapeutic equivalency should limit generic substitution by pharmacies and/or pharmacy benefit managers. However, we cannot be certain that pharmacists and/or pharmacy benefit managers will not seek prescriber authorization to substitute
generics in place of Contrave and Empatic, which could significantly diminish their market potential and significantly impact our ability and our collaborative partners ability to successfully commercialize our product candidates and generate
revenues.

In addition, although we believe the current market prices for the generic forms of naltrexone and zonisamide make
generic substitution by physicians, pharmacists or pharmacy benefit managers unlikely, should the prices of the generic forms decline, the motivation for generic substitution may become stronger. Wide scale generic substitution by physicians and at
the pharmacy level could have substantial negative consequences to our business.

We have limited sales and marketing experience and
resources, and if we do not enter into additional collaboration or co-promotion arrangements, we may not be able to effectively market and sell Contrave outside the United States, Canada or Mexico or Empatic, if approved, and our ability to generate
revenues may be delayed or limited.

We are developing our obesity product candidates for large markets traditionally
served by general and family practitioners and internists. Generalist physicians number in the several hundred thousand in the United States. Traditional pharmaceutical companies employ groups of sales representatives numbering in the thousands to
call on this large generalist physician population. In order to effectively promote to these physician groups, we entered into a collaboration agreement with Takeda in September 2010 to develop and commercialize Contrave in the United States, Canada
and Mexico. In order to expand the market opportunity outside of these countries for Contrave and to address the commercialization of Empatic, if approved, we must either establish additional sales and marketing collaborations or co-promotion
arrangements or expend significant resources to develop our own sales and marketing presence. We currently possess limited resources and may not be successful in developing our own sales and marketing presence We may not be able to enter into
additional collaboration or co-promotion arrangements on acceptable terms, if at all. If we are unable to enter into additional collaboration or co-promotion arrangements for Contrave outside the United States, Canada and Mexico or for Empatic, and
we must develop our own sales and marketing presence to address the large market of general and family practitioners and internists in these areas, we will require additional capital and our ability to market and sell our product candidates and
generate revenues from our product candidates may be delayed or limited. We also face competition in our search for collaborators, co-promoters and sales force personnel. If our competitors are able to establish collaboration or co-promotion
arrangements with pharmaceutical companies who have substantially greater resources than we have, our ability to successfully commercialize Contrave outside the United States, Canada and Mexico and/or Empatic will be limited and as a result our
competitors may be more successful in marketing and selling their products in these areas. Even if we do enter into additional collaboration or co-promotion arrangements with third parties, we will be reliant on such third parties to successfully
develop and/or commercialize our product candidates in these areas. These third parties may fail to develop or effectively commercialize our product candidates because they cannot obtain the necessary regulatory approvals, decide to pursue a
competitive potential product that may be developed outside of the collaboration or fail to devote the resources necessary to realize the full commercial potential of our product candidates, especially in light of the resources being devoted by our
competitors collaboration and co-promotion partners. Any such failures would negatively affect our ability to generate revenues from sales of Contrave outside the United States, Canada and Mexico or from sales of Empatic.



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Our development and commercialization strategy depends upon access to findings of safety and
effectiveness based on data not developed by us but which the FDA may reference in reviewing our U.S. marketing applications. In territories outside the United States, we must either negotiate access to these safety and effectiveness findings or
develop them ourselves.

The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the
Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug, and Cosmetic Act. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for
the applicant and for which the applicant has not obtained a right of reference. This statutory provision expressly allows the FDA to rely, for purposes of approving an NDA, on findings of safety and effectiveness based on data not developed by the
filer of the NDA. Under these guidelines, we were able to move directly into Phase II clinical trials for each of our drug combinations, because our submitted NDA for Contrave relied, and our planned NDA for Empatic, will rely, in part, upon the
FDAs findings of safety and effectiveness for the previously-approved products that are incorporated into Contrave and Empatic. Analogous legislation does not exist in other countries. In territories where data are not freely available, we may
not have the ability to commercialize our products without negotiating rights from third parties to refer to their clinical data in our regulatory applications, which could require the expenditure of significant additional funds to generate our own
data. We may be unable to obtain rights to the necessary clinical data and may be required to develop our own proprietary safety and manufacturing dossiers. In addition, even though we can take advantage of Section 505(b)(2) to support
potential U.S. approval for Contrave and Empatic, the FDA may also require us to perform additional studies or measurements to support changes from the previously-approved products incorporated into our product candidates.

To the extent that a Section 505(b)(2) application relies on the FDAs finding of safety and effectiveness of a
previously-approved drug, the applicant is required to make certifications to the FDA with respect to any patents listed for the approved product in the FDAs publication called Approved Drug Products with Therapeutic Equivalence
Evaluations, otherwise known as the Orange Book. Specifically, the applicant must certify when the application is submitted that: (1) there is no relevant patent information listed; (2) the listed patent has expired;
(3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or will not be infringed by the manufacture, use, or sale of the new product. A
certification that the new product will not infringe the already approved products Orange Book listed patents or that such patents are invalid is called a paragraph IV certification. If the 505(b)(2) applicant has provided a
paragraph IV certification to the FDA, the applicant must also send notice of the paragraph IV certification to the NDA holder and patent owner. We have made paragraph IV certifications that Contrave does not infringe the bupropion SR
formulation patents listed in the Orange Book, and have sent the appropriate notice to the patent holder and NDA holder. We will be required to make similar certification if and when we file an NDA for Empatic. In the event that the patent holder or
NDA holder files a patent infringement lawsuit against us within 45 days of its receipt of our paragraph IV certification, such lawsuit would automatically prevent the FDA from approving our Section 505(b)(2) NDA until the earliest of
30 months, expiration of the applicable patent (2013 in the case of bupropion SR), settlement of the lawsuit or a decision in the infringement case that is favorable to us. Any such patent infringement lawsuit could be costly, take a
substantial amount of time to resolve and divert management resources. This 45-day period with respect to our certifications related to bupropion SR in Contrave has elapsed and no such lawsuit was filed against us.If we obtain FDA approval
for either Contrave or Empatic, we could obtain three years of Hatch-Waxman marketing exclusivity for such product, since we have conducted a substantial clinical program that is essential to approval of our NDA. Under this form of exclusivity, the
FDA would be precluded from approving a 505(b)(2) NDA or ANDA for the same drug product for the protected indication (for example, a product that incorporates the change or innovation represented by our product) for a period of three years, although
the FDA may accept and commence review of such applications. However, this form of exclusivity might not prevent the FDA from approving a 505(b)(1) NDA that relies on its own clinical data. Further, if another company obtains approval for an
identical product candidate for the same indication we are studying before we do, our approval could be blocked until the other companys Hatch-Waxman marketing exclusivity expires.



