##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q





(Mark One)



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

FOR THE QUARTERLY PERIOD ENDED March 31, 2010



| ̈ | 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 May 7, 2010, the registrant had 47,216,779 shares of Common Stock ($0.001 par value) outstanding.









---

##### Table of Contents

OREXIGEN THERAPEUTICS, INC.

TABLE OF CONTENTS



|                                                                                                                                                                      |  |   
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                                                         |  |   
|                                                                                                                                                                      | 
|Item 1. Financial Statements                                                                                                                                          |  | 3 
|Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009                                                                                                 |  | 3 
|Unaudited Statements of Operations for the three months ended March 31, 2010 and March 
31, 2009 and the period from September 12, 2002 (Inception) to March 31, 2010 |  | 4 
|Unaudited Statements of Cash Flows for the three months ended March 31, 2010 and March 
31, 2009 and the period from September 12, 2002 (Inception) to March 31, 2010 |  | 5 
|Notes to Unaudited Financial Statements                                                                                                                               |  | 6 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                         |  | 12
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                                                                                    |  | 17
|Item 4.Controls and Procedures                                                                                                                                        |  | 18
|                                                                                                                                                                      | 
|PART II. OTHER INFORMATION                                                                                                                                            |  | 18
|                                                                                                                                                                      | 
|Item 1. Legal Proceedings                                                                                                                                             |  | 18
|Item 1A. Risk Factors                                                                                                                                                 |  | 19
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                   |  | 47
|Item 3. Defaults Upon Senior Securities                                                                                                                               |  | 47
|Item 4. (Removed and Reserved)                                                                                                                                        |  | 47
|Item 5. Other Information                                                                                                                                             |  | 47
|Item 6. Exhibits                                                                                                                                                      |  | 48
|                                                                                                                                                                      | 
|SIGNATURES                                                                                                                                                            |  | 49
|                                                                                                                                                                      | 
|EXHIBIT 31.1                                                                                                                                                          |  |   
|EXHIBIT 31.2                                                                                                                                                          |  |   
|EXHIBIT 32.1                                                                                                                                                          |  |   
|EXHIBIT 32.2                                                                                                                                                          |  |   



2



---

##### Table of Contents

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)



|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                    |  | March 31,2010 |          |   | December 31,2009 |  
|                                                                                                                                                                                                                    |  | (Unaudited)   |          |   |                  |  
|Assets                                                                                                                                                                                                              |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                           |  | $             | 17,834   |   |                  | $ | 37,658   |  
|Investment securities, available-for-sale                                                                                                                                                                           |  |               | 57,480   |   |                  |   | 54,500   |  
|Prepaid expenses and other current assets                                                                                                                                                                           |  |               | 2,010    |   |                  |   | 1,529    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                                |  |               | 77,324   |   |                  |   | 93,687   |  
|Property and equipment, net                                                                                                                                                                                         |  |               | 1,221    |   |                  |   | 1,324    |  
|Restricted cash                                                                                                                                                                                                     |  |               | 1,290    |   |                  |   | 1,290    |  
|Other assets                                                                                                                                                                                                        |  |               | 487      |   |                  |   | 547      |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                        |  | $             | 80,322   |   |                  | $ | 96,848   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Accounts payable and accrued expenses                                                                                                                                                                               |  | $             | 6,862    |   |                  | $ | 9,828    |  
|Deferred revenue, current portion                                                                                                                                                                                   |  |               | 88       |   |                  |   | 88       |  
|Long-term debt, current portion                                                                                                                                                                                     |  |               | 5,564    |   |                  |   | 6,384    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                           |  |               | 12,514   |   |                  |   | 16,300   |  
|Deferred revenue, less current portion                                                                                                                                                                              |  |               | 949      |   |                  |   | 971      |  
|Long-term debt, less current portion                                                                                                                                                                                |  |               | 1,067    |   |                  |   | 2,416    |  
|Other long-term liabilities                                                                                                                                                                                         |  |               | 1,740    |   |                  |   | 1,258    |  
|Commitments and contingencies                                                                                                                                                                                       |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Preferred stock, $.001 par value, 10,000,000 shares authorized at March 31, 2010 and December 31, 2009; no shares
issued and outstanding at March 31, 2010 and December 31, 2009                                    |  |               |         |   |                  |   |         |  
|Common stock, $.001 par value, 100,000,000 shares authorized at March 31, 2010 and December 31, 2009; 47,216,779 and
47,215,479 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively |  |               | 47       |   |                  |   | 47       |  
|Additional paid-in capital                                                                                                                                                                                          |  |               | 344,841  |   |                  |   | 342,599  |  
|Accumulated other comprehensive loss                                                                                                                                                                                |  |               | (20      | ) |                  |   | (6       | )
|Deficit accumulated during the development stage                                                                                                                                                                    |  |               | (280,816 | ) |                  |   | (266,737 | )
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                          |  |               | 64,052   |   |                  |   | 75,903   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                          |  | $             | 80,322   |   |                  | $ | 96,848   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  

See accompanying notes.



3



---

##### Table of Contents

Orexigen Therapeutics, Inc.

(a development stage company)

Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                                                                    |  | Three Months EndedMarch 31, |         |   | Period
fromSeptember 12, 2002(Inception)
toMarch 31, 2010 |  
|                                                                                                    |  | 2010                        |         |   | 2009                                                      |   |        
|Revenues:                                                                                           |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Collaborative agreement                                                                             |  | $                           |        |   |                                                           | $ |        |   |  | $ | 174      |  
|License revenue                                                                                     |  |                             | 22      |   |                                                           |   | 22      |   |  |   | 463      |  
|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Total revenues                                                                                      |  |                             | 22      |   |                                                           |   | 22      |   |  |   | 637      |  
|Operating expenses:                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Research and development                                                                            |  |                             | 7,981   |   |                                                           |   | 15,731  |   |  |   | 224,540  |  
|General and administrative                                                                          |  |                             | 6,021   |   |                                                           |   | 3,365   |   |  |   | 62,020   |  
|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Total operating expenses                                                                            |  |                             | 14,002  |   |                                                           |   | 19,096  |   |  |   | 286,560  |  
|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Loss from operations                                                                                |  |                             | (13,980 | ) |                                                           |   | (19,074 | ) |  |   | (285,923 | )
|Other income (expense):                                                                             |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Interest income                                                                                     |  |                             | 46      |   |                                                           |   | 165     |   |  |   | 9,058    |  
|Interest expense                                                                                    |  |                             | (145    | ) |                                                           |   | (394    | ) |  |   | (3,951   | )
|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Total other income (expense)                                                                        |  |                             | (99     | ) |                                                           |   | (229    | ) |  |   | 5,107    |  
|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net loss                                                                                            |  |                             | (14,079 | ) |                                                           |   | (19,303 | ) |  |   | (280,816 | )
|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                                                        |  | $                           | (14,079 | ) |                                                           | $ | (19,303 | ) |  | $ | (294,754 | )
|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net loss per share attributable to common stockholders  basic and diluted                          |  | $                           | (0.30   | ) |                                                           | $ | (0.56   | ) |  |   |          |  
|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Shares used in computing net loss per share attributable to common stockholders  basic and diluted |  |                             | 47,216  |   |                                                           |   | 34,611  |   |  |   |          |  
|                                                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  

See accompanying notes.



