**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

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

 

**Forthe quarterly period ended March 31, 2008.**

 

**or**

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

 

**Forthe transition periodfrom                      to                     .**

 

**CommissionFile Number 000-51171**

 

**SIRTRISPHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                              | ** ** | **20-1410189**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of          |       | (IRS Employer  Identification Number) |
| incorporation or  organization)           | ** ** | ** **                            |
|                                      |       |                                  |
| **200  Technology Square**                | ** ** | ** **                            |
| **Cambridge,  Massachusetts**             | ** ** | **02139**                             |
| (Address of  Principal Executive Offices) |       | (Zip Code)                            |

 

**(617)252-6920**

(Registrant’stelephone number, including area code)

 

**None**

(Former name,former address and former fiscal year, if changes since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes   x   No   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).Yes  o   No  x

 

Number of shares of theregistrant’s common stock, $0.001 par value per share, outstanding as of May 9,2008: 29,275,644 shares

 

 

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**SIRTRISPHARMACEUTICALS, INC.**

**QUARTERLYREPORT**

**ONFORM 10-Q**

** **

**INDEX**

 
| PART I  | FINANCIAL  INFORMATION                                                                      | 3      |
|--------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.      | Financial Statements  (Unaudited)                                                           | 3      |
| Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11     |
| Item  3.     | Quantitative  and Qualitative Disclosures About Market Risk                                 | 13     |
| Item  4.     | Controls and  Procedures                                                                    | 13     |
|         |                                                                                        |   |
| PART II | OTHER INFORMATION                                                                           | 14     |
| Item 1.      | Legal Proceedings                                                                           | 14     |
| Item 1A.     | Risk Factors                                                                                | 14     |
| Item  2.     | Unregistered  Sales of Equity Securities and Use of Proceeds from Registered Securities     | 26     |
| Item  4.     | Submission  of Matters To a Vote of Security Holders                                        | 27     |
| Item 5.      | Other Information                                                                           | 27     |
| Item 6.      | Exhibits                                                                                    | 27     |
| SIGNATURES   |                                                                                        | 28     |

 

2

----

 

**PART I**

 

**FORWARD-LOOKINGSTATEMENTS**

 

This quarterly report on Form 10-Qcontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 that involve risks and uncertainties,as well as assumptions that, if they never materialize or prove incorrect,could cause the results of Sirtris to differ materially from those expressed orimplied by such forward-looking statements. All statements other thanstatements of historical fact are statements that could be deemedforward-looking statements, including statements about the proposed merger withSmithKline Beecham Corporation, any projections of financing needs, revenue,expenses, earnings or losses from operations, or other financial items; anystatements of the plans, strategies and objectives of management for futureoperations; any statements concerning product research, development andcommercialization plans and timelines; any statements regarding safety andefficacy of product candidates, any statements of expectation or belief; andany statements of assumptions underlying any of the foregoing. In addition,forward looking statements may contain the words “believe,” “anticipate,” “expect,”“estimate,” “intend,” “plan,” “project,” “will be,” will continue,” “willresult,” “seek,” “could,” “may,” “might,” or any variations of such words orother words with similar meanings.

 

The risks, uncertaintiesand assumptions referred to above include risks that are described in “RiskFactors” and elsewhere in this quarterly report and that are otherwisedescribed from time to time in our Securities and Exchange Commission reportsfiled after this report.

 

The forward-lookingstatements included in this quarterly report represent our estimates as of thedate of this quarterly report. We specifically disclaim any obligation toupdate these forward-looking statements in the future. These forward-lookingstatements should not be relied upon as representing our estimates or views asof any date subsequent to the date of this quarterly report.

 

**Item 1. Financial Statements -Unaudited**

 

The financial informationset forth below should be read in conjunction with our “Management’s Discussionand Analysis of Financial Condition and Results of Operations” appearingelsewhere in this Quarterly Report on Form 10-Q.

 

3

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**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**ConsolidatedBalance Sheets**

 

(in thousands,except per share amounts)

(Unaudited)

 
| ** **                                                                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                                                                                                                                                          |       |               |       |                  |       |
| **Assets**                                                                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                               |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                    |       | $                  | 27,656     |                  | $          | 23,062 |   |
| Short-term  investments                                                                                                                                                       |       | 79,879             |       | 95,024                |       |
| Prepaid expenses  and other current assets                                                                                                                                    |       | 1,568              |       | 1,610                 |       |
| Restricted cash                                                                                                                                                               |       | —             |       | 26                    |       |
| Total current  assets                                                                                                                                                         |       | 109,103            |       | 119,722               |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Property and  equipment, net                                                                                                                                                  |       | 3,579              |       | 3,221                 |       |
| Other assets                                                                                                                                                                  |       | 159                |       | 172                   |       |
| Restricted cash                                                                                                                                                               |       | 2,100              |       | 2,100                 |       |
| Total assets                                                                                                                                                                  |       | $                  | 114,941    |                  | $          | 125,215 |   |
|                                                                                                                                                                          |       |               |       |                  |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                         |       |               |       |                  |       |
| Accounts payable                                                                                                                                                              |       | $                  | 2,010      |                  | $          | 2,558 |   |
| Accrued expenses                                                                                                                                                              |       | 1,534              |       | 2,932                 |       |
| Current portion  of notes payable                                                                                                                                             |       | 2,565              |       | 2,498                 |       |
| Total current  liabilities                                                                                                                                                    |       | 6,109              |       | 7,988                 |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Notes payable,  net of current portion and discount                                                                                                                           |       | 6,042              |       | 6,711                 |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                                                                   |       |               |       |                  |       |
| Preferred stock,  $0.001 par value; 20,000 shares authorized; none issued                                                                                                     |       | —             |       | —                |       |
| Common stock,  $0.001 par value: 100,000 shares authorized; 29,263 and 28,758 shares issued  and outstanding at March 31, 2008 and December 31, 2007,  respectively |       | 29                 |       | 29                    |       |
| Additional  paid-in capital                                                                                                                                                   |       | 171,166            |       | 169,932               |       |
| Accumulated  other comprehensive income                                                                                                                                       |       | 324                |       | 218                   |       |
| Deficit  accumulated during the development stage                                                                                                                             |       | (68,729            | )          | (59,663               | )          |
| Total  stockholders’ equity                                                                                                                                              |       | 102,790            |       | 110,516               |       |
| Total  liabilities and stockholders’ equity                                                                                                                              |       | $                  | 114,941    |                  | $          | 125,215 |   |

 

4

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**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**ConsolidatedStatements of Operations**

(in thousands,except share and per share amounts)

(Unaudited)

 
| ** **                                                                             | ** ** | **Three months ended March 31,** | ** ** | **Period from March  25, 2004 (date of  inception) through** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                             | ** ** | **2007**                                                                                   | ** ** | **March 31****, 2008** | ** ** |
| ** **                                                                             | ** ** | ** **                                           | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** |
| Revenue                                                                                |       | $                                                    | 500        |                                                                                       | $          | — |   | $ | 568 |   |
|                                                                                   |       |                                                 |       |                                                                                       |       |   |   |
| Operating  expenses:                                                                   |       |                                                 |       |                                                                                       |       |   |   |
| Research and  development (1)                                                          |       | 7,882                                                |       | 5,120                                                                                      |       | 59,411 |   |
| General and  administrative (1)                                                        |       | 2,637                                                |       | 1,239                                                                                      |       | 17,698 |   |
| Total operating  expenses                                                              |       | 10,519                                               |       | 6,359                                                                                      |       | 77,109 |   |
|                                                                                   |       |                                                 |       |                                                                                       |       |   |   |
| Loss from operations                                                                   |       | (10,019                                              | )          | (6,359                                                                                     | )          | (76,541 | ) |
| Interest income                                                                        |       | 1,258                                                |       | 900                                                                                        |       | 10,388 |   |
| Interest expense                                                                       |       | (305                                                 | )          | (324                                                                                       | )          | (2,576 | ) |
| Net loss                                                                               |       | $                                                    | (9,066     | )                                                                                          | $          | (5,783 | ) | $ | (68,729 | ) |
|                                                                                   |       |                                                 |       |                                                                                       |       |   |   |
| Net loss per  share - basic and diluted                                                |       | $                                                    | (0.32      | )                                                                                          | $          | (4.71 | ) |   |   |
| Weighted average  number of common shares used in net loss per basic and diluted share |       | 28,756,828                                           |       | 1,233,707                                                                                  |       |   |   |

 

----

(1) Amounts include stock-based compensation expense, as follows:

 
| Research  and development   |   | $ | 540 |   | $ | 181 |   |   |   |
|-----------------------------|--------|---|-----|--------|---|-----|--------|--------|--------|
| General  and administrative |   | $ | 506 |   | $ | 93  |   |   |   |

 

5

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**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**ConsolidatedStatements of Cash Flow**

(in thousands)

(Unaudited)

 
| ** **                                                                   | ** ** | **Three months ended March 31,** | ** ** | **Period from March  25, 2004 (date of  inception) through** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                             | ** ** | **2007**                                                                                   | ** ** | **March 31, 2008** | ** ** |
| ** **                                                                   | ** ** | ** **                                           | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** |
| **Operating activities**                                                | ** ** | ** **                                           | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                                    | (9,066     | )                                                                                          | $          | (5,783 | ) | $ | (68,729 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                 |       |                                                                                       |       |   |   |
| Depreciation and  amortization                                               |       | 225                                                  |       | 106                                                                                        |       | 1,278 |   |
| Stock-based  compensation expense                                            |       | 1,046                                                |       | 274                                                                                        |       | 4,874 |   |
| Issuance of  common stock in exchange for licenses and services              |       | —                                               |       | —                                                                                     |       | 82 |   |
| Non-cash rent  expense                                                       |       | —                                               |       | 28                                                                                         |       | 97 |   |
| Non-cash  interest expense                                                   |       | 39                                                   |       | 36                                                                                         |       | 347 |   |
| Change in  operating assets and liabilities:                                 |       |                                                 |       |                                                                                       |       |   |   |
| Prepaid expenses  and other current assets                                   |       | 42                                                   |       | (58                                                                                        | )          | (1,568 | ) |
| Other assets                                                                 |       | 13                                                   |       | (681                                                                                       | )          | (193 | ) |
| Accounts payable                                                             |       | (548                                                 | )          | 1,525                                                                                      |       | 2,010 |   |
| Accrued expenses                                                             |       | (1,398                                               | )          | (571                                                                                       | )          | 1,534 |   |
| Net cash used in  operating activities                                       |       | (9,647                                               | )          | (5,124                                                                                     | )          | (60,268 | ) |
|                                                                         |       |                                                 |       |                                                                                       |       |   |   |
| **Investing  activities**                                                    |       |                                                 |       |                                                                                       |       |   |   |
| Purchases of  property and equipment                                         |       | (583                                                 | )          | (674                                                                                       | )          | (4,857 | ) |
| Purchases of  short-term investments                                         |       | (49,980                                              | )          | (36,972                                                                                    | )          | (344,400 | ) |
| Sales and  maturities of short-term investments                              |       | 65,231                                               |       | 23,517                                                                                     |       | 264,845 |   |
| Decrease  (increase) in restricted cash                                      |       | 26                                                   |       | —                                                                                     |       | (2,100 | ) |
| Net cash  provided by (used in) investing activities                         |       | 14,694                                               |       | (14,129                                                                                    | )          | (86,512 | ) |
|                                                                         |       |                                                 |       |                                                                                       |       |   |   |
| **Financing  activities**                                                    |       |                                                 |       |                                                                                       |       |   |   |
| Proceeds from  issuance of redeemable convertible preferred stock            |       | —                                               |       | 35,890                                                                                     |       | 102,565 |   |
| Proceeds from  issuance of common stock                                      |       | 188                                                  |       | 62                                                                                         |       | 62,835 |   |
| Proceeds from  note payable                                                  |       | —                                               |       | —                                                                                     |       | 10,797 |   |
| Repayment of  note payable                                                   |       | (641                                                 | )          | —                                                                                     |       | (1,761 | ) |
| Net cash (used  in) provided by financing activities                         |       | (453                                                 | )          | 35,952                                                                                     |       | 174,436 |   |
|                                                                         |       |                                                 |       |                                                                                       |       |   |   |
| Net increase in  cash and cash equivalents                                   |       | 4,594                                                |       | 16,699                                                                                     |       | 27,656 |   |
|                                                                         |       |                                                 |       |                                                                                       |       |   |   |
| Cash and cash  equivalents at beginning of the period                        |       | 23,062                                               |       | 7,513                                                                                      |       | — |   |
| **Cash  and cash equivalents at end of the period**                          |       | $                                                    | 27,656     |                                                                                       | $          | 24,212 |   | $ | 27,656 |   |
| ** **                                                                   | ** ** | ** **                                           | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** |
| **Supplemental  disclosure of non-cash financing activities:**               |       |                                                 |       |                                                                                       |       |   |   |
| Accretion of  redeemable convertible preferred stock to redemption value     |       | $                                                    | —     |                                                                                       | $          | 22 |   | $ | 173 |   |
| Discount to note  payable for warrant valuation                              |       | $                                                    | —     |                                                                                       | $          | 185 |   | $ | 604 |   |

 

6

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**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

**1. Basisof Presentation**

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”) forinterim financial reporting and as required by Regulation S-X, Rule 10-01.Accordingly, they do not include all of the information and footnotes requiredby GAAP for complete financial statements. In the opinion of management, alladjustments (including those which are normal and recurring) considerednecessary for a fair presentation of the interim financial information havebeen included. When preparing financial statements in conformity with GAAP, theCompany must make estimates and assumptions that affect the reported amounts ofassets, liabilities, revenues, expenses and related disclosures at the date ofthe financial statements. Actual results could differ from those estimates.Additionally, operating results for the three months ended March 31, 2008are not necessarily indicative of the results that may be expected for anyother interim period or for the fiscal year ending December 31, 2008.