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Even if our product candidates receive regulatory approval in the United States, we may never receive
approval or commercialize our products outside of the United States.

In order to market any products outside of the
United States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional
administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding
FDA approval in the United States as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the
regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States. As described
above, such effects include the risks that our product candidates may not be approved for all indications requested, which could limit the uses of our product candidates and have an adverse effect on their commercial potential or require costly,
post-marketing follow-up studies.

We face potential product liability exposure, and, if successful claims are brought against us, we
may incur substantial liability.

The use of our product candidates in clinical trials and the sale of any products for
which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health-care providers, pharmaceutical companies or others selling or otherwise coming into
contact with our products. If we cannot successfully defend ourselves against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:



| |  |  | decreased demand for our product candidates;
| | - |  | --------------------------------------------



| |  |  | impairment of our business reputation;
| | - |  | --------------------------------------



| |  |  | withdrawal of clinical trial participants;
| | - |  | ------------------------------------------



| |  |  | costs of related litigation;
| | - |  | ----------------------------



| |  |  | distraction of managements attention from our primary business;
| | - |  | ----------------------------------------------------------------



| |  |  | substantial monetary awards to patients or other claimants;
| | - |  | -----------------------------------------------------------



| |  |  | loss of revenues; and
| | - |  | ---------------------



| |  |  | the inability to commercialize our product candidates.
| | - |  | ------------------------------------------------------

We have obtained product liability insurance coverage for our clinical trials. Our insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance
coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval
for any of our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain this product liability insurance on commercially reasonable terms. On occasion, large
judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our
insurance coverage, could decrease our cash and adversely affect our business.

If any of our product candidates for which we receive
regulatory approval does not achieve broad market acceptance, the revenues, including any milestone or royalty payments we may be eligible to receive under our collaboration agreement with Takeda, that we generate from their sales will be limited.

The commercial success of our product candidates for which we obtain marketing approval from the FDA or other
regulatory authorities will depend upon the acceptance of these products by both the medical community and patient population. Coverage and reimbursement of our product candidates by third-party payors, including government payors, generally is also
necessary for optimal commercial success. The degree of market acceptance of any of our approved products will depend on a number of factors, including:



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| |  |  | our ability to provide acceptable evidence of safety and efficacy;
| | - |  | ------------------------------------------------------------------



| |  |  | the timing of market introduction of our products as well as competitive products;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the relative convenience and ease of administration;
| | - |  | ----------------------------------------------------



| |  |  | the prevalence and severity of any adverse side effects;
| | - |  | --------------------------------------------------------



| |  |  | limitations or warnings contained in a products FDA-approved labeling, including, for example, potential black box warnings or
pregnancy precautions associated with the APIs in Contrave and/or Empatic;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | availability of alternative treatments and the potential or perceived advantages or disadvantages of such treatments, including, in the case of
Contrave and/or Empatic, a number of competitive products already approved for the treatment of weight loss or expected to be commercially launched in the near future;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pricing and cost effectiveness;
| | - |  | -------------------------------



| |  |  | our REMs;
| | - |  | ---------



| |  |  | the effectiveness of our, or our current or any future collaborators sales and marketing strategies;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | our and our current or any future collaborative partners ability to obtain sufficient third-party coverage or reimbursement; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | the willingness of patients to pay out of pocket in the absence of third-party coverage.
| | - |  | ----------------------------------------------------------------------------------------

If our product candidates are approved but do not achieve an adequate level of acceptance by physicians, health care payors and patients,
we may not generate sufficient revenue from these products, and we may not become or remain profitable. In addition, our and our current and any future collaborative partners efforts to educate the medical community and third-party payors on
the benefits of our product candidates may require significant resources and may never be successful.

We and our current and any future
collaborative partner are subject to uncertainty relating to reimbursement policies which, if not favorable to our product candidates, could hinder or prevent our product candidates commercial success.

Our ability and our current and any future collaborative partners ability to commercialize our product candidates successfully will
depend in part on the extent to which governmental authorities, private health insurers and other third-party payors establish appropriate coverage and reimbursement levels for our product candidates and related treatments. As a threshold for
coverage and reimbursement, third-party payors generally require that drug products have been approved for marketing by the FDA. Third-party payors also are increasingly challenging the effectiveness of and prices charged for medical products and
services. We cannot provide any assurances that we or such collaborative partner will be able to obtain third-party coverage or reimbursement for our product candidates in whole or in part.

The obesity market, in particular, continues to be marked by limited coverage and reimbursement from health insurers and other payors,
who have historically viewed obesity as a lifestyle issue. For example, state Medicaid programs, administered by individual states for qualifying low income individuals, are permitted to exclude coverage for weight loss drugs. In addition, weight
loss drugs are excluded from coverage under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 designed for eligible seniors and disabled individuals and which went into effect on January 1, 2006.

Currently, our competitors drug products have limited third-party payor coverage. This means that individuals prescribed such drug
products often either have significant out-of-pocket costs or pay for the products entirely by themselves. If our product candidates do not receive adequate coverage or reimbursement, the market acceptance and commercial success of our products may
be limited.

The Medicare program, a federal governmental third-party payor whose policies often are emulated or adopted by
other payors, has removed longstanding policy language that obesity itself cannot be considered an illness. This deletion did not alter the statutory prohibition on drug reimbursement by Medicare or result in a change to coverage for particular
obesity-related procedures, and treatment for obesity alone remains uncovered. However, the Medicare program has since issued a national policy recognizing coverage for bariatric surgery for co-morbid conditions associated with obesity. Although
third-party payor attitudes regarding obesity-related products and services appear to be changing, as exemplified by Medicare changes, we may continue to face a poor coverage and reimbursement environment.



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Healthcare reform measures could hinder or prevent our product candidates commercial success.

Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes
in healthcare systems to contain healthcare costs and improve quality. While reform proposals often involve expanding coverage to more individuals, healthcare reform may also involve increased government price controls, additional regulatory
mandates and other measures designed to lower medical and pharmaceutical costs. Within the United States, the pharmaceutical industry has been a particular focus of both the U.S. Congress, as well as state governments.