4



---

##### Table of Contents

Orexigen Therapeutics, Inc.

(a development stage company)

Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | --------------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                                                                 |  | Three Months EndedMarch 31, |         |   | Period
FromSeptember 12, 2002(Inception)
toMarch 31, 2010 |  
|                                                                                                 |  | 2010                        |         |   | 2009                                                      |   |        
|Operating activities                                                                             |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net loss                                                                                         |  | $                           | (14,079 | ) |                                                           | $ | (19,303 | ) |  | $ | (280,816 | )
|Adjustments to reconcile net loss to net cash used by operating activities:                      |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Depreciation                                                                                     |  |                             | 117     |   |                                                           |   | 127     |   |  |   | 1,237    |  
|Loss on sale/disposal of assets                                                                  |  |                             |        |   |                                                           |   | 83      |   |  |   | 87       |  
|Amortization of premium (discount accretion) on securities available-for-sale                    |  |                             | 226     |   |                                                           |   | 127     |   |  |   | (3,138   | )
|Amortization of debt issuance costs                                                              |  |                             | 9       |   |                                                           |   | 95      |   |  |   | 938      |  
|Stock-based compensation                                                                         |  |                             | 2,237   |   |                                                           |   | 1,216   |   |  |   | 23,387   |  
|Issuance of common stock in exchange for technology and services                                 |  |                             |        |   |                                                           |   |        |   |  |   | 47       |  
|Changes in operating assets and liabilities:                                                     |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Prepaid expenses and other current assets                                                        |  |                             | (479    | ) |                                                           |   | 273     |   |  |   | (1,944   | )
|Accounts payable and accrued expenses                                                            |  |                             | (2,967  | ) |                                                           |   | (2,668  | ) |  |   | 6,915    |  
|Other assets                                                                                     |  |                             | 50      |   |                                                           |   | (47     | ) |  |   | (9       | )
|Other long-term liabilities                                                                      |  |                             | 500     |   |                                                           |   |        |   |  |   |         |  
|Deferred rent                                                                                    |  |                             | (18     | ) |                                                           |   | 8       |   |  |   | 549      |  
|Deferred revenue                                                                                 |  |                             | (22     | ) |                                                           |   | (22     | ) |  |   | 1,037    |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net cash used in operating activities                                                            |  |                             | (14,426 | ) |                                                           |   | (20,111 | ) |  |   | (251,710 | )
|Investing activities                                                                             |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Purchases of securities available-for-sale                                                       |  |                             | (29,775 | ) |                                                           |   | (31,189 | ) |  |   | (446,139 | )
|Maturities of securities available-for-sale                                                      |  |                             | 26,555  |   |                                                           |   | 26,774  |   |  |   | 391,778  |  
|Purchases of property and equipment                                                              |  |                             | (14     | ) |                                                           |   | (5      | ) |  |   | (2,910   | )
|Proceeds from sale of equipment                                                                  |  |                             |        |   |                                                           |   |        |   |  |   | 300      |  
|Restricted cash                                                                                  |  |                             |        |   |                                                           |   |        |   |  |   | (1,290   | )
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net cash used in investing activities                                                            |  |                             | (3,234  | ) |                                                           |   | (4,420  | ) |  |   | (58,261  | )
|Financing activities                                                                             |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Proceeds from issuance of common stock, net of repurchases                                       |  |                             | 5       |   |                                                           |   | 196     |   |  |   | 245,685  |  
|Proceeds from borrowings on long-term debt                                                       |  |                             |        |   |                                                           |   |        |   |  |   | 23,800   |  
|Payments on borrowings on long-term debt                                                         |  |                             | (2,169  | ) |                                                           |   | (1,340  | ) |  |   | (17,168  | )
|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     | )
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net cash provided by (used in) financing activities                                              |  |                             | (2,164  | ) |                                                           |   | (1,144  | ) |  |   | 327,805  |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                             |  |                             | (19,824 | ) |                                                           |   | (25,675 | ) |  |   | 17,834   |  
|Cash and cash equivalents at beginning of period                                                 |  |                             | 37,658  |   |                                                           |   | 45,451  |   |  |   |         |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Cash and cash equivalents at end of period                                                       |  | $                           | 17,834  |   |                                                           | $ | 19,776  |   |  | $ | 17,834   |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Supplemental disclosure                                                                          |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Non-cash operating activities                                                                    |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Receivable on sale of equipment                                                                  |  | $                           |        |   |                                                           | $ | 300     |   |  | $ |         |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  

See accompanying notes.



5



---

##### Table of Contents

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 submitted a new drug application (NDA), to the U.S. Food and Drug Administration (FDA) for Contrave in March 2010. 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 March 31, 2010, had an accumulated deficit of $280.8 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, 2009 has been derived from the
audited financial statements as of December 31, 2009 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, 2009 included in the Companys Annual Report on Form 10-K for the year ended
December 31, 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. When determining the revenue
recognition, the Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there
is a unique earnings process associated with each element of a contract. If the required ongoing obligations involve minimal or no cost effort, nonrefundable upfront fees would be recognized upon receipt. Otherwise, nonrefundable upfront fees are
recognized over the period the related services are provided or over the period the Company has significant involvement. Revenue from milestones is recognized as agreed upon scientific events are achieved, as long as the event is substantial and was
not readily assured at the beginning of the collaboration.



6



---

##### Table of Contents

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

New Accounting Standards

In October 2009, the Financial Accounting Standards Board (FASB) issued an amendment to the accounting standards related to
the accounting for revenue in arrangements with multiple deliverables including how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminates the use of the
residual method for allocating arrangement consideration and requires an entity to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in the arrangement in the absence of having
vendor-specific objective evidence or other third party evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-deliverable revenue arrangement and
expands the disclosure requirements about the judgments made in applying the estimated selling price method and how those judgments affect the timing or amount of revenue recognition. This standard, for which the Company is currently assessing the
impact, will become effective for the Company on January 1, 2011.

In January 2010, the FASB issued ASU
No. 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements (ASU No. 2010-06). ASU No. 2010-06 requires new disclosures about significant transfers in
and out of Level 1 and Level 2 fair value measurements and the reasons for such transfers and in the reconciliation for Level 3 fair value measurements the requirement to disclose separately information about purchases, sales, issuances and
settlements. The Company adopted the provisions of ASU No. 2010-06 on January 1, 2010, except for disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements. Those disclosures
will be effective for financial statements issued for fiscal years beginning after December 15, 2010. The Company does not expect the impact of its adoption to be material to its consolidated financial statements.