 

The accompanyingunaudited consolidated financial statements and notes thereto should be read inconjunction with the audited consolidated financial statements for the yearended December 31, 2007 included in the Company’s Annual Report on Form 10-Kas filed with the Securities and Exchange Commission (“SEC”) on March 24,2008.

 

**2. FairValue Measurements**

 

On January 1, 2008,the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 157,”Fair ValueMeasurements,” (“ SFAS 157”), which defines fair value, establishes aframework for measuring fair value under GAAP, and expands disclosures aboutfair value measurements. SFAS 157 defines fair value, establishes a threelevel valuation hierarchy for disclosure of fair value measurement and enhancesdisclosure requirements for fair value measurements. The valuation hierarchy isbased upon the transparency of inputs to the valuation of an asset or liabilityas of the measurement date. The three levels are defined as follows:

 

·                  Level 1 – inputs to the valuationmethodology are quoted prices (unadjusted) for identical assets or liabilitiesin active   markets.

·                  Level 2 – inputs to the valuationmethodology include quoted prices for similar assets and liabilities in activeor non-  active markets, inputs other than quoted prices that areobservable for the asset or liability, and inputs that are not   directlyobservable, but are corroborated by observable market data.

·                  Level 3 – inputs to the valuationmethodology are unobservable for the asset or liability.

 

A level 1 classificationis applied to any asset that has a readily available quoted price from anactive market where there is significant transparency in the executed / quotedprice. A level 2 classification is applied to assets that have evaluated pricesreceived from fixed income vendors where the data inputs to these valuations donot represent quoted prices from an active market. In certain cases where thereis limited activity or less transparency around input to the valuation, securitiesare classified within level 3 of the valuation hierarchy.

 

Assets measured at fairvalue at March 31, 2008 are as follows:

 
| ** **                     | ** ** | **Fair Value Measurement as of March 31, 2008** | ** ** | ** **       | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **Level 1**                                                                   | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Available-for-sale  securities |       | $                                                                                  | 14,446     |             | $          | 65,433 |   | $ | — |   | $ | 79,879 |   |
|                                |            |                                                                                    |            |                  |            |  |  |  |  |  |  |  |  |

 

**3. Cashand cash equivalents**

 

Cash equivalents includeall highly liquid investments maturing within 90 days from the date ofpurchase. Cash equivalents consist of money market funds, certificates ofdeposit, U.S. agency notes, corporate bonds and commercial paper.

 

**4.Short-term investments**

 

Short-term investmentsconsist primarily of investments with original maturities greater than ninetydays and less than one year when purchased. The Company classifies theseinvestments as available-for-sale as defined by SFAS No. 115, “Accounting for Certain Investments in Debtand Equity Securities”. Unrealizedgains and losses are included in other comprehensive income (loss).

 

7

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**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

Short-term investmentsincluded the following at March 31, 2008 and December 31, 2007:

 
| **March 31, 2008 —** | ** ** | **Amortized****Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------------|------------|-----------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Commercial paper                         |       | $                     | 41,089     |                         | $          | 282                           |       | $               | —     |   | $ | 41,371 |   |
| Asset-backed  securities                 |       | 10,661                |       | 31                           |       | —                        |       | 10,692          |       |
| Corporate debt  securities               |       | 27,805                |       | 16                           |       | (5                            | )          | 27,816          |       |
|                                     |       | $                     | 79,555     |                         | $          | 329                           |       | $               | (5         | ) | $ | 79,879 |   |

 
| **December 31, 2007 —** | ** ** | **Amortized****Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Commercial paper                            |       | $                     | 47,555     |                         | $          | 199                           |       | $               | —     |   | $ | 47,754 |   |
| Asset-backed  securities                    |       | 20,371                |       | 27                           |       | —                        |       | 20,398          |       |
| Corporate debt  securities                  |       | 26,880                |       | 7                            |       | (15                           | )          | 26,872          |       |
|                                        |       | $                     | 94,806     |                         | $          | 233                           |       | $               | (15        | ) | $ | 95,024 |   |

 

All short-terminvestments have contractual maturities of less than one year. Investments withunrealized losses were in an unrealized loss position for less than a year. Asof March 31, 2008, the Company held four investments that were in anunrealized loss position. The Company reviewed its investments with unrealizedlosses and has concluded that no other-than-temporary impairment existed at March 31,2008 and December 31, 2007 as the Company has the ability and intent tohold these investments to anticipated recovery.

 

**5.Comprehensive Loss**

 

The Company’s totalcomprehensive loss consists of the following:

 
|                                         |   | **Three months ended March 31,** |       |     |   |   |   |
|----------------------------------------------|--------|------------------------------------------------------|------------|----------|--------|--------|--------|
|                                         |   | **2008**                                             | ** ** | **2007** |   |   |   |   |   |
|                                         |   |                                                 |       |     |   |   |   |   |   |   |   |
| Net loss  applicable to common stockholders: |   | $                                                    | (9,066     | )        | $      | (5,805 | )      |   |   |   |   |
| Unrealized gain  on investments              |   | 106                                                  |       | 2        |   |   |   |   |   |
| Comprehensive  loss                          |   | $                                                    | (8,960     | )        | $      | (5,803 | )      |   |   |   |   |

 

**6. Accounting for Stock-Based Compensation**

 

The Company follows theprovisions of SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS123R”) . Under SFAS 123R, the Company is required to recognize, as expense, theestimated fair value of all share based payments to employees.  For thethree months ended March 31, 2008, the Company recorded stock-basedcompensation expense of approximately $788 in connection with its share-basedpayment awards to employees.

 

Equity instruments issuedto non-employees are recorded at their fair value as determined in accordancewith SFAS 123R and EITF Issue No. 96-18, “Accounting for EquityInstruments That are Issued to Other Than Employees for Acquiring, or inConjunction with Selling Goods and Services” (“EITF 96-18”) and areperiodically revalued as the equity instruments vest and are recognized asexpense over the related service period.

 

*StockPlans*

 

The Company’s 2004Amended & Restated Incentive Plan (“Plan”) provides for the issuanceof a total of 5,053,702 shares of common stock in the form of incentivestock options, awards of stock, and direct stock purchase opportunities todirectors, officers, employees and consultants of the Company. Generally, stockoptions granted to employees pursuant to the Plan fully vest four years fromthe grant date, with 25% of the award vesting after one year and 6.25% of theaward vesting quarterly thereafter. All outstanding stock options have a termof 10 years. The Plan includes an “evergreen provision” that allows for anannual increase in the number of shares of common stock available for issuanceunder the Plan. The annual increase will be added on the first day of eachfiscal year from 2008 through 2013, inclusive, and will be equal to the lesserof (i) 1,904,762 shares; (ii) 3.5% of the number of then-outstandingshares of stock; and (iii) a number as determined by the board ofdirectors. Pursuant to the Plan’s “evergreen provision”, 1,006,545 shares wereadded to the Plan on January 1, 2008.

 

As of March 31,2008, there were 354,182 shares available for future issuance under the plan.

 

A summary of the statusof the Plan at March 31, 2008 and changes during the three months thenended is presented in the table and narrative below:

 

8

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 
| ** **                                         | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------|------------|-------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| Options  outstanding at December 31, 2007     |       | 2,818,887   |       | $                                      | 2.19       |                                                | 8.26       |                                | $          | 32,441 |   |
| Options granted                                    |       | 754,357     |       | $                                      | 12.95      |                                                |       |                                |       |   |
| Options  exercised                                 |       | (164,440    | )          | $                                      | 1.14       |                                                |       |                                |       |   |
| Options  forfeited or expired                      |       | (37,285     | )          | $                                      | 5.00       |                                                |       |                                |       |   |
|                                               |       |        |       |                                   |       |                                                |       |                                |       |
| Options  outstanding at March 31, 2008        |       | 3,371,519   |       | $                                      | 4.62       |                                                | 8.31       |                                | $          | 28,300 |   |
| Vested or  expected to vest at March 31, 2008 |       | 3,046,438   |       | $                                      | 4.54       |                                                | 8.30       |                                | $          | 25,803 |   |
| Options  exercisable at March 31, 2008        |       | 1,019,305   |       | $                                      | 1.25       |                                                | 7.79       |                                | $          | 11,962 |   |

 

The aggregate intrinsicvalue in the table above represents the value (the difference between theCompany’s closing common stock price on March 31, 2008 and the exerciseprice of the options, multiplied by the number of in-the-money options) thatwould have been received by the option holders had all option holders exercisedtheir options on March 31, 2008. As of March 31, 2008, there was$10.2 million of total unrecognized stock-based compensation expense related tostock options granted under the Plan. The expense is expected to be recognizedover a weighted-average period of 2.63 years. The weighted-average grant datefair value of options granted during the three months ended March 31, 2008was $6.95. The intrinsic value of stock options exercised for the three monthsended March 31, 2008 was $1.9 million, and represents the differencebetween the exercise price of the option and the market price of the Company’scommon stock on the dates exercised.

 

The Company values stockoptions using a Black-Scholes method of valuation and has applied theweighted-average assumptions set forth in the following table. The resultingfair value is recorded as compensation cost on a straight line basis over therequisite service period, which generally equals the option vesting period.Since the Company completed its initial public offering in May 2007, itdid not have sufficient history as a publicly traded company to evaluate itsvolatility factor and expected term. As such, the Company analyzed thevolatilities and expected terms of a group of peer companies to support theassumptions used in its calculations for the three months ended March 31,2008. The Company averaged the volatilities and expected terms of the peercompanies with in-the-money options, sufficient trading history and similarvesting terms to generate the assumptions detailed above. The risk freeinterest rates are based on the United States Treasury yield curve in effectfor periods corresponding with the expected life of the stock option.

 
| ** **                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                           |       |                                                 |       |   |   |
| Expected term  (life in years) |       | 5.53                                                 |       | 5.69 |   |
| Interest rate                  |       | 3.21                                                 | %          | 4.75 | % |
| Volatility                     |       | 54.0                                                 | %          | 72.3 | % |
| Dividend yield                 |       | —                                               |       | — |   |

 

*RestrictedStock*

 

A summary of the statusof nonvested restricted stock as of March 31, 2008 and changes during thethree months ended March 31, 2008 are as follows:

 
| ** **                           | ** ** | **Shares** | ** ** |
|--------------------------------------|------------|------------|------------|
| Nonvested at  December 31, 2007 |       | 76,190     |       |
| Granted                              |       | 339,737    |       |
| Vested                               |       | (19,048    | )          |
| Canceled                             |       | —     |       |
| Nonvested at  March 31, 2008    |       | 396,879    |       |

 

*StockOptions Granted to Non-Employees*

 

The Company granted stockoptions to purchase 20,000 shares of common stock to non-employees at anexercise price of $13.00 in the three months ended March 31, 2008. Thestock options vest over four years. The Company has recorded the estimated fairvalue of the nonemployee options on an accelerated basis under FASBInterpretation No. 28 (FIN 28), “Accounting for Stock Appreciation Rightsand Other Variable Stock Options or Award Plans (an interpretation of APBOpinion No. 15 and 25)”. The assumptions used in the calculations were asfollows: (i) risk-free interest rate of 3.74%, (ii) contractual lifeof ten years, (iii) volatility of 74.9% and (iv) no expecteddividends. The Company recognized stock-based compensation expense relating tothe estimated fair value of non-employee options of $258 for the three monthsended March 31, 2008. The unvested stock options are 

 

9

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

subject to remeasurementover the remaining service period.