In March 2010, the President signed into law one of the most significant health reform measures in decades. The Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively the PPACA, substantially changes the way healthcare is financed by both governmental and private insurers, including several payment
reforms that establish payments to hospitals and physicians based in part on quality measures, subjects biologic products to potential competition by lower-cost biosimilars, and significantly impacts the pharmaceutical and medical device
industries. The PPACA includes, among other things, the following measures:



| |  |  | annual, non-deductible fees on any entity that manufactures or imports certain prescription drugs and biologics;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | increased Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program for both branded and generic drugs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical research;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | new requirements for manufacturers to discount drug prices to eligible patients by 50% at the pharmacy level and for mail order services in order for
their outpatient drugs to be covered under Medicare Part D;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an increase in the number of entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | establishes a licensure framework for follow-on biologic products.
| | - |  | ------------------------------------------------------------------

The PPACA provisions on comparative clinical effectiveness research extend the initiatives of the American Recovery and Reinvestment Act
of 2009, also known as the stimulus package, which included $1.1 billion in funding to study the comparative effectiveness of healthcare treatments and strategies. This stimulus funding was designated for, among other things, conducting,
supporting or synthesizing research that compares and evaluates the risks and benefits, clinical outcomes, effectiveness and appropriateness of products. The PPACA also appropriates additional funding to comparative clinical effectiveness research.
Although Congress has indicated that this funding is intended to improve the quality of healthcare, it remains unclear how the research will impact current Medicare coverage and reimbursement or how new information will influence other third-party
payor policies.

In addition, the PPACA provides for a prevention and health promotion outreach and education campaign to
raise public awareness of health improvement, including obesity reduction and obesity-related services that are available to Medicaid enrollees. The PPACA also provides funding for projects designed to reduce childhood obesity.

We cannot predict what effect the PPACA or other healthcare reform initiatives that may be adopted in the future will have on our
business. Several lawsuits have been filed challenging the constitutionality of provisions of the PPACA, with varying results. Although it is possible that portions of the PPACA may be repealed or determined to be unconstitutional, other health
reform legislation may be implemented. The continuing efforts of the government, insurance companies, managed care organizations and other payors of health care services to contain or reduce costs of health care may adversely affect:



| |  |  | our and our current and any future collaborative partners ability to set a price we believe is fair for our products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | our any our current or any future collaborative partners ability to generate revenues and achieve or maintain profitability; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the availability of capital.
| | - |  | ----------------------------

Our failure to successfully acquire, develop and market additional product candidates or approved products would impair our ability to grow.

As part of our corporate strategy, we may acquire, in-license, develop and/or market additional products and product candidates. Because
our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends
partly upon our ability to identify, select and acquire promising pharmaceutical product candidates and products.

The process
of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete
with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our
current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights
to additional product candidates on terms that we find acceptable, or at all.

In addition, future acquisitions may entail
numerous operational and financial risks, including:



| |  |  | exposure to unknown liabilities;
| | - |  | --------------------------------



| |  |  | disruption of our business and diversion of our managements time and attention to develop acquired products or technologies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | higher than expected acquisition and integration costs;
| | - |  | -------------------------------------------------------



| |  |  | increased amortization expenses;
| | - |  | --------------------------------



| |  |  | difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to retain key employees of any acquired businesses.
| | - |  | -------------------------------------------------------------

Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive
clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not
be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products that we develop or approved products that we may acquire will be commercialized profitably or achieve
market acceptance.

We may not be able to manage our business effectively if we are unable to attract and retain key personnel.*

We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due
to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Diego, California area. Our retention efforts may be particularly challenging in light of the recent
development with our Contrave NDA and our workforce reduction completed in February 2011. Our industry has experienced a high rate of turnover of management personnel in recent years. If we are not able to attract, retain and motivate necessary
personnel to accomplish our business objectives, we may experience constraints that will significantly impede the successful development and commercialization of our product candidates, our ability to raise additional capital and our ability to
implement our overall business strategy.



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We are highly dependent on the development, regulatory, commercial and financial expertise
of our senior management, particularly Michael A. Narachi, our President and Chief Executive Officer. Although we have employment agreements with each of our executive officers, these agreements are terminable at will at any time with or without
notice and, therefore, we may not be able to retain their services as expected. If we lose any members of our senior management team, including Mr. Narachi, we may not be able to find suitable replacements, and our business may be harmed as a
result. In March 2011, Graham Cooper, our Chief Financial Officer and Treasurer resigned from his position with us. We are not aware of any other key personnel who has plans to retire or leave our company in the near future. In addition to the
competition for personnel, the San Diego area in particular is characterized by a high cost of living. As such, we could have difficulty attracting experienced personnel to our company and may be required to expend significant financial
resources in our employee recruitment and retention efforts.

In addition, we have scientific and clinical advisors who assist
us in formulating our product development and clinical and regulatory strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or
may have arrangements with other companies to assist in the development of products that may compete with ours.

We will need to obtain
FDA approval of our proposed product names, Contrave and Empatic, and any failure or delay associated with such approval may adversely impact our business.

Any name we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the U.S. Patent and Trademark
Office, or PTO. The FDA typically conducts a rigorous review of proposed product names, including an evaluation of potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately
implies medical claims. If the FDA objects to the product names Contrave or Empatic, we may be required to adopt an alternative name for our initial product candidates. If we adopt an alternative name, we would lose the benefit of our existing
trademark applications for Contrave and/or Empatic and may be required to expend significant additional resources in an effort to identify a suitable product name that would qualify under applicable trademark laws, not infringe the existing rights
of third parties and be acceptable to the FDA. We and our current and any future collaborative partner may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our and such collaborative
partners ability to commercialize our product candidates.

If we fail to comply with healthcare regulations, we could face
substantial penalties and our business, operations and financial condition could be adversely affected.

As a
manufacturer of pharmaceuticals, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to
fraud and abuse and patients rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business,
without limitation. The laws that may affect our ability to operate include:



| |  |  | the federal healthcare program Anti-Kickback Statute (as amended by the PPACA, which modified the intent requirement of the Anti-Kickback Statute so
that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it), which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce
either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us which promote pharmaceutical products and provide coding and billing advice to customers, and under the PPACA, the
government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal false claims laws;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare benefit
program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the Federal Food, Drug, and Cosmetic Act, which among other things, strictly regulates drug product marketing, prohibits manufacturers from marketing
drug products for off-label use and regulates the distribution of drug samples; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by
any third-party payor, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA,
thus complicating compliance efforts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, the compliance environment is changing, with more
states, such as California and Massachusetts, mandating implementation of compliance programs, compliance with industry ethics codes, and spending limits, and other states, such as Vermont, Maine, and Minnesota requiring reporting to state
governments of gifts, compensation, and other remuneration to physicians. The PPACA also imposes new reporting and disclosure requirements on device and drug manufacturers for any transfer of value made or distributed to prescribers and
other healthcare providers, effective March 30, 2013. Such information will be made publicly available in a searchable format beginning September 30, 2013. In addition, device and drug manufacturers will also be required to report and
disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and
up to an aggregate of $1 million per year for knowing failures), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. Finally, under the PPACA, effective April 1, 2012,
pharmaceutical manufacturers and distributors must provide the U.S. Department of Health and Human Services with an annual report on the drug samples they provide to physicians. The shifting regulatory environment, along with the requirement to
comply with multiple jurisdictions with different compliance and/or reporting requirements, increases the possibility that a pharmaceutical company may run afoul of one or more laws.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us,
we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our
ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation
of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable
federal and state privacy, security and fraud laws may prove costly.