In March 2010, the FASB ratified the final consensus on Emerging Issues Task Force 08-9, Milestone Method of Revenue
Recognition (EITF 08-9). EITF 08-9 establishes a revenue recognition method for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of the milestone
method is limited to research and development agreements and is applicable to milestones in multiple-deliverable arrangements involving research and development transactions. The guidance does not preclude the application of any other applicable
revenue guidance. The guidance will be effective for financial statements issued for fiscal years beginning after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the potential impact of EITF 08-9 on its
consolidated financial statements.

3. Net Loss per Share

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

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

(In thousands, except per share amounts)



|                                                                                                                               |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                               |  | Three Months EndedMarch 31, |        
|                                                                                                                               |  | 2010                        |         |   | 2009 |  
|Numerator:                                                                                                                     |  |                             |         |  
|Net loss attributable to common stockholders                                                                                   |  | $                           | (14,079 | ) |      | $ | (19,303 | )
|                                                                                                                               |  |                             |         |   |      |   |         |  
|Denominator:                                                                                                                   |  |                             |         |   |      |   |         |  
|Basic and diluted weighted average shares of common stock outstanding                                                          |  |                             | 47,216  |   |      |   | 34,611  |  
|                                                                                                                               |  |                             |         |   |      |   |         |  
|Basic and diluted net loss per share attributable to common stockholders                                                       |  | $                           | (0.30   | ) |      | $ | (0.56   | )
|                                                                                                                               |  |                             |         |   |      |   |         |  
|Potentially outstanding anti-dilutive securities not included in diluted net loss per share calculation include the following: |  |                             |         |   |      |   |         |  
|Common stock options                                                                                                           |  |                             | 8,429   |   |      |   | 4,085   |  
|                                                                                                                               |  |                             |         |   |      |   |         |  



7



---

##### 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 March 31, 2010 and December 31, 2009 (in thousands):



|                                  |  |                  |  |               |        |            |   |        |  |   |           |   |  |   |       
|--------------------------------- |  | ---------------- |  | ------------- | ------ | ---------- | - | ------ |  | - | --------- | - |  | - | ------
|March 31, 2010                    |  |                  |  |               |        | Unrealized |   |        | 
|                                  |  | Maturity inYears |  | AmortizedCost |        | Gains      |   | Losses |  |   | FairValue
|U.S. government agency securities |  | Less than 1      |  | $             | 57,500 |            | $ | 6      |  | $ | (26       | ) |  | $ | 57,480
|                                  |  |                  |  |               |        |            |   |        |  |   |           |   |  |   |       
|Total investment securities       |  |                  |  | $             | 57,500 |            | $ | 6      |  | $ | (26       | ) |  | $ | 57,480
|                                  |  |                  |  |               |        |            |   |        |  |   |           |   |  |   |       



|                                  |  |                  |  |               |        |            |   |        |  |   |           |   |  |   |       
|--------------------------------- |  | ---------------- |  | ------------- | ------ | ---------- | - | ------ |  | - | --------- | - |  | - | ------
|December 31, 2009                 |  |                  |  |               |        | Unrealized |   |        | 
|                                  |  | Maturity inYears |  | AmortizedCost |        | Gains      |   | Losses |  |   | FairValue
|U.S. government agency securities |  | Less than 1      |  | $             | 54,506 |            | $ | 13     |  | $ | (19       | ) |  | $ | 54,500
|                                  |  |                  |  |               |        |            |   |        |  |   |           |   |  |   |       
|Total investment securities       |  |                  |  | $             | 54,506 |            | $ | 13     |  | $ | (19       | ) |  | $ | 54,500
|                                  |  |                  |  |               |        |            |   |        |  |   |           |   |  |   |       

Gross realized gains and losses on available-for-sale securities were
immaterial during the three months ended March 31, 2010 and 2009.

5. Fair Value Measurements

The fair values of the Companys financial instruments are recorded using a hierarchal disclosure framework based upon the level of
subjectivity of the inputs used in measuring assets and liabilities. The following table presents information about the Companys financial assets measured at fair value on a recurring basis as of March 31, 2010, 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.



8



---

##### Table of Contents

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



|                                            |  |                             |        |                                                             |   |                                             |  |                                         |        |  |   |  
|------------------------------------------- |  | --------------------------- | ------ | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | ------ |  | - | -
|                                            |  |                             |        | Fair Value Measurement at Reporting Date Using             
|Description                                 |  | Balance as ofMarch 
31,2010 |        | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|Financial instruments owned:                |  |                             |        |                                                             |   |                                             |  |                                         |        |  |   |  
|Money market funds/U.S. Treasury securities |  | $                           | 36,289 |                                                             | $ | 36,289                                      |  | $                                       |       |  | $ | 
|U.S. government agency securities           |  |                             | 38,502 |                                                             |   |                                            |  |                                         | 38,502 |  |   | 
|                                            |  |                             |        |                                                             |   |                                             |  |                                         |        |  |   |  
|Total financial instruments owned           |  | $                           | 74,791 |                                                             | $ | 36,289                                      |  | $                                       | 38,502 |  | $ | 
|                                            |  |                             |        |                                                             |   |                                             |  |                                         |        |  |   |  

6. Property and Equipment

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



|                                               |  |                     |  |               |        |   |                  |   |       |  
|---------------------------------------------- |  | ------------------- |  | ------------- | ------ | - | ---------------- | - | ----- | -
|                                               |  | Useful LifeIn Years |  | March 31,2010 |        |   | December 31,2009 |  
|Furniture and fixtures                         |  | 5                   |  | $             | 1,102  |   |                  | $ | 1,102 |  
|Computer equipment and software                |  | 3 to 5              |  |               | 507    |   |                  |   | 493   |  
|Leasehold improvements                         |  | 5                   |  |               | 597    |   |                  |   | 597   |  
|Laboratory equipment                           |  | 5                   |  |               | 44     |   |                  |   | 44    |  
|                                               |  |                     |  |               |        |   |                  |   |       |  
|                                               |  |                     |  |               | 2,250  |   |                  |   | 2,236 |  
|Less accumulated depreciation and amortization |  |                     |  |               | (1,029 | ) |                  |   | (912  | )
|                                               |  |                     |  |               |        |   |                  |   |       |  
|                                               |  |                     |  | $             | 1,221  |   |                  | $ | 1,324 |  
|                                               |  |                     |  |               |        |   |                  |   |       |  

