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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 JUNE 30, 2009



| ̈ | 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   ̈                      |  | Smaller reporting company   ̈
|                           |  |                      |  | (Do not check if a 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 August 3, 2009, the registrant had 46,434,171 shares of Common Stock ($0.001 par value) outstanding.









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##### Table of Contents

OREXIGEN THERAPEUTICS, INC.

TABLE OF CONTENTS



|                                                                                                                                                                           |  |   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                                                              |  | 3 
|                                                                                                                                                                           | 
|Item 1. Financial Statements                                                                                                                                               |  | 3 
|Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008                                                                                                       |  | 3 
|Unaudited Statements of Operations for the three and six months ended June 30, 2009 and June 
30, 2008 and the period from September 12, 2002 (Inception) to June 30, 2009 |  | 4 
|Unaudited Statements of Cash Flows for the six months ended June 30, 2009 and June 
30, 2008 and the period from September 12, 2002 (Inception) to June 30, 2009           |  | 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                                                                                                         |  | 18
|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                                                                                                        |  | 45
|Item 3. Defaults Upon Senior Securities                                                                                                                                    |  | 45
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                                                |  | 45
|Item 5. Other Information                                                                                                                                                  |  | 45
|Item 6. Exhibits                                                                                                                                                           |  | 46
|                                                                                                                                                                           | 
|SIGNATURES                                                                                                                                                                 |  | 47
|                                                                                                                                                                           | 
|EXHIBIT 31.1                                                                                                                                                               |  |   
|EXHIBIT 31.2                                                                                                                                                               |  |   
|EXHIBIT 32.1                                                                                                                                                               |  |   
|EXHIBIT 32.2                                                                                                                                                               |  |   



2



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PART I. FINANCIAL INFORMATION



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

Orexigen Therapeutics, Inc.

(a development stage company)

Balance Sheets

(In thousands, except
share and par value amounts)



|                                                                                                                                                                                                                  |  |              |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                  |  | June 30,2009 |          |   | December 31,2008 |  
|                                                                                                                                                                                                                  |  | (Unaudited)  |          |   |                  |  
|Assets                                                                                                                                                                                                            |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                         |  | $            | 8,573    |   |                  | $ | 45,451   |  
|Investment securities, available-for-sale                                                                                                                                                                         |  |              | 37,434   |   |                  |   | 40,716   |  
|Prepaid expenses and other current assets                                                                                                                                                                         |  |              | 1,665    |   |                  |   | 1,184    |  
|                                                                                                                                                                                                                  |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                              |  |              | 47,672   |   |                  |   | 87,351   |  
|Property and equipment, net                                                                                                                                                                                       |  |              | 1,558    |   |                  |   | 2,059    |  
|Restricted cash                                                                                                                                                                                                   |  |              | 1,290    |   |                  |   | 1,375    |  
|Other assets                                                                                                                                                                                                      |  |              | 785      |   |                  |   | 1,123    |  
|                                                                                                                                                                                                                  |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                      |  | $            | 51,305   |   |                  | $ | 91,908   |  
|                                                                                                                                                                                                                  |  |              |          |   |                  |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|Accounts payable and accrued expenses                                                                                                                                                                             |  | $            | 15,930   |   |                  | $ | 18,810   |  
|Deferred revenue, current portion                                                                                                                                                                                 |  |              | 88       |   |                  |   | 88       |  
|Long-term debt, current portion                                                                                                                                                                                   |  |              | 7,966    |   |                  |   | 7,591    |  
|                                                                                                                                                                                                                  |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                         |  |              | 23,984   |   |                  |   | 26,489   |  
|Deferred revenue, less current portion                                                                                                                                                                            |  |              | 1,015    |   |                  |   | 1,058    |  
|Long-term debt, less current portion                                                                                                                                                                              |  |              | 5,043    |   |                  |   | 8,800    |  
|Other long-term liabilities                                                                                                                                                                                       |  |              | 1,791    |   |                  |   | 1,767    |  
|Commitments and contingencies                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                             |  |              |          |   |                  |   |          |  
|Preferred stock, $.001 par value, 10,000,000 shares authorized at June 30, 2009 and December 31, 2008; no shares issued and
outstanding at June 30, 2009 and December 31, 2008                                    |  |              |         |   |                  |   |         |  
|Common stock, $.001 par value, 100,000,000 shares authorized at June 30, 2009 and December 31, 2008; 34,661,541 and 34,433,322
shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively |  |              | 35       |   |                  |   | 34       |  
|Additional paid-in capital                                                                                                                                                                                        |  |              | 256,677  |   |                  |   | 253,782  |  
|Accumulated other comprehensive income                                                                                                                                                                            |  |              | 44       |   |                  |   | 153      |  
|Deficit accumulated during the development stage                                                                                                                                                                  |  |              | (237,284 | ) |                  |   | (200,175 | )
|                                                                                                                                                                                                                  |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                        |  |              | 19,472   |   |                  |   | 53,794   |  
|                                                                                                                                                                                                                  |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                        |  | $            | 51,305   |   |                  | $ | 91,908   |  
|                                                                                                                                                                                                                  |  |              |          |   |                  |   |          |  

See accompanying notes.



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Orexigen Therapeutics, Inc.

(a development stage company)

Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | -------------------------------------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | -
|                                                                                                    |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |   |         | Period fromSeptember 12, 2002(Inception) toJune 30, 2009 | 
|                                                                                                    |  | 2009                       |         |   | 2008                     |   |         | 2009                                                     |  |   | 2008    |   | 
|Revenues:                                                                                           |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Collaborative agreement                                                                             |  | $                          |        |   |                          | $ |        |                                                          |  | $ |        |   |  | $ |        |   |  | $ | 174      |  
|License revenue                                                                                     |  |                            | 22      |   |                          |   | 22      |                                                          |  |   | 44      |   |  |   | 44      |   |  |   | 397      |  
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Total revenues                                                                                      |  |                            | 22      |   |                          |   | 22      |                                                          |  |   | 44      |   |  |   | 44      |   |  |   | 571      |  
|Operating expenses:                                                                                 |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Research and development                                                                            |  |                            | 13,256  |   |                          |   | 19,585  |                                                          |  |   | 28,987  |   |  |   | 40,272  |   |  |   | 198,105  |  
|General and administrative                                                                          |  |                            | 4,297   |   |                          |   | 4,092   |                                                          |  |   | 7,662   |   |  |   | 7,411   |   |  |   | 45,484   |  
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Total operating expenses                                                                            |  |                            | 17,553  |   |                          |   | 23,677  |                                                          |  |   | 36,649  |   |  |   | 47,683  |   |  |   | 243,589  |  
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Loss from operations                                                                                |  |                            | (17,531 | ) |                          |   | (23,655 | )                                                        |  |   | (36,605 | ) |  |   | (47,639 | ) |  |   | (243,018 | )
|Other income (expense):                                                                             |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Interest income                                                                                     |  |                            | 83      |   |                          |   | 939     |                                                          |  |   | 248     |   |  |   | 2,138   |   |  |   | 8,927    |  
|Interest expense                                                                                    |  |                            | (358    | ) |                          |   | (397    | )                                                        |  |   | (752    | ) |  |   | (826    | ) |  |   | (3,193   | )
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Total other income (expense)                                                                        |  |                            | (275    | ) |                          |   | 542     |                                                          |  |   | (504    | ) |  |   | 1,312   |   |  |   | 5,734    |  
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Net loss                                                                                            |  |                            | (17,806 | ) |                          |   | (23,113 | )                                                        |  |   | (37,109 | ) |  |   | (46,327 | ) |  |   | (237,284 | )
|Accretion to redemption value of redeemable convertible preferred stock                             |  |                            |        |   |                          |   |        |                                                          |  |   |        |   |  |   |        |   |  |   | (78      | )
|Deemed dividend of beneficial conversion for Series C preferred stock                               |  |                            |        |   |                          |   |        |                                                          |  |   |        |   |  |   |        |   |  |   | (13,860  | )
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Net loss attributable to common stockholders                                                        |  | $                          | (17,806 | ) |                          | $ | (23,113 | )                                                        |  | $ | (37,109 | ) |  | $ | (46,327 | ) |  | $ | (251,222 | )
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Net loss per share attributable to common stockholders - basic and diluted                          |  | $                          | (0.51   | ) |                          | $ | (0.67   | )                                                        |  | $ | (1.07   | ) |  | $ | (1.40   | ) |  |   |          |  
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Shares used in computing net loss per share attributable to common stockholders  basic and diluted |  |                            | 34,662  |   |                          |   | 34,311  |                                                          |  |   | 34,637  |   |  |   | 33,126  |   |  |   |          |  
|                                                                                                    |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  

See accompanying notes.



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Orexigen Therapeutics, Inc.

