##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM       TO
 Commission file number: 001-33415
 OREXIGEN THERAPEUTICS, INC.
  Delaware
    
    65-1178822(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)12481 High Bluff Drive, Suite 160, San Diego, CA
    
    92130(Address of Principal Executive Offices)
    
    (Zip Code)
 (858) 436-8600
 
 o þ
  o o þ
  o þ




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##### 



OREXIGEN THERAPEUTICS, INC.
TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006
    
    
    3Unaudited Statements of Operations for the three months ended March 31, 2007 and 2006
    
    
    4Unaudited Statements of Cash Flows for the three months ended March 31, 2007 and 2006
    
    
    5Notes to Unaudited Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATION
    
    
    19Item 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3. Defaults Upon Senior Securities
    
    
    45Item 4. Submission of Matters to a Vote of Security Holders
    
    
    45Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46SIGNATURES
    
    
    47EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Orexigen Therapeutics, Inc.
(a development stage company)
 
 Balance Sheets
 (In thousands, except share and par value amounts)
 Pro FormaMarch 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007(Unaudited)
    
    
    
    
    
    
    (Unaudited)(See Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    14,746
    
    
    $
    19,425
    
    
    $
    103,663Securities available-for-sale
    
    
    17,583
    
    
    
    14,988
    
    
    
    17,583Prepaid expenses and other current assets
    
    
    743
    
    
    
    222
    
    
    
    743Total current assets
    
    
    33,072
    
    
    
    34,635
    
    
    
    121,989Property and equipment, net
    
    
    498
    
    
    
    528
    
    
    
    498Restricted cash
    
    
    155
    
    
    
    155
    
    
    
    155Other assets
    
    
    1,688
    
    
    
    1,492
    
    
    
    759Total assets
    
    $
    35,413
    
    
    $
    36,810
    
    
    $
    123,401Liabilities
and stockholders equity (deficit)Current liabilities:Accounts payable and accrued expenses
    
    $
    4,769
    
    
    $
    4,903
    
    
    $
    4,769Deferred revenue, current portion
    
    
    88
    
    
    
    88
    
    
    
    88Long-term debt, current portion
    
    
    3,056
    
    
    
    
    
    
    
    3,056Total current liabilities
    
    
    7,913
    
    
    
    4,991
    
    
    
    7,913Deferred revenue, less current portion
    
    
    1,213
    
    
    
    1,235
    
    
    
    1,213Long-term debt, less current portion
    
    
    6,944
    
    
    
    
    
    
    
    6,944Other long-term liabilities
    
    
    537
    
    
    
    534
    
    
    
    537Commitments and contingenciesSeries A and B redeemable convertible preferred
stock, $.001 par value, 24,152,544 shares
authorized, issued and outstanding at March 31,
2007 and December 31, 2006; aggregate
liquidation preference of $46,000 at March 31,
2007 and December 31, 2006; no shares issued
and outstanding pro forma
    
    
    45,905
    
    
    
    45,897
    
    
    
    Stockholders equity (deficit):Series C convertible preferred stock, $.001 par
value, 8,771,930 shares authorized, issued and
outstanding at March 31, 2007 and December 31,
2006; aggregate liquidation preference of
$30,000 at March 31, 2007 and December 31,
2006; no shares issued and outstanding pro
forma
    
    
    9
    
    
    
    9
    
    
    
    Common stock, $.001 par value, 50,000,000
shares authorized at March 31, 2007 and
December 31, 2006; 2,398,039 shares issued and
outstanding at March 31, 2007 and December 31,
2006; 26,910,270 shares issued and outstanding
pro forma
    
    
    2
    
    
    
    2
    
    
    
    26,910Additional paid-in capital
    
    
    34,221
    
    
    
    33,299
    
    
    
    141,215Accumulated
other comprehensive income
    
    
    6
    
    
    
    11
    
    
    
    6Deficit accumulated during the development stage
    
    
    (61,337
    )
    
    
    (49,168
    )
    
    
    (61,337
    )Total stockholders equity (deficit)
    
    
    (27,099
    )
    
    
    (15,847
    )
    
    
    106,794Total liabilities and stockholders equity
    
    $
    35,413
    
    
    $
    36,810
    
    
    $
    123,401
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Orexigen Therapeutics, Inc.
(a development stage company)
 