7. Accounts Payable and Accrued Expenses

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



|                                                |  |               |       |                   |   |      
|----------------------------------------------- |  | ------------- | ----- | ----------------- | - | -----
|                                                |  | March 31,2010 |       | December 
31,2009
|Accounts payable                                |  | $             | 3,587 |                   | $ | 4,713
|Accrued compensation related expenses           |  |               | 2,456 |                   |   | 3,588
|Accrued preclinical and clinical trial expenses |  |               | 250   |                   |   | 451  
|Accrued legal and professional expenses         |  |               | 265   |                   |   | 159  
|Other accrued liabilities                       |  |               | 304   |                   |   | 917  
|                                                |  |               |       |                   |   |      
|                                                |  | $             | 6,862 |                   | $ | 9,828
|                                                |  |               |       |                   |   |      

8. Comprehensive Income (Loss)

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



|                                                   |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|-------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                   |  | Three Months EndedMarch 31, |         |   | Period
fromSeptember 12, 2002(Inception)
toMarch 31, 2010 |  
|                                                   |  | 2010                        |         |   | 2009                                                      |   |        
|Net loss, as reported                              |  | $                           | (14,079 | ) |                                                           | $ | (19,303 | ) |  | $ | (280,816 | )
|Unrealized gains (losses) on marketable securities |  |                             | (14     | ) |                                                           |   | (119    | ) |  |   | (20      | )
|                                                   |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Comprehensive loss                                 |  | $                           | (14,093 | ) |                                                           | $ | (19,422 | ) |  | $ | (280,836 | )
|                                                   |  |                             |         |   |                                                           |   |         |   |  |   |          |  



9



---

##### Table of Contents

9. Stock-Based Compensation

Total stock-based compensation expense recognized during the three months ended March 31, 2010 and 2009 and the period from
September 12, 2002 (inception) to March 31, 2010 was comprised of the following (in thousands):



|                           |  |                              |       |                                                           |   |       |  |   |       
|-------------------------- |  | ---------------------------- | ----- | --------------------------------------------------------- | - | ----- |  | - | ------
|                           |  | Three Months EndedMarch 
31, |       | Period
fromSeptember 12, 2002(Inception)
toMarch 31, 2010
|                           |  | 2010                         |       | 2009                                                      |  
|General and administrative |  | $                            | 1,289 |                                                           | $ | 575   |  | $ | 14,401
|Research and development   |  |                              | 948   |                                                           |   | 641   |  |   | 8,986 
|                           |  |                              |       |                                                           |   |       |  |   |       
|                           |  | $                            | 2,237 |                                                           | $ | 1,216 |  | $ | 23,387
|                           |  |                              |       |                                                           |   |       |  |   |       

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



|                         |  |                              |   |  |      |  
|------------------------ |  | ---------------------------- | - |  | ---- | -
|                         |  | Three Months EndedMarch 
31, |  
|                         |  | 2010                         |   |  | 2009 |  
|Expected life (in years) |  | 6.0                          |   |  | 5.6  |  
|Expected volatility      |  | 60.0                         | % |  | 55.0 | %
|Risk-free interest rate  |  | 2.7                          | % |  | 2.0  | %
|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 7.01% on amounts outstanding at March 31, 2010). The loan
is collateralized by substantially all of the Companys assets other than, subject to certain limited exceptions, intellectual property. Subject to certain limited exceptions, amounts prepaid under the credit and security agreement are subject
to a prepayment fee equal to 3% of the amount prepaid. In addition, upon repayment of the total amounts borrowed for any reason, the Company will be required to pay an exit fee of approximately $1.2 million. Under the terms of the agreement, the
Company is subject to operational covenants, including limitations on the Companys ability to incur liens or additional debt, pay dividends, redeem stock, make specified investments and engage in merger, consolidation or asset sale
transactions, among other restrictions. GE Healthcare Financial Services acquired a portfolio of loans from Merrill Lynch Capital in 2008, and the credit and security agreement, as amended, was subsequently assigned to GE Healthcare Financial
Services. As of March 31, 2010, $6.6 million is outstanding under this agreement. The fair value of the outstanding debt approximates its carrying value as of March 31, 2010.



10



---

##### Table of Contents

At March 31, 2010, future minimum principal payments under the credit and security
agreement, as amended, with GE Healthcare Financial Services are as follows (in thousands):



|                      |  |   |        |  
|--------------------- |  | - | ------ | -
|Due in:               |  |   |       
|2010                  |  | $ | 4,215  |  
|2011                  |  |   | 2,416  |  
|                      |  |   |        |  
|                      |  |   | 6,631  |  
|Less: current portion |  |   | (5,564 | )
|                      |  |   |        |  
|                      |  | $ | 1,067  |  
|                      |  |   |        |  

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 University (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 March 31, 2010 and 2009
and for the period September 12, 2002 (inception) to March 31, 2010, the Company recognized revenues under this agreement of $22,000, $22,000 and $463,000, respectively. At March 31, 2010 and December 31, 2009, deferred revenue
under this agreement totaled $1.0 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



---

##### 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, 2009 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, 2009. Except as required by law, we assume no obligation to update these
forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Background

We are a biopharmaceutical company focused on the development of pharmaceutical product candidates for the treatment
of obesity. Our lead combination product candidates targeted for obesity are Contrave®, which has completed
Phase III clinical trials, and Empatic, which has completed Phase II clinical trials. Each of these product candidates is a combination of generic drugs, which we have systematically screened for synergistic central nervous system
activity. Each of the components of our product candidates has already received regulatory approval and has been commercialized previously. In March 2010, we submitted a new drug application, or NDA, to the U.S. Food and Drug Administration, or FDA,
for Contrave. 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 March 31, 2010, we had an accumulated deficit of $280.8 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 January 2008, we completed a public offering of 7,000,000 shares of common stock at a public offering price of $11.00 per share.
Net cash proceeds from the public offering were approximately $71.5 million, after deducting underwriting discounts, commissions and offering expenses payable by us. In February 2008, the underwriters exercised a portion of their overallotment
option and purchased an additional 326,435 shares of our common stock, from which we received cash proceeds, net of underwriting discounts, of approximately $3.4 million.

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 $81.6 million, after deducting underwriting discounts, commissions and offering expenses.

Revenues

We have
generated approximately $637,000 in revenue from inception through March 31, 2010, 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.



12



---

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

Our internal research and development resources are not directly tied to any individual research project and are primarily deployed
across our Contrave and Empatic programs, both of which target the obesity market. We are developing our two obesity product candidates in parallel and, due to the fact that we use shared resources across projects, we do not maintain information
regarding our internal costs incurred for our research and development programs on a program-specific basis. We use external service providers to manage our clinical trials, to manufacture the product supplies used in these trials and for
formulations development, consulting and other activities. Prior to 2007, our external service providers did not generally bill us on a program-specific basis.