(a development stage company)

Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                                 |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | -------------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                                                                 |  | Six Months EndedJune 30, |         |   | Period FromSeptember 12, 2002(Inception) toJune 30, 2009 |  
|                                                                                                 |  | 2009                     |         |   | 2008                                                     |   |        
|Operating activities                                                                             |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Net loss                                                                                         |  | $                        | (37,109 | ) |                                                          | $ | (46,327 | ) |  | $ | (237,284 | )
|Adjustments to reconcile net loss to net cash used by operating activities:                      |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Depreciation                                                                                     |  |                          | 244     |   |                                                          |   | 183     |   |  |   | 886      |  
|Loss on sale/disposal of assets                                                                  |  |                          | 83      |   |                                                          |   |        |   |  |   | 87       |  
|Amortization of premium (discount accretion) on securities available-for-sale                    |  |                          | 201     |   |                                                          |   | (1,229  | ) |  |   | (3,755   | )
|Amortization of debt issuance costs                                                              |  |                          | 191     |   |                                                          |   | 117     |   |  |   | 652      |  
|Stock-based compensation                                                                         |  |                          | 2,699   |   |                                                          |   | 3,014   |   |  |   | 17,621   |  
|Issuance of common stock in exchange for technology and services                                 |  |                          |        |   |                                                          |   |        |   |  |   | 47       |  
|Changes in operating assets and liabilities:                                                     |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Prepaid expenses and other current assets                                                        |  |                          | (181    | ) |                                                          |   | 908     |   |  |   | (1,300   | )
|Accounts payable and accrued expenses                                                            |  |                          | (2,879  | ) |                                                          |   | 8,424   |   |  |   | 15,986   |  
|Other assets                                                                                     |  |                          | 147     |   |                                                          |   | 181     |   |  |   | (20      | )
|Deferred rent                                                                                    |  |                          | 25      |   |                                                          |   | 263     |   |  |   | 601      |  
|Deferred revenue                                                                                 |  |                          | (44     | ) |                                                          |   | (44     | ) |  |   | 1,103    |  
|                                                                                                 |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Net cash used by operating activities                                                            |  |                          | (36,623 | ) |                                                          |   | (34,510 | ) |  |   | (205,376 | )
|Investing activities                                                                             |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Purchases of securities available-for-sale                                                       |  |                          | (48,045 | ) |                                                          |   | (93,929 | ) |  |   | (364,043 | )
|Maturities of securities available-for-sale                                                      |  |                          | 51,017  |   |                                                          |   | 63,161  |   |  |   | 330,407  |  
|Purchases of property and equipment                                                              |  |                          | (126    | ) |                                                          |   | (1,528  | ) |  |   | (2,896   | )
|Restricted cash                                                                                  |  |                          | 85      |   |                                                          |   |        |   |  |   | (1,290   | )
|                                                                                                 |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Net cash provided by (used in) investing activities                                              |  |                          | 2,931   |   |                                                          |   | (32,296 | ) |  |   | (37,822  | )
|Financing activities                                                                             |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Proceeds from issuance of common stock, net of repurchases                                       |  |                          | 196     |   |                                                          |   | 74,922  |   |  |   | 163,273  |  
|Proceeds from borrowings on long-term debt                                                       |  |                          |        |   |                                                          |   |        |   |  |   | 23,800   |  
|Payments on borrowings on long-term debt                                                         |  |                          | (3,382  | ) |                                                          |   | (1,924  | ) |  |   | (10,790  | )
|Proceeds from issuance of redeemable convertible preferred stock for cash, net of issuance costs |  |                          |        |   |                                                          |   |        |   |  |   | 44,109   |  
|Proceeds from issuance of convertible preferred stock for cash, net of issuance costs            |  |                          |        |   |                                                          |   |        |   |  |   | 29,940   |  
|Proceeds from promissory notes                                                                   |  |                          |        |   |                                                          |   |        |   |  |   | 1,665    |  
|Costs paid in connection with loan agreement                                                     |  |                          |        |   |                                                          |   |        |   |  |   | (226     | )
|Costs paid in connection with public offering                                                    |  |                          |        |   |                                                          |   | 107     |   |  |   |         |  
|                                                                                                 |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Net cash provided by (used in) financing activities                                              |  |                          | (3,186  | ) |                                                          |   | 73,105  |   |  |   | 251,771  |  
|                                                                                                 |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                             |  |                          | (36,878 | ) |                                                          |   | 6,299   |   |  |   | 8,573    |  
|Cash and cash equivalents at beginning of period                                                 |  |                          | 45,451  |   |                                                          |   | 28,967  |   |  |   |         |  
|                                                                                                 |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Cash and cash equivalents at end of period                                                       |  | $                        | 8,573   |   |                                                          | $ | 35,266  |   |  | $ | 8,573    |  
|                                                                                                 |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Supplemental disclosure                                                                          |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Non-cash operating activities                                                                    |  |                          |         |   |                                                          |   |         |   |  |   |          |  
|Receivable on sale of equipment                                                                  |  | $                        | 300     |   |                                                          | $ |        |   |  | $ | 300      |  
|                                                                                                 |  |                          |         |   |                                                          |   |         |   |  |   |          |  

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. Since the Company has not yet begun principal operations of commercializing a product candidate, the
Company is considered to be in the development stage. In addition, the Company has experienced losses since its inception, and as of June 30, 2009, had an accumulated deficit of $237.3 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, 2008
has been derived from the audited financial statements as of December 31, 2008 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, 2008 included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2008. Further, subsequent events for these unaudited interim financial statements have been evaluated up to the issuance date of August 7, 2009.

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 an agreement with Cypress Bioscience, Inc. (Cypress) which contains 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. The Company applies the revenue recognition
criteria outlined in Staff Accounting Bulletin (SAB) No. 104, Revenue Recognitionand Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables. In applying these
revenue recognition criteria, 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 agreed upon scientific events are achieved, as long as the event is
substantial and was not readily assured at the beginning of the collaboration.



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

New Accounting Standards

In
June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 165, Subsequent Events (SFAS 165). Prior to SFAS 165, the authoritative guidance for
subsequent events was previously addressed only in U.S. auditing standards. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are
available to be issued and requires the Company to disclose the date through which it has evaluated subsequent events and whether that was the date the financial statements were issued or available to be issued. SFAS 165 does not apply to subsequent
events or transactions that are within the scope of other applicable generally accepted accounting principles in the United States (GAAP) that provide different guidance on the accounting treatment for subsequent events or transactions.
SFAS 165 became effective for the Company on June 30, 2009 and its adoption did not have a material impact on its unaudited interim financial statements.

During the second quarter of 2009, the Company adopted three accounting pronouncements on the fair value of financial instruments issued by the FASB in April 2009:

SFAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and
Identifying Transactions That Are Not Orderly (SFAS No. 157-4) amends SFAS No. 157 to provide additional guidance on estimating fair value when the markets become inactive and quoted prices may reflect distressed transactions.

SFAS No. 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments extends the disclosure requirements
of SFAS No. 107,Disclosures about Fair Value of Financial Instruments to interim financial statements (SFAS No. 107-1).

SFAS No. 115-2 and SFAS No. 124-2,Recognition and Presentation of Other-Than-Temporary Impairments (SFAS No. 115-2) provides new criteria for recording impairment charges on investments in debt instruments.

The Company adopted these accounting pronouncements on April 1, 2009 and their adoption did not have a material impact on its
unaudited interim financial statements.

3. Net Loss per Share

We calculate net loss per share in accordance with SFAS No. 128, Earnings 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 EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                                                                                               |  | 2009                       |         |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|Numerator:                                                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net loss attributable to common stockholders                                                                                   |  | $                          | (17,806 | ) |                          | $ | (23,113 | )    |  | $ | (37,109 | ) |  | $ | (46,327 | )
|                                                                                                                               |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Denominator:                                                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted weighted average shares of common stock outstanding                                                          |  |                            | 34,662  |   |                          |   | 34,311  |      |  |   | 34,637  |   |  |   | 33,126  |  
|                                                                                                                               |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share attributable to common stockholders                                                       |  | $                          | (0.51   | ) |                          | $ | (0.67   | )    |  | $ | (1.07   | ) |  | $ | (1.40   | )
|                                                                                                                               |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Potentially outstanding anti-dilutive securities not included in diluted net loss per share calculation include the following: |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Common stock options                                                                                                           |  |                            | 6,797   |   |                          |   | 3,393   |      |  |   | 6,797   |   |  |   | 3,393   |  
|                                                                                                                               |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  



