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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 1/22/07  Optimer Pharmaceuticals Inc       S-1/A                 13:360                                    Merrill Corp/New/- FA

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Pre-Effective Amendment to Registration Statement   HTML  1,172K 
                          (General Form)                                         
 2: EX-1.1      Underwriting Agreement                              HTML    189K 
 3: EX-3.2      Articles of Incorporation/Organization or By-Laws   HTML     19K 
 4: EX-5.1      Opinion re: Legality                                HTML     10K 
 5: EX-10.4     Material Contract                                   HTML    261K 
 6: EX-10.5     Material Contract                                   HTML    199K 
 7: EX-10.6     Material Contract                                   HTML    223K 
 8: EX-10.11    Material Contract                                   HTML    123K 
 9: EX-10.12    Material Contract                                   HTML    226K 
10: EX-10.23    Material Contract                                   HTML     65K 
11: EX-10.24    Material Contract                                   HTML     61K 
12: EX-10.25    Material Contract                                   HTML     73K 
13: EX-23.2     Consent of Experts or Counsel                       HTML      8K 

As filed with the Securities and Exchange Commission on January 22, 2007

Registration No. 333-138555

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

OPTIMER PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

Subject to Completion, dated January 22, 2007

The information in this prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

5,250,000 Shares

Common Stock

Price $           per share

We are offering 5,250,000 shares of our common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $12.00 and $14.00 per share.

We expect our common stock to be listed on the Nasdaq Global Market under the symbol "OPTR."

This investment involves risks. See "Risk Factors" beginning on page 10.

The underwriters have a 30-day option to purchase up to 787,500 additional shares of common stock from the selling stockholder to cover over-allotments, if any. We will not receive any of the proceeds from the sale of these shares by the selling stockholder.

Neither the Securities and Exchange Commission nor any state securities commission has approved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on or about                           , 2007.

The date of this prospectus is                           , 2007.

   
TABLE OF CONTENTS

You should rely only on the information contained in this prospectus and in any free writing prospectus that we provide. We and the selling stockholder have not, and the underwriters have not, authorized any other person to provide you with different information. We and the selling stockholder are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.

   
PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements and the accompanying notes. References in this prospectus to "we," "us" and "our" refer to Optimer Pharmaceuticals, Inc., unless the context requires otherwise.

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing innovative anti-infective products. Our initial development efforts address products that treat gastrointestinal infections and related diseases where current therapies have limitations, including diminished efficacy, serious adverse side effects, drug-to-drug interactions, difficult patient compliance and bacterial resistance. We currently have two late-stage anti-infective product candidates, Difimicin and Prulifloxacin.

Difimicin, our lead product candidate, is an antibiotic currently in a Phase 2b/3 registration trial for the treatment of Clostridium difficile-associated diarrhea, or CDAD, the most common nosocomial, or hospital-acquired, diarrhea. CDAD is caused by infection of the lining of the colon by C. difficile bacteria, which results in severe diarrhea and, in serious cases, death. The U.S. Food and Drug Administration, or FDA, granted Difimicin Fast Track status for the treatment of CDAD and selected it to be the only investigational new drug in the Division of Anti-Infective and Ophthalmology Products' Continuous Marketing Applications, or CMA, Pilot 2 Program. These FDA programs are designed to facilitate and expedite development and marketing of drugs that address serious conditions for which there are no effective treatments, but participation in the programs will not eliminate any phase of clinical development. We believe that Difimicin is highly active against C. difficile, has a favorable safety profile and offers a more convenient dosing regimen than current treatments for CDAD.

We are developing Prulifloxacin for the treatment of infectious diarrhea. Prulifloxacin is an antibiotic currently in two Phase 3 trials for the treatment of travelers' diarrhea, a form of infectious diarrhea. We acquired the exclusive U.S. rights to develop and commercialize Prulifloxacin from Nippon Shinyaku Co., Ltd. in June 2004. Prulifloxacin has been marketed by other companies in Japan since 2002 to treat a wide range of bacterial infections, including infectious diarrhea, and in Italy since 2004 to treat urinary tract infections and respiratory tract infections, or RTIs. Prulifloxacin has been established by other parties to be well-tolerated as demonstrated by its use in the treatment of over two million patients. We believe that Prulifloxacin has a more convenient dosing regimen than current treatments for travelers' diarrhea, is active against a broad set of gastrointestinal pathogens and has a favorable safety profile.