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

Our third-party manufacturers activities involve the controlled storage, use and disposal of hazardous materials owned by us, including the components of our product candidates and other hazardous
compounds. We and our manufacturers are 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 safety procedures utilized by
our third-party manufacturers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of
an accident, state or federal authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a result of our
third-party manufacturers activities involving hazardous materials, our business and financial condition may be adversely affected. In the future we may seek to establish longer term third-party manufacturing arrangements, pursuant to which we
would seek to obtain contractual indemnification protection from such third-party manufacturers potentially limiting this liability exposure.

Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants
are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident or security breach to date, if such
an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed or ongoing clinical trials for Contrave or
Empatic could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to our data or
applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed.



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Risks Related to Intellectual Property

Our market opportunity for Contrave and Empatic may be limited by the relatively small number of issued U.S. patents and foreign patents that we
own or in-license. In addition, although we have additional U.S. and international patent applications pending which seek further protection of our product candidates, these applications may not issue on a timely basis or at all.*

Contrave is currently protected, in part, by U.S. patent number 5,512,593 issued in April 1996 and
U.S. patent number 5,817,665 issued in October 1998, which we have licensed on an exclusive basis from Dr. Lee Dante and which we collectively refer to as the Dante patents. Provided maintenance fees are paid, U.S. patent number
5,512,593 is expected to expire in April 2013 and U.S. patent number 5,817,665 is expected to expire in March 2013. The Dante patents do not protect Contrave outside of the United States. The Dante patents cover compositions of certain
specified opioid antagonists (including naltrexone) combined with certain specified antidepressants (including bupropion), and thus provide coverage for Contrave.

In addition to the Dante patents, Contrave is also currently protected by U.S. patent number 7,375,111, which we refer to as the Weber/Cowley composition patent, and U.S. patent number 7,462,626,
which we refer to as the Weber/Cowley methods patent. Provided maintenance fees are paid, the Weber/Cowley composition patent is expected to expire in March 2025, and the Weber/Cowley methods patent is expected to expire in July 2024. Collectively,
we refer to the Weber/Cowley composition patent and the Weber/Cowley methods patent as the Weber/Cowley patents. We own the Weber/Cowley patents, but they are subject to our license agreement with Oregon Health & Science University, or
OHSU, and our license agreement with Duke University, or Duke. The Weber/Cowley patents cover the current composition of Contrave and methods of administering it to treat obesity. We and/or our licensors have filed a number of international
counterparts to the Weber/Cowley patents in foreign countries. A European counterpart application to the Weber/Cowley patent has issued in the European Patent Office, or EPO, and provides protection for Contrave in the various EPO countries in which
the patent has been registered. Several international counterparts to the Weber/Cowley patents have also issued in other foreign jurisdictions. However, we cannot provide assurance that other pending international counterparts will issue on a timely
basis or at all. There is also no assurance that the currently pending claims in those foreign countries will not be rejected, that any such rejections and any future rejections will ultimately be overcome, nor that any claims that may issue will be
sufficiently broad to protect Contrave in those foreign countries. Furthermore, we cannot be certain that the scope of any issued foreign patent will be consistent with the currently pending claims, as there is a significant likelihood that the
scope of the currently pending claims will be modified. If a competitor is willing to challenge the scope or validity of the Dante patents and/or the Weber/Cowley patents, the competitor could file an NDA seeking approval any time before we obtain
approval from the FDA of an NDA for Contrave and three years after we obtain such approval.

We have also filed patent
applications, directed to various treatment and formulation aspects of Contrave, in the United States and certain foreign countries under the Patent Cooperation Treaty, or PCT. The PCT is an international treaty providing a unified procedure under
which the initial filing of a single patent application can provide an effective filing date in each participating country in which appropriate steps are subsequently taken. Such steps have been taken in various foreign countries, including Europe
and Japan, with respect to a number of our PCT filings. Thus, we now have patent applications pending in those foreign countries, along with our previous filings in the United States and certain non-PCT countries. These filings seek to provide
further protection for Contrave in the United States and overseas, but we cannot provide assurance that the claims in these patent applications will issue in their current form or at all.

Our intellectual property protection for Empatic derives from U.S. patent number 7,109,198, which was issued in September 2006 and
which we refer to as the Gadde patent, and from U.S. patent number 7,425,571, which was issued in September 2008. We have in-licensed these patents on an exclusive basis from Duke together with several related patent applications. The Gadde patent
provides composition coverage for the Empatic zonisamide/bupropion combination and also covers methods for using Empatic to treat obesity and to reduce the risk of hypertension, diabetes or dyslipidemia. Provided maintenance fees are paid, the
Gadde patent is also expected to expire in 2023. U.S. patent number 7,425,571 covers methods of using zonisamide (including combinations with bupropion) to cause weight loss. Provided maintenance fees are paid, this patent is expected to expire
in 2023. In addition, Duke has filed international counterparts to the Gadde patent that are currently pending; however, there is no assurance that the claims in these applications will issue in their currently pending form or at all. We have also
filed patent applications in the United States, under the PCT and in certain foreign countries with the goal of protecting the formulations and use of zonisamide SR, an ingredient in Empatic. The PCT filing has matured into patent applications in
Europe and Japan, and thus we now have patent applications pending in those countries (along with certain other foreign countries and the United States). However, we cannot provide assurance that the claims in these patent applications will issue in
their currently pending form or at all.



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We may face additional competition outside of the United States as a result of a lack of patent
enforcement in foreign countries and off-label use of other dosage forms of the generic components in our product candidates.

While we have filed patent applications in many countries outside the United States, and have obtained some patent coverage for certain of our product candidates in certain foreign countries, we do not
currently have widespread patent protection for Contrave and Empatic outside the United States and have no protection in many foreign jurisdictions. Even if international patent applications ultimately issue or receive approval, it is likely that
the scope of protection provided by such patents will be different from, and possibly less than, the scope provided by our corresponding U.S. patents. The success of our international market opportunity is dependent upon the enforcement of
patent rights in various other countries. A number of countries in which we have filed or intend to file patent applications have a history of weak enforcement and/or compulsory licensing of intellectual property rights. Even if we have patents
issued in these jurisdictions, there can be no assurance that our patent rights will be sufficient to prevent generic competition or unauthorized use.

We and our current and any future collaborative partner may face competition from the off-label use of other dosage forms of the generic components in our product candidates. In addition, others may
attempt to commercialize our product candidate combinations in the countries of the European Union, Canada, Mexico, Japan or other markets where we do not have patent protection for our product candidates. Due to the lack of patent protection for
these combinations in territories outside the United States and the potential for correspondingly lower prices for the drugs in those markets, it is possible that patients will seek to acquire the generic IR components of our product candidates
(naltrexone IR and zonisamide IR), in those other territories. The off-label use of the generic IR components in the United States or the importation of the generic IR components from foreign markets could adversely affect the commercial potential
for our product candidates and adversely affect our overall business and financial results.