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##### Table of Contents

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 June 30, 2009 and December 31, 2008 (in thousands):



|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  
|--------------------------------- |  | ---------------- |  | ------------- | ------ | - | ---------- | - | ------ |  | ---------- | - |  | - | ------ | -
|June 30, 2009                     |  |                  |  |               |        |   | Unrealized |   |        | 
|                                  |  | Maturity inYears |  | AmortizedCost |        |   | Gains      |   | Losses |  | Fair Value |  
|Corporate debt obligations        |  | Less than 1      |  | $             | 4,247  |   |            | $ | 1      |  | $          |  |  | $ | 4,248  |  
|U.S. government agency securities |  | Less than 1      |  |               | 41,042 |   |            |   | 42     |  |            |  |  |   | 41,084 |  
|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  
|                                  |  |                  |  |               | 45,289 |   |            |   | 43     |  |            |  |  |   | 45,332 |  
|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  
|Less: cash equivalents            |  |                  |  |               | (7,898 | ) |            |   |       |  |            |  |  |   | (7,898 | )
|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  
|Total investment securities       |  |                  |  | $             | 37,391 |   |            | $ | 43     |  | $          |  |  | $ | 37,434 |  
|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  



|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  
|--------------------------------- |  | ---------------- |  | ------------- | ------ | - | ---------- | - | ------ |  | ---------- | - |  | - | ------ | -
|December 31, 2008                 |  |                  |  |               |        |   | Unrealized |   |        | 
|                                  |  | Maturity inYears |  | AmortizedCost |        |   | Gains      |   | Losses |  | Fair Value |  
|Corporate debt obligations        |  | Less than 1      |  | $             | 13,551 |   |            | $ | 46     |  | $          |  |  | $ | 13,597 |  
|U.S. government agency securities |  | Less than 1      |  |               | 29,521 |   |            |   | 107    |  |            |  |  |   | 29,628 |  
|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  
|                                  |  |                  |  |               | 43,072 |   |            |   | 153    |  |            |  |  |   | 43,225 |  
|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  
|Less: cash equivalents            |  |                  |  |               | (2,509 | ) |            |   |       |  |            |  |  |   | (2,509 | )
|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  
|Total investment securities       |  |                  |  | $             | 40,563 |   |            | $ | 153    |  | $          |  |  | $ | 40,716 |  
|                                  |  |                  |  |               |        |   |            |   |        |  |            |   |  |   |        |  

Gross realized gains and losses on available-for-sale securities were immaterial during the three and six months
ended June 30, 2009 and 2008.

5. Fair Value Measurements

In 2006, the FASB issued SFAS No. 157, Fair Value Measurement(SFAS No. 157), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements. SFAS No. 157 also requires the Company to consider its own credit spreads when measuring the fair value of liabilities, including derivatives. Effective January 1, 2008, the Company adopted the provisions of SFAS
No. 157. The Company did not record a cumulative adjustment as a result of adopting SFAS No. 157.

The following table presents
information about the Companys financial assets measured at fair value on a recurring basis as of June 30, 2009, 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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##### Table of Contents

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



|                                            |  |                           |                                                             |                                                |                                             |        |                                         |   |        |  |   |  
|------------------------------------------- |  | ------------------------- | ----------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------- | ------ | --------------------------------------- | - | ------ |  | - | -
|                                            |  | Balance as ofJune 30,2009 |                                                             | Fair Value Measurement at Reporting Date Using
|Description                                 |  |                           | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |                                                | Significant OtherObservableInputs (Level 2) |        | SignificantUnobservableInputs (Level 3)
|Financial instruments owned:                |  |                           |                                                             |                                                |                                             |        |                                         |   |        |  |   |  
|Money market funds/U.S. Treasury securities |  | $                         | 22,884                                                      |                                                | $                                           | 22,884 |                                         | $ |       |  | $ | 
|Corporate debt obligations                  |  |                           | 4,248                                                       |                                                |                                             |       |                                         |   | 4,248  |  |   | 
|U.S. government agency securities           |  |                           | 18,200                                                      |                                                |                                             |       |                                         |   | 18,200 |  |   | 
|                                            |  |                           |                                                             |                                                |                                             |        |                                         |   |        |  |   |  
|Total financial instruments owned           |  | $                         | 45,332                                                      |                                                | $                                           | 22,884 |                                         | $ | 22,448 |  | $ | 
|                                            |  |                           |                                                             |                                                |                                             |        |                                         |   |        |  |   |  

6. Property and Equipment

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



|                                               |  |                     |  |              |       |   |                  |   |       |  
|---------------------------------------------- |  | ------------------- |  | ------------ | ----- | - | ---------------- | - | ----- | -
|                                               |  | Useful LifeIn Years |  | June 30,2009 |       |   | December 31,2008 |  
|Furniture and fixtures                         |  | 5                   |  | $            | 1,102 |   |                  | $ | 1,102 |  
|Computer equipment and software                |  | 3 to 5              |  |              | 493   |   |                  |   | 488   |  
|Leasehold improvements                         |  | 5                   |  |              | 597   |   |                  |   | 477   |  
|Laboratory equipment                           |  | 5                   |  |              | 44    |   |                  |   | 566   |  
|                                               |  |                     |  |              |       |   |                  |   |       |  
|                                               |  |                     |  |              | 2,236 |   |                  |   | 2,633 |  
|Less accumulated depreciation and amortization |  |                     |  |              | (678  | ) |                  |   | (574  | )
|                                               |  |                     |  |              |       |   |                  |   |       |  
|                                               |  |                     |  | $            | 1,558 |   |                  | $ | 2,059 |  
|                                               |  |                     |  |              |       |   |                  |   |       |  

7. Accounts Payable and Accrued Expenses

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



|                                                |  |              |        |                  |   |       
|----------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                                |  | June 30,2009 |        | December 31,2008
|Accounts payable                                |  | $            | 7,546  |                  | $ | 5,644 
|Accrued preclinical and clinical trial expenses |  |              | 5,680  |                  |   | 10,513
|Accrued compensation related expenses           |  |              | 2,010  |                  |   | 2,271 
|Accrued legal and professional expenses         |  |              | 337    |                  |   | 150   
|Other accrued liabilities                       |  |              | 357    |                  |   | 232   
|                                                |  |              |        |                  |   |       
|                                                |  | $            | 15,930 |                  | $ | 18,810
|                                                |  |              |        |                  |   |       

8. Comprehensive Income (Loss)

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



|                                                   |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|-------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | -------------------------------------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | -
|                                                   |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |   |         | Period fromSeptember 12, 2002(Inception) toJune 30, 2009 | 
|                                                   |  | 2009                       |         |   | 2008                     |   |         | 2009                                                     |  |   | 2008    |   | 
|Net loss, as reported                              |  | $                          | (17,806 | ) |                          | $ | (23,113 | )                                                        |  | $ | (37,109 | ) |  | $ | (46,327 | ) |  | $ | (237,284 | )
|Unrealized gains (losses) on marketable securities |  |                            | 9       |   |                          |   | (434    | )                                                        |  |   | (109    | ) |  |   | (111    | ) |  |   | 44       |  
|                                                   |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  
|Comprehensive loss                                 |  | $                          | (17,797 | ) |                          | $ | (23,547 | )                                                        |  | $ | (37,218 | ) |  | $ | (46,438 | ) |  | $ | (237,240 | )
|                                                   |  |                            |         |   |                          |   |         |                                                          |  |   |         |   |  |   |         |   |  |   |          |  



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9. Stock-Based Compensation

Total stock-based compensation expense recognized during the three and six months ended June 30, 2009 and 2008 was comprised of the following (in thousands):



|                           |  |                            |       |                          |   |                                                          |  |      |       |  |   |       |  |   |       
|-------------------------- |  | -------------------------- | ----- | ------------------------ | - | -------------------------------------------------------- |  | ---- | ----- |  | - | ----- |  | - | ------
|                           |  | Three Months EndedJune 30, |       | Six Months EndedJune 30, |   | Period fromSeptember 12, 2002(Inception) toJune 30, 2009
|                           |  | 2009                       |       | 2008                     |   | 2009                                                     |  | 2008 |      
|General and administrative |  | $                          | 783   |                          | $ | 969                                                      |  | $    | 1,358 |  | $ | 1,848 |  | $ | 11,183
|Research and development   |  |                            | 700   |                          |   | 601                                                      |  |      | 1,341 |  |   | 1,166 |  |   | 6,438 
|                           |  |                            |       |                          |   |                                                          |  |      |       |  |   |       |  |   |       
|                           |  | $                          | 1,483 |                          | $ | 1,570                                                    |  | $    | 2,699 |  | $ | 3,014 |  | $ | 17,621
|                           |  |                            |       |                          |   |                                                          |  |      |       |  |   |       |  |   |       

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 EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                         |  | 2009                       |   |  | 2008                     |   |  | 2009 |   |  | 2008 |  
|Expected life (in years) |  | 6.2                        |   |  | 6.3                      |   |  | 6.1  |   |  | 6.3  |  
|Expected volatility      |  | 60.0                       | % |  | 55.0                     | % |  | 59.4 | % |  | 55.0 | %
|Risk-free interest rate  |  | 2.1                        | % |  | 3.3                      | % |  | 2.1  | % |  | 3.1  | %
|Expected dividend yield  |  |                           |   |  |                         |   |  |     |   |  |     |  

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 7.5% on amounts outstanding at June 30, 2009). 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 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 June 30, 2009, $13.0 million is outstanding under this agreement. The fair value of the outstanding debt approximates its carrying value as of June 30, 2009.