We are developing additional product candidates using our proprietary technology, including our Optimer One-Pot Synthesis, or OPopS, drug discovery platform. OPopS is a computer-aided technology that enables the rapid and low cost synthesis of a wide array of carbohydrate-based compounds. Using this technology, we have identified product candidates for treating RTIs, serious nosocomial infections, breast cancer and osteoarthritis, a degenerative joint disease. We intend to license these product candidates opportunistically to third-party partners for further clinical development. We currently have no products approved for commercial sale and to date we have not generated any revenues from product sales.

1

Our Market Opportunity

The combined market for prescription antibacterial drugs in 2004 for the United States, Japan, Korea, Germany, France, Italy, the United Kingdom and Spain exceeded $20.0 billion, according to IMS Health, an independent marketing research firm. We believe there is a growing market for new anti-infective products due to limitations of current antibiotic treatments. These shortcomings include diminished efficacy, serious adverse side effects, drug-to-drug interactions, difficult patient compliance and bacterial resistance. We estimate that CDAD affected over 500,000 patients in the United States in 2005. The total projected annual cost for treating CDAD in Europe is approximately $3.8 billion according to data presented at the 2006 Interscience Conference on Antimicrobial Agents and Chemotherapy, and we believe that CDAD incidence is growing in patients worldwide. We believe that the incidence of CDAD may be higher than what is currently being reported because many hospitals are not required to and do not report incidents of CDAD. In addition, we estimate that approximately 23 million patients are treated with antibiotics for infectious diarrhea annually in the United States. The U.S. Centers for Disease Control and Prevention, or CDC, estimates that for the years 2005 and 2006 there are approximately 50,000 cases of travelers' diarrhea each day among the 50 million worldwide annual travelers to developing countries.

Our Product Candidates

The following table summarizes our product candidates and their current development status:

(1)

We filed an investigational new drug application, or IND, with the FDA for Difimicin (OPT-80) in August 2003.

(2)

We have granted our partner Par Pharmaceutical, Inc., or Par, rights to market Difimicin in North America and, at its option, Israel. We have the right to receive royalties from Par on any sales of Difimicin. We intend to use a portion of the net proceeds of this offering to repurchase these commercial rights from Par following completion of this offering subject to our continuing obligation to pay Par royalties on sales of Difimicin and net revenues we receive from any future license of rights to Difimicin to another party. We own all other commercial rights to Difimicin.

(3)

A proof-of-concept trial is an exploratory clinical trial to provide or establish evidence that a product candidate is efficacious for a target indication.

(4)

We filed an IND with the FDA for Prulifloxacin (OPT-99) in December 2005.

(5)

We have the right to receive royalties from Cempra Pharmaceuticals, Inc. on any sales of OPT-1068 and OPT-1273.

2

Difimicin (OPT-80)

Difimicin is a differentiated antibiotic for the treatment of CDAD. We believe that Difimicin offers advantages over current treatments due to its superior activity against C. difficile, low rates of recurrence, evidence of low C. difficile resistance, minimal systemic exposure, limited disruption of normally occurring gastrointestinal bacteria and convenient dosing regimen. Our studies indicate that Difimicin acts by inhibiting RNA polymerase, a bacterial enzyme, which results in the death of specific bacteria such as C. difficile. In May 2006, we initiated a Phase 2b/3 trial to compare the safety and efficacy of Difimicin dosed at 200 mg twice daily (400 mg/day), versus oral vancomycin, the only FDA-approved drug for the treatment of CDAD, dosed at 125 mg every six hours (500 mg/day) for ten days. In the initial Phase 2b trial, we plan to enroll a total of 100 CDAD patients at approximately 20 sites. Following an interim-blinded safety analysis by an independent data safety monitoring board, we intend to transition this trial to a Phase 3 trial in the first quarter of 2007. We plan to expand the number of sites in this trial to approximately 100 and target total enrollment of approximately 664 CDAD patients. We anticipate receiving data from this trial in the fourth quarter of 2007. We plan to initiate a second Phase 3 pivotal trial of the same design in the first half of 2007 and anticipate receiving data from this trial in the first half of 2008. If both trials are successful, we intend to file a new drug application, or NDA, in the second half of 2008.