 

**7. NetLoss Per Share**

 

The Company calculatesnet loss per share in accordance with SFAS No. 128, “Earnings Per Share”. Basic and diluted net loss per commonshare was determined by dividing net loss applicable to common stockholders bythe weighted average common shares outstanding during the period. The Company’spotentially dilutive shares, which include outstanding common stock options,unvested restricted stock, convertible preferred stock, redeemable convertiblepreferred stock, and warrants, have not been included in the computation ofdiluted net loss per share for all periods as the result would beanti-dilutive.

 
| ** **                                                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                                                   |       |                                             |       |   |   |
| Net loss                                                                               |       | $                                                | (9,066     | ) | $ | (5,783 | ) |
| Accretion of  redeemable convertible preferred stock issuance costs                    |       | —                                           |       | (22 | ) |
| Net loss  applicable to common stockholders                                            |       | $                                                | (9,066     | ) | $ | (5,805 | ) |
| Weighted-average  number of common shares used in net loss per share-basic and diluted |       | 28,756,828                                       |       | 1,233,707 |   |
| Net loss per  share applicable to common stockholders—basic and diluted           |       | $                                                | (0.32      | ) | $ | (4.71 | ) |

 

The following commonshare equivalents, prior to the use of the treasury stock method, have beenexcluded from the computation of diluted weighted average shares outstanding asof March 31, 2008 and 2007, as they would be anti-dilutive.

 
| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                        |       |                                             |       |   |   |
| Redeemable  convertible preferred stock                     |       | —                                           |       | 20,287,131 |   |
| Options  outstanding                                        |       | 3,371,519                                        |       | 2,767,174 |   |
| Unvested  restricted stock under the 2004 Stock Option Plan |       | 396,879                                          |       | 133,333 |   |
| Unvested  restricted stock issued to founders               |       | 20,857                                           |       | 81,539 |   |
| Warrants  outstanding                                       |       | 96,939                                           |       | 99,465 |   |

 

**8. Subsequent Event**

 

On April 22, 2008,the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”)with SmithKline Beecham Corporation, a Pennsylvania corporation (“SKB”), andFountain Acquisition Corporation, a Delaware corporation and a wholly-ownedsubsidiary of SKB (the “Purchaser”), pursuant to which, among other things, thePurchaser agreed to commence a tender offer for all the outstanding shares ofcommon stock of the Company, subject to the terms and conditions of the MergerAgreement. SKB is a wholly-owned subsidiary of GlaxoSmithKline plc (“GSK”).Pursuant to the Merger Agreement, and upon the terms and subject to theconditions thereof, the Purchaser commenced a tender offer on May 2, 2008(the “Offer”) to acquire all the outstanding shares of Company common stock, parvalue $0.001 per share (“Company Common Stock”), at a price of $22.50 pershare, net to the selling stockholders in cash, without interest thereon (the “OfferPrice”). Pursuant to the Merger Agreement, after the consummation of the Offer,and subject to the satisfaction or waiver of certain conditions set forth inthe Merger Agreement, the Purchaser will merge with and into the Company (the “Merger”)and the Company will become a wholly-owned subsidiary of SKB. At the effectivetime of the Merger, each issued and outstanding share of Company Common Stock(the “Shares”) (other than Shares owned by the Company, GSK or any wholly-ownedsubsidiary of GSK, and Shares held by stockholders who have perfected theirstatutory rights of appraisal under Section 262 of the Delaware GeneralCorporation Law) will be automatically converted into the right to receive theOffer Price in cash, without interest, as set forth above. The Merger Agreementincludes certain representations, warranties and covenants of the Company, SKBand the Purchaser. Among others, the Company has agreed to operate its businessin the ordinary course until the Offer is consummated. The Company has alsoagreed not to solicit or initiate discussions with third parties regardingother proposals to acquire the Company and to certain restrictions on itsability to respond to such proposals. The Merger Agreement also includescustomary termination provisions for both the Company and SKB and providesthat, in connection with the termination of the Merger Agreement underspecified circumstances, the Company will be required to pay to SKB atermination fee of $22.5 million. In connection with the proposed Merger,the Company agreed to pay its financial advisor a transaction fee for itsservices of approximately $7.2 million, in addition to a discretionary feeof up to $1.4 million to be determined by the Company’s board of directorsprior to closing, payable upon the consummation of the Offer and the Merger.

 

10

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*Thefollowing discussion contains forward-looking statements, which involve risksand uncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of various factors,including those set forth below under Part II, Item 1A, “RiskFactors.” The interim financial statements and this Management’s Discussion andAnalysis of Financial Condition and Results of Operations should be read inconjunction with the financial statements and notes thereto for the year ended December 31,2007 and the related Management’s Discussion and Analysis of FinancialCondition and Results of Operations, both of which are contained in the Company’sAnnual Report on Form 10-K as filed with the SEC on March 24, 2008. Except as requiredby law, we assume no obligation to update these forward-looking statements,whether as a result of new information, future events or otherwise.*

 

**Overview**

 

We area biopharmaceutical company focused on discovering and developing proprietary,orally available, small molecule drugs with the potential to treat diseasesassociated with aging, including metabolic diseases such as Type 2 Diabetes.Our goal is to successfully develop therapeutics for diseases of aging bymodulating sirtuins, a recently discovered class of enzymes, and their relatedpathways. To date, we have devoted substantially all of our resources to ourdrug discovery efforts and the development of our drug candidates, includingconducting preclinical studies and clinical trials and seeking protection forour intellectual property. Since our inception in March 2004, we have hadno revenue from product sales, and have funded our operations principallythrough private and public sales of equity securities and debt financings.

 

Wehave never been profitable and, as of March 31, 2008, we have anaccumulated deficit of $68.7 million. We had net losses of $9.7 millionfor the year ended December 31, 2005, $17.0 million for the yearended December 31, 2006, $31.1 million for the year ended December 31,2007 and $9.1 million for the three months ended March 31, 2008. We expectto incur significant and increasing operating losses for the foreseeable futureas we advance our product candidates from discovery through preclinical studiesand clinical trials and seek regulatory approval and eventualcommercialization. In addition to these increasing research and developmentexpenses, we expect general and administrative costs to increase as we addpersonnel and continue to operate as a public company. We will need to generatesignificant revenues to achieve profitability and may never do so.

 

On April 22,2008, we entered into an Agreement and Plan of Merger (the “Merger Agreement”)with SmithKline Beecham Corporation, a Pennsylvania corporation (“SKB”), andFountain Acquisition Corporation, a Delaware corporation and a wholly-ownedsubsidiary of SKB (the “Purchaser”), pursuant to which, among other things, thePurchaser agreed to commence a tender offer for all our outstanding shares ofcommon stock, subject to the terms and conditions of the Merger Agreement. SKBis a wholly-owned subsidiary of GlaxoSmithKline plc (“GSK”). Pursuant to theMerger Agreement, and upon the terms and subject to the conditions thereof, thePurchaser commenced a tender offer on May 2, 2008 (the “Offer”) to acquireall of our outstanding shares of common stock, par value $0.001 per share (“CompanyCommon Stock”), at a price of $22.50 per share, net to the selling stockholdersin cash, without interest thereon (the “Offer Price”). Pursuant to the MergerAgreement, after the consummation of the Offer, and subject to the satisfactionor waiver of certain conditions set forth in the Merger Agreement, thePurchaser will merge with and into us (the “Merger”) and we will become awholly-owned subsidiary of SKB. At the effective time of the Merger, eachissued and outstanding share of Company Common Stock (the “Shares”) (other thanShares owned by us, GSK or any wholly-owned subsidiary of GSK, and Shares heldby stockholders who have perfected their statutory rights of appraisal under Section 262of the Delaware General Corporation Law) will be automatically converted intothe right to receive the Offer Price in cash, without interest, as set forthabove. The Merger Agreement includes certain representations, warranties andcovenants of us, SKB and the Purchaser. Among others, we have agreed to operateits business in the ordinary course until the Offer is consummated. We havealso agreed not to solicit or initiate discussions with third parties regardingother proposals to acquire us and to certain restrictions on our ability torespond to such proposals. The Merger Agreement also includes customarytermination provisions for both us and SKB and provides that, in connectionwith the termination of the Merger Agreement under specified circumstances, wewill be required to pay to SKB a termination fee of $22.5 million. Inconnection with the proposed Merger, we agreed to pay our financial advisor atransaction fee for its services of approximately $7.2 million, inaddition to a discretionary fee of up to $1.4 million to be determined by ourboard of directors prior to closing, payable upon the consummation of the Offerand the Merger.

 

**Critical Accounting Policies**

 

Webelieve that several accounting policies are important to understanding ourhistorical and future performance. We refer to these policies as “critical”because these specific areas generally require us to make judgments andestimates about matters that are uncertain at the time we make the estimate,and different estimates - which also would have been reasonable - could havebeen used, which would have resulted in different financial results.  Itis important that the discussion of our operating results that follows be readin conjunction with the critical accounting policies included in the Company’sAnnual Report on Form 10-K as filed with the SEC on March 24, 2008.There were no changes to such critical accounting policies in the three monthsended March 31, 2008.

 

11

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

**Results of Operations**

 

***Comparison of the Three Months ended March 31,2008 (the “2008 Quarter”) and March 31, 2007 (the “2007 Quarter”)***

 

*Revenue*.     Revenue for the 2008 Quarter of $500,000 represents a payment from asublicense for worldwide rights to certain technology in the field of plants.For the 2007 Quarter, we recorded no revenue.

 

*Research and development.*     Researchand development expense for the 2008 Quarter was $7.9 million compared to$5.1 million for the 2007 Quarter. The $2.8 million increase from the 2007Quarter to the 2008 Quarter principally resulted from an increase of $697,000in occupancy costs primarily due to costs relating to a new facility, anincrease of $477,000 for personnel costs related principally to an increase inresearch and development headcount, an increase of $450,000 in preclinicalstudies, an increase of $359,000 in stock-based compensation expense, anincrease of $275,000 in formulation costs for our product candidates, anincrease of $230,000 in consulting expense and an increase in general lab suppliesof $143,000.

 

*General and administrative*.     Generaland administrative expense for the 2008 Quarter was $2.6 million comparedto $1.2 million for the 2007 Quarter. The $1.4 million increase from the2007 Quarter to the 2008 Quarter was primarily due to an increase of $413,000in professional fees primarily as a result of being a public company, anincrease of $413,000 in stock-based compensation expense and an increase of$256,000 in personnel costs.

 

*Interest income*.                                  Interestincome increased to $1.3 million for the 2008 Quarter from $900,000 for the2007 Quarter. The increase in interest income was caused by an increase in theaverage fund balances available for investment. The increase in the averagefund balances for investment was primarily due to net proceeds of approximately$35.9 million from the sale of redeemable convertible preferred stock in January andFebruary of 2007 and net proceeds of approximately $62.5 million from thecompletion of our initial public offering in May 2007.

 

*Interest expense.*                             Interestexpense decreased to $305,000 for the 2008 Quarter from $324,000 for the 2007Quarter. The decrease in interest expense from the 2007 Quarter to the 2008Quarter was primarily due to lower outstanding balances under a loan agreementwith Hercules Technology Growth Capital, Inc. and an equipment loan agreementwith Silicon Valley Bank.

 

***Liquidity and Capital Resources***

 

Sinceour inception in March 2004, we have funded our operations principallythrough the private placement of equity securities, which provided aggregatenet cash proceeds of approximately $102.6 million and the completion of aninitial public offering that provided net proceeds of approximately $62.5million. We have also generated funds from debt financing and interest income.As of March 31, 2008, we had cash, cash equivalents and short-terminvestments of approximately $107.5 million. Our funds are currentlyinvested in investment grade and United States government securities.

 

Duringthe 2008 Quarter and 2007 Quarter, our operating activities used cash of$9.6 million and $5.1 million, respectively. The use of cash in bothperiods primarily resulted from our net losses and changes in our workingcapital accounts. The increase in cash used in operations in the 2008 Quarterwas due primarily to an increase in research and development activities asnoted above.