At June 30, 2009, future minimum principal payments under the credit and security agreement, as amended, with GE Healthcare Financial
Services are as follows (in thousands):



|                      |  |   |        |  
|--------------------- |  | - | ------ | -
|Due in:               |  |   |        |  
|2009                  |  | $ | 4,209  |  
|2010                  |  |   | 6,384  |  
|2011                  |  |   | 2,416  |  
|                      |  |   |        |  
|                      |  |   | 13,009 |  
|Less: current portion |  |   | (7,966 | )
|                      |  |   |        |  
|                      |  | $ | 5,043  |  
|                      |  |   |        |  



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##### Table of Contents

GlaxoSmithKline

In June 2009, the Company entered into a license agreement with SmithKline Beecham Corporation and Glaxo Group Limited (collectively GSK) for
the licensing of certain intellectual property that expands the Companys intellectual property position underlying Contrave. In exchange for undisclosed upfront payment and a future milestone payment, the Company secured non-exclusive rights
to certain formulation patents related to bupropion, one of the constituents of Contrave.

The term of the license agreement generally
extends on a country-by-country basis until the date of the expiration, lapse or invalidation of the last remaining patent or patent application within the licensed patents in such country. The Company may terminate the agreement with respect to any
particular country or in its entirety at any time upon specified written notice to GSK. However, if the Company has not yet paid the potential future milestone payment, the Company may only exercise this termination right if it determines in good
faith that the patent, medical/scientific, technical, regulatory or commercial profile of Contrave or a similar product candidate covered under the license agreement does not justify continued development and/or commercialization. Either party may
terminate the agreement upon delivery of written notice if the other party is in material default or breach of its obligations and fails to remedy the breach within a specified period. In addition, either party may terminate the agreement upon
specified bankruptcy, liquidation or receivership proceedings, and the agreement may be terminated by the mutual written agreement of both parties.

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 is being recognized over 17 years, the estimated term of the agreement. In addition, Cypress is obligated to pay the
Company a royalty on net sales of any products covered by the sublicensed technology. Cypress may also be required to make future milestone payments to the Company of up to $57.0 million upon its achievement of various regulatory milestones. In June
2006, Cypress announced that the results of a completed Phase 2a trial did not support continuing its development program for obstructive sleep apnea, one of the specified uses under the agreement. Therefore, the Companys receipt of $20.0
million of milestone payments related to sleep apnea is unlikely at this time.

For the three months ended June 30, 2009 and 2008, the
six months ended June 30, 2009 and 2008, and for the period September 12, 2002 (inception) to June 30, 2009, the Company recognized revenues under this agreement of $22,000, $22,000, $44,000, $44,000, and $397,000, respectively. At
June 30, 2009 and December 31, 2008, deferred revenue under this agreement totaled $1.1 million and $1.1 million, respectively.

As a result of the Companys sublicensing of the Duke technology to Cypress for specified uses, the Company may be required to make future payments to Duke of up to $5.7 million ($3.7 million excluding milestone payments related to
sleep apnea) upon Cypresss achievement of various regulatory milestones. The term of the Cypress agreement generally extends until the last licensed patent right expires, which is expected to occur in 2023. Either party may terminate the
agreement upon delivery of written notice if the other party commits fraud, willful misconduct, or illegal conduct of the other party with respect to the subject matter of the agreement. In addition, either party may terminate the agreement upon
delivery of written notice if the other party commits a material breach of its obligations and fails to remedy the breach within a specified period. Cypress may terminate the agreement for any reason upon delivery of written notice within the
specified period. Cypress may also terminate with no notice if an unfavorable judgment is entered against the Company or any other party relating to the patents we have sublicensed to Cypress. In addition, Cypress may terminate the agreement upon
specified bankruptcy, liquidation or receivership proceedings.

11. Subsequent Events

Public Offering of Common Stock

In July 2009, the Company completed a public offering of
11,500,000 shares of its common stock at a public offering price of $7.50 per share. Net cash proceeds from the public offering were approximately $81.6 million, after deducting underwriting discounts, commissions and estimated offering expenses
payable by the Company.



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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, 2008 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, 2008. 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 3 clinical trials, and Empatic, which is in the later stages of Phase 2 clinical development. Each of these product candidates is a
combination of generic drugs, which we have systematically screened for synergistic central nervous system activity. Each of the components of our product candidates has already received regulatory approval and has been commercialized previously. In
July 2009, we announced the results of the remaining Phase 3 clinical trials for Contrave. We expect to submit a new drug application, or NDA, with the U.S. Food and Drug Administration for Contrave in the first half of 2010. We have not yet
received regulatory approval for any product candidate.

We are a development stage company. We have incurred significant net losses since
our inception. As of June 30, 2009, we had an accumulated deficit of $237.3 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 operating losses for the next several years as we pursue the clinical development and market launch of our product candidates and
acquire or in-license additional products and technologies, and add the necessary infrastructure to support our growth.

In July 2009, we
completed a public offering of 11,500,000 shares of our common stock at a public offering price of $7.50 per share. Net cash proceeds from the public offering were approximately $81.6 million, after deducting underwriting discounts, commissions and
estimated offering expenses payable by us.

Revenues

We have generated approximately $571,000 in revenue from inception through June 30, 2009, resulting from the sublicensing of technology and amounts earned under a collaborative agreement. During 2005, we
sublicensed technology to Cypress Bioscience, Inc., or Cypress, for an upfront payment of $1.5 million, and this amount is being recognized ratably over the estimated life of the sublicensed patent. In addition, we recognized revenue of
approximately $174,000 during the year ended December 31, 2005 related to a collaborative agreement with Eli Lilly and Company, or Eli Lilly, the term of which has since expired. 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 either ourselves or with a collaborator. However, we may never generate revenues from our
product candidates as we may never succeed in obtaining regulatory approval or commercializing products.



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##### Table of Contents

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.

At any time, we
have several ongoing research projects. 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 and six months ended June 30, 2009 and 2008. Costs that are not
attributable to a specific research program are included in the Other category (in thousands):



|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|--------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                        |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                        |  | 2009                       |        | 2008                     |   | 2009   |  | 2008
|Costs of external service providers:    |  |                            |        |                          |   |        |  |      |        |  |   |       
|Obesity                                 |  | $                          | 10,527 |                          | $ | 16,476 |  | $    | 23,854 |  | $ | 34,902
|Non-Obesity                             |  |                            |       |                          |   | 899    |  |      |       |  |   | 1,439 
|Other                                   |  |                            | 12     |                          |   | 150    |  |      | 148    |  |   | 238   
|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|Subtotal                                |  |                            | 10,539 |                          |   | 17,525 |  |      | 24,002 |  |   | 36,579
|Internal costs                          |  |                            | 2,017  |                          |   | 1,459  |  |      | 3,644  |  |   | 2,527 
|Stock-based compensation                |  |                            | 700    |                          |   | 601    |  |      | 1,341  |  |   | 1,166 
|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total research and development expenses |  | $                          | 13,256 |                          | $ | 19,585 |  | $    | 28,987 |  | $ | 40,272
|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       

At this time, due to the risks inherent in the clinical trial process and given the stage of our
product development programs, 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 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.

We expect our development expenses to decline in the remainder of 2009 due to the completion of our Contrave Phase 3 program. Future development expenses will depend on whether we must conduct additional clinical trials for Contrave, our
financial resources, as well as decisions made with respect to our Empatic program. We disclosed the data for the remaining three Contrave Phase 3 trials in July 2009. In July 2008, we initiated a Phase 2b clinical trial for Empatic. We expect to
disclose the data from this trial in the second half of 2009. 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 before 2011, if at all.

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
increases in general and administrative expenses as we add personnel, comply with the reporting obligations applicable to publicly-held companies, and continue to build our corporate infrastructure in support of our continued development and
preparation for the potential commercialization of our product candidates.