 Statements of Operations
 (In thousands, except per share amounts)
 (Unaudited)
 Period fromThree months ended
    
    
    September 12, 2002March 31,
    
    
    (Inception) to2007
    
    
    2006
    
    
    March 31, 2007Revenues:Collaborative agreement
    
    $
    
    
    
    $
    
    
    
    $
    174License revenue
    
    
    22
    
    
    
    21
    
    
    
    199Total revenues
    
    
    22
    
    
    
    21
    
    
    
    373Operating expenses:Research and development
    
    
    10,128
    
    
    
    4,447
    
    
    
    49,731General and administrative
    
    
    2,361
    
    
    
    1,056
    
    
    
    13,875Total operating expenses
    
    
    12,489
    
    
    
    5,503
    
    
    
    63,606Loss from operations
    
    
    (12,467
    )
    
    
    (5,482
    )
    
    
    (63,233
    )Other income (expense):Interest income
    
    
    357
    
    
    
    248
    
    
    
    2,020Interest expense
    
    
    (59
    )
    
    
    
    
    
    
    (124
    )Total other income (expense)
    
    
    298
    
    
    
    248
    
    
    
    1,896Net loss
    
    
    (12,169
    )
    
    
    (5,234
    )
    
    
    (61,337
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    (8
    )
    
    
    (8
    )
    
    
    (75
    )Deemed dividend of beneficial conversion
for Series C preferred stock
    
    
    
    
    
    
    
    
    
    
    (13,860
    )Net loss attributable to common stockholders
    
    $
    (12,177
    )
    
    $
    (5,242
    )
    
    $
    (75,272
    )Net loss per share attributable to common
stockholders  basic and diluted
    
    $
    (5.26
    )
    
    $
    (2.49
    )Shares used in computing net loss per share
attributable to common stockholders  basic
and diluted
    
    
    2,315
    
    
    
    2,104
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Orexigen Therapeutics, Inc.
(a development stage company)
 
 Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Period fromThree months ended
    
    
    September 12, 2002March 31,
    
    
    (Inception) to2007
    
    
    2006
    
    
    March 31, 2007Operating activitiesNet loss
    
    $
    (12,169
    )
    
    $
    (5,234
    )
    
    $
    (61,337
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation
    
    
    30
    
    
    
    8
    
    
    
    88Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    4Amortization of premium on securities available-for-sale
    
    
    (194
    )
    
    
    59
    
    
    
    (87
    )Amortization of debt issuance costs
    
    
    48
    
    
    
    
    
    
    
    56Stock-based compensation
    
    
    930
    
    
    
    376
    
    
    
    4,306Issuance of common stock in exchange for technology and services
    
    
    
    
    
    
    
    
    
    
    47Changes in operating assets and liabilities:Prepaid expenses and other current assets
    
    
    (521
    )
    
    
    (36
    )
    
    
    (743
    )Accounts payable and accrued expenses
    
    
    (134
    )
    
    
    475
    
    
    
    4,825Other assets
    
    
    62
    
    
    
    1
    
    
    
    (132
    )Deferred rent
    
    
    3
    
    
    
    
    
    
    
    37Deferred revenue
    
    
    (22
    )
    
    
    (21
    )
    
    
    1,301Net cash used by operating activities
    
    
    (11,967
    )
    
    
    (4,372
    )
    
    
    (51,635
    )Investing activitiesPurchases of securities available-for-sale
    
    
    (3,656
    )
    
    
    (2,279
    )
    
    
    (59,791
    )Maturities of securities available-for-sale
    
    
    1,250
    
    
    
    6,431
    
    
    
    42,301Purchases of property and equipment
    
    
    
    
    
    
    
    
    
    
    (590
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    (155
    )Net cash provided (used) by investing activities
    
    
    (2,406
    )
    
    
    4,152
    
    
    
    (18,235
    )Financing activitiesProceeds from issuance of redeemable convertible preferred
stock for cash, net of issuance costs
    
    
    
    
    
    
    
    
    
    
    44,109Proceeds from issuance of convertible preferred stock for cash,
net of issuance costs
    
    
    
    
    
    
    
    
    