 

Ourinvesting activities provided cash of $14.7 million during the 2008 Quarter andused cash of $14.1 million during 2007 Quarter. Investing activities providedcash during the 2008 Quarter because cash provided from sales and maturities ofshort-term investment exceeded cash used to purchase short-term investments. Investingactivities used cash during the 2007 Quarter because cash used to purchaseshort-term investments exceeded cash provided from sales and maturities ofshort-term investments.

 

Ourfinancing activities used cash of $453,000 in the 2008 Quarter and providedcash of $36.0 million in the 2007 Quarter. Cash used in the 2008 Quarterresulted from the repayment of notes payable, partially offset by proceeds fromthe issuance of common stock from the exercise of stock options. Cash providedin the 2007 Quarter resulted from the sale and issuance of 21.4 millionshares of Series C-1 redeemable convertible preferred stock in January andFebruary 2007 that provided net proceeds of approximately $35.9 million.

 

In April 2006,we obtained a loan from Hercules Technology Growth Capital, Inc. whichpermitted borrowings of up to $15.0 million, $10.0 million of whichwas available immediately and an additional $5.0 million was availableduring the third quarter of 2007 when certain clinical milestones wereachieved. The additional $5.0 million was not drawn down, so there is noremaining amount available under this loan. We were obligated to makeinterest-only payments through July 2007 followed by forty-five equalmonthly payments of principal and interest. The loan is secured by essentiallyall our assets except for intellectual property and bears interest at 10.60%per annum. In April 2006, we borrowed $10.0 million under the loan.As of March 31, 2008, there was $8.5 million outstanding under the loan.In connection with the loan, the lender received a warrant to purchase up to127,551 shares of our common stock depending upon the amount actually borrowedat 

 

12

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

an exercise price of$5.88 per share. The warrant is currently exercisable for up to 85,034 sharesof our common stock and no additional shares of our common stock will becomeexercisable as we cannot make additional borrowings under this loan. Thiswarrant has not been exercised.

 

In May 2006,we entered into an equipment loan agreement with Silicon Valley Bank to borrowup to $1.5 million through March 2007. Amounts borrowed under theequipment loan agreement are repayable over 36 months beginning in April 2007and bear interest at prime plus 0.25% per annum. As of March 31, 2008,there was $532,000 outstanding and no remaining amount available under theequipment loan agreement. In connection with the financing, the lender receiveda warrant to purchase up to 4,749 shares of our common stock depending upon theamount actually borrowed at an exercise price of $4.20 per share. The warrantis currently exercisable for up to 2,526 shares of our common stock while thewarrant for the remaining 2,223 additional shares of our common stock wascancelled since we did not make any additional borrowings under this loanbefore March 2007.  The warrant was exercised in December 2007to purchase 2,526 shares of our common stock. The equipment loan agreement wasrepaid in April 2008.

 

We expect our existingresources to be sufficient to fund our planned operations until at least early2010.

 

**Contractual Obligations**

 

Thereare no other additional material obligations incurred by us that materiallychange the disclosure of our contractual obligations in our Annual Report on Form 10-Kas filed with the SEC on March 24, 2008.

 

**Off-Balance Sheet Arrangements**

 

We donot have any off-balance sheet arrangements or relationships withunconsolidated entities of financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities.

 

**Item 3. Quantitative and QualitativeDisclosure about Market Risk**

 

We areexposed to market risk related to changes in interest rates. As of March 31,2008, we had cash, cash equivalents and short-term investments of $107.5million consisting of cash and highly liquid short-term investments. Ourprimary exposure to market risk is interest income sensitivity, which isaffected by changes in the general level of U.S. interest rates, particularlybecause our investments are in short-term marketable securities. Due to theshort-term duration of our investment portfolio and the low risk profile of ourinvestments, an immediate 10% change in interest rates would not have amaterial effect on the fair market value of our portfolio. Our outstandingnotes payable are at fixed interest rates and therefore have minimal exposureto changes in interest rates.

 

**Item 4. Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Asrequired by Rule 13a–15(b) of the 1934 Act, the Company’s management,including the principal executive officer and the principal financial officer,conducted an evaluation as of the end of the period covered by this QuarterlyReport on Form 10-Q of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures. Based on that evaluation, theCompany’s principal executive officer and principal financial officer concludedthat the Company’s disclosure controls and procedures are effective at thereasonable assurance level in ensuring that information required to bedisclosed by the Company in the reports that it files or submits under the 1934Act is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by us in the reports we file under theSecurities and Exchange Act is accumulated and communicated to our management,including our principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

**Changes in Internal Control**

 

Asrequired by Rule 13a-15(d) of the 1934 Act, the Company’s management,including the principal executive officer and the principal financial officer,conducted an evaluation of the internal control over financial reporting todetermine whether any changes occurred during the period covered by thisQuarterly Report on Form 10-Q that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting. Based on that evaluation, the principal executive officer andprincipal financial officer concluded no such changes during the fiscal quartercovered by this Quarterly Report on Form 10-Q materially affected, or werereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

13

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

**PART II**

 

**Item 1. Legal Proceedings**

 

We are currently not aparty to any material legal proceedings.

 

**Item 1a. Risk Factors**

 

**RISK FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

*Investmentin our common stock involves a high degree of risk and uncertainty. You shouldcarefully consider each of the risks and uncertainties described below beforeyou decide to invest in our common stock. You should also refer to the otherinformation in this quarterly report, including our financial statements andrelated notes. If any of the following risks and uncertainties actually occurs,our business, financial condition, and results of operations could be severelyharmed. This could cause the trading price of our common stock to decline, andyou could lose all or part of your investment.*

 

**Risksrelated to our proposed acquisition by SKB, a wholly-owned subsidiary of GSK**

 

***Failure to complete our proposed acquisition by SKB couldadversely affect our stock price and future business and operations.***

 

On April 22, 2008,the Company entered into the Merger Agreement with SKB and the Purchaser,pursuant to which, among other things, the Purchaser agreed to commence atender offer for all the outstanding shares of common stock of the Company,subject to the terms and conditions of the Merger Agreement. SKB is awholly-owned subsidiary of GSK. The proposed acquisition by SKB is subject tothe satisfaction of customary closing conditions, including, but not limitedto, approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 andthe acquisition by SKB of a majority of Sirtris’s shares. We cannot assure youthat these conditions will be satisfied or that the merger will be successfullycompleted. In the event that the merger is not completed:

 

·                  management’s attention may bediverted from our day-to-day business, we may lose key employees, and ourongoing business and prospects, as well as relationships with customers andpartners, may be disrupted by resulting uncertainties;

 

·                  we may be required in specificcircumstances to pay a termination fee of up to $22.5 million to SKB;

 

·                  the market price of shares of our commonstock may decline to the extent that the current market price of those sharesreflects a market assumption that the merger will be completed; and

 

·                  we will be required to paysignificant costs related to the merger, such as legal, accounting and advisoryfees.

 

Anysuch events could adversely affect our stock price and harm our business,financial condition and results of operations.

 

***The restrictive covenants of the merger agreement haveplaced, and will continue to place, significant restrictions on our businessoperations until the completion of the merger with SKB.***

 

Pursuant to the MergerAgreement between the Company and SKB, until the completion of the merger withSKB, the Company is required to conduct its business in the ordinary and usualcourse consistent with past practice. In addition, the Company shall not, amongother things, agree to do any of the following without the prior writtenconsent of SKB:

 

·                  acquire any corporation, partnershipor other business organization or make any capital expenditure above certainthreshold amounts;

 

·                  issue, sell, pledge or dispose of anyshares of the Company or stock options, warrants, calls, commitments or rightsof the Company’s capital stock; or

 

·                  enter into, modify, amend orterminate any contract relating to research, development, clinical trial, orcollaboration with respect to, any product or product candidate relating to theCompany’s current research and development.

 

GSK may not consent toour taking any of these actions even though our board of directors may believethat such action is in the best interests of our stockholders.

 

14

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

**Risksrelated to our discovery, development and commercialization of new medicines**

 

***Our results to date provide no basis for predicting whetherany of our product candidates will be safe or effective, or receive regulatoryapproval.***

 

Our only clinicalcandidate, SRT501, is in an early stage of development and its risk of failureis high. To date, the data supporting our drug discovery and developmentprograms, including SRT501 and new chemical entities, are derived solely fromlaboratory and preclinical studies and limited early stage clinical trials.Results in animal studies of SRT501 were favorable.  Results in limited early stage clinicaltrials showed SRT501 to be safe and well-tolerated.  However, additional clinical trials in humansmay not show that our current formulation of SRT501 is safe and effective, inwhich event we may need to reformulate or abandon development of SRT501.Reformulation of SRT501 could result in delays and additional costs. It isimpossible to predict when or if SRT501 or any of our NCEs will prove effectiveor safe in humans or will receive regulatory approval. These compounds may notdemonstrate in patients the chemical and pharmacological properties ascribed tothem in laboratory studies, or early stage clinical trials, and they mayinteract with human biological systems or other drugs in unforeseen,ineffective or harmful ways. Neither we nor any other company has receivedregulatory approval to market therapeutics that target sirtuins. If we areunable to discover or successfully develop drugs that are effective and safe inhumans, we will not have a viable business.

 

***We may not be able to initiate and complete preclinicalstudies and clinical trials for our product candidates which could adverselyaffect our business.***

 

We have completed twoPhase 1a trials and two Phase 1b trials with respect to our only clinicalproduct candidate, SRT501, all of which were conducted outside of the UnitedStates.  We have not commenced anyclinical trials for our NCEs. We must successfully initiate and completeextensive preclinical studies and clinical trials for our product candidatesbefore we can receive regulatory approval. Preclinical studies and clinicaltrials are expensive and will take several years to complete and may not yieldresults that support further clinical development or product approvals.Conducting clinical studies for any of our drug candidates for approval in theUnited States requires filing an IND and reaching agreement with the FDA onclinical protocols, finding appropriate clinical sites and clinicalinvestigators, securing approvals for such studies from the institutionalreview board at each such site, manufacturing clinical quantities of drugcandidates, supplying drug product to clinical sites and enrolling sufficientnumbers of participants. Currently, the IND that we filed for SRT501 in August 2006is on hold with the FDA, and we cannot conduct clinical studies in the UnitesStates with SRT501 until we satisfactorily respond to requests from the FDA forcertain additional information. In order to commence clinical trials in theUnited States, we must reach agreement with the FDA on a second animal species.We cannot guarantee that we will be able to successfully accomplish this or allof the other activities necessary to initiate and complete clinical trials. Asa result, our preclinical studies and clinical trials may be extended, delayedor terminated, and we may be unable to obtain regulatory approvals or successfullycommercialize our products.

 

***None of our product candidates has received regulatoryapprovals. If we are unable to obtain regulatory approvals to market one ormore of our product candidates, our business may be adversely affected.***

 

All of our productcandidates are in early stages of development, and we do not expect our productcandidates to be commercially available for several years, if at all. Ourproduct candidates are subject to strict regulation by regulatory authoritiesin the United States and in other countries. We cannot market any productcandidate until we have completed all necessary preclinical studies andclinical trials and have obtained the necessary regulatory approvals. We do notknow whether regulatory agencies will grant approval for any of our productcandidates. Even if we complete preclinical studies and clinical trialssuccessfully, we may not be able to obtain regulatory approvals or we may notreceive approvals to make claims about our products that we believe to be necessaryto effectively market our products. Data obtained from preclinical studies andclinical trials are subject to varying interpretations that could delay, limitor prevent regulatory approval, and failure to comply with regulatoryrequirements or inadequate manufacturing processes are examples of otherproblems that could prevent approval. In addition, we may encounter delays orrejections due to additional government regulation from future legislation,administrative action or changes in the FDA policy. Even if the FDA approves aproduct, the approval will be limited to those indications covered in theapproval.

 

Outside the UnitedStates, our ability to market any of our potential products is dependent uponreceiving marketing approvals from the appropriate regulatory authorities.These foreign regulatory approval processes include all of the risks associatedwith the FDA approval process described above. If we are unable to receiveregulatory approvals, we will be unable to commercialize our product candidates,and our business may fail.