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Other Income (Expense)

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

Income Taxes

As of December 31, 2008, we had federal and state net operating loss carryforwards of approximately $172.5 million and $175.3
million, respectively. If not utilized, the net operating loss carryforwards will begin expiring in 2022 for federal purposes and 2012 for state purposes. As of December 31, 2008, we had federal and state research and development tax credit
carryforwards of approximately $10.4 million and $7.9 million, respectively. The federal tax credits will begin expiring in 2023 unless previously utilized and the state tax credits carry forward indefinitely. Under Section 382 of the Internal
Revenue Code of 1986, as amended, or the Internal Revenue Code, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. An analysis was
performed which indicated that multiple ownership changes have occurred in previous years which created annual limitations on our ability to utilize our net operating loss and tax credit carryovers. Such limitations will result in approximately
$900,000 of tax benefits related to net operating loss and tax credit carryforwards that will expire unused. Accordingly, the related net operating loss and research and development tax credit carryforwards have been removed from deferred tax assets
accompanied by a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact our effective tax rate as long as we have a full valuation
allowance on our deferred tax assets.

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 six months ended June 30, 2009 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,
2008.

Results of Operations

Comparison of three
months ended June 30, 2009 to three months ended June 30, 2008

Revenues.Revenues for each of the three months
ended June 30, 2009 and June 30, 2008 were $22,000 and were related to our sublicensed technology to Cypress.

Research and
Development Expenses.Research and development expenses decreased to $13.3 million for the three months ended June 30, 2009 from $19.6 million for the comparable period during 2008. This decrease of approximately $6.3 million was due
primarily to a decrease in expenses in connection with our Contrave Phase 3 clinical trials, related proprietary product formulation work and consulting activities totaling approximately $9.9 million. The decrease in research and development
expenses was partly offset by an increase in license fees of $2.5 million, an increase in costs incurred in connection with the preparation for our NDA for Contrave of $560,000 and an increase in salaries and personnel related costs totaling
approximately $506,000.

General and Administrative Expenses.General and administrative expenses increased to $4.3 million for the
three months ended June 30, 2009 from $4.1 million for the comparable period during 2008. This increase of approximately



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$200,000 was due primarily to an increase in salaries and personnel related costs of approximately $375,000. The increase in general and administrative
expenses was partly offset by a decrease in stock-based compensation expense of approximately $185,000.

Interest Income.Interest
income decreased to $83,000 for the three months ended June 30, 2009 from $939,000 for the comparable period during 2008. This decrease of $856,000 was due to lower interest rates and a decrease in average cash and investment balances.

Interest Expense.Interest expense decreased to $358,000 for the three months ended June 30, 2009 from $397,000 for the
comparable period during 2008 due to a lower average interest rate on the amounts outstanding under the credit and security agreement with GE Healthcare Financial Services.

Comparison of six months ended June 30, 2009 to six months ended June 30, 2008

Revenues.Revenues for each of the six month periods ended June 30, 2009 and June 30, 2008 were $44,000 and were related to our sublicensed technology to Cypress.

Research and Development Expenses.Research and development expenses decreased to $29.0 million for the six months ended June 30, 2009 from
$40.3 million for the comparable period during 2008. This decrease of $11.3 million was due primarily to a decrease in expenses in connection with our Contrave Phase 3 clinical trials, related proprietary product formulation work and consulting
activities totaling $15.8 million. The decrease in research and development expenses was partly offset by an increase in license fees of $2.5 million, an increase in salaries and personnel related costs totaling approximately $1.1 million and an
increase in costs incurred in connection with the preparation for our NDA for Contrave of $765,000.

General and Administrative
Expenses.General and administrative expenses increased to approximately $7.7 million for the six months ended June 30, 2009 from approximately $7.4 million for the comparable period during 2008. This increase of $251,000 was due primarily
to an increase in salaries and personnel related costs of approximately $704,000, an increase in recruiting expense of $237,000 and in increase in depreciation of $104,000. The increase in general and administrative expenses was partly offset by a
decrease in stock-based compensation expense of approximately $490,000 and a decrease in legal and accounting fees of approximately $478,000.

Interest Income.Interest income decreased to $248,000 for the six months ended June 30, 2009 from $2.1 million for the comparable period during 2008. This decrease of approximately $1.9 million was due to lower interest rates
and a decrease in average cash and investment balances.

Interest Expense.Interest expense decreased to $752,000 for the six months
ended June 30, 2009 from $826,000 for the comparable period during 2008. This decrease of approximately $74,000 was primarily due to the decrease in interest expense resulting from a lower average interest rate on the $23.8 million borrowed
under the credit and security agreement with GE Healthcare Financial Services as of June 30, 2009.

Liquidity and Capital Resources

Since inception, our operations have been financed primarily through the sale of equity securities. Through June 30, 2009, we received net
proceeds of approximately $238.6 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

As of June 30, 2009, we had $8.6 million in cash and cash equivalents and an additional $37.4 million in investment
securities, available-for-sale. In addition, in July 2009, we raised additional cash totaling approximately $81.6 million from the sale of shares of our common stock in a public offering. As of June 30, 2009, our holdings primarily consisted of
treasury-backed money market funds, treasuries, other instruments that are insured, guaranteed or supported by the U.S. federal government, and 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 $36.6 million and $34.5 million
for the six months ended June 30, 2009 and 2008, 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 $2.9 million for the six months ended June 30, 2009 and
the net cash used in investing activities was $32.3 million for the six months ended June 30, 2008. These amounts are primarily the result of the net purchases and maturities of investment securities.

Net cash used in financing activities was $3.2 million for the six months ended June 30, 2009 and the net cash provided by financing activities was
$73.1 million for the six months ended June 30, 2008. The net cash used in financing activities for the six months ended June 30, 2009 was for payments of principal towards our credit and security agreement with GE Healthcare Financial
Services, as amended. The net cash provided by financing activities for the six months ended June 30, 2008 is primarily as a result of the public sale of common stock in January and February 2008 for aggregate net proceeds of $74.9 million.

We cannot be certain if, when or to what extent we will receive cash inflows from the commercialization of our product candidates. We
expect our pre-commercialization and commercialization expenses to be substantial and to increase over the next few years as we seek approval for and launch Contrave, and we expect development expenses will increase as we continue the advancement of
Empatic.

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 at an exercise price of $0.10 per share, which expires in April 2014. We also paid Dr. Dante an upfront fee of $100,000 and may be required to make future milestone payments totaling up
to $1.0 million upon the achievement of a milestone related to a regulatory event. 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 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to establish and maintain strategic collaborations, including licensing and other arrangements;
| | - |  | -----------------------------------------------------------------------------------------------------------



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



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



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| |  |  | the costs of establishing sales or distribution capabilities;
| | - |  | -------------------------------------------------------------



| |  |  | 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 is obligated to make advances to us under the credit and security agreement from December 31, 2007 to December 31, 2008. GE Healthcare
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 June 30, 2009 bear interest at an average rate of 7.5%. 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.

We believe that our
existing cash and cash equivalents, including the proceeds from our July 2009 public offering, 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, potential borrowings and potential corporate collaborations. In addition, we may finance future cash needs through the sale of additional equity securities, strategic collaboration agreements and other
debt financing. In addition, 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, 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.
If we raise additional funds by incurring debt financing, the terms of the debt 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).



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

Our cash and cash equivalents as of June 30, 2009 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.

Over the last year, there has been concern in the credit markets regarding the value of a variety of
mortgage-backed and auction rate securities and the resultant effect on various securities markets. 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, continuing concerns over inflation, energy costs, geopolitical issues, the availability
and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors combined with
volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic recession and fears of a possible depression. Domestic and international equity markets continue to experience heightened
volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, 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. Given the current economic instability, we
cannot provide assurance that we will not experience losses on these investments.



|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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.

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. We are not 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 submitted an NDA or received marketing approval for any of our
product candidates. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. The FDA also 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 require additional preclinical or clinical studies;
| | - |  | ---------------------------------------------------------------



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



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

Contrave has been evaluated in Phase 3 clinical trials for the treatment of obesity. We anticipate submitting an NDA with respect to Contrave to the FDA
for potential approval in the first half of 2010. Empatic is in the later stages of Phase 2 development and, following its Phase 2 clinical trials, it will need to successfully complete two or more pivotal trials prior to our submission of an NDA to
the FDA for potential approval. Our product candidates may not be approved even if they achieve their specified endpoints in these and future clinical trials. For example, Contrave may not be approved even though it achieved its specified endpoints
in the Phase 3 clinical trials and met the FDA guidance on the general efficacy benchmarks required in pivotal trials for comparison against placebo. The FDA may disagree with our trial design and our interpretation of efficacy and safety data from
the Phase 3 clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials. The FDA may also approve Contrave for fewer or more limited indications than we request, may
request additional clinical trials prior to approval, or may grant approval contingent on the performance of costly post-approval clinical trials, including cardiovascular outcome studies which may be required prior to or after approval. In
addition, the FDA may not approve the labeling claims that we believe are 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) 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



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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 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 FDA 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 3 clinical trials.