The following table summarizes our research and development expenses for the three months ended March 31, 2010 and 2009. Costs that
are not attributable to a specific research program are included in the Other category (in thousands):



|                                        |  |                             |       |      |   |       
|--------------------------------------- |  | --------------------------- | ----- | ---- | - | ------
|                                        |  | Three Months EndedMarch 31,
|Costs of external service providers:    |  | 2010                        |       | 2009
|Obesity                                 |  | $                           | 3,915 |      | $ | 13,245
|Other                                   |  |                             | 62    |      |   | 136   
|                                        |  |                             |       |      |   |       
|Subtotal                                |  |                             | 3,977 |      |   | 13,381
|Internal costs                          |  |                             | 3,056 |      |   | 1,710 
|Stock-based compensation                |  |                             | 948   |      |   | 640   
|                                        |  |                             |       |      |   |       
|Total research and development expenses |  | $                           | 7,981 |      | $ | 15,731
|                                        |  |                             |       |      |   |       

At this time, due to the risks inherent in 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, including seeking approval of our NDA for Contrave that we submitted with the FDA in March 2010, our
future research and development expenses will depend on the approval process of the NDA for Contrave and potential development expenses associated therewith, the clinical success of Empatic, 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
2010 due to the completion of our Contrave Phase III clinical trial program, as well as the completion of our Phase II clinical trial for Empatic. We expect increases in pre-commercialization expenses as we seek approval for and prepare to launch
Contrave. 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. 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.



13



---

##### Table of Contents

Other Income (Expense)

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

Income Taxes

At December 31, 2009, we had federal and state net operating loss carryforwards of approximately $247.9 million and
$224.6 million, respectively. The federal and state net operating loss carryforwards begin to expire in 2022 and 2013, respectively, unless previously utilized. At December 31, 2009, we had federal and state research and development tax
credit carryforwards of $10.4 million and $2.6 million, respectively. The federal research and development tax credit carryforwards begin to expire in 2023 unless previously utilized and the state tax credits carry forward indefinitely. Under
Sections 382 and 383 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, or NOL, and tax credit carryovers.
Such limitations will result in approximately $945,000 of tax benefits related to NOL and tax credit carryforwards that will expire unused. Accordingly, the related NOL 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.

Critical Accounting Policies and Estimates

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

There were no significant changes during the three months ended March 31, 2010 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, 2009.

Results of Operations

Comparison
of three months ended March 31, 2010 to three months ended March 31, 2009

Revenues.Revenues for
each of the three months ended March 31, 2010 and March 31, 2009 were $22,000, and were related to our sublicensed technology to Cypress.

Research and Development Expenses.Research and development expenses decreased to $8.0 million for the three months
ended March 31, 2010 from $15.7 million for the comparable period during 2009. This decrease of approximately $7.7 million was due primarily to a decrease in expenses in connection with our Contrave Phase III clinical trials, related
proprietary product formulation work and consulting activities totaling $10.9 million. The decrease in research and development expenses was partially offset by an increase in costs incurred in connection with the preparation for our NDA for
Contrave of $1.6 million, an increase in salaries and personnel related costs totaling approximately $1.2 million and an increase in stock-based compensation expense of $308,000.

General and Administrative Expenses.General and administrative expenses increased to $6.0 million for the three months
ended March 31, 2010 from $3.4 million for the comparable period during 2009. This increase of approximately $2.6 million was due primarily to an increase in salaries and personnel related costs including relocation expense of $1.2 million, an
increase in stock-based compensation expense of $714,000 and an increase in market research costs totaling $486,000.



14



---

##### Table of Contents

Interest and Other Income.Interest income decreased to $46,000 for the three
months ended March 31, 2010 from $165,000 for the comparable period during 2009. This decrease of $119,000 was due to the decrease in average cash and investment balances and lower interest rates as compared to the same period in 2009.

Interest Expense.Interest expense decreased to $145,000 for the three months ended March 31, 2010 from
$394,000 for the comparable period during 2009. This decrease was primarily due to a decrease in interest expense resulting from a lower average interest rate and a lower average outstanding balance on the $23.8 million borrowed under the credit and
security agreement with GE Healthcare Financial Services as of March 31, 2010.

Liquidity and Capital Resources

Since inception, our operations have been financed primarily through the sale of equity securities. Through March 31, 2010, we
received net proceeds of approximately $320.2 million from the sale of shares of our preferred and common stock as follows:



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



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



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



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



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



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



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

As of March 31, 2010, we had $17.8 million in cash and cash equivalents and an additional
$57.5 million in investment securities, available-for-sale. As of March 31, 2010, our holdings primarily consisted of treasury-backed money market funds, treasuries and other instruments that are insured, guaranteed or supported by the
U.S. federal government. We maintain established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity.

Net cash used in operating activities was $14.4 million and $20.1 million for the three months ended March 31, 2010 and
2009, 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 used in investing activities was $3.2 million and $4.4 million for the three months ended March 31, 2010 and 2009,
respectively. These amounts are primarily the result of the net purchases and maturities of investment securities.

Net cash
used in financing activities was $2.2 million and $1.1 million for the three months ended March 31, 2010 and 2009, respectively. The net cash used in financing activities for the three months ended March 31, 2010 was primarily the
result of payments of principal towards our credit and security agreement with GE Healthcare Financial Services, as amended.

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.



15



---

##### Table of Contents

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



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



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



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



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



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



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



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

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

We drew down $10.0 million, $8.0 million and $5.8 million under the credit and security agreement in March
2007, December 2007 and December 2008, respectively. Under the credit and security agreement, we are required to make monthly payments of principal and interest and all amounts then outstanding will become due and payable upon the earlier to
occur of July 1, 2011 or three years from the funding of any amounts under the agreement. Interest accrues on amounts outstanding under the agreement at a base rate set forth in the agreement plus an applicable margin, which ranges from 3.75%
to 4.25% based on the date of borrowing. Amounts outstanding under the credit and security agreement at March 31, 2010 bear interest at an average rate of 7.0%. 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.



16



---

##### Table of Contents

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

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

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

Off-Balance Sheet Arrangements

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



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

Our cash and cash equivalents and investment securities, available-for-sale, as of March 31, 2010 consisted primarily of money market
funds and U.S. government agency securities. We do not have any auction rate securities on our balance sheet, as they are not permitted by our investment policy. Our primary exposure to market risk is interest income sensitivity, which is affected
by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable debt securities. The primary objective of our investment activities is to preserve principal while at the
same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value
of the investment to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment will probably decline. To minimize this risk, we intend to
continue to maintain our portfolio of cash equivalents and short-term investments in a variety of securities including commercial paper, money market funds and government and non-government debt securities, all with various maturities. In general,
money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

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

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



17



---

##### Table of Contents

|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.