We have in-licensed all or a portion of the
rights to our product candidates from third parties. If we default on any of our material obligations under those licenses, we could lose rights to our product candidates.

We have in-licensed and otherwise contracted for rights to our product candidates, and we may enter into similar licenses in the future to
supplement our product candidate pipeline. Under the relevant agreements, we are subject to commercialization, development, sublicensing, royalty, insurance and other obligations. If we or our current or any future collaborative partner fail to
comply with any of these requirements, or otherwise breach these license agreements, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license. Loss of any of these licenses or the
exclusive rights provided therein could harm our financial condition and operating results. For example, our license agreement with Dr. Dante requires us to use commercially reasonable efforts to develop, obtain regulatory approval of and
commercialize Contrave. To the extent we are unable to comply with these obligations, the license may be terminated.

Restrictions on
our patent rights relating to our product candidates may limit our and our current and any future collaborative partners ability to prevent third parties from competing against us.

Our success will depend on our and our current and any future collaborative partners ability to obtain and maintain patent
protection for our product candidates, preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. Composition of matter patents on APIs are
generally considered to be the strongest form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use. Entirely new individual chemical compounds, often referred to as new chemical entities,
are typically entitled to composition of matter coverage. Current law also allows novel and unobvious combinations of old compounds to receive composition of matter coverage for the combination. However, we cannot be certain that the current law
will remain the same, or that our product candidates will be considered novel and unobvious by the PTO and courts.

In
addition to composition of matter patents and patent applications, we also have issued and filed method of use patents and patent applications. This type of patent protects the use of the product only for the specified method. However, this type of
patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if these competitors do not actively promote their product
for our targeted indication, physicians may prescribe these products off-label. Although off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement is
difficult to prevent or prosecute.



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Although we believe we and our licensors have conducted appropriate prior art searches
relating to our key patents and patent applications, there is no assurance that all of the potentially relevant prior art has been found. Moreover, because the constituents of our combination product candidates have been on the market as separate
monotherapeutic products for many years, it is possible that these monotherapies have previously been used off-label in such a manner that such prior usage would affect the validity of our method of use patents.

Patent applications in the United States and most other countries are confidential for a period of time until they are published, and
publication of discoveries in scientific or patent literature typically lags actual discoveries by several months or more. As a result, we cannot be certain that we and the inventors of the issued patents and applications that we in-licensed were
the first to conceive inventions covered by the patents and pending patent applications or that we and those inventors were the first to file patent applications for such inventions.

We and our current and any future collaborative partner also rely upon unpatented trade secrets, unpatented know-how and continuing
technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants, some of whom assist with the development of other
obesity drugs. We and our collaborative partner also have agreements with our employees and selected consultants that obligate them to assign their inventions to us. It is possible that technology relevant to our business will be independently
developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants that are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach
or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

If we or our current or any future collaborative partner are sued for infringing intellectual property rights of third parties, it will be costly
and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.

Our commercial success depends upon our and our current and any future collaborative partners ability to develop, manufacture,
market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties,
exist in the fields in which we and our collaborative partner are developing products. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates and/or proprietary
technologies may give rise to claims of infringement of the patent rights of others. There may be issued patents of third parties of which we are currently unaware that may be infringed by our product candidates or proprietary technologies. Because
patent applications can take many years to issue, there may be currently pending applications, unknown to us or our collaborative partner, which may later result in issued patents that our product candidates or proprietary technologies may infringe.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property
rights alleging that our product candidates and/or proprietary technologies infringe their intellectual property rights. If one of these patents is found to cover our product candidates, proprietary technologies or their uses, we or our current or
any future collaborative partner could be enjoined by a court and required to pay damages and could be unable to commercialize our product candidates or use our proprietary technologies unless we or they obtained a license to the patent. A license
may not be available to us or our current or any future collaborative partner on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable relief which could prohibit us
or our current or any future collaborative partner from making, using or selling our products, technologies or methods pending a trial on the merits, which could be years away.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and
pharmaceutical industries generally. If a third party claims that we or our collaborative partner infringe its intellectual property rights, we may face a number of issues, including, but not limited to:



| |  |  | infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our
managements attention from our core business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third
partys rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owners attorneys fees;
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| |  |  | a court prohibiting us from selling or licensing the product unless the third party licenses its product rights to us, which it is not required to do;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if a license is available from a third party, we may have to pay substantial royalties and fees and/or grant cross-licenses to intellectual property
rights for our products; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesigning our products or processes so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

We will be obtaining our bupropion SR, zonisamide SR, naltrexone SR, our finished Contrave and Empatic
tablets combining these components, and the packaging for these tablets from third-party manufacturers. Each aspect of product design, formulation, manufacturing, packaging, and use has the potential to implicate third-party patent rights. We have
taken various measures to reduce the potential for infringement. For example, we have in-licensed from GlaxoSmithKline certain formulation patents related to bupropion that expand our formulation options as we develop our commercial formulation of
Contrave. However, we could be exposed to potential patent infringement liability from other third parties who hold patents on various formulations of bupropion and naltrexone.

No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering
these or other aspects of our products, technology or methods, as implemented by us or by third-party manufacturers with whom we contract. Because of the large number of patents issued and patent applications filed in our field, we believe there is
a risk that third parties may allege they have patent rights encompassing our products, technology or methods. Such third-party patent rights, if relevant, could prevent us or our current or any future collaborative partner from adopting or
marketing a particular formulation or product, or could expose us to patent infringement liability.

Obtaining and maintaining our
patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.

Periodic maintenance fees on the Gadde patents covering Empatic and the Weber/Cowley patents covering
Contrave are due to be paid to the PTO in several stages over the lifetimes of the patents. We have systems in place to remind us to pay these fees, and we employ an outside firm, Computer Patent Annuities, to pay annuity fees due to foreign patent
agencies on our issued and pending foreign patent applications. The PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent
application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are
situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter
the market and this circumstance would have a material adverse effect on our business.

We have not yet registered our trademarks in all
of our potential markets, and failure to secure those registrations could adversely affect our business.