    
    29,940Proceeds from borrowings on long-term debt
    
    
    10,000
    
    
    
    
    
    
    
    10,000Proceeds from promissory notes
    
    
    
    
    
    
    
    
    
    
    1,665Costs paid in connection with loan agreement
    
    
    
    
    
    
    
    
    
    
    (183
    )Costs paid in connection with initial public offering
    
    
    (306
    )
    
    
    
    
    
    
    (929
    )Proceeds from issuance of common stock, net of repurchases
    
    
    
    
    
    
    
    
    
    
    14Net cash provided by financing activities
    
    
    9,694
    
    
    
    
    
    
    
    84,616Net increase (decrease) in cash and cash equivalents
    
    
    (4,679
    )
    
    
    (220
    )
    
    
    14,746Cash and cash equivalents at beginning of period
    
    
    19,425
    
    
    
    8,740
    
    
    
    Cash and cash equivalents at end of period
    
    $
    14,746
    
    
    $
    8,520
    
    
    $
    14,746
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OREXIGEN THERAPEUTICS, INC.
 
 NOTES TO UNAUDITED FINANCIAL STATEMENTS
 1. The Company and Basis of Presentation
 Organization
   Basis of Presentation
   Reverse Stock Split
  Unaudited Pro Forma Balance Sheet and Initial Public Offering
  
    
    In May 2007, the Company completed its initial public offering of 7,000,000 shares of
its common stock at a public offering price of $12.00 per share. Net cash proceeds from the
initial public offering were approximately $76.3 million, after deducting underwriting
discounts, commissions and estimated offering costs payable by us.
    
    In connection with the closing of the initial public offering, all of the Companys
shares of convertible preferred stock outstanding at the time of the offering were
automatically converted into 16,462,231 shares of common stock.
    
    In May 2007, the underwriters exercised their over-allotment option and purchased an
additional 1,050,000 shares of the Companys common stock, from which the Company received
cash proceeds, net of underwriting discounts, of approximately $11.7 million.
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2. Summary of Significant Accounting Policies
 Research and Development Costs
  Revenue Recognition
 Revenue Recognition Revenue Arrangements with Multiple Deliverables
  New Accounting Standards Not Yet Adopted
 The
Fair Value Option for Financial Assets and Financial Liabilities
 Fair
Value Measurements
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3. Net Loss per Share
 Earnings Per Share
   Three months endedMarch 31,2007
    
    
    2006Numerator:Net loss attributable to common stockholders
    
    $
    (12,177
    )
    
    $
    (5,242
    )D Denominator:Weighted average shares of common stock outstanding
    
    
    2,398
    
    
    
    2,353Weighted average unvested shares of common stock subject to repurchase
    
    
    (83
    )
    
    
    (249
    )Denominator for basic and diluted net loss per share attributable to common stockholders
    
    
    2,315
    
    
    
    2,104Basic and diluted net loss per share attributable to common stockholders
    
    $
    (5.26
    )
    
    $
    (2.49
    )Historical outstanding anti-dilutive securities not included in diluted net loss per
share calculation include the following:Convertible preferred stock, as converted
    
    
    16,462
    
    
    
    12,076Common stock options
    
    
    2,352
    
    
    
    1,339Common shares subject to repurchase
    
    
    69
    
    
    
    23318,883
    
    
    
    13,648
  4.
Investment Securities, Available-for-Sale
  Maturity in
    
    
    
    
    
    UnrealizedMarch 31, 2007
    
    Years
    
    Amortized Cost
    
    Gains
    
    Losses
    
    Fair ValueCorporate debt obligations
    
    Less than 1
    
    $
    17,577
    
    
    $
    6
    
    
    $
    
    
    
    $
    17,583
 Maturity in
    
    
    
    
    
    UnrealizedDecember 31, 2006
    
    Years
    
    Amortized Cost
    
    Gains
    
    Losses
    
    Fair ValueCorporate debt obligations
    
    Less than 1
    
    $
    33,069
    
    
    $
    11
    
    
    $
    
    
    
    $
    33,080Less cash equivalents
    
    
    
    
    
    
    (18,092
    )
    
    
    
    
    
    
    
    
    
    
    (18,092
    )Amounts classified as investments
    
    
    