18



---

##### Table of Contents

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

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

We have marked with an asterisk
(*) those risk factors that reflect substantive changes from the risk factors included in our previously filed Annual Report on Form 10-K for the year ended December 31, 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 received marketing approval for any of our product candidates. In March 2010, we submitted an NDA to the FDA for Contrave. Our near-term success is substantially dependent on the approval process for this NDA. Obtaining
approval of an NDA is a lengthy, expensive and uncertain process. Although we have submitted our NDA for Contrave, the FDA has not yet determined whether to accept the NDA for filing and the FDA may refuse to accept the NDA. The FDA may request
additional information rather than accepting the NDA for filing. For example, we submitted six months primary stability data from three registration batches from each dose with our NDA along with supporting clinical batches with 24 months of
stability data. The FDA could request additional stability data. Any delay in acceptance for filing of our NDA will delay the approval process for Contrave. If our NDA submission is accepted for filing, the FDA will begin an in-depth review of
the NDA and this process can take substantial time and require the expenditure of substantial and unanticipated resources.

Under the policies agreed to by the FDA under The Prescription Drug User Fee Act, or PDUFA, the FDA has a goal to complete its review of
a standard NDA and respond to the applicant within ten months from the date of submission of an NDA. The review process and the PDUFA goal date may be extended by three months if the FDA requests or the NDA sponsor otherwise provides additional
information or clarification regarding information already provided in the submission within the three months prior to the PDUFA goal date. The FDAs review goals are subject to change, and it is unknown whether the review of our NDA for
Contrave, or an NDA filing for any of our other product candidates, will be completed within the FDAs review goals or will be delayed. Moreover, the duration of the FDAs review may depend on the number and type of other NDAs that are
submitted with the FDA around the same time period. We submitted our NDA for Contrave in March 2010. Both Arena Pharmaceuticals, Inc. and Vivus, Inc. filed NDAs seeking approval of their respective obesity product candidates in December 2009 and
received PDUFA dates in October 2010. In addition, Vivus recently announced that an advisory committee of the FDA will review its product candidate on July 15, 2010. The review of Vivus and Arenas NDAs and the results of this
advisory committee may negatively affect and/or delay the approval process of our NDA for Contrave.

If the FDAs
evaluations of the NDA and the clinical and manufacturing procedures and facilities are favorable, the FDA may issue an approval letter, authorizing commercial marketing of the drug for a specified indication. If the FDA is not satisfied with the
information in the NDA, the FDA may issue an approvable letter, which contains the conditions that must be met in order to secure final approval of the NDA. If and when those conditions have been met to the FDAs satisfaction, the FDA will
issue an approval letter. If the FDAs evaluation of the NDA submission and the clinical and manufacturing procedures and facilities is not favorable, the FDA may refuse to approve the NDA and issue a not approvable letter. The FDA has
substantial discretion in this 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;
| | - |  | ------------------------------------------------------------



19



---

##### Table of Contents

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



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



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



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



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

Contrave has been evaluated in Phase III clinical trials for the treatment of obesity. Empatic has been evaluated in Phase II clinical
trials and it will need to successfully complete two or more pivotal trials, as well as potential additional non-pivotal clinical trials we may be required to conduct based on feedback we may receive at the End of Phase II meeting we plan to conduct
with the FDA, 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 III 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 III 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 additional clinical trials, including cardiovascular outcomes
studies which may be required prior to or after approval. The risk of an outcomes study may be more likely depending on the results of the large sibutramine outcomes, or SCOUT, trial, the preliminary data for which suggests that patients using
sibutramine have a higher number of cardiovascular events (heart attack, stroke, resuscitated cardiac arrest, or death) than patients using a placebo. In response to the preliminary data from the SCOUT trial, the European Medicines Agency recently
recommended suspension of market authorizations for sibutramine across the European Union.

In addition, the FDA may not
approve the labeling that we believe is necessary or desirable for the successful commercialization of Contrave. We submitted a risk evaluation and mitigation strategy, or REMS, to the FDA along with our NDA submission. It is possible that a REMS
submission may delay the drug approval process for our NDA submission. 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 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 guidance on the general efficacy benchmarks required in pivotal trials for comparison against placebo. While we believe the design of
our pivotal clinical trials for Contrave is consistent with the recommendations made by the FDA in the draft guidance and that the pivotal clinical trials have met the efficacy and safety requirements, the FDA may not agree with our interpretation
of the results from the Contrave pivotal Phase III clinical trials.

With respect to Empatic, in September 2009, we announced
the results of our latest Phase IIb clinical trial which we believe established that the combination of Empatics components is more effective than the individual components. It is not clear what magnitude of superiority the FDA will require
Empatic to demonstrate versus the most active individual component in order to agree that Phase III clinical trials may be conducted against placebo only. We plan to meet with the FDA for an End of Phase II meeting to discuss the Phase IIb data with
the goal of defining a Phase III plan for Empatic. We have not yet commenced any Phase III clinical trials for this product candidate.

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





20



---

##### Table of Contents

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

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

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

In addition, the constituent
drugs of each of our product candidates each has its own side effect profile that is included in the respective current product label. If our product candidates are approved by the FDA, we would anticipate that their labels would include the side
effect profiles of each of the constituent drugs. Moreover, patients in our clinical trials may experience side effects that are indicated in the constituent drugs labels, as was the case with the side effects experienced by patients in our
clinical trials of Contrave and Empatic to date. In addition, while the constituent drugs that make up Contrave and Empatic have post-marketing safety records and while we have tested these constituent drugs in combination in our clinical trials of
Contrave and Empatic to date, the combination of the constituent drugs for Empatic is still being tested and neither that combination nor the combination of the constituent drugs for Contrave has received regulatory approval. Accordingly, the safety
of the combined use of the constituents of Empatic is not yet fully known, and any future trials, if any, of the constituents of Contrave may produce side effects not observed to date. 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. Any of the side effects of Contrave or Empatic, or their individual constituent drugs, could delay or prevent their regulatory approval or limit the commercial profile of an
approved label.

Further, if any of our product candidates receives marketing approval and we or others 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

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



| |  |  | 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. 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. 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 a
branded form of bupropion. The warning highlights the risk of serious mental health events including changes in behavior, depressed mood, hostility, and suicidal thoughts. Although neither Contrave nor Empatic is intended to be promoted for or used
in the treatment of major depression or smoking cessation, we expect that a similar warning statement will be required on labeling for both Contrave and Empatic, particularly because it is likely that there will be obese patients who smoke or
depressed obese patients who will use these product candidates, if approved.

The FDA has also directed manufacturers of
antidepressant drugs to create Medication Guides to be distributed to patients regarding the risk of suicidal thinking and behavior in children and adolescents. Although we have not designed either the Contrave or Empatic programs for the treatment
of children or adolescents, it is possible that the FDA will require a Medication Guide for both Contrave and Empatic. These warnings and other requirements may have the effect of limiting the market acceptance by our 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 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 IIb trial, four women on Empatic became pregnant and carried the pregnancies to term. Three of the pregnancies
resulted in normal infants at birth. In the fourth case there were birth abnormalities, one of which, a cardiac abnormality, was corrected surgically. Although this case is a complicated one with a number of plausible, alternative etiologies, it has
been reported by the investigator as a serious adverse event and possibly related to Empatic.