 

***We may not be able to gain market acceptance of our productcandidates, which would prevent us from becoming profitable.***

 

We cannot be certain thatany of our product candidates will gain market acceptance among physicians,patients, healthcare payers, pharmaceutical companies or others. Demonstratingthe safety and efficacy of our product candidates and obtaining regulatoryapprovals will not guarantee future revenue. Sales of medical products largelydepend on the reimbursement of patients’ medical expenses by governmenthealthcare programs and private health insurers. Governments and privateinsurers closely examine medical products to determine whether they should becovered by reimbursement and if so, the level of reimbursement that will apply.We cannot be certain that third party payers will sufficiently reimburse salesof our products, or enable us to sell our products at profitable prices.Similar concerns could also limit the reimbursement amounts that health insurersor government agencies in other countries are prepared to pay for our products.In many countries where we plan to market our products, including Europe, Japanand Canada, the 

 

15

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

pricing of prescriptiondrugs is controlled by the government or regulatory agencies. Regulatoryagencies in these countries could determine that the pricing for our productsshould be based on prices of other commercially available drugs for the samedisease, rather than allowing us to market our products at a premium as newdrugs.

 

Sales of medical productsalso depend on physicians’ willingness to prescribe the treatment, which islikely to be based on a determination by these physicians that the products aresafe, therapeutically effective and cost-effective. We cannot predict whetherphysicians, other healthcare providers, government agencies or private insurerswill determine that our products are safe, therapeutically effective and costeffective relative to competing treatments.

 

***Our current product candidates are SIRT1 activators.Resveratrol, a SIRT1 activator, is marketed by other companies as a dietarysupplement. As a result, any products we successfully develop may be subject tosubstitution and competition.***

 

SRT501, a proprietaryformulation of resveratrol, and our NCEs activate SIRT1. Resveratrol, anaturally occurring substance currently marketed by others as a dietarysupplement, also activates SIRT1. We believe that our product candidates willhave a significantly superior therapeutic profile to resveratrol based onpreclinical data regarding the level of resveratrol in the blood and theeffectiveness of these product candidates in reducing fasted glucose levels andfed insulin levels in animals. However, we cannot be sure that physicians willview our product candidates as superior to currently available dietarysupplements. To the extent that the price of any product candidate wesuccessfully develop is significantly higher than the prices of commerciallyavailable resveratrol as marketed by other companies as dietary supplements,physicians may recommend this commercially available resveratrol instead ofwriting prescriptions for our products or patients may elect on their own totake commercially available resveratrol, and this may limit how we price ourproduct.

 

***We may not be able to manufacture our product candidates inclinical or commercial quantities, which would prevent us from commercializingour product candidates.***

 

To date, our productcandidates have been manufactured in small quantities by us and third partymanufacturers for preclinical studies and clinical trials. If any of ourproduct candidates is approved by the FDA or other regulatory agencies forcommercial sale, we will need to manufacture it in larger quantities and weintend to use third party manufacturers for commercial quantities. Our thirdparty manufacturers may not be able to successfully increase the manufacturingcapacity for any of our product candidates in a timely or efficient manner, orat all. If we are unable to successfully increase the manufacturing capacity fora product candidate, the regulatory approval or commercial launch of thatproduct candidate may be delayed or there may be a shortage in the supply ofthe product candidate. Our failure or the failure of our third partymanufacturers to comply with the FDA’s good manufacturing practices and to passinspections of the manufacturing facilities by the FDA or other regulatoryagencies could seriously harm our business.

 

***We may not be able to obtain and maintain the third partyrelationships that are necessary to develop, commercialize and manufacture someor all of our product candidates.***

 

We expect to depend oncollaborators, partners, licensees, clinical research organizations,manufacturers and other third parties to support our discovery efforts, toformulate product candidates, to conduct clinical trials for some or all of ourproduct candidates, to manufacture clinical and commercial scale quantities ofour product candidates and products and to market, sell, and distribute anyproducts we successfully develop.

 

We cannot guarantee thatwe will be able to successfully negotiate agreements for or maintainrelationships with collaborators, partners, licensees, clinical investigators,manufacturers and other third parties on favorable terms, if at all. If we areunable to obtain or maintain these agreements, we may not be able to clinicallydevelop, formulate, manufacture, obtain regulatory approvals for orcommercialize our product candidates, which will in turn adversely affect ourbusiness.

 

We expect to expendsubstantial management time and effort to enter into relationships with thirdparties and, if we successfully enter into such relationships, to manage theserelationships. In addition, substantial amounts of our expenditures will bepaid to third parties in these relationships. However, we cannot control theamount or timing of resources our contract partners will devote to our researchand development programs, product candidates or potential product candidates,and we cannot guarantee that these parties will fulfill their obligations to usunder these arrangements in a timely fashion, if at all.

 

In particular, wecurrently have approximately 40 contract scientists performing research anddevelopment services for us in a contract research organization in China. Theloss of this contractual relationship could result in a significant delay andadditional costs for our discovery and development activities. In addition, weare less knowledgeable about the reputation and quality of third partycontractors in countries outside of the United States where we conductdiscovery and clinical development programs and, therefore, enter into theserelationships with less information than if these third parties were in theUnited States and may not choose the best parties for these relationships.

 

16

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

***We have no experience in sales, marketing and distributionand may have to enter into agreements with third parties to perform thesefunctions, which could prevent us from successfully commercializing our productcandidates.***

 

We currently have nosales, marketing or distribution capabilities. To commercialize our productcandidates, we must either develop our own sales, marketing and distributioncapabilities, which will be expensive and time consuming, or make arrangementswith third parties to perform these services for us. If we decide to market anyof our products on our own, we will have to commit significant resources todeveloping a marketing and sales force and supporting distributioncapabilities. If we decide to enter into arrangements with third parties forperformance of these services, we may find that they are not available on termsacceptable to us, or at all. If we are not able to establish and maintainsuccessful arrangements with third parties or build our own sales and marketinginfrastructure, we may not be able to commercialize our product candidateswhich would adversely affect our business and financial condition.

 

***If we were to elect to commercialize SRT501 as a dietarysupplement, we may not be able to successfully market one or more of our NCEsas a therapy for disease, if approved, and our results may be adverselyaffected.***

 

Resveratrol is currentlyavailable for sale by other companies as dietary supplements. If we were toelect to market SRT501 as a dietary supplement, we believe we could do sowithout the need to complete lengthy and costly clinical trials. If we were toobtain regulatory approval for one of our NCEs, we anticipate that we wouldprice the NCE at a considerably higher level than SRT501 would be priced if wewere selling SRT501 as a dietary supplement. While our NCEs are chemicalentities distinct from SRT501 and resveratrol, patients suffering from diseasesfor which our NCEs may be approved for treatment may choose to use the lowerpriced SRT501 dietary supplement, since it also activates SIRT1, rather thanthe higher priced approved NCE prescription product. As a result, if we chooseto commercialize SRT501 as a dietary supplement, our ability to successfullycommercialize NCE activators of SIRT1 may be adversely affected.

 

***We may fail to select or capitalize on the mostscientifically, clinically or commercially promising or profitable productcandidates.***

 

We have limitedtechnical, managerial and financial resources to determine which of our productcandidates should proceed to initial clinical trials, later stage clinicaldevelopment and potential commercialization. We may make incorrectdeterminations. Our decisions to allocate our research and development,management and financial resources toward particular product candidates ortherapeutic areas may not lead to the development of viable commercial productsand may divert resources from better opportunities. Similarly, our decisions todelay or terminate drug development programs may also be incorrect and couldcause us to miss valuable opportunities.

 

***If we are not able to retain our current senior managementteam and our scientific advisors or continue to attract and retain qualifiedscientific, technical and business personnel, our business will suffer.***

 

We are dependent on themembers of our management team and our scientific advisors for our businesssuccess. An important element of our strategy is to take advantage of theresearch and development expertise of our current management and to utilize theunique expertise of our scientific advisors in the sirtuin field. We currentlyhave employment agreements with all of our executive officers. Our employmentagreements with our executive officers are terminable on short notice or nonotice and provide for severance and change of control benefits. The loss ofany one of our executive officers or key scientific consultants, including, inparticular, Dr. Christoph Westphal, our Chief Executive Officer, couldresult in a significant loss in the knowledge and experience that we, as anorganization, possess and could cause significant delays, or outright failure,in the development and further commercialization of our product candidates.

 

To grow, we will need tohire a significant number of qualified commercial, scientific andadministrative personnel. However, there is intense competition for humanresources, including management in the technical fields in which we operate,and we may not be able to attract and retain qualified personnel necessary forthe successful development and commercialization of our product candidates. Ourinability to attract new employees or to retain existing employees could limitour growth and harm our business.

 

***Disputes under key agreements or conflicts of interest withour scientific advisors or clinical investigators could delay or preventdevelopment or commercialization of our product candidates.***

 

Any agreements we have ormay enter into with third parties, such as collaboration, license, formulationsupplier, manufacturing, clinical research organization or clinical trialagreements, may give rise to disputes regarding the rights and obligations ofthe parties. Disagreements could develop over rights to ownership or use ofintellectual property, the scope and direction of research and development, theapproach for regulatory approvals or commercialization strategy. We intend toconduct research programs in a range of therapeutic areas, but our pursuit ofthese opportunities could result in conflicts with the other parties to theseagreements who may be developing or selling pharmaceuticals or conducting otheractivities in these same therapeutic areas. Any disputes or commercialconflicts could lead to the termination of our agreements, delay progress ofour product development programs, compromise our ability to renew agreements orobtain future agreements, lead to the loss of intellectual property rights orresult in costly litigation.

 

We collaborate withoutside scientific advisors and collaborators at academic and otherinstitutions that assist us in our research and development efforts. Ourscientific advisors are not our employees and may have other commitments thatlimit their availability to us. If a conflict of interest between their workfor us and their work for another entity arises, we may lose their services.

 

17

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

***We may encounter difficulties in managing our growth, whichcould adversely affect our operations.***

 

Since our inception in2004, we have grown to approximately 60 employees. We have experienced a periodof rapid growth that has placed a strain on our administrative and operationalinfrastructure. We expect this strain to continue as we continue to grow andseek to obtain and manage relationships with third parties. Our ability tomanage our operations and growth effectively depends upon the continualimprovement of our procedures, reporting systems, and operational, financial,and management controls. We may not be able to implement improvements in anefficient or timely manner and may discover deficiencies in existing systemsand controls. If we do not meet these challenges, we may be unable to takeadvantage of market opportunities, execute our business strategies or respondto competitive pressures which in turn may slow our growth or give rise toinefficiencies that would increase our losses.

 

We may acquire additionaltechnology and complementary businesses in the future. Acquisitions involvemany risks, any one of which could materially harm our business, including thediversion of management’s attention from core business concerns, failure toexploit acquired technologies, or the loss of key employees from either ourbusiness or the acquired business.

 

**Risksrelated to our financial results and need for additional financing**

 

***We have a history of operating losses, expect to incursignificant and increasing operating losses and may never be profitable.***

 

We were incorporated in March 2004and have a very limited operating history for you to evaluate our business. Wehave no approved products and have generated no product revenue. We haveincurred operating losses since our inception in 2004. As of March 31,2008, we had an accumulated deficit of $68.7 million.  We have spent, and expect to continue tospend, significant resources to fund research and development of our productcandidates. We expect to incur substantial and increasing operating losses overthe next several years as our research, development, preclinical testing, andclinical trial activities increase. As a result, our accumulated deficit willalso increase significantly.

 

Our product candidatesare in the early stages of development and may never result in any revenue. Wewill not be able to generate product revenue unless and until one of ourproduct candidates successfully completes clinical trials and receivesregulatory approval. As our most advanced product candidates are at an earlyproof-of-concept stage, we do not expect to receive revenue from any productcandidate for the foreseeable future. We may seek to obtain revenue fromcollaboration or licensing agreements with third parties. We currently have nosuch agreements which will provide us with material, ongoing future revenue andwe may never enter into any such agreements. Even if we eventually generate revenues, we may never be profitable, andif we do achieve profitability, we may not be able to sustain or increaseprofitability on a quarterly or annual basis.

 

***We may be unable to raise the substantial additional capitalthat we will need to sustain our operations.***

 

We will need substantialadditional funds to support our planned operations. Based on our currentoperating plans, we expect our existing resources to be sufficient to fund ourplanned operations until at least early 2010. We may, however, need to raiseadditional funds before that date if our research and development expenses exceedour current expectations. This could occur for many reasons, including:

 

·                  some or all of our product candidatesfail in clinical or preclinical studies and we are forced to seek additionalproduct candidates;

 

·                  our product candidates require more extensiveclinical or preclinical testing than we currently expect;

 

·                  we advance more of our productcandidates than expected into costly later stage clinical trials;

 

·                  we advance more preclinical productcandidates than expected into early stage clinical trials;

 

·                  we are required, or consider itadvisable, to acquire or license rights from one or more third parties; or

 

·                  we acquire or license rights toadditional product candidates or new technologies.