    
    
    $
    14,977
    
    
    $
    11
    
    
    $
    
    
    
    $
    14,988
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5. Property and Equipment
  March 31,
    
    
    December 31,2007
    
    
    2006Furniture and
fixtures
    
    $
    311
    
    
    $
    311Computers and
equipment
    
    
    105
    
    
    
    105Leasehold
improvements
    
    
    36
    
    
    
    36Laboratory
equipment
    
    
    126
    
    
    
    126578
    
    
    
    578Less accumulated
depreciation and
amortization
    
    
    (80
    )
    
    
    (50
    )$
    498
    
    
    $
    528
 6. Accounts Payable and Accrued Expenses
  March 31,
    
    
    December 31,2007
    
    
    2006Accounts
payable
    
    $
    3,047
    
    
    $
    1,699Accrued preclinical and clinical trial
expenses
    
    
    1,153
    
    
    
    2,269Accrued compensation related
expenses
    
    
    314
    
    
    
    762Accrued legal
expenses
    
    
    173
    
    
    
    104Other accrued
liabilities
    
    
    82
    
    
    
    69$
    4,769
    
    
    $
    4,903
 7. Comprehensive Income
  Period fromThree months ended
    
    
    September 12, 2002March 31,
    
    
    (Inception) to2007
    
    
    2006
    
    
    March 31, 2007Net loss, as
reported
    
    $
    (12,169
    )
    
    $
    (5,234
    )
    
    $
    (61,337
    )Unrealized gains
(losses) on
marketable
securities
    
    
    (5
    )
    
    
    11
    
    
    
    6Comprehensive
loss
    
    $
    (12,174
    )
    
    $
    (5,223
    )
    
    $
    (61,331
    )
 8. Stock-Based Compensation
   9




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Share-Based Payment
  Period fromThree months ended
    
    
    September 12, 2002March 31,
    
    
    (Inception) to2007
    
    
    2006
    
    
    March 31, 2007Research and development
    
    $
    587
    
    
    $
    297
    
    
    $
    3,140General and administrative
    
    
    343
    
    
    
    79
    
    
    
    1,166$
    930
    
    
    $
    376
    
    
    $
    4,306
  Three months endedMarch 31,2007
    
    2006Expected life (in years)
    
    
    6.2
    
    
    
    6.2Expected volatility
    
    
    70.00
    %
    
    
    70.00
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.7
    %Expected dividend yield
    
    
    
    
    
    
    
 9. Commitments and Contingencies
 Credit and Security Agreement
   Due in:2007
    
    $
    2,2222008
    
    
    3,3332009
    
    
    3,3332010
    
    
    1,11210,000Less: current portion
    
    
    (3,056
    )$
    6,944
 10




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Technology and License Agreement
 Cypress Bioscience, Inc.
    10. Income Taxes
 Accounting for Uncertainty in Income
Taxes  An Interpretation of FASB Statement No. 109
  11




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11. Related Party Transactions
  12




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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, 2006 and the related
Managements Discussion and Analysis of Financial Condition and Results of Operations, both of
which are contained in our Prospectus filed pursuant to Rule 424(b) under the Securities Act with
the Securities and Exchange Commission on April 26, 2007. 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
     Revenues
  13




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Research and Development Expenses
     General and Administrative
  Interest and Other Income
  Income Taxes
  14




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Beneficial Conversion Feature
 Accounting for Convertible Securities with Beneficial
Conversion Features
 Critical Accounting Policies and Estimates
   Accounting for Income Taxes
 Accounting for Uncertainty in Income Taxes  An Interpretation of
FASB Statement No. 109 Accounting for Income Taxes,
 Results of Operations
 Comparison of three months ended March 31, 2007 to three months ended March 31, 2006
 Revenues.
 Research and Development Expenses.
 General and Administrative Expenses.
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Interest and Other Income.
 Interest Expense.
 Liquidity and Capital Resources
  
    
    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; and
    
    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.
      16
    Table of Contents     
    
    the progress of our clinical trials, including expenses to support the trials and milestone payments that
may become payable;
    
    our ability to establish and maintain strategic collaborations, including licensing and other arrangements;
    
    the costs involved in enforcing or defending patent claims or other intellectual property rights;
    
    the costs and timing of regulatory approvals;
    
    the costs of establishing sales or distribution capabilities;
    
    the successful commercialization of our products; and
    
    the extent to which we in-license, acquire or invest in
other indications, products, technologies and businesses.
    17