With respect to Empatic, in July 2008, we initiated an additional Phase 2b
clinical trial to establish that the combination 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 3 clinical trials may be conducted against placebo only. We have not yet commenced any Phase 3 clinical trials for this product candidate.

In addition, before we can submit an NDA to the FDA for potential regulatory approval, we may need to complete additional preclinical testing of our product candidates to evaluate safety and toxicity. 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.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or limit the commercial
profile of an approved label.*

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 restricted label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. Contrave has now been evaluated in four completed Phase 3 clinical
trials, which we refer to collectively as the Contrave Obesity Research, or COR, program. Across the entire COR program, seven serious adverse events were attributed by investigators as possibly 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 and headache. 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. We have just begun to analyze the full set of safety data from our COR program. The safety data we
disclosed to date represented our interpretation of the data at that time 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 be not 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, severe or otherwise will have an adverse effect on our stock price. In addition, our
interpretation of the 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.

The most common side effects reported in our first Phase 2b trial of Empatic were headache, nausea and insomnia. 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. 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 combination of these constituent drugs is still being tested and has not received
regulatory approval. Accordingly, the safety of their combined use is not yet fully known. 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. For example, the Endocrinologic and Metabolic Drugs Advisory Committee convened by the FDA reviewed another companys obesity product candidate, rimonabant, and determined not to recommend approval of
the product candidate to the FDA, based on concerns regarding the safety profile of the product candidate (in particular, depression, suicidality and seizures) and the potential for long-term use of the product by patients.



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If any of our product candidates receives marketing approval and we or others identify undesirable side
effects caused by the product, a number of potentially significant negative consequences could result, including:



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



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



| |  |  | we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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



| |  |  | we could be asked to formulate a risk evaluation mitigation strategy that could include a program of post-marketing surveillance or restricted distribution for
patients receiving our products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we 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 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 to 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 black box 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 black box 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 black box warning be extended to cover adults up to their mid-20s. In July 2009, the FDA issued a news release announcing that
it was requiring manufacturers to put a black box warning on the prescribing information for smoking cessation drugs including Zyban®, which is bupropion. The warning will highlight 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 use these product candidates, if approved.

We expect that any additional warnings or other labeling changes related to suicidal thinking and behavior in adults will be required on labeling for both Contrave and Empatic. 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 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 black box warning and expanded warnings statements
regarding hepatotoxicity, or liver toxicity. A similar warning statement may be required on labeling for Contrave.

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



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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 limitation 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 2b 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.

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 on 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.

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

Delays in the commencement or completion of clinical
testing could result in increased costs to us and delay or limit our ability to generate revenues.*

Delays in the commencement or
completion of clinical testing 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;
| | - |  | -----------------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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, 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;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | -----------------------------



| |  |  | lack of adequate funding to continue the clinical trial.
| | - |  | --------------------------------------------------------

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes or initiate new clinical trials to account for these changes. For
instance, the FDA intends to 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 and the advisory committees discussions with respect to rimonabant, we cannot guarantee that in the final guidance the FDA will not require different designs or data to be generated. In addition, at the time of approval the FDA may
request one or more clinical trials or additional studies to support regulatory approval. For example, the FDA has indicated that it may require cardiovascular outcomes studies for compounds in development for the treatment of diabetes, if the
safety observed in development programs raises concerns. The FDA has not provided guidance on outcome studies for compounds in development for the treatment of obesity. However, we are unable to predict whether the FDA may extend this requirement to
obesity development programs. If the FDA does impose such a requirement, we may need to conduct additional studies on our product candidates. Moreover, amendments to ongoing clinical trials in response to changes in regulatory requirements or
guidance may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of or we terminate any of our clinical
trials, or if we have to conduct additional clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues 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 denial of regulatory approval of a product candidate.

We
rely primarily on third parties to 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 primarily on Metropolitan Research Associates, or
MRA, a CRO, to conduct our clinical trials for Contrave and Empatic, and we may depend on other CROs and independent clinical investigators to conduct our clinical trials in the future. We utilize the services of inVentiv Clinical Solutions LLC to
conduct our data management. The third parties with which we contract for execution of our clinical trials play a significant role in the conduct of these trials and the subsequent collection, review and analysis of data. 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 MRA, inVentiv, other CROs, consultants or independent investigators fail to devote sufficient time and resources to our
drug development programs, or if their performance is substandard, it may delay the submission and potential approval of our regulatory applications and the commercialization of our product candidates. In addition, the execution of clinical trials,
and the subsequent compilation, review and analysis of the data produced, 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 may be delayed or compromised. Moreover, these independent investigators and CROs may also have relationships with other commercial entities, some of which may compete with us. If independent investigators and CROs also contract
to provide services for our competitors, it could adversely affect our business.



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We expect intense competition in the obesity marketplace for Contrave and Empatic, 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., and Meridia® (sibutramine), marketed by Abbott Laboratories. 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. Both orlistat and sibutramine are marketed by
pharmaceutical companies 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 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 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., among others. Arena and Vivus either have or
will release data from their respective Phase 3 clinical trials in the near-term.

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. 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, Leptos Biomedical, Inc., 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 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.
| | - |  | ------------------

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. We are developing Contrave to treat mild to moderate obesity, especially in
women with food craving. We are developing Empatic to treat more severe obesity, especially in men and in women beyond the childbearing years. 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 will be successful in marketing Contrave and Empatic to
their respective target markets or minimizing competition between them.



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Our product candidates are combinations of generically-available pharmaceutical products, and our success is
dependent on our 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 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 to 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 or resources, and we may not be able to
effectively market and sell our products.

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 adequately address these physician groups, we must either establish 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 or establishing collaborations or co-promotion arrangements on acceptable terms, if at all. We also face
competition in our search for collaborators, co-promoters and sales force personnel. We may rely on third parties to develop or commercialize our product candidates. 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.

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 2 clinical trials for each of our drug combinations, because our planned NDAs 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 certify to the FDA concerning any patents listed for the
approved



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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 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. When we submit our NDAs for Contrave and Empatic, we intend to make paragraph IV certifications that our products do not infringe the bupropion SR formulation patents listed in the
Orange Book, and send the appropriate notice to the patent holder and NDA holder once we receive confirmation from the FDA that our NDA is sufficiently complete to permit a substantive review. 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 patent (2013), 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. 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 marketing application 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 an NDA of different active ingredients that relies on its own clinical data to support the
change or innovation. 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.

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 black box warning related to concerns regarding antidepressants, anticonvulsants, products for smoking cessation, naltrexone or otherwise. The FDA may also require the
distribution of a Medication Guide to patients outlining the increased risk of suicidal thinking or behavior in children and adolescents or other populations. The FDA could also require a registry to track the patients utilizing the product. 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 has indicated that
it may require cardiovascular outcomes studies for compounds in development for the treatment of diabetes, if the safety observed in development programs raises concerns. The FDA has not provided guidance on outcome studies for compounds in
development for the treatment of obesity. However, we are unable to predict whether the FDA may extend this requirement to obesity development programs. If the FDA does impose such a requirement, we may need to conduct additional studies on our
product candidates.

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 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, a regulatory agency may impose restrictions on that product, the manufacturer or us, including requiring withdrawal of the product from the market or suspension
of manufacturing. If we, 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;
| | - |  | ----------------------------------------------------------------------------------



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



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

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.

If the suppliers upon whom we rely for active pharmaceutical ingredients, or API, fail to produce such ingredients in the volumes that we require on a timely basis, or to comply with stringent regulations
applicable to pharmaceutical drug manufacturers, we 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 for use in our clinical trials. The failure or inability of our API suppliers to satisfy our API requirements on a timely basis could delay our development programs.

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 by 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 ability to complete our clinical trials and commercially launch 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.

Historically, all of our purchases of API have been completed by purchase orders. 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.



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We have no other 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 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.

If the contract manufacturers upon whom we rely fail to produce our product candidates in the volumes
that we require on a timely basis, or fail to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we 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 Contrave titration packs, Empatic
titration packs and bottles used to package these tablets for use in clinical trials. To date, all of these contract manufacturers have performed services under short-term purchase orders or similar arrangements. We have no long-term commitments or
supply agreements with these contract manufacturers. For example, Patheon manufactured bupropion SR as well as finished Contrave tablets for our Contrave Phase 3 clinical trials on a proposal by proposal basis under a master agreement for
pharmaceutical development services that we entered into in February 2007. Either party may terminate the agreement upon notice if the other party commits a material breach of its obligations and fails to remedy the breach within 30 days. In
addition, we may terminate the agreement immediately for any business reason.