 

While we expect to seekadditional funding through public or private financings, we may not be able toobtain financing on acceptable terms, or at all. In addition, the terms of ourfinancings may be dilutive to, or otherwise adversely affect, holders of ourcommon stock. We may also seek additional funds through arrangements withcollaborators or other third parties. These arrangements would generallyrequire us to relinquish rights to some of our technologies, product candidatesor products, and we may not be able to enter into such agreements, on acceptableterms, if at all. These arrangements also may include issuances of equity,which may also be dilutive to, or otherwise adversely affect, holders of ourcommon stock.  If we are unable to obtainadditional funding on a timely basis, we may be required to curtail orterminate some or all of our research or development programs, including someor all of our product candidates.

 

18

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

**Risksrelated to regulatory approvals**

 

***Our product candidates must undergo rigorous clinical trialsand regulatory approvals, which could delay or prevent commercialization of ourproduct candidates.***

 

All of our productcandidates will be subject to rigorous and extensive clinical trials andextensive regulatory approval processes implemented by the FDA and similarregulatory bodies in other countries. The approval process is typically lengthyand expensive, and approval is never certain. We or our collaborators, if any,may delay, suspend or terminate clinical trials at any time for reasonsincluding:

 

·                  ongoing discussions with the FDA orcomparable foreign authorities regarding the scope or design of our clinicaltrials;

 

·                  delays or the inability to obtainrequired approvals from institutional review boards or other governing entitiesat clinical sites selected for participation in our clinical trials;

 

·                  delays in enrolling patients andvolunteers into clinical trials;

 

·                  lower than anticipated retentionrates of patients and volunteers in clinical trials;

 

·                  the need to repeat clinical trials asa result of inconclusive or negative results or poorly executed testing;

 

·                  insufficient supply or deficientquality of product candidate materials or other materials necessary to conductour clinical trials;

 

·                  unfavorable FDA inspection and reviewof a clinical trial site or records of any clinical or preclinical investigation;

 

·                  serious and unexpected drug-relatedside effects or adverse device effects experienced by participants in ourclinical trials; or

 

·                  the placement of a clinical hold on atrial.

 

The use of commerciallyavailable resveratrol could adversely affect our development or the approval ofSRT501, which is our proprietary formulation of resveratrol, if any adverseside effects become associated with such commercially available resveratrolproducts. Such use could also adversely affect our ability to market andcommercialize our product candidates.

 

Positive or timelyresults from preclinical studies and early clinical trials do not ensurepositive or timely results in late stage clinical trials or product approval bythe FDA or any other regulatory authority. Product candidates that showpositive preclinical or early clinical results often fail in later stageclinical trials. Data obtained from preclinical and clinical activities issusceptible to varying interpretations, which could delay, limit, or preventregulatory approvals.

 

We have limitedexperience in conducting the clinical trials required to obtain regulatoryapproval. We may not be able to conduct clinical trials at preferred sites,enlist clinical investigators, enroll sufficient numbers of participants, orbegin or successfully complete clinical trials in a timely fashion, if at all.Any failure to perform may delay or terminate the trials. Our current clinicaltrials may be insufficient to demonstrate that our potential products will beactive, safe, or effective. Additional clinical trials may be required ifclinical trial results are negative or inconclusive, which will require us toincur additional costs and significant delays. If we do not receive thenecessary regulatory approvals, we will not be able to generate productrevenues and may not become profitable.

 

***The regulatory approval process is costly and lengthy and wemay not be able to successfully obtain all required regulatory approvals.***

 

The preclinicaldevelopment, clinical trials, manufacturing, marketing and labeling ofpharmaceuticals are all subject to extensive regulation by numerousgovernmental authorities and agencies in the United States and other countries.We must obtain regulatory approval for each of our product candidates beforemarketing or selling any of them. It is not possible to predict how long theapproval processes of the FDA or any other applicable federal or foreignregulatory authority or agency for any of our products will take or whether anysuch approvals ultimately will be granted. The FDA and foreign regulatoryagencies have substantial discretion in the drug approval process, and positiveresults in preclinical testing or early phases of clinical studies offer noassurance of success in later phases of the approval process. Generally,preclinical and clinical testing of products can take many years and requirethe expenditure of substantial resources, and the data obtained from thesetests and trials can be susceptible to varying interpretations that could delay,limit or prevent regulatory approval. If we encounter significant delays in theregulatory process that result in excessive costs, this may prevent us fromcontinuing to develop our product candidates. Any delay in obtaining, orfailure to obtain, approvals could adversely affect the marketing of ourproducts and our ability to generate product revenue. The risks associated withthe approval process include:

 

19

----

** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

·                  failure of our product candidates tomeet a regulatory agency’s requirements for safety, efficacy and quality;

 

·                  limitation on the indicated uses forwhich a product may be marketed;

 

·                  unforeseen safety issues or sideeffects; and

 

·                  governmental or regulatory delays andchanges in regulatory requirements and guidelines.

 

The FDA has grantedorphan-drug status to SRT501 for the treatment of MELAS syndrome.  We have filed for Orphan Drug status forSRT501 for MELAS in the European Union and are currently in discussion withregulatory agencies. The FDA and the European Union regulatory authoritiesgrant Orphan Drug designation to drugs intended to treat a rare disease orcondition, which is generally a disease or condition that affects fewer than200,000 individuals in the United States and fewer than 5 in 10,000 individualsin the European Union. In the United States, a product that has Orphan Drugdesignation and receives the first FDA approval for the disease, for which ithas such designation, is entitled to market exclusivity, except in very limitedcircumstances, for seven years. However, if a competitor has Orphan Drug statusfor its own product and is first to obtain approval of the same drug, asdefined by the FDA, for the Orphan Drug indication, or if our product candidateis determined to be contained within the competitor’s product for the sameindication or disease, then that competitor would have market exclusivity andapproval of our product for that indication or disease could potentially beblocked for seven years. Orphan Drug designation does not convey any advantagein, or shorten the duration of, the regulatory review and approval process.Obtaining Orphan Drug designation may not provide us with a material commercialadvantage.

 

***Even if we receive regulatory approvals for marketing ourproduct candidates, if we fail to comply with continuing regulatoryrequirements, we could lose our regulatory approvals, and our business would beadversely affected.***

 

The FDA and otherregulatory authorities continue to review products even after they receiveinitial approval. If we receive approval to commercialize any product candidates,the manufacturing, testing, marketing, sale and distribution of these drugswill be subject to continuing regulation, including compliance with qualitysystems regulations, good manufacturing practices, adverse event requirements,and prohibitions on promoting a product for unapproved uses. Enforcementactions resulting from our failure to comply with government and regulatoryrequirements could result in fines, suspension of approvals, withdrawal ofapprovals, product recalls, product seizures, mandatory operating restrictions,criminal prosecution, civil penalties and other actions that could impair themanufacturing, testing, marketing, sale and distribution of our potentialproducts and our ability to conduct our business.

 

***Even if we are able to obtain regulatory approvals for anyof our product candidates, if they exhibit harmful side effects after approval,our regulatory approvals could be revoked or otherwise negatively impacted, andwe could be subject to costly and damaging product liability claims.***

 

Even if we receiveregulatory approval for SRT501 or any of our NCEs, we will have tested them inonly a small number of patients during our clinical trials. If our applicationsfor marketing are approved and more patients begin to use our product, newrisks and side effects associated with our products may be discovered. As aresult, regulatory authorities may revoke their approvals; we may be requiredto conduct additional clinical trials, make changes in labeling of our product,reformulate our product or make changes and obtain new approvals for our andour suppliers’ manufacturing facilities. We might have to withdraw or recallour products from the marketplace. We may also experience a significant drop inthe potential sales of our product if and when regulatory approvals for suchproduct are obtained, experience harm to our reputation in the marketplace orbecome subject to lawsuits, including class actions. Any of these results coulddecrease or prevent any sales of our approved product or substantially increasethe costs and expenses of commercializing and marketing our product.

 

***Healthcare reform measures could adversely affect ourbusiness.***

 

The efforts ofgovernmental and third-party payers to contain or reduce the costs ofhealthcare may adversely affect the business and financial condition ofpharmaceutical companies. In the United States and in foreign jurisdictionsthere have been, and we expect that there will continue to be, a number oflegislative and regulatory proposals aimed at changing the healthcare system.For example, in some countries other than the United States, pricing ofprescription drugs is subject to government control, and we expect proposals toimplement similar controls in the United States to continue. The pendency orapproval of such proposals could result in a decrease in our common stock priceor limit our ability to raise capital or to enter into collaborations orlicense rights to our products.

 

***New federal legislation may increase the pressure to reduceprices of pharmaceutical products paid for by Medicare, which could adverselyaffect our revenues, if any.***

 

The Medicare PrescriptionDrug Improvement and Modernization Act of 2003, or MMA, expanded Medicarecoverage for drug purchases by the elderly and disabled beginning in 2006. Thenew legislation uses formularies, preferred drug lists and similar mechanismsthat may limit the number of drugs that will be covered in any therapeuticclass or reduce the reimbursement for some of 

 

20

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

the drugs in a class.

 

As a result of theexpansion of legislation and the expansion of federal coverage of drugproducts, we expect that there will be additional pressure to contain andreduce costs. Indeed, legislation that would permit the federal government tonegotiate drug prices directly with manufacturers under the Medicareprescription drug programs is currently under consideration. These costreduction initiatives could decrease the coverage and price that we receive forour products in the future and could seriously harm our business. While the MMAapplies only to drug benefits for Medicare beneficiaries, private payers oftenfollow Medicare coverage policy and payment limitations in setting their ownreimbursement systems, and any limits on or reductions in reimbursement thatoccur in the Medicare program may result in similar limits on or reductions inpayments from private payers.

 

***New federal laws or regulations on drug importation couldmake lower cost versions of our future products available, which couldadversely affect our revenues, if any.***

 

The prices of some drugsare lower in other countries than in the United States because of governmentregulation and market conditions. Under current law, importation of drugs intothe United States is generally not permitted unless the drugs are approved inthe United States and the entity that holds that approval consents to theimportation. Various proposals have been advanced to permit the importation ofdrugs from other countries to provide lower cost alternatives to the productsavailable in the United States. In addition, the MMA requires the Secretary ofHealth and Human Services to promulgate regulations for drug reimportation fromCanada into the United States under some circumstances, including when thedrugs are sold at a lower price than in the United States.

 

If the laws orregulations are changed to permit the importation of drugs into the UnitedStates in circumstances that are currently not permitted, such a change couldhave an adverse effect on our business by making available lower pricedalternatives to our future products.

 

***Failure to obtain regulatory and pricing approvals inforeign jurisdictions could delay or prevent commercialization of our productsabroad.***

 

If we succeed indeveloping any products, we intend to market them in the European Union andother foreign jurisdictions. In order to do so, we must obtain separateregulatory approvals and comply with numerous and varying regulatoryrequirements. The approval procedure varies among countries and can involveadditional testing. The time required to obtain approval abroad may differ fromthat required to obtain FDA approval. The foreign regulatory approval processmay include all of the risks associated with obtaining FDA approval andadditional risks associated with requirements particular to those foreignjurisdictions where we will seek regulatory approval of our products. We maynot obtain foreign regulatory approvals on a timely basis, if at all. Approvalby the FDA does not ensure approval by regulatory authorities in othercountries, and approval by one foreign regulatory authority does not ensureapproval by regulatory authorities in other foreign countries or by the FDA. Weand our collaborators may not be able to file for regulatory approvals and maynot receive necessary approvals to commercialize our products in any marketoutside the United States. The failure to obtain these approvals couldmaterially adversely affect our business, financial condition and results ofoperations.

 

**Risksrelated to our intellectual property**

 

***Our success depends upon our ability to obtain and maintainintellectual property protection for our products and technologies.***

 

Our success will dependon our ability to obtain and maintain adequate protection of our intellectualproperty covering any products or product candidates we plan to develop. Inaddition to taking other steps to protect our intellectual property, we intendto apply for patents with claims covering our technologies, processes, productsand product candidates when and where we deem it appropriate to do so. We haveapplied for patent protection, with claims directed at mechanism and methodsrelating to our product candidates, SRT501 formulations, our NCEs and severalof our drug discovery tools in the United States, and in some, but not all, foreigncountries. Any changes we make to the SRT501 formulations may not be covered byour existing patent applications which would require us to file newapplications or seek other forms of protection. In addition, resveratrol, theactive ingredient in SRT501, our most advanced product candidate, cannot beprotected by a patent covering its chemical composition of matter sinceresveratrol has long been in the public domain. Consequently, we are relying onmethod of use and formulation patent protection for SRT501, which may notprovide the same level of protection as composition of matter patentprotection. In countries where we have not and do not seek patent protection,third parties may be able to manufacture and sell our products without ourpermission, and we may not be able to stop them from doing so.