In July 2005, we completed a Phase 2a open-label, dose-ranging, randomized safety and clinical evaluation study of Difimicin in patients with CDAD at five sites. A primary endpoint of the trial was clinical cure of CDAD. Among the 45 evaluated patients, only four patients failed to achieve clinical cure by the end of ten days of therapy, two of whom were in the lowest 100 mg/day dose group and two of whom were in the 200 mg/day dose group. None of the patients in the 400 mg/day dose group failed to achieve clinical cure. Two of the cured patients experienced recurrence within the six-week study period following therapy. The median cure times, or time-to-resolution of diarrhea, were as follows: 5.5 days for the 100 mg/day dose group, 3.5 days for the 200 mg/day dose group and 3.0 days for the 400 mg/day dose group.

In April 2005, we entered into an agreement with Par Pharmaceutical, Inc., or Par, a wholly-owned subsidiary of Par Pharmaceutical Companies, Inc. pursuant to which we agreed to exclusively collaborate with Par on the development and commercialization of Difimicin. We granted to Par an exclusive royalty bearing license, with the right to sublicense, promote, market, distribute and sell Difimicin in a territory composed of the United States, Canada and Puerto Rico, with an option to extend the territory to include Israel. We retained rights to receive double-digit royalties for the first year of Difimicin sales by Par and royalties of over 20% each year thereafter. We also granted to Par a non-exclusive license to manufacture Difimicin for its territory. We retained all other rights to Difimicin in the rest of the world, subject to a requirement to pay Par low single-digit royalties on our net sales of Difimicin in certain markets.

In January 2007, we entered into an agreement with Par pursuant to which we intend to use a portion of the net proceeds of this offering to repurchase Par's rights to develop and commercialize Difimicin in North America and Israel. Upon such repurchase, we would obtain worldwide rights to Difimicin and our April 2005 collaboration agreement with Par would terminate. In addition, we would be required to pay Par a one-time $20.0 million upfront payment, a future one-time $5.0 million milestone payment, a 5% royalty on net sales by us, our affiliates and our licensees of Difimicin in North America and Israel, and a 1.5% royalty on net sales by us or our affiliates of Difimicin in the rest of the world. In addition, in the event we license our right to market Difimicin in the rest of the world to another party, we will be required to pay Par a 6.25% royalty on net revenues we receive related to Difimicin.

3

We are also pursuing the development of Difimicin for additional indications. We believe Difimicin may be effective for CDAD prophylaxis, or the prevention of CDAD. Independent investigators at Oxford University are planning to conduct a proof-of-concept clinical trial of Difimicin for CDAD prophylaxis in the second half of 2007. In addition, we are planning to conduct a proof-of-concept clinical trial for the prevention of nosocomial infections by vancomycin-resistant Enterococci, or VRE, and we are developing a formulation for methicillin-resistant Staphylococci, or MRS, prophylaxis. Enterococci are common bacteria that reside in the gastrointestinal tract, or GI tract, and Staphylococci are common bacteria that reside on the skin and in the GI tract.

Prulifloxacin (OPT-99)

We are developing Prulifloxacin for the treatment of infectious diarrhea, including travelers' diarrhea, which can be caused by a broad range of bacteria. Prulifloxacin is a prodrug, or an inactive form of the compound, that converts in the body to the active form ulifloxacin following oral administration. Ulifloxacin, a compound that inhibits bacterial DNA replication, has demonstrated activity against a wide range of the bacteria that can cause infectious diarrhea. We are currently conducting two Phase 3 trials of Prulifloxacin for the treatment of travelers' diarrhea. The first trial is being conducted in 375 patients located in the United States, Mexico and Peru. The second trial is being conducted in 250 patients in India with plans to add additional sites in other countries such as Guatemala and Thailand. Both trials are double-blind and placebo-controlled. The primary endpoint for the trials is the time to last unformed stool. We anticipate data from both of these trials in the second half of 2007. We intend to conduct a 320-patient Phase 4 trial subsequent to NDA submission to compare Prulifloxacin to ciprofloxacin, an antibiotic commonly used to treat infectious diarrhea. We believe that Prulifloxacin is active against a broad set of gastrointestinal pathogens, has a favorable safety profile and has a more convenient dosing regimen than current treatments for travelers' diarrhea.

Other Pipeline Product Candidates

Using our OPopS technology, we are developing a pipeline of promising new drug candidates, which we intend to license opportunistically to third-party partners. Our anti-infective product candidates in pre-clinical studies include OPT-1068 