With respect to the manufacturing for our commercial scale
product, we intend to eventually pursue long-term agreements with our current manufacturers or transfer the manufacturing to other larger manufacturers. There can be no assurance we will be able to transfer any manufacturing processes to other
larger manufacturers. Furthermore, we may be required to agree to minimum volume requirements, exclusivity arrangements or other restrictions. We may not be able to enter into long-term agreements on commercially reasonable terms, or at all. If we
change to other manufacturers, 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. If our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations to us, our ability to provide product
candidates to patients in our 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 our clinical trials, increase the
costs associated with maintaining our clinical trial program and, depending upon the period of delay, require us 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 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 may be unable to meet demand for our products and would lose potential revenues.

Bupropion, which is an API in both Contrave and Empatic, is known to have issues with stability.

Bupropion, which is an API in both Contrave and Empatic, is known to have issues with stability that require manufacturing processes that minimize exposure to moisture and limit oxidation. We are performing stability testing to ensure that
our combination tablet of Contrave has sufficient stability to provide the customary stability characteristics and



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shelf life expected of a conventional pharmaceutical product. Although we are currently conducting stability studies, we cannot be sure that either Contrave
or Empatic will be stable, and we may not be able to demonstrate sufficient long-term stability, which could jeopardize our ability to bring such product candidates to market.

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 with a $10.0 million annual aggregate coverage limit. 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 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:



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



| |  |  | 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, 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | our 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 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 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 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 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.

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 health care systems to contain health care costs and improve quality. While reform proposals often involve expanding
coverage to more individuals, health care reform may also involve increased government price controls, additional regulatory mandates and other measures designed to lower medical and pharmaceutical costs (such as private health insurance expansion,
the creation of competing public health insurance plans, a variety of proposals that would reduce government expenditures for prescription drugs to help finance healthcare reform, or the eventual transition of the U.S. multiple payer system to a
single payer system). Within the United States, the pharmaceutical industry has been a particular focus of both the U.S. Congress, as well as state governments. Proposed reforms include, but are not limited to, increasing regulation of
pharmaceutical representatives, restricting direct to consumer advertising and off-label uses, an accelerated approval process for follow-on biologics, involuntary approval of medicines for over-the-counter use, limiting
manufacturers access to marketing data, requiring greater reliance on comparative effectiveness reviews of competing drugs, increasing use of electronic prescribing and authorizing the re-importation of drugs from Canada and other foreign
countries to lower pharmaceutical costs to U.S. consumers.



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We cannot predict the initiatives that may be adopted in the future. 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 ability to set a price we believe is fair for our products;
| | - |  | ---------------------------------------------------------------



| |  |  | our ability to generate revenues and achieve or maintain profitability; and
| | - |  | ---------------------------------------------------------------------------



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

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

As of July 20, 2009, we had 46
full-time employees and one part-time employee. We will need to continue to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our development activities and
commercialize our current and any of our future product candidates. Our management and personnel and systems currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:



| |  |  | manage our clinical trials effectively, including our Phase 2b clinical trial for Empatic and any future trials of Contrave;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | manage the manufacturing and development of Contrave and Empatic;
| | - |  | -----------------------------------------------------------------



| |  |  | manage our internal development efforts effectively while carrying out our contractual obligations to licensors, contractors, collaborators and other third parties;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continue to improve our operational, financial and management controls, reporting systems; and procedures; and
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | attract and retain the breadth and depth of sufficient numbers of talented employees.
| | - |  | -------------------------------------------------------------------------------------

We outsource many key functions of our business and therefore rely on a substantial number of consultants, and we will need to be able to effectively
manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services
provided by consultants is compromised for any reason, our clinical trials or other development activities may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for our product candidates or otherwise advance
our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.

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

As part of our growth 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;
| | - |  | --------------------------------



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| |  |  | 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 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 achievement of our development objectives, our ability to raise additional capital and our
ability to implement our business strategy.

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.
We are not aware of any key personnel who have 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 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 may be unable to build a successful brand identity for a new trademark in a timely manner or
at all, which would limit our ability to commercialize our product candidates.



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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, 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. Federal legislation, the Physician Payments Sunshine Act of 2009, has been proposed and is moving forward in Congress. This legislation would require disclosure to the federal government of
payments to physicians. These laws all provide for penalties for non-compliance. 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



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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.

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 all 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. 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.

We have also filed patent applications in the United States and certain foreign countries under the Patent Cooperation Treaty, or PCT, which 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. These filings seek to protect the formulations and use of SR oral naltrexone, an ingredient in Contrave, but we
cannot provide assurance that the claims in these patent applications will issue in their current form or at all. 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.



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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, but we cannot provide
assurance that the claims in these patent applications will issue in their currently pending form or at all.

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 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 all of 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 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 ability to prevent third parties from competing against us.

Our success will depend on our 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.



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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.

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 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 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 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 ability and the ability of our collaborators 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 collaborators 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, 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 collaborators 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 collaborators 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 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 collaborators 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;
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| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 our Contrave titration packs, Empatic titration packs and bottles used to package 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 from adopting or marketing a particular formulation or product, or could expose us to
patent infringement liability.

Although we have entered into a settlement agreement designed to prevent the parties to the agreement from asserting
infringement and other specified claims against Empatic in the United States, and abroad, disputes with third parties relating to Empatic could nevertheless affect our intellectual property rights.

In June 2004, we jointly filed a lawsuit with Duke, against Elan Corporation, plc, Elan Pharma International Ltd. and Elan Pharmaceuticals, Inc., which
we refer to collectively as Elan, Eisai, Inc. and Eisai Co., Ltd., which we refer to together as Eisai, and Julianne E. Jennings, a former employee of Elan, in the U.S. District Court for the Middle District of North Carolina, Durham Division, to
resolve a dispute over rights in an invention relating to the use of zonisamide to treat obesity. We alleged in this lawsuit that scientists at Duke made the invention, and that Elan improperly used information supplied by the Duke scientists to
file a U.S. patent application on the invention, in which Ms. Jennings (then an Elan product manager) is named as the sole inventor. This patent application was later assigned by Elan to Eisai. Duke also filed a U.S. patent application on the
invention at issue, which patent application is exclusively licensed to us and, as discussed above, was issued by the PTO in September 2008 as U.S. patent number 7,425,571. In December 2006, we, Elan, Eisai, Duke and Ms. Jennings entered into a
settlement agreement to settle the lawsuit. Upon execution of the settlement agreement, the lawsuit was dismissed with prejudice.

Under
the terms of the settlement agreement, the parties have, subject to limitations set forth in the agreement, released each other from all claims and demands arising under the laws of the United States or any state within the United States existing as
of the date of the settlement agreement that arise out of or relate to the lawsuit or the specified Duke and Eisai patents that may issue from certain patent applications claiming the use of zonisamide as the sole active ingredient to treat obesity
or other weight-related disorders or conditions. In addition, if Elan, Eisai or Ms. Jennings obtains a U.S. patent containing a claim that encompasses the use of zonisamide as the sole active ingredient to treat obesity or other weight-related
disorders or conditions that issues from or is based upon the Eisai patent application, Elan, Eisai and Ms. Jennings have each agreed that they will not assert such patent against any of our products containing zonisamide in combination with
any other active pharmaceutical agent, including bupropion. Likewise, for any U.S. patent obtained by Duke containing a claim that encompasses the use of zonisamide as the sole active ingredient to treat obesity or other weight-related disorders or
conditions that issues from or is based upon the Duke patent application, we and Duke have agreed that we will not assert any such patent against Elan, Eisai or Ms. Jennings for any conduct relating to Zonegran, which is a zonisamide product
currently marketed by Eisai. As discussed above, U.S. patent number 7,425,571, a patent having such claims, was issued by the PTO.



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In September 2007, we and Duke entered into a settlement agreement with Eisai which resolves the foreign
aspects of the dispute referenced in the paragraph above. Under the terms of the settlement agreement, the parties have, subject to limitations set forth in the agreement, released each other from all claims and demands arising under the laws of any
country outside of the United States existing as of the date of the agreement that arise out of or relate to the lawsuit or certain specified Duke and Eisai foreign patents that may issue from certain patent applications claiming the use of
zonisamide as the sole active ingredient to treat obesity or other weight-related disorders or conditions. In addition, if Eisai obtains a foreign patent containing a claim that encompasses the use of zonisamide as the sole active ingredient to
treat obesity or other weight-related disorders or conditions that issues from or is based upon the specified Eisai foreign patent applications, Eisai has agreed that it will not assert any such patent against any product of ours containing
zonisamide in combination with any other active pharmaceutical agent, including bupropion. Likewise, if Duke obtains a foreign patent containing a claim that encompasses the use of zonisamide as the sole active ingredient to treat obesity or other
weight-related disorders or conditions that issues from or is based upon the specified Duke foreign patent applications, we and Duke have agreed that we will not assert any such patent against Eisai for any conduct relating to Zonegran, which is a
zonisamide product currently marketed by Eisai.