 

Similar to otherbiotechnology companies, our patent position is generally uncertain andinvolves complex legal and factual questions. In addition, the laws of someforeign countries do not protect proprietary rights to the same extent as thelaws of the United States, and other biotechnology companies have encounteredsignificant problems in protecting and defending their proprietary rights inforeign jurisdictions. Whether filed in the United States or abroad, our patentapplications may be challenged or may fail to result in issued patents. Inaddition, our existing patents and any future patents we obtain may not besufficiently broad to prevent others from practicing our technologies or fromdeveloping or commercializing competing products. Furthermore, others mayindependently develop or commercialize similar or alternative technologies ordrugs, or design around our patents. Our patents may be challenged, 

 

21

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

invalidated or fail toprovide us with any competitive advantages.

 

We have licensed somepatents on a non-exclusive basis which means such patents could, now or in thefuture, potentially be licensed to our competitors as well, and we may not beable to control or influence the prosecution or enforcement of such patents. Wealso may not have unilateral control over the prosecution and enforcement ofour exclusively licensed patents, and our ability to protect our products usingsuch patents may depend to some extent on the cooperation of our licensors.

 

If we do not obtain or weare unable to maintain adequate patent or trade secret protection for ourproducts in the United States, competitors could duplicate them withoutrepeating the extensive testing that we will be required to undertake to obtainapproval of the products by the FDA. Regardless of any patent protection, underthe current statutory framework the FDA is prohibited by law from approving anygeneric version of any of our products for three years after it has approvedour product. Upon the expiration of that period, or if that time period isaltered, the FDA could approve a generic version of our product unless we havepatent protection sufficient for us to block that generic version. Withoutsufficient patent protection, the applicant for a generic version of our productwould be required only to conduct a relatively inexpensive study to show thatits product is bioequivalent to our product and would not have to repeat thestudies that we conducted to demonstrate that the product is safe andeffective. In the absence of adequate patent protection in other countries,competitors may similarly be able to obtain regulatory approval in thosecountries of products that duplicate our products.

 

A significant portion ofour discovery and development efforts is performed in China and other countriesoutside of the United States through third party contractors. We may not beable to effectively monitor and assess intellectual property developed by thesecontractors and may therefore not appropriately protect this intellectual propertyand lose valuable intellectual property rights. In addition, the legalprotection afforded to inventors and owners of intellectual property incountries outside of the United States may not be as protective of intellectualproperty rights as in the United States, and we may, therefore, be unable toacquire and protect intellectual property developed by these contractors to thesame extent as if these discovery and development activities were beingconducted in the United States.

 

***We may be unable to in-license intellectual property rightsor technology necessary to develop and commercialize our products.***

 

Several third parties areactively researching and seeking patents and have obtained issued patents inthe sirtuin field. Such patents being sought by third parties include publishedapplications that are directed to the use of activators of SIRT1, which includeclaims that, if issued as published, could encompass SRT501. Although we do notbelieve that these applications support patentable claims that would cover ourproduct candidates, including SRT501, we cannot assure you that such claimswill be denied by the patent office. There can be no assurance that such licenses will be available oncommercially reasonable terms, or at all. If a third party does not offer us anecessary license or offers a license only on terms that are unattractive orunacceptable to us, we might be unable to develop and commercialize one or moreof our product candidates.

 

Moreover, if we fail tomeet our obligations under our license agreements, or our agreements areterminated for any other reasons, we may lose our rights to in-licensedtechnologies.

 

***Confidentiality agreements with employees and others may notadequately prevent disclosure of trade secrets and other proprietaryinformation.***

 

In our activities, werely substantially upon proprietary materials, information, trade secrets andknow-how to conduct our research and development activities, and to attract andretain collaborators, licensees and customers. Our scientific advisors andcollaborators gain access to valuable proprietary knowledge through theiractivities in collaboration with us. We take steps to protect our proprietaryrights and information, including the use of confidentiality and otheragreements with our employees and consultants and in our academic andcommercial relationships. However, these steps may be inadequate, agreementsmay be violated, or there may be no adequate remedy available for a violationof an agreement. We cannot assure you that our proprietary information will notbe disclosed or that we can meaningfully protect our trade secrets. Ourcompetitors may independently develop substantially equivalent proprietaryinformation or may otherwise gain access to our trade secrets, which could adverselyaffect our ability to compete in the market.

 

***Litigation or third party claims of intellectual propertyinfringement could require substantial time and money to resolve. Unfavorableoutcomes in these proceedings could limit our intellectual property rights andour activities.***

 

We may need to resort tolitigation to enforce or defend our intellectual property rights, including anypatents issued to us. If a competitor or collaborator files a patentapplication claiming technology also invented by us, in order to protect ourrights, we may have to participate in an expensive and time consuminginterference proceeding before the United States Patent and Trademark Office.We cannot guarantee that our product candidates will be free of claims by thirdparties alleging that we have infringed their intellectual property rights.Third parties may assert that we are employing their proprietary technologieswithout authorization and they may resort to litigation to attempt to enforcetheir rights. Third parties may have or obtain patents in the future and claimthat the use of our technology or any of our product candidates infringes theirpatents. We may not be able to develop or commercialize 

 

22

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

product candidatesbecause of patent protection others have. Our business will be harmed if wecannot obtain a necessary or desirable license, can obtain such a license onlyon terms we consider to be unattractive or unacceptable, or if we are unable toredesign our product candidates or processes to avoid actual or potentialpatent or other intellectual property infringement. Obtaining, protecting anddefending patent and other intellectual property rights can be expensive andmay require us to incur substantial costs, including the diversion ofmanagement and technical personnel. An unfavorable ruling in patent orintellectual property litigation could subject us to significant liabilities tothird parties, require us to cease developing, manufacturing or selling theaffected products or using the affected processes, require us to license thedisputed rights from third parties, or result in awards of substantial damagesagainst us.

 

There can be no assurancethat we would prevail in any intellectual property infringement action, will beable to obtain a license to any third party intellectual property on commerciallyreasonable terms, successfully develop non-infringing alternatives on a timelybasis, or license non-infringing alternatives, if any exist, on commerciallyreasonable terms. Any significant intellectual property impediment to ourability to develop and commercialize our products could seriously harm ourbusiness and prospects.

 

***Patent litigation or other litigation in connection with ourintellectual property rights may lead to publicity that may harm our reputationand the market price of our common stock may decline.***

 

During the course of anypatent litigation, there may be public announcements of the results ofhearings, motions, and other interim proceedings or developments in thelitigation. If securities analysts or investors regard these announcements asnegative, the market price of our common stock may decline. Generalproclamations or statements by key public figures may also have a negativeimpact on the perceived value of our intellectual property.

 

**Risksrelated to our industry**

 

***Our competitors and potential competitors may developproducts and technologies that make ours less attractive or obsolete.***

 

Many companies,universities, and research organizations developing competing productcandidates have greater resources and significantly greater experience infinancial, research and development, manufacturing, marketing, sales,distribution, and technical regulatory matters than we have. In addition, manycompetitors have greater name recognition and more extensive collaborativerelationships. Our competitors could commence and complete clinical testing oftheir product candidates, obtain regulatory approvals, and begincommercial-scale manufacturing of their products faster than we are able to forour products. They could develop products that would render our productcandidates, and those of our collaborators, obsolete and noncompetitive. If weare unable to compete effectively against these companies, then we may not beable to commercialize our product candidates or achieve a competitive positionin the market. This would adversely affect our ability to generate revenues.

 

***Competition in the biotechnology and pharmaceuticalindustries may result in competing products, superior marketing of otherproducts and lower revenues or profits for us.***

 

There are many companiesthat are seeking to develop products and therapies for the treatment ofdiabetes and other metabolic disorders. Our competitors include multinationalpharmaceutical and chemical companies, specialized biotechnology firms and universitiesand other research institutions. A number of pharmaceutical companies,including Abbott, AstraZeneca, Bayer, Bristol-Myers Squibb, GlaxoSmithKline,Johnson & Johnson, Lilly, Merck, Novartis, Novo Nordisk, Pfizer,Roche, Sanofi-Aventis, Takeda and Wyeth, as well as large and smallbiotechnology companies such as Amgen, Amylin, Genentech and MannKind, arepursuing the development or marketing of pharmaceuticals that target the samediseases that we are targeting, and it is possible that the number of companiesseeking to develop products and therapies for the treatment of diabetes andother metabolic disorders will increase. We are also aware of other companies,including Elixir Pharmaceuticals and Pharmion that are seeking to develop drugsthat modulate sirtuins. Many of our competitors have substantially greaterfinancial, technical, human and other resources than we do and may be betterequipped to develop, manufacture and market technologically superior products.In addition, many of these competitors have significantly greater experiencethan we do in undertaking preclinical testing and human clinical studies of newpharmaceutical products and in obtaining regulatory approvals of humantherapeutic products. Accordingly, our competitors may succeed in obtaining FDAapproval for superior products.

 

Other products arecurrently in development or exist in the market that may compete directly withthe products that we are developing or marketing. Various other products totreat Type 2 Diabetes are available or are in development, including:

 

·                  Biguanides;

 

·                  Sulfonylureas;

 

·                  Thiazolidinediones (TZDs);

 

·                  Alpha-glucosidase inhibitors (AGIs);

 

23

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

·                  Dipeptidyl peptidase 4 (DPP4)inhibitors;

 

·                  Glucagon-like peptide-1 (GLP-1)analogues; and

 

·                  Insulins, including injectable andinhaled versions.

 

In addition, severalcompanies are developing various approaches to improve treatments for Type 1and Type 2 Diabetes. We cannot predict whether any products we successfullydevelop will have sufficient advantages to cause health care professionals toadopt them over our competitors’ products or that our products will offer aneconomically feasible alternative to our competitors’ products. Our potentialproducts could become obsolete before we recover expenses incurred indeveloping them.

 

***We may have significant product liability exposure which mayharm our business and our reputation.***

 

We face exposure toproduct liability and other claims if our product candidates, products orprocesses are alleged to have caused harm. These risks are inherent in thetesting, manufacturing, and marketing of human therapeutic products. Althoughwe currently maintain product liability insurance in the amount of$5.0 million, we may not have sufficient insurance coverage, and we maynot be able to obtain sufficient coverage at a reasonable cost, if at all. Ourinability to obtain product liability insurance at an acceptable cost or tootherwise protect against potential product liability claims could prevent orinhibit the commercialization of any products or product candidates that wedevelop. If we are sued for any injury caused by our products, productcandidates or processes, our liability could exceed our product liabilityinsurance coverage and our total assets. Claims against us, regardless of theirmerit or potential outcome, may also generate negative publicity or hurt ourability to obtain physician endorsement of our products or expand our business.

 

***We use and generate materials that may expose us toexpensive and time-consuming legal claims.***

 

Our research and developmentprograms involve the use of hazardous materials, chemicals and radioactive andbiological materials. We are subject to foreign, federal, state and localenvironmental and health and safety laws and regulations governing, among othermatters, the use, manufacture, handling, storage, and disposal of hazardousmaterials and waste products. We may incur significant costs to comply withthese current or future environmental and health and safety laws andregulations. In addition, we cannot completely eliminate the risk ofcontamination or injury from hazardous materials and may incur materialliability as a result of such contamination or injury. In the event of anaccident, an injured party may seek to hold us liable for any damages thatresult. Any liability could exceed the limits or fall outside the coverage ofour workers’ compensation, property and business interruption insurance and wemay not be able to maintain insurance on acceptable terms, if at all. Wecurrently carry no insurance specifically covering environmental claims.

 

**Risksrelated to an investment in our Common Stock**

 

***Our common stock may have a volatile public trading priceand a low trading volume.***

 

The market prices forsecurities of companies comparable to us have been highly volatile. Often,these stocks have experienced significant price and volume fluctuations forreasons unrelated to the operating performance of the individual companies. Themarket price of our stock has been, and may continue to be volatile.  Factors giving rise to this volatility mayinclude:

 

·                  the merger agreement with GSK.