22



---

##### Table of Contents

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
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



23



---

##### Table of Contents

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

Additionally, changes in regulatory requirements and guidance may occur and we may need to initiate new clinical trials to account for
these changes. For instance, the FDA may issue final guidance on developing products for weight management. While we believe the designs of our pivotal clinical trials for Contrave are consistent with the current recommendations made by the FDA in
the draft guidance and the advisory committees discussions with respect to rimonabant, we cannot guarantee that in the final guidance the FDA will not require different data to be generated. In addition, at the time of approval the FDA may
request one or more additional clinical trials or 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 before or subsequent to approval. If we are required to conduct substantial clinical trials, including, for
example, cardiovascular outcomes trials, prior to approval, we may not have the resources to successfully commercialize our product candidates. 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 and assist us in the preparation of
our regulatory applications. 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 may depend on CROs and independent clinical investigators to conduct our clinical trials in
the future. We currently rely on Octagon Research Solutions, Inc., or Octagon, to assist us with a variety of matters related to the preparation of our regulatory applications. In addition, we utilize the services of inVentiv Clinical Solutions LLC
to conduct our data management in connection with our clinical trials, as well as the preparation of our regulatory applications. The third parties with which we contract for execution of our clinical trials and preparation of our regulatory
applications play a significant role in the conduct of our clinical trials, the subsequent collection, review and analysis of data and the preparation of regulatory applications. These third parties, including CROs and investigators, are not our
employees, and we have limited ability to control the amount or timing of resources that they devote to our programs. If Octagon, inVentiv, other CROs, consultants or independent investigators fail to devote sufficient time and resources to our drug
development programs and related regulatory applications, or if their performance is substandard, it may delay the potential approval of our regulatory applications and the commercialization of our product candidates. In addition, the execution of
clinical trials; the subsequent compilation, review and analysis of the data produced and the preparation of regulatory applications requires coordination among various parties. In order for these functions to be carried out effectively and
efficiently, it is imperative that these parties provide the necessary resources and communicate and coordinate with one another. If these third parties are unable to provide the necessary resources or coordinate and communicate with one another,
our clinical trials may be delayed or the completion and analysis of the data and the related regulatory applications may be delayed or compromised. Moreover, these third parties may also have relationships with other commercial entities, some of
which may compete with us. If these third parties also contract to provide services for our competitors, it could adversely affect our business.

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, Amylin Pharmaceuticals, Inc., Alizyme plc, Athersys, Inc., Genaera Corporation, Neurosearch A/S, Novo Nordisk A/S,
Sanofi-Aventis, and Vivus, among others. Arena and Vivus have both filed an NDA seeking approval of their respective product candidates in December 2009 and received Prescription Drug User Fee Act dates in October 2010. If either Arena or Vivus is
successful at obtaining FDA approval prior to us, they may achieve a significant competitive advantage prior to the time we are able to market our product candidates, if approved.



24



---

##### Table of Contents

There are also surgical approaches to treat severe obesity that are becoming increasingly
accepted and could become competitors against our product candidates. Two of the most well established surgical procedures are gastric bypass surgery and adjustable gastric banding. In addition, other potential approaches which utilize various
implantable devices or surgical tools are in development, including an endoscopic approach for treating obesity. Some of these approaches are in late stage development and may be approved for marketing. Companies such as Allergan, Inc., Boston
Scientific, Covidien Ltd, EnteroMedics, Inc., GI Dynamics, Inc., Johnson & Johnson, 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 nutritional, pharmaceutical and medical technology industries at a rapid pace. These developments may render our product candidates less competitive. Some of our potential competitors are large pharmaceutical or device firms and have
substantially greater resources than we have. These resources could be directed toward the obesity market and include:



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



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



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



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



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

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.

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.



25



---

##### Table of Contents

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

We have limited
sales and marketing experience and resources, and if we do not enter into collaboration or co-promotion arrangements, we may not be able to effectively market and sell our products and our ability to generate revenues may be delayed or limited.

We are developing our obesity product candidates for large markets traditionally served by general and
family practitioners and internists. Generalist physicians number in the several hundred thousand in the United States. Traditional pharmaceutical companies employ groups of sales representatives numbering in the thousands to call on this large
generalist physician population. In order to 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. We also may not be able to enter into collaboration or co-promotion arrangements on acceptable terms, if at all. If we are
unable to enter into collaboration or co-promotion arrangements for our product candidates, and we must develop our own sales and marketing presence to address the large market of general and family practitioners and internists, we will require
additional capital and our ability to market and sell our product candidates and generate revenues from our product candidates may be delayed or limited. We also face competition in our search for collaborators, co-promoters and sales force
personnel. If our competitors are able to establish collaboration or co-promotion arrangements with pharmaceutical companies who have substantially greater resources than we have, our ability to successfully commercialize our product candidates will
be limited and as a result our competitors may be more successful in marketing and selling their products. Even if we do enter into collaboration or co-promotion arrangements with third parties, we will be reliant on such third parties to
successfully develop and/or commercialize our product candidates. 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. Any such failures would negatively affect our ability to
generate revenues.

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

The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the
Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug, and Cosmetic Act. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for
the applicant and for which the applicant has not obtained a right of reference. This statutory provision expressly allows the FDA to rely, for purposes of approving an NDA, on findings of safety and effectiveness based on data not developed by the
filer of the NDA. Under these guidelines, we were able to move directly into Phase II clinical trials for each of our drug combinations, because our 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 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. 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.



26



---

##### Table of Contents

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. If we are required to conduct substantial clinical trials, including, for example, cardiovascular outcomes trials, prior to approval, we may not have the resources to successfully commercialize 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;
| | - |  | ----------------------------------------------------------------------------------



27



---

##### Table of Contents

| |  |  | 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.



28



---

##### Table of Contents

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

We have no other 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.

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



29



---

##### Table of Contents

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

The manufacture of pharmaceutical products requires significant expertise and capital
investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up for commercial production. These
problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal,
state and foreign regulations. 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 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 result
in the delay or denial of regulatory approval by the FDA or 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;
| | - |  | ----------------------------------------------------------------



30



---

##### Table of Contents

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



| |  |  | 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.



31



---

##### Table of Contents

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

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



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



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



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



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



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



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

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



32



---

##### Table of Contents

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

We cannot predict what effect the PPACA or other healthcare reform initiatives that may be adopted in the future will have on
our business. 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 May 7, 2010, we had 62 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, 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 any future trials of Contrave or Empatic;
| | - |  | -------------------------------------------------------------------------------------------



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



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



| |  |  | build a marketing and sales organization if Contrave is approved and we do not either enter into a collaboration with or outsource such functions to a
third party;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 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.