Although we have resolved the U.S. lawsuit and entered into a settlement agreement
containing terms that would prevent Eisai, Elan and Ms. Jennings from asserting specified U.S. patents against our Empatic product and have entered into a settlement agreement containing terms that would prevent Eisai from asserting specified
foreign patents against our Empatic product, there is no assurance that the parties will abide by these settlement agreements. There also is no assurance that Eisai, Elan and/or Ms. Jennings do not have, or will not in the future obtain, other
patent rights not covered by the settlement agreements that could be asserted against Empatic or our other product candidates. Furthermore, Elan and Ms. Jennings are not parties to the settlement agreement which resolves the foreign aspects of
the dispute. Although PTO records indicate that Eisai has abandoned its pending patent application, it may take steps to revive the application. In the event that Eisai revives its application for use of zonisamide to treat obesity or other
weight-related disorders, such actions may lead to initiation of a patent interference to determine whether Eisai or Duke invented first. The U.S. settlement agreement also contains terms that would not allow Eisai, Elan or Ms. Jennings to use
any patent they may obtain by winning an interference to prevent the sale of our Empatic product, if approved. However, if Duke loses the interference then the additional protection for Empatic from U.S. patent number 7,425,571 will not be available
to us.

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. Future maintenance fees
will also need to be paid on the Dante 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, Europe and Japan for the same mark.
In addition, we have received federal 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, printed instructional,
educational and teaching materials in the field of treatment and management of disorders of the central nervous system, and providing medical information in the field of disorders of the central nervous system. We have obtained trademark
registrations in Canada, Europe and Japan for the same mark. We have obtained foreign trademark registrations for the corporate name Orexigen Therapeutics, Inc. in Europe and Japan. We have received federal 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. An application for the CONTRAVE mark remains pending in the United States in connection with certain printed
materials and medical information services. We have also obtained foreign trademark registrations for the mark CONTRAVE in Europe and Japan and an application for this mark is pending in Canada. We have received a Notice of



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Allowance from the PTO for the intent-to-use trademark application 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 Europe 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.

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 June 30, 2009, we had an accumulated deficit of $237.3 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. We expect our development expenses, as well as clinical product manufacturing expenses, to increase in connection with our ongoing and planned clinical trials for our product candidates. In addition, if we obtain regulatory approval
for any of our product candidates, we may incur significant sales, marketing and outsourced manufacturing expenses as well as continued development expenses. As a result, we expect to continue to incur significant and increasing operating losses for
the foreseeable future. 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. To date, 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 any future trials for Contrave, if any, and future clinical trials for Empatic;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | obtain regulatory approval for Contrave and Empatic;
| | - |  | ----------------------------------------------------



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



| |  |  | identify and enter into one or more strategic collaborations to effectively market and sell our product candidates.
| | - |  | -------------------------------------------------------------------------------------------------------------------

Even if one or more of our product candidates is approved for commercial sale, which we do not expect to occur for several years (we do not expect to
file our first NDA until the first half of 2010), we anticipate incurring significant costs associated with commercializing any approved product. We may not achieve profitability soon after generating product sales, if ever. If we are unable to
generate product revenues, we will not become profitable and may be unable to continue operations without continued funding.



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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 may need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.*

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 our operations and continue to conduct clinical trials to support potential regulatory approval of marketing applications;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | commercialize Contrave, Empatic or any other product candidates that we may develop, in-license or acquire, if any of these product candidates receive regulatory
approval.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  |  | 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, Empatic and any other product candidates that we may develop, in-license or acquire;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of regulatory approval of our product candidates, if at all;
| | - |  | -----------------------------------------------------------------------



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



| |  |  | the effect of competing technological and market developments; and
| | - |  | ------------------------------------------------------------------



| |  |  | the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish.
| | - |  | ---------------------------------------------------------------------------------------------------------------

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 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.



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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;
| | - |  | ------------------------------------------------------------------------------------------------------------------



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



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



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



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



| |  |  | if any of our product candidates receives regulatory approval, the level of underlying demand for our product candidates and wholesalers buying patterns.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

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 financing
typically contains 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 financing 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.

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.

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 have and will continue to increase our 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, commencing in fiscal year 2008 we were 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



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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 public company 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.
Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished
expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic recession and fears of a possible
depression. Domestic and international equity markets continue to experience heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, 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. Given the current economic instability, we cannot provide assurance that we will not experience losses on these investments.

Negative conditions in the global credit markets may have an impact on the value of our investment securities.

Our investment securities consist primarily of money market funds, corporate debt obligations and U.S. government agency securities. We do not have any
auction rate securities. Over the past year, there has been concern in the credit markets regarding the value of a variety of mortgage-backed securities and the resultant effects on various securities markets. We maintain a small amount of cash and
cash equivalents at one or more financial institutions that are not federally insured, guaranteed or supported. While we do not believe that our investment securities have significant risk of default or illiquidity, we cannot provide assurance that
our investments are not subject to adverse changes in market value. If our investments experience adverse changes in market value, we may have less capital to fund our 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 year, the volatility in the overall capital markets has reached unprecedented levels. 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 June 30, 2009, the price per share for our common stock on the Nasdaq Global Market has ranged from a low sale price of
$1.78 to a high sale price of $5.40. 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:



| |  |  | the results from our clinical trials, including our Phase 3 clinical trials and any future required trials, if any, for Contrave and future clinical trials for
Empatic;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements regarding results of our competitors clinical trials;
| | - |  | --------------------------------------------------------------------



| |  |  | FDA or international regulatory actions, including failure to receive regulatory approval for any of our product candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



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



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



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| |  |  | 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;
| | - |  | -----------------------------------------



| |  |  | third-party coverage and reimbursement policies;
| | - |  | ------------------------------------------------



| |  |  | developments concerning current or future strategic collaborations; 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.*

In July 2009, we completed a public offering of 11,500,000 shares of common stock at a public offering price of $7.50 per share. This sale and any future
sales of a substantial number of shares of our common stock in the public market, 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.

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 July 30, 2009, our executive officers and directors and their affiliates
together controlled approximately 35.7% 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.



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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.

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

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.



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##### Table of Contents

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

Recent Sales of Unregistered Securities

None.



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

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

We held our annual meeting of stockholders on May 27, 2009. The following is a brief description of each matter voted upon at the meeting and the number of votes cast for, cast against or withheld, the number of abstentions and the
number of broker non-votes with respect to each such matter as applicable:



|1. | To elect the following two directors to hold office until the 2012 annual meeting of stockholders, or until their successors are duly elected and qualified:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



|                |  |                  |  |                          
|--------------- |  | ---------------- |  | -------------------------
|Director Name   |  | Shares Voted For |  | Voting Authority Withheld
|Louis C. Bock   |  | 29,017,245       |  | 440,846                  
|Joseph S. Lacob |  | 21,571,299       |  | 7,886,792                

The following directors continue to serve their respective terms which will expire on the date of
our annual meeting of stockholders in the year noted, or until their successors are duly elected and qualified:



|                         |  |             
|------------------------ |  | ------------
|Director Name            |  | Term Expires
|Brian H. Dovey           |  | 2010        
|Michael F. Powell, Ph.D. |  | 2010        
|Daniel K. Turner III     |  | 2010        
|Eckard Weber, M.D.       |  | 2011        
|Patrick J. Mahaffy       |  | 2011        
|Michael A. Narachi       |  | 2011        



|2. | To ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009:
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------



|           |  |         |  |         |  |                 
|---------- |  | ------- |  | ------- |  | ----------------
|For        |  | Against |  | Abstain |  | Broker Non-Votes
|29,053,444 |  | 399,417 |  | 5,230   |  | 0               



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

None.



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##### Table of Contents

|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         |  | License Agreement, dated June 10, 2009, between the Registrant, SmithKline Beecham Corporation and Glaxo Group Limited                              
|              | 
|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.
|--- | --------------------------------------------------------------------------



| | Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and submitted separately to the Securities and Exchange Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|* | 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: August 7, 2009 |  | By:                         |  | /s/ Michael A. Narachi                                                            
|                     |  |                             |  | Michael A. Narachi                                                                
|                     |  |                             |  | President and Chief Executive Officer (Principal
Executive Officer)               
|                     |  |                            
|Date: August 7, 2009 |  | By:                         |  | /s/ Graham K. Cooper                                                              
|                     |  |                             |  | Graham K. Cooper                                                                  
|                     |  |                             |  | Chief Financial Officer and Treasurer (Principal
Financial and Accounting Officer)



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##### Table of Contents

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         |  | License Agreement, dated June 10, 2009, between the Registrant, SmithKline Beecham Corporation and Glaxo Group Limited                              
|              | 
|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.
|--- | --------------------------------------------------------------------------



| | Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and submitted separately to the Securities and Exchange Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|* | 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.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48