 

·                  disclosure of actual or potentialresults with respect to product candidates we are developing;

 

·                  regulatory developments in both theUnited States and abroad;

 

·                  developments concerning proprietaryrights, including patents and litigation matters;

 

·                  public concern about the safety orefficacy of our product candidates or technology, or related technology, or newtechnologies generally;

 

·                  public announcements by ourcompetitors or others;

 

·                  general market conditions andcomments by securities analysts and investors; and

 

***Fluctuations in our operating losses could adversely affectthe price of our common stock.***

 

Our operating losses mayfluctuate significantly on a quarterly and annual basis. Some of the factorsthat may cause our operating 

 

24

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

losses to fluctuate on aperiod-to-period basis include the status of our preclinical and clinicaldevelopment programs, level of expenses incurred in connection with ourpreclinical and clinical development programs, implementation or termination ofcollaboration, licensing, manufacturing or other material agreements with thirdparties, non-recurring revenue or expenses under any such agreement, andcompliance with regulatory requirements. Period-to-period comparisons of ourhistorical and future financial results may not be meaningful, and investorsshould not rely on them as an indication of future performance. Our fluctuatinglosses may fail to meet the expectations of securities analysts or investors.Our failure to meet these expectations may cause the price of our common stockto decline.

 

***Because of expected volatility in our trading price andtrading volume, we may incur significant costs from class action litigation.***

 

Our stock price mayfluctuate for many reasons, including as a result of public announcementsregarding the progress of our development efforts, the addition or departure ofour key personnel, variations in our quarterly and annual operating results andchanges in market valuations of pharmaceutical, biotechnology or other lifescience companies. Recently, when the market price of a stock has beenvolatile, as our stock price has been and may continue to be, holders of thatstock have occasionally brought securities class action litigation against thecompany that issued the stock. If any of our stockholders were to bring alawsuit of this type against us, even if the lawsuit is without merit, we couldincur substantial costs defending the lawsuit. A stockholder lawsuit could alsodivert the time and attention of our management, which could adversely affectour business.

 

***Future sales of our common stock may cause the market priceof our common stock to decline.***

 

The market price of ourcommon stock may decline if our stockholders or we sell shares of our commonstock.  A small number of stockholdersown a significant number of shares that they are able to sell in the publicmarket.  Sales by our currentstockholders of a substantial number of shares, or the expectation that suchsales may occur, could significantly reduce the market price of our commonstock.  Moreover, the holders of asubstantial number of shares of common stock have rights, subject to certainconditions, to require us to file registration statements to permit the resaleof their shares in the public market or to include their shares in registrationstatements that we may file for ourselves or other stockholders.

 

We filed a registrationstatement ninety days following our initial public offering to permit the saleof shares of our common stock that we may issue under our stock optionplan.  As a result, these shares may befreely sold in the public market upon issuance, subject to restrictions underthe securities laws and lock-up agreements.

 

***Our management team may invest or spend the proceeds fromour initial public offering in ways with which our stockholders may not agreeor in ways which may not yield a significant return.***

 

We may allocate theproceeds from our initial public offering in ways that stockholders may notsupport. Our management has considerable discretion in the application of thenet proceeds of our initial public offering. We may use the net proceeds for corporate purposes that do not increaseour profitability or our stock price. Until the net proceeds are used, weintend to invest them in accordance with our investment policy, which includesinvestments in short-term, interest-bearing, investment-grade securities orguaranteed obligations of the United States or other governments or theiragencies.

 

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

 

As a public company, weare incurring and will continue to incur significant legal, accounting and otherexpenses that we did not incur as a private company.  In addition, the Sarbanes-Oxley Act, as wellas rules adopted or proposed by the United States Securities and ExchangeCommission, or SEC, and by The NASDAQ Global Market, have imposed various requirementson public companies, including establishment and maintenance of effectivedisclosure and financial controls and changes in corporate governancepractices.  Our management and otherpersonnel are required to devote a substantial amount of time to thesecompliance initiatives.  Moreover, these rules andregulations have already and will continue to increase our legal and financialcompliance costs and will make some activities more time-consuming andcostly.  For example, we expect theselaws and regulations will make it more difficult and more costly for us toobtain certain types of insurance, including director and officer liabilityinsurance, and we may be forced to accept reduced policy limits and coverage orincur substantially higher costs to obtain the same or similar coverage. Theimpact of these events could also make it more difficult for us to attract andretain qualified persons to serve on our board of directors, our boardcommittees or as executive officers. We cannot estimate the amount or timing ofadditional costs we may incur as a result of these laws and regulations.

 

***Section 404 of the Sarbanes-Oxley Act of 2002 willrequire us to document and test our internal control over financial reportingfor fiscal year 2008 and beyond and will require an independent registeredpublic accounting firm to report on our assessment as to the effectiveness ofthese controls. Any delays or difficulty in satisfying these requirements couldadversely affect our future results of operations and our stock price.***

 

Section 404 of theSarbanes-Oxley Act of 2002 will require us to document and test theeffectiveness of our internal control over 

 

25

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

financial reporting inaccordance with an established internal control framework and to report on ourconclusion as to the effectiveness of our internal controls. It will alsorequire an independent registered public accounting firm to test our internalcontrol over financial reporting and report on the effectiveness of suchcontrols for our fiscal year ending December 31, 2008 and subsequentyears. An independent registered public accounting firm will also be requiredto test, evaluate and report on the completeness of our assessment. Inaddition, we are required under the Securities Exchange Act of 1934 to maintaindisclosure controls and procedures and internal control over financialreporting. Moreover, it may cost us more than we expect to comply with thesecontrol and procedure-related requirements.

 

We may in the futurediscover areas of our internal controls that need improvement. We cannot becertain that any remedial measures we take will ensure that we implement andmaintain adequate internal controls over our financial processes and reportingin the future. Any failure to implement required new or improved controls, ordifficulties encountered in their implementation, could harm our operatingresults or cause us to fail to meet our reporting obligations. If we are unableto conclude that we have effective internal control over financial reporting,or if our independent registered public accounting firm is unable to provide uswith an unqualified opinion regarding the effectiveness of our internal controlover financial reporting as of December 31, 2008 and in future periods asrequired by Section 404, investors could lose confidence in the reliabilityof our consolidated financial statements, which could result in a decrease inthe value of our common stock. Failure to comply with Section 404 couldpotentially subject us to sanctions or investigations by the SEC, the NASD orother regulatory authorities.

 

***Anti-takeover provisions in our charter documents andprovisions of Delaware law may make an acquisition more difficult.***

 

We are incorporated inDelaware. Anti-takeover provisions of Delaware law and our charter documentsmay make a change in control more difficult. Also, under Delaware law, ourboard of directors may adopt additional anti-takeover measures.

 

Our charter authorizesour board of directors to issue up to 20,000,000 shares of preferred stock andto determine the terms of those shares of stock without any further action byour stockholders. If the board of directors exercises this power to issuepreferred stock, it could be more difficult for a third party to acquire amajority of our outstanding voting stock.

 

Our charter also providesstaggered terms for the members of our board of directors. Under Section 141of the Delaware General Corporation Law, our directors may be removed bystockholders only for cause and only by a vote of the holders of a majority ofvoting shares then outstanding.  Theseprovisions may prevent stockholders from replacing the entire board in a singleproxy contest, making it more difficult for a third party to acquire control ofus without the consent of our board of directors.  These provisions could also delay the removalof management by the board of directors with our without cause.  In addition, our bylaws limit the ability ofour stockholders to call special meetings of stockholders.

 

Our stock option plangenerally permits our board of directors to provide for acceleration of vestingof options granted under the plan in the event of certain transactions thatresult in a change of control. If our board of directors uses its authority toaccelerate vesting of options, this action could make an acquisition morecostly, and it could prevent an acquisition from going forward.

 

Under Section 203 ofthe Delaware General Corporation Law, a corporation may not engage in abusiness combination with any holder of 15% or more of its capital stock untilthe holder has held the stock for three years unless, among otherpossibilities, the board of directors approves the transaction. Our board ofdirectors could use this provision to prevent changes in management. Theexistence of the foregoing provisions could limit the price that investorsmight be willing to pay in the future for shares of our common stock.

 

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

 

***Use of Proceeds from Registered Securities***

 

Ourinitial public offering of common stock was effected through a RegistrationStatement on Form S-1 (File No. 333-140979), that was declaredeffective by the Securities and Exchange Commission on May 22, 2007, whichregistered an aggregate of 5,750,000 shares of our common stock.  On May 22, 2007, an additional 1,150,000shares of our common stock were registered through a Registration Statementfiled pursuant to Rule 462(b) (File No. 333-143174).  On May 29, 2007, we completed an initialpublic offering of 6,000,000 shares of our common stock at a price to thepublic of $10.00 per share.  J.P. MorganSecurities Inc, CIBC World Markets Corp., Piper Jaffray & Co., JMPSecurities LLC and Rodman & Renshaw, LLC were the managingunderwriters of the initial public offering. In addition, on May 29, 2007 in connection with the exercise of theunderwriters’ over-allotment option, 900,000 additional shares of common stockwere sold on our behalf at the initial public offering price of $10.00 pershare, for aggregate gross proceeds of $9.0 million.  There were no selling stockholders in theoffering.

 

Wepaid $4.8 million in underwriting discounts to the underwriters in connectionwith the offering.  In addition, weincurred additional costs of approximately $1.7 million in connection with theoffering, which then added to the 

 

26

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** **

**SirtrisPharmaceuticals, Inc.**

**(Adevelopment-stage company)**

 

**Notesto Consolidated Financial Statements**

(*in thousands, except share and per share amounts*)

*(Unaudited)*

 

underwriting discountspaid by us, amounts to total expenses of approximately $6.5 million.  Thus the net offering proceeds to us, afterdeducting underwriting discounts and offering expenses, were approximately$62.5 million.  No offering expenses werepaid directly or indirectly to any of our directors or officers (or theirassociates) or persons owning ten percent or more of any class of our equitysecurities or to any other affiliates.

 

Wehave used approximately $30.9 million of the net proceeds from the initialpublic offering to fund the clinical development of SRT501, to advance andexpand our preclinical development of additional product candidates targetingSIRT1, other sirtuins and related pathways, and for working capital, capitalexpenditures and other general corporate purposes. We have invested the unusedproceeds from the offering in short-term interest-bearing, investment gradesecurities.

 

**Item 3. Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4. Submission of Matters To aVote of Security Holders.**

 

None.

 

**Item 5. Other Information.**

 

Thedescription of the lease amendment for 200 Technology Square, Cambridge,Massachusetts, is described in Form 8-K filed November 9, 2007 withthe Securities and Exchange Commission and above in Part 1, Item 2 under “ContractualObligations”.

 

**Item 6. Exhibits.**

 

(a) **Exhibits.**

 

The Exhibits listed inthe Exhibit Index immediately preceding the Exhibits are filed as a partof this Quarterly Report on Form 10-Q.

 

27

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                    |   | SIRTRIS  PHARMACEUTICALS, INC.                                         |
|-------------------------|--------|------------------------------------------------------------------------|
|                    |   |                                                                   |
|                    |   |                                                                   |
|                    | By:    | /s/ Christoph Westphal                                                 |
|                    |   | Christoph Westphal                                                     |
|                    |   | President and Chief  Executive Officer   (principal executive officer) |
|                    |   |                                                                   |
|                    |   |                                                                   |
|                    | By:    | /s/ Garen Bohlin                                                       |
|                    |   | Garen Bohlin                                                           |
|                    |   | Chief Operating Officer    (principal financial officer)               |
|                    |   |                                                                   |
|                    |   |                                                                   |
| Date: May 14, 2008 |   |                                                                   |

 

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**EXHIBITINDEX**

 
| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                               |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                                                                                          |
| 10.1              |       | Amendment to Warrant  issued to ARE-770/784/790 Memorial Drive, LLC, dated April 17, 2008.                                                                                    |
|              |       |                                                                                                                                                                          |
| 10.2              |       | Amendment  to Warrant issued to Hercules Technology Growth Capital, Inc. dated April 17,  2008.                                                                               |
|              |       |                                                                                                                                                                          |
| 31.1              |       | Certification of Chief  Executive Officer pursuant to Exchange Act rules 13a-14 or 15d-14.                                                                               |
|              |       |                                                                                                                                                                          |
| 31.2              |       | Certification of Chief  Operating Officer pursuant to Exchange Act rules 13a-14 or 15d-14.                                                                               |
|              |       |                                                                                                                                                                          |
| 32.1              |       | Certifications of Chief  Executive Officer and Chief Operating Officer pursuant to Exchange Act  rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350. |

 

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