We have
received U.S. trademark registration number 3396021 for our corporate logo for use in connection with pharmaceutical preparations and substances for the treatment of obesity, inducement of weight loss and prevention of weight gain. We have obtained
trademark registrations in Canada, the European Union, and Japan for the same mark. In addition, we have received U.S. trademark registration number 3396807 for our corporate name OREXIGEN for use in connection with pharmaceutical preparations for
the treatment of disorders of the central nervous system, or CNS, printed instructional, educational and teaching materials in the field of treatment and management of disorders of the CNS, and providing medical information in the field of disorders
of the CNS. We have obtained trademark registrations in Canada, the European Union, and Japan for the same mark. We have obtained foreign trademark registrations for the corporate name Orexigen Therapeutics, Inc. in the European Union and Japan. We
have received U.S. trademark registration number 3393576 for the mark CONTRAVE for use in connection with pharmaceutical preparations for use in the treatment of obesity and inducing weight loss. We have also obtained foreign trademark registrations
for the mark CONTRAVE in Canada, the European Union and Japan. An application for the CONTRAVE mark remains pending in the United States and in Canada in connection with certain printed materials and medical information services. An intent-to-use
trademark application for the CONTRAVE logo has been filed in the U.S. and remains pending in connection with pharmaceutical preparations for use in the treatment of obesity and inducing weight loss as well as certain printed materials and medical
information services. We have an intent-to-use trademark application pending in the United States for the mark EMPATIC for use in connection with pharmaceutical preparations for the treatment of obesity and inducing weight loss, various printed
materials, and medical information services. Foreign trademark registrations have issued in the European Union and Japan for the mark EMPATIC, and an application remains pending in Canada. However, no assurance can be given that our allowed
trademark applications will actually become registered, or that our registered trademarks can be maintained or enforced. During trademark registration proceedings in the various countries, we have received and expect to receive rejections. Although
we are given an opportunity to respond to those rejections, there can be no assurance that the rejections can be successfully overcome. In addition, in the PTO and in many foreign jurisdictions, third parties are given an opportunity to oppose
pending trademark applications and to cancel registered trademarks. For example, another pharmaceutical company opposed the registration of EXCALIA, the prior mark for the product candidate that we now call EMPATIC. No assurance can be given that
opposition or cancellation proceedings will not be filed against our trademarks, nor can there be any assurance that our trademarks would survive such proceedings.



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We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets
of their former employers.

As is common in the biotechnology and pharmaceutical industries, we employ individuals who
were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have
inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims,
litigation could result in substantial costs and be a distraction to management.

Risks Related to Our Finances and Capital
Requirements

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

We are a development stage company with a limited operating history. We have focused
primarily on developing our first two product candidates, Contrave and Empatic, with the goal of supporting regulatory approval for these product candidates. We have financed our operations almost exclusively through the sale of our preferred and
common stock and debt and have incurred losses in each year since our inception in September 2002. As of March 31, 2011, we had an accumulated deficit of approximately $330.3 million. These losses, combined with expected future losses, have had
and will continue to have an adverse effect on our stockholders equity and working capital. Subject to regulatory approval of any of our product candidates, we expect to continue to incur significant and increasing operating losses for the
foreseeable future and such losses have had, and will continue to have, an adverse effect on our stockholders equity. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict
the extent of any future losses or when we will become profitable, if at all.

We have not generated any revenue from our product
candidates and may never be profitable.

Our ability to become profitable depends upon our ability to generate revenue.
With the exception of the $50 million upfront cash payment we received from Takeda upon execution of the collaboration agreement, we have not generated any revenue from our development-stage product candidates, and we do not know when, or if, we
will generate any revenue. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:



| |  |  | successfully complete future trials for Contrave and Empatic, including any cardiovascular outcomes trial that we may conduct for Contrave;
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| |  |  | obtain regulatory approval for Contrave and Empatic;
| | - |  | ----------------------------------------------------



| |  |  | manufacture commercial quantities of our product candidates at acceptable cost levels if regulatory approvals are
received;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | successfully manage our collaborative relationship with Takeda to effectively market and sell Contrave, if approved, in the United States, Canada and
Mexico; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | identify and enter into one or more additional strategic collaborations to effectively market and sell Empatic or market and sell Contrave outside the
United States, Canada and Mexico, if approved.
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Even if one or more of our product candidates is approved for commercial sale, which we do
not expect to occur in the near future, we anticipate incurring significant costs associated with commercializing and continued development for any approved product. We may not achieve profitability soon after generating product sales, if ever. If
we or our collaborative partner are unable to generate product revenues, we will not become sustainably profitable and may be unable to continue operations without continued funding.

Our short operating history makes it difficult to evaluate our business and prospects.

We were incorporated in September 2002. Our operations to date have been limited to organizing and staffing our company and conducting product development activities primarily for our first two product
candidates, Contrave and Empatic. We have not yet demonstrated an ability to obtain regulatory approval for or commercialize a product candidate. Consequently, any predictions about our future performance may not be as accurate as they could be if
we had a history of successfully developing and commercializing pharmaceutical products.

We will need to raise additional funds and/or
enter into an additional collaborative or other agreement in order to fund any pre-approval clinical trials required for Contrave, commercialize Contrave outside the United States, Canada and Mexico or continue the development of Empatic, and we may
be unable to raise capital when needed or enter into such an agreement, which would force us to delay, reduce or eliminate any additional development activities required for Contrave, our commercialization efforts for Contrave outside such countries
and our development efforts for Empatic.

Developing products for the obesity market, conducting clinical trials,
establishing outsourced manufacturing relationships and successfully manufacturing and marketing drugs that we may develop is expensive. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our
projected operating requirements through at least the next 12 months. However, we have based these estimates on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect.
Further, we will need to raise additional capital to:



| |  |  | fund the cardiovascular outcomes trial for Contrave the FDA requested we conduct prior to any approval of our NDA for Contrave and any additional
pre-approval clinical trials required for Contrave;
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| |  |  | fund our operations and continue to conduct clinical trials to support potential regulatory approval of marketing applications, including any Phase III
clinical trials for Empatic;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | commercialize Contrave outside the United States, Canada and Mexico, Empatic or any other product candidates that we may develop, in-license or
acquire, if any of these product candidates receives regulatory approval;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | co-promote Contrave in the United States, if it receives regulatory approval; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | qualify and outsource the commercial-scale manufacturing of our products under cGMPs.
| | - |  | -------------------------------------------------------------------------------------

The amount and timing of our future funding requirements will depend on many factors, including, but not limited to:



| |  |  | the timing of regulatory approval of Contrave or Empatic, if at all;
| | - |  | --------------------------------------------------------------------



| |  |  | the rate of progress and cost of our clinical trials and other product development programs for Contrave, including the cardiovascular outcomes trial
requested in the Contrave CRL, to the extent additional clinical trials need to be conducted, Empatic and any other product candidates that we may develop, in-license or acquire;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of establishing sales, marketing and distribution capabilities in order to commercialize and/or co-promote Contrave, should we elect or are
required to do so;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the terms and timing of any additional collaborative, licensing, co-promotion or other arrangements that we may establish with respect to Contrave or
Empatic;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our product
candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of completion of outsourced commercial manufacturing supply arrangements for each product candidate; and
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| |  |  | the effect of competing technological and market developments.
| | - |  | --------------------------------------------------------------

Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products
and technologies. We currently have no commitments or agreements relating to any of these types of transactions.