33



---

##### Table of Contents

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



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



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



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



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



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



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



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



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

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

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

We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the
intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Diego, California area. Our 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.



34



---

##### Table of Contents

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.

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

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



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



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



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



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



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

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



35



---

##### Table of Contents

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

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

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

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

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

Risks Related to Intellectual Property

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

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





36



---

##### Table of Contents

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. If a competitor is willing to challenge the scope or validity of the Dante patents and/or the Weber/Cowley patents, the competitor could file an NDA seeking approval any time before we obtain
approval from the FDA of an NDA for Contrave and three years after we obtain such approval.

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

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

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 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.



37



---

##### Table of Contents

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.

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.



38



---

##### Table of Contents

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



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

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



39



---

##### Table of Contents

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

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

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

We have received U.S. trademark registration
number 3396021 for our corporate logo for use in connection with pharmaceutical preparations and substances for the treatment of obesity, inducement of weight loss and prevention of weight gain. We have obtained trademark registrations in Canada,
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, or CNS, printed instructional, educational and teaching materials in the field of treatment and management of disorders of the CNS, and providing medical information in the field of disorders of the CNS. We have obtained trademark
registrations in Canada, 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. An intent-to-use trademark application for the
CONTRAVE logo has been filed in the U.S. and remains pending in connection with pharmaceutical preparations for use in the treatment of obesity and inducing weight loss as well as certain printed materials and medical information services. We have
an intent-to-use trademark application pending in the United States for the mark EMPATIC for use in connection with pharmaceutical preparations for the treatment of obesity and inducing weight loss, various printed materials, and medical information
services. Foreign trademark registrations have issued in 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.



40



---

##### Table of Contents

Risks Related to Our Finances and Capital Requirements

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

We are a development stage company with a limited operating history. We have focused primarily on developing our
first two product candidates, Contrave and Empatic, with the goal of supporting regulatory approval for these product candidates. We have financed our operations almost exclusively through the sale of our preferred and common stock and debt and have
incurred losses in each year since our inception in September 2002. As of March 31, 2010, we had an accumulated deficit of $280.8 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 to decrease in 2010 due to the completion of our Contrave Phase III clinical trial program, as well as the completion of our Phase II clinical trial for
Empatic. We expect increases in pre-commercialization expenses as we seek approval for and prepare for the launch of Contrave. 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 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
submitted our first NDA for Contrave in March 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.

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

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

We will need to raise additional funds or enter into a collaborative or other agreement in order to commercialize Contrave,
and we may be unable to raise capital when needed or enter into such an agreememt, which would force us to delay, reduce or eliminate our commercialization efforts for Contrave and our other product development programs.*

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



41



---

##### Table of Contents

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



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

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



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



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



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



| |  |  | 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 Empatic, if at all; and
| | - |  | ------------------------------------------------------------



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

If we are not successful in entering into a collaborative, licensing, co-promotion or other arrangement with respect to the
commercialization of Contrave on acceptable terms, if at all, we may be required to develop commercialization capabilities entirely on our own, and we will require additional capital to do so and the marketing and sale of Contrave, if approved, may
be delayed or limited. Our inability to enter into such agreements or raise additional capital would also cause us to significantly curtail future development activities and expenditures with respect to Empatic, which would delay its development
timeline.

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

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

Our quarterly operating results may fluctuate significantly.*

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



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



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



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



42



---

##### Table of Contents

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



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



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

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

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

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

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



43



---

##### Table of Contents

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

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

Risks
Relating to Securities Markets and Investment in Our Stock

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

The market prices for securities of
biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.
Over the last several years, the overall capital markets have been highly volatile. Since the commencement of trading in connection with our initial public offering, or IPO, the publicly traded shares of our common stock have themselves experienced
significant price and volume fluctuations. During the quarter ended March 31, 2010, the price per share for our common stock on the Nasdaq Global Market has ranged from a low sale price of $5.81 to a high sale price of $7.77. 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:



| |  |  | announcements concerning our NDA for Contrave;
| | - |  | ----------------------------------------------



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



| |  |  | FDA or international regulatory actions, including advisory committee outcomes such as the advisory committee for Vivus product candidate
scheduled for July 2010, or failure to receive regulatory approval for any of our product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



44



---

##### Table of Contents

| |  |  | 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 May 1, 2010, our executive officers and directors and their affiliates together controlled approximately 32% of our
outstanding common stock. As a result, these stockholders will collectively be able to significantly influence all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate
transactions. The concentration of ownership may delay, prevent or deter a change in control of our company even when such a change may be in the best interests of some stockholders, could deprive our stockholders of an opportunity to receive a
premium for their common stock as part of a sale of our company or our assets and might affect the prevailing market price of our common stock.

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

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



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



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



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



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



45



---

##### Table of Contents

| |  |  | 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 and could subject us to significant liabilities.*

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

It is possible that securities class action litigation may be brought against us following the
release of information regarding our Contrave NDA or Phase 3 clinical trials negatively causing the market price of our common stock to decline. Any adverse determination in such litigation could subject us to significant liabilities.



46



---

##### Table of Contents

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

None.



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

None.



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

None.



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

None.



47



---

##### 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                                                                                                   
|              | 
|10.25        |  | Amended and Restated Master Agreement for Pharmaceutical Development Services dated March 12, 2010 by and between the Registrant and Patheon Pharmaceuticals Inc.
|              | 
|10.26        |  | Manufacturing Services Agreement dated March 12, 2010 by and among the Registrant, Patheon Pharmaceuticals and Patheon Inc.                                      
|              | 
|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 from the Registration Statement and filed separately with 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



---

##### Table of Contents

SIGNATURES

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



|                   |  |                             |  |                                                                                                    
|------------------ |  | --------------------------- |  | ---------------------------------------------------------------------------------------------------
|                   |  | OREXIGEN THERAPEUTICS, INC.
|                   |  |                            
|Date: May 10, 2010 |  | By:                         |  | /s/Michael A. Narachi                                                                              
|                   |  |                             |  |                                                                                                    
|                   |  |                             |  | Michael A. Narachi
President and Chief Executive Officer (Principal
Executive Officer)             
|                   |  |                            
|Date: May 10, 2010 |  | By:                         |  | /s/Graham K. Cooper                                                                                
|                   |  |                             |  |                                                                                                    
|                   |  |                             |  | Graham K. Cooper Chief
Financial Officer and Treasurer (Principal Financial and Accounting Officer)



49



---

##### 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                                                                                                   
|              | 
|10.25        |  | Amended and Restated Master Agreement for Pharmaceutical Development Services dated March 12, 2010 by and between the Registrant and Patheon Pharmaceuticals Inc.
|              | 
|10.26        |  | Manufacturing Services Agreement dated March 12, 2010 by and among the Registrant, Patheon Pharmaceuticals and Patheon Inc.                                      
|              | 
|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 from the Registration Statement and filed separately with 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.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



50