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Contractual Obligations and Commitments
  Payments Due by PeriodLess than1 Year
    
    
    1-3 Years
    
    
    4-5 YearsTotal
    
    
    (2007)
    
    
    (2008 - 2010)
    
    
    (2011  2012)
    
    
    After 5 YearsLong-term debt obligations(1)
    
    $
    10,000
    
    
    $
    2,222
    
    
    $
    7,778
    
    
    $
    
    
    
    $
    Long-term liabilities(2)
    
    
    537
    
    
    
    
    
    
    
    1
    
    
    
    536
    
    
    
    Operating lease obligations
    
    
    1,038
    
    
    
    202
    
    
    
    426
    
    
    
    410
    
    
    
    License obligations(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    11,575
    
    
    $
    2,424
    
    
    $
    8,205
    
    
    $
    946
    
    
    $
    
 
 (1)
    
    In December 2006, we entered into a credit and security agreement
with Merrill Lynch Capital providing for the potential borrowing
of up to $17.0 million. In March 2007, we drew down $10.0 million
under the credit and security agreement.(2)
    
    Primarily represents costs incurred in connection with our credit and security agreement with Merrill Lynch Capital.(3)
    
    License obligations do not include additional payments of up to $2.7 million due upon the occurrence of certain
milestones related to regulatory or commercial events or potential payments of up to $5.7 million to Duke should we
receive milestone payments from Cypress under our agreement with Cypress (up to $3.7 million excluding milestone
payments unrelated to sleep apnea). We may also be required to pay royalties on any net sales of the licensed
products. License payments may be increased based on the timing of various milestones and the extent to which the
licensed technologies are pursued for other indications. These milestone payments and royalty payments under our
license agreements are not included in the table above because we cannot, at this time, determine when or if the
related milestones will be achieved or the events triggering the commencement of payment obligations will occur.  Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  18




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Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 Investing in our common stock involves a high degree of risk. You should carefully consider
the following risk factors, as well as the other information in this report, before deciding
whether to invest in 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. In that
case, the trading price of our common stock could decline, and you may lose all or part of your
investment.
 Risks Related to Our Business and Industry
 We are largely dependent on the success of our two product candidates in clinical development:
Contrave (naltrexone/bupropion, each in a sustained release, or SR, formulation) and Empatic
(zonisamide SR/bupropion SR). We cannot be certain that either product candidate will receive
regulatory approval or be successfully commercialized.
  
    
    the FDA may not deem a product candidate safe and effective;
    
    the FDA may not find the data from preclinical studies and clinical trials sufficient to support approval;
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
    
    the FDA may not approve of our third-party manufacturers processes and facilities; or
    
    the FDA may change its approval policies or adopt new regulations.
  Our clinical trials may fail to demonstrate acceptable levels of safety and efficacy of our product
candidates, which could prevent or significantly delay their regulatory approval.
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Our product candidates may cause undesirable side effects or have other properties that could
delay or prevent their regulatory approval or limit the commercial profile of any approved label.
     
    
    regulatory authorities may withdraw their approval of the product;
    
    regulatory authorities may require the addition of labeling
statements, such as a black box warning with Contrave or
Empatic or a contraindication;
    
    we may be required to create a Medication Guide outlining the
risks of such side effects for distribution to patients;
    
    we may be required to change the way the product is
administered, conduct additional clinical trials or change the
labeling of the product;
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
    
    we could be sued and held liable for harm caused to patients; and
    
    our reputation may suffer.
  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.
  
    
    obtaining regulatory approval to commence a clinical trial;
    
    reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and
trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among
different CROs and trial sites;
    
    manufacturing sufficient quantities of a product candidate for use in clinical trials;
    
    obtaining institutional review board, or IRB, approval to conduct a clinical trial at a prospective site;
    
    recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including
competition from other clinical trial programs for the treatment of obesity or similar indications; and
    
    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.
  