Until we can
generate a sufficient amount of product revenue and achieve profitability, we expect to finance future cash needs through public or private equity offerings, debt, receivables or royalty financings, or corporate collaboration and licensing
arrangements, as well as through interest income earned on cash and investment balances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available, we may be required to delay,
reduce the scope of or eliminate one or more of our development programs or our commercialization efforts.

Our quarterly operating
results may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. Our net
loss and other operating results will be affected by numerous factors, including:



| |  |  | variations in the level of expenses related to our two existing product candidates or future development programs;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | regulatory developments affecting our product candidates or those of our competitors;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the timing of future payments, if any, we may receive under our collaboration agreement with Takeda;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | our execution of any additional collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these
arrangements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | addition or termination of clinical trials or funding support;
| | - |  | --------------------------------------------------------------



| |  |  | any intellectual property infringement lawsuit in which we may become involved; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | if any of our product candidates receives regulatory approval, the level of underlying demand for our product candidates, wholesalers buying
patterns and with respect to Contrave, Takedas performance under our collaboration agreement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If our
quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of
our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

Raising additional funds by issuing securities may cause dilution to existing stockholders and raising funds through lending and licensing
arrangements may restrict our operations or require us to relinquish proprietary rights.

To the extent that we raise
additional capital by issuing equity securities, our existing stockholders ownership will be diluted. Debt, receivables and royalty financings typically contain covenants that restrict operating activities. Our credit and security agreement,
as amended, with GE Healthcare Financial Services is secured by a pledge of all of our assets other than, subject to certain limited exceptions, intellectual property, and contains a variety of operational covenants, including limitations on our
ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions, among other restrictions. Any future debt, receivables and royalty
financings we enter into may involve similar or more onerous covenants that restrict our operations. Any borrowings under the credit and security agreement, as amended, with GE Healthcare Financial Services or any future debt financing will need to
be repaid, which creates additional financial risk for our company, particularly if our business or prevailing financial market conditions are not conducive to paying off or refinancing our outstanding debt obligations. Debt, receivables and royalty
financings may be coupled with an equity component, such as warrants to purchase stock, which could also result in dilution of our existing stockholders ownership.

If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our current product candidates, potential
products or proprietary technologies, or grant licenses on terms that are not favorable to us. If adequate funds are not available, our ability to achieve profitability or to respond to competitive pressures would be significantly limited and we may
be required to delay, significantly curtail or eliminate the development of one or more of our product candidates.



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We incur significant costs as a result of operating as a public company, and our management is
required to devote substantial time to public company compliance initiatives.

As a public company, we incur
significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and the Nasdaq Stock Market,
Inc., have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a
substantial amount of time to these compliance initiatives. Moreover, these rules and regulations result in increased legal and financial compliance costs and will make some activities more time-consuming and costly.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure.
In particular, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our
internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over
financial reporting that are deemed to be material weaknesses. We have incurred and continue to expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. We currently do not have
an internal audit function, and we may need to hire additional accounting and financial staff with appropriate experience and technical accounting knowledge. Moreover, if we do not comply with the requirements of Section 404, or if we or our
independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq,
the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.

Our results
of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturn.

Our results of operations could be materially negatively affected by economic conditions generally, both in the U.S. and elsewhere around
the world. Domestic and international equity markets have experienced and may continue to experience heightened volatility and turmoil based on domestic and international economic conditions and concerns. In the event these economic conditions and
concerns continue and the markets continue to remain volatile, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary, and our stock price may
further decline. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are not federally insured. If economic instability continues, we cannot provide assurance that we will not
experience losses on these investments.

We may lose the ability to use our net operating loss carryforwards, which could prevent or
delay us from offsetting future taxable income.

We have incurred substantial losses during our history and do not
expect to become profitable in 2011 and may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. Our
federal and state net operating loss carryforwards begin to expire in 2022 and 2017, respectively. Additionally, the future utilization of our net operating loss carryforwards to offset future taxable income is subject to annual limitations,
pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as a result of ownership changes that have occurred in prior years or may occur in the future, which could defer our ability to utilize or prevent us from fully
utilizing our net operating loss carryforwards, which could have an adverse effect on our results of operations.

Risks
Relating to Securities Markets and Investment in Our Stock

The market price of our common stock has fluctuated and is likely to
continue to fluctuate, which could reduce the market price of our common stock.*

The market prices for securities of
biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.
Over the last several years, the overall capital markets have been highly volatile. Since the commencement of trading in connection with our initial public offering, or IPO, the publicly traded shares of our common stock have themselves experienced
significant price and volume fluctuations. During the quarter ended March 31, 2011, the price per share for our common stock on the Nasdaq Global Market has ranged from a low sale price of $2.47 to a high sale price of $10.08. This market
volatility is likely to continue and could reduce the market price of our common stock, regardless of our operating performance. In addition, the trading price of our common stock could change significantly over short periods of time in response to
many factors, including:



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| |  |  | FDA or international regulatory actions, including announcements concerning our NDA or our communications with the FDA for Contrave, or failure to
receive regulatory approval for any of our product candidates;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the results from our clinical trials, including future clinical trials, if any, for Contrave and Empatic;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | announcements regarding our competitors regulatory submissions and/or the results of their clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | announcements regarding our collaborative relationship with Takeda;
| | - |  | -------------------------------------------------------------------



| |  |  | announcements regarding bupropion, naltrexone or zonisamide;
| | - |  | ------------------------------------------------------------



| |  |  | announcements regarding manufacturing or supply developments for Contrave or Empatic;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | failure of any of our product candidates, if approved, to achieve commercial success;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | developments concerning current or future strategic collaborations;
| | - |  | -------------------------------------------------------------------



| |  |  | announcements of the introduction of new products by us or our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | market conditions in the pharmaceutical and biotechnology sectors;
| | - |  | ------------------------------------------------------------------



| |  |  | announcements concerning product development results or intellectual property rights of others;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | litigation or public concern about the safety of our potential products;
| | - |  | ------------------------------------------------------------------------



| |  |  | actual and anticipated fluctuations in our quarterly operating results;
| | - |  | -----------------------------------------------------------------------



| |  |  | deviations in our operating results from the estimates of securities analysts or other analyst comments;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | healthcare reform measures and other third-party coverage and reimbursement policies; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | discussion of us or our stock price by the financial and scientific press and in online investor communities.
| | - |  | -------------------------------------------------------------------------------------------------------------

The realization of any of the risks described in these Risk Factors could also have a dramatic and material adverse impact on
the market price of our common stock.