    
    failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
    
    inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities
resulting in the imposition of a clinical hold;
    
    unforeseen safety issues; and
    
    lack of adequate funding to continue the clinical trial.
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Our product candidates are combinations of generically-available pharmaceutical products, and our
success is dependent on our ability to prevent off-label generic substitution of our combination
products through our patent estate and laws that may prevent substituting drug products that are
not therapeutically equivalent to our own.
    We rely on third parties to conduct our clinical trials. If these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we may not be able to
obtain regulatory approval for or commercialize our product candidates within our expected
timeframes or at all.
  We 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.
  23
    Table of Contents     
    
    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.
   We have limited sales and marketing experience or resources, and we may not be able to effectively
market and sell our products.
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Our development and commercialization strategy depends upon access to findings of safety and
effectiveness based on data not developed by us but which the FDA may reference in reviewing our
U.S. marketing applications. In territories outside the United States, we must either negotiate
access to these safety and effectiveness findings or develop them ourselves.
   Even if our product candidates receive regulatory approval, they may still face future
development and regulatory difficulties.
  
    
    issue warning letters or untitled letters;
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
    
    issue warning letters or untitled letters;
    
    impose civil or criminal penalties;
    
    suspend regulatory approval;
    
    suspend any ongoing clinical trials;
    
    refuse to approve pending applications or supplements to applications filed by us;
    
    impose restrictions on operations, including costly new manufacturing requirements; or
    
    seize or detain products or require us 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.
  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
conduct of our clinical trials.
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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.
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We are combining drugs in novel combinations and cannot be sure that the combined drugs can
co-exist for extended periods in close proximity.
  We face potential product liability exposure, and, if successful claims are brought against
us, we may incur substantial liability.
  
    
    decreased demand for our product candidates;
    
    impairment of our business reputation;
    
    withdrawal of clinical trial participants;
    
    costs of related litigation;
    
    distraction of managements attention from our primary business;
    
    substantial monetary awards to patients or other claimants;
    
    loss of revenues; and
    
    the inability to commercialize our product candidates.
  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.
  
    
    our ability to provide acceptable evidence of safety and efficacy;
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
    
    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 active ingredients of 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.
  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.
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Our failure to successfully acquire, develop and market additional product candidates or
approved products would impair our ability to grow.
    
    
    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.
  Healthcare reform measures could hinder or prevent our product candidates commercial success.
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
    
    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.
  
    
    manage our clinical trials effectively, including our
current and upcoming Phase III clinical trials for Contrave
and our ongoing Phase IIb clinical trial for Empatic, which
are being conducted at numerous clinical trial sites;
    
    manage our internal development efforts effectively while
carrying out our contractual obligations to licensors,
contractors, collaborators and other third parties;
    
    continue to improve our operational, financial and
management controls, reporting systems and procedures; and
    
    attract and retain sufficient numbers of talented employees.
  We may not be able to manage our business effectively if we are unable to attract and retain
key personnel.
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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.
  Recent federal legislation and actions by state and local governments may permit
re-importation of drugs from foreign countries into the United States, including foreign countries
where the drugs are sold at lower prices than in the United States, which could materially
adversely affect our operating results and our overall financial condition.
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If we fail to comply with healthcare regulations, we could face substantial penalties and our
business, operations and financial condition could be adversely affected.
  
    
    the federal healthcare program Anti-Kickback Law, 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 provide coding and billing advice to customers;
    
    the federal Health Insurance Portability and Accountability
Act of 1996, or HIPAA, which prohibits executing a scheme
to defraud any healthcare benefit program or making false
statements relating to healthcare matters and which also
imposes certain requirements relating to the privacy,
security and transmission of individually identifiable
health information;
    
    the Federal Food, Drug, and Cosmetic Act, which among other
things, strictly regulates drug product marketing,
prohibits manufacturers from marketing drug products for
off-label use and regulates the distribution of drug
samples; and
    
    state law equivalents of each of the above federal laws,
such as anti-kickback and false claims laws which may apply
to items or services reimbursed by any third-party payor,
including commercial insurers, and state laws governing the
privacy and security of health information in certain
circumstances, many of which differ from each other in
significant ways and often are not preempted by HIPAA, thus
complicating compliance efforts.
  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.
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Our business and operations would suffer in the event of system failures.
  Risks Related to Intellectual Property
 The issued patent rights that we have in-licensed covering Contrave and Empatic are limited to
the United States, and our market opportunity for these product candidates may be limited by the
lack of patent protection in other territories.
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Although we have international patent applications pending, we do not currently have patent
protection for our Contrave and Empatic product candidates outside the United States.
   We have in-licensed 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 Contrave and Empatic.
  Restrictions on our patent rights relating to our product candidates may limit our ability to
prevent third parties from competing against us.
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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.
    