Future sales of our common stock may depress our stock price.

Any future sales of a substantial number of shares of our common stock in the public market such as that offering, or the perception that
such sales may occur, could adversely affect the price of our common stock. We cannot predict the effect, if any, that market sales of those shares of common stock or the availability of those shares of common stock for sale will have on the market
price of our common stock.

In addition, persons who were our stockholders prior to the sale of shares in our IPO continue to
hold a substantial number of shares of our common stock that they may be able to sell in the public market, subject to the limitations of Rule 144 of the Securities Act of 1933, as amended. Significant portions of these shares are held by a small
number of stockholders. Sales by our current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock. For example, certain of our executive
officers have established selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for the purpose of effecting specified sales of our common stock over a specified period of time. Moreover, the
holders of a substantial number of shares of common stock may have rights, subject to certain conditions, to require us to file registration statements to permit the resale of their shares in the public market or to include their shares in
registration statements that we may file for ourselves or other stockholders.



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

Our executive officers and directors and
their affiliates will exercise significant influence over stockholder voting matters in a manner that may not be in the best interests of all of our stockholders.*

As of May 1, 2011, our executive officers and directors and their affiliates together controlled approximately 28% of our outstanding common stock. As a result, these stockholders will collectively
be able to significantly influence all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions. The concentration of ownership may delay, prevent or deter a change in
control of our company even when such a change may be in the best interests of some stockholders, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets and might
affect the prevailing market price of our common stock.

Anti-takeover provisions under our charter documents and Delaware law could
delay or prevent a change of control which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a
change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:



| |  |  | a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a prohibition on stockholder action through written consent;
| | - |  | ------------------------------------------------------------



| |  |  | a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, the
president or by a majority of the total number of authorized directors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice requirements for stockholder proposals and nominations;
| | - |  | ----------------------------------------------------------------------



| |  |  | a requirement of approval of not less than 662/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our
certificate of incorporation; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law,
which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law
could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including to delay or impede a merger, tender offer or
proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

We have never paid dividends on our capital stock, and because we do not anticipate paying any cash dividends in the foreseeable future, capital
appreciation, if any, of our common stock will be your sole source of gain on an investment in our stock.

We have paid
no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. We do not anticipate paying any cash dividends on our common stock in
the foreseeable future. Furthermore, our credit and security agreement, as amended, with GE Healthcare Financial Services restricts our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be your sole source
of gain for the foreseeable future.



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We may become involved in securities class action litigation that could divert managements
attention and harm our business and could subject us to significant liabilities.

The stock markets have from time to
time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past,
securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced
significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts managements attention and resources, which could adversely affect our business.

It is possible that securities class action litigation may be brought against us following stock price declines related to
the release of information regarding our Contrave NDA or clinical trial results. Any adverse determination in such litigation could subject us to significant liabilities.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USSE OF PROCEEDS
|------- | ------------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | (REMOVED AND RESERVED)
|------- | ----------------------

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



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|ITEM 6. | EXHIBITS
|------- | --------



|              |  |                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                         
|3.1(1)        |  | Amended and Restated Certificate of Incorporation of the Registrant                                                                                 
|3.2(1)        |  | Amended and Restated Bylaws of the Registrant                                                                                                       
|4.1(1)        |  | Form of the Registrants Common Stock Certificate                                                                                                   
|4.2(1)        |  | Second Amended and Restated Investors Rights Agreement dated November 20, 2006                                                                     
|4.3(2)        |  | Registration Rights Waiver and Amendment dated January 6, 2008                                                                                      
|10.1(3)       |  | Separation Agreement dated as of February 16, 2011 by and between Orexigen Therapeutics, Inc.
and Graham K. Cooper                                  
|10.2(4)       |  | Orexigen Therapeutics, Inc. Key Executive Employee Retention Plan                                                                                   
|31.1*         |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended
|31.2*         |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended
|32.1*         |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  
|32.2*         |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  



|(1) | Filed with the Registrants Registration Statement on Form S-1 on December 19, 2006, as amended (File No. 333-139496).
|--- | ----------------------------------------------------------------------------------------------------------------------



|(2) | Filed with the Registrants Current Report on Form 8-K on January 7, 2008.
|--- | --------------------------------------------------------------------------



|(3) | Filed with the Registrants Current Report on Form 8-K on February 17, 2011.
|--- | ----------------------------------------------------------------------------



|(4) | Filed with the Registrants Current Report on Form 8-K on March 7, 2011.
|--- | ------------------------------------------------------------------------



|* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Orexigen Therapeutics, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such
filing.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



|                  |  |                                                                                                          
|----------------- |  | ---------------------------------------------------------------------------------------------------------
|                  |  | OREXIGEN THERAPEUTICS, INC.                                                                              
|                  | 
|Date: May 9, 2011 |  | By: /s/    Michael A.
Narachi                                                                            
|                  | 
|                  |  | Michael A. Narachi
President and Chief Executive Officer (Principal
Executive Officer)                   
|                  | 
|Date: May 9, 2011 |  | By: /s/    Joseph P.
Hagan                                                                               
|                  | 
|                  |  | Joseph P. Hagan
Acting-Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)



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INDEX TO EXHIBITS



|              |  |                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                         
|3.1(1)        |  | Amended and Restated Certificate of Incorporation of the Registrant                                                                                 
|3.2(1)        |  | Amended and Restated Bylaws of the Registrant                                                                                                       
|4.1(1)        |  | Form of the Registrants Common Stock Certificate                                                                                                   
|4.2(1)        |  | Second Amended and Restated Investors Rights Agreement dated November 20, 2006                                                                     
|4.3(2)        |  | Registration Rights Waiver and Amendment dated January 6, 2008                                                                                      
|10.1(3)       |  | Separation Agreement dated as of February 16, 2011 by and between Orexigen Therapeutics, Inc.
and Graham K. Cooper                                  
|10.2(4)       |  | Orexigen Therapeutics, Inc. Key Executive Employee Retention Plan                                                                                   
|31.1*         |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended
|31.2*         |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended
|32.1*         |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  
|32.2*         |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  



|(1) | Filed with the Registrants Registration Statement on Form S-1 on December 19, 2006, as amended (File No. 333-139496).
|--- | ----------------------------------------------------------------------------------------------------------------------



|(2) | Filed with the Registrants Current Report on Form 8-K on January 7, 2008.
|--- | --------------------------------------------------------------------------



|(3) | Filed with the Registrants Current Report on Form 8-K on February 17, 2011.
|--- | ----------------------------------------------------------------------------



|(4) | Filed with the Registrants Current Report on Form 8-K on March 7, 2011.
|--- | ------------------------------------------------------------------------



|* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Orexigen Therapeutics, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such
filing.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



51