    
    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;
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
    
    if a license is available from a third party, we may have
to pay substantial royalties, 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.
   Although we have entered into a settlement agreement designed to prevent the parties to the
agreement from asserting infringement and other specified claims against our Empatic product
candidate in the United States, if an acceptable settlement of foreign patent rights cannot be
reached, or our efforts to assert patent rights outside of the Unites States prove unsuccessful, we
could be prevented from marketing and selling our Empatic product in foreign countries.
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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.
  We have not yet registered our trademarks in all of our potential markets, and failure to
secure those registrations could adversely affect our business.
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We may be subject to claims that our employees have wrongfully used or disclosed alleged trade
secrets of their former employers.
  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 have not generated any revenue from our product candidates and may never be profitable.
  
    
    successfully complete our ongoing and planned clinical trials for Contrave and 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.
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Our short operating history makes it difficult to evaluate our business and prospects.
  We will need additional funding and may be unable to raise capital when needed, which would
force us to delay, reduce or eliminate our product development programs or commercialization
efforts.
  
    
    fund our operations and continue to conduct clinical trials to support potential
regulatory approval of marketing applications;
    
    qualify and outsource the commercial-scale manufacturing of our products under cGMPs; and
    
    commercialize Contrave, Empatic or any other product
candidates that we may develop, in-license or acquire, if
any of these product candidates receive regulatory
approval.
  
    
    the rate of progress and cost of our clinical trials and
other product development programs for Contrave, Empatic
and any other product candidates that we may develop,
in-license or acquire;
    
    the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual
property rights associated with our product candidates;
    
    the costs and timing of completion of outsourced commercial manufacturing supply arrangements for
each product candidate;
    
    the timing of regulatory approval of our product candidates, if at all;
    
    the costs of establishing sales, marketing and distribution capabilities, should we elect to do so;
    
    the effect of competing technological and market developments; and
    
    the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we
may establish.
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Our quarterly operating results may fluctuate significantly.
  
    
    variations in the level of expenses related to our two existing product candidates
or future development programs;
    
    addition or termination of clinical trials or funding support;
    
    any intellectual property infringement lawsuit in which we may become involved;
    
    regulatory developments affecting our product candidates or those of our competitors;
    
    our execution of any collaborative, licensing or similar arrangements, and the
timing of payments we may make or receive under these arrangements; and
    
    if either of our product candidates receives regulatory approval, the level of
underlying demand for our product candidates and wholesalers buying patterns.
  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.
   We will incur significant increased costs as a result of operating as a public company, and
our management will be required to devote substantial time to new compliance initiatives.
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Risks Relating to Securities Markets and Investment in Our Stock
 There may not be a viable public market for our common stock.
  Future sales of our common stock may cause our stock price to decline.
   We expect that the price of our common stock will fluctuate substantially.
  
    
    the results from our clinical trials, including our current
and planned Phase III clinical trials for Contrave and our
ongoing Phase II clinical trial for Empatic;
    
    FDA or international regulatory actions, including failure to receive regulatory
approval for any of our product candidates;
    
    failure of any of our product candidates, if approved, to achieve commercial success;
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
    
    announcements of the introduction of new products by us or our competitors;
    
    market conditions in the pharmaceutical and biotechnology sectors;
    
    announcements concerning product development results or intellectual property rights of others;
    
    litigation or public concern about the safety of our potential products;
    
    actual and anticipated fluctuations in our quarterly operating results;
    
    deviations in our operating results from the estimates of securities analysts or other analyst comments;
    
    additions or departures of key personnel;
    
    third-party coverage and reimbursement policies;
    
    developments concerning current or future strategic collaborations; and
    
    discussion of us or our stock price by the financial and scientific press and in online investor
communities.
  Our management team may invest or spend the proceeds from our initial public offering in ways
with which our stockholders may not agree or in ways which may not yield a significant return.
  Our executive officers and directors and their affiliates will exercise control over
stockholder voting matters in a manner that may not be in the best interests of all of our
stockholders.
  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.
  
    
    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;
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
    
    a prohibition on stockholder action through written consent;
    
    a requirement that special meetings of stockholders be called only by
the chairman of the board of directors, the chief executive officer,
the president or by a majority of the total number of authorized
directors;
    
    advance notice requirements for stockholder proposals and nominations;
    
    a requirement of approval of not less than
662/3%
of all outstanding shares of our capital stock entitled to vote to
amend any bylaws by stockholder action, or to amend specific
provisions of our certificate of incorporation; and
    
    the authority of the board of directors to issue preferred stock on
terms determined by the board of directors without stockholder
approval.
  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 may become involved in securities class action litigation that could divert managements
attention and harm our business.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Recent Sales of Unregistered Securities
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Use of Proceeds
    
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
    
    The approval and adoption of an Amendment to our Amended and Restated
Certificate of Incorporation to be filed prior to the effectiveness of
our initial public offering to implement a one-for-two reverse stock
split of our outstanding common stock;
    
    The approval and adoption of our Amended and Restated Certificate of
Incorporation, which, among other things, authorized 100,000,000
shares of common stock and eliminated certain series of existing
preferred stock and implemented certain stockholder protection
measures, including the authorization of up to 10,000,000 shares of
undesignated preferred stock to become effective upon the closing of
our initial public offering;
    
    The approval and adoption of our Amended and Restated Bylaws
containing various stockholder protection measures customary for
bylaws of publicly traded companies, to become effective upon the
closing of our initial public offering;
    
    The classification of our board of directors into three classes to
become effective upon the closing of our initial public offering;
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
    
    The approval and adoption of our 2007 Equity Incentive Award Plan to
become effective as of the day prior to the pubic trading date of our
common stock ;
    
    The approval and adoption of our Director Compensation Policy to
become effective on the pubic trading date of our common stock;
    
    The approval and adoption of the form of indemnity agreement between
us and each of our directors and executive officers to become
effective upon the closing of our initial public offering.
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description3.1(1)
    
    Amended and Restated Certificate of Incorporation3.2(1)
    
    Amended and Restated Bylaws4.1(2)
    
    Form of Specimen Stock Certificate4.2(3)
    
    Second Amended and Restated Investors Rights Agreement dated November 20, 200631.1*
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant
to the Securities Exchange Act of 1934, as amended31.2*
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant
to the Securities Exchange Act of 1934, as amended32.1*
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Filed with Amendment No. 2 to the Registrants Registration Statement on Form S-1 on February
16, 2007.(2)
    
    Filed with Amendment No. 3 to the Registrants Registration Statement on Form S-1 on April 9,
2007.(3)
    
    Filed with the Registrants Registration Statement on Form S-1 on December 19, 2006.*
    
    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. 46




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SIGNATURES
  OREXIGEN THERAPEUTICS, INC.Date: May 25, 2007
    
    By: /s/ GARY D. TOLLEFSONGary D. Tollefson, M.D.,Ph.D.President and Chief Executive Officer(Principal Executive Officer)Date: May 25, 2007
    
    By: /s/ Graham K. CooperGraham K. CooperChief Financial Officer, Treasurer and Secretary(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description3.1(1)
    
    Amended and Restated Certificate of Incorporation3.2(1)
    
    Amended and Restated Bylaws4.1(2)
    
    Form of Specimen Stock Certificate4.2(3)
    
    Second Amended and Restated Investors Rights Agreement dated November 20, 200631.1*
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant
to the Securities Exchange Act of 1934, as amended31.2*
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant
to the Securities Exchange Act of 1934, as amended32.1*
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Filed with Amendment No. 2 to the Registrants Registration Statement on Form S-1 on February
16, 2007.(2)
    
    Filed with Amendment No. 3 to the Registrants Registration Statement on Form S-1 on April 9,
2007.(3)
    
    Filed with the Registrants Registration Statement on Form S-1 on December 19, 2006.*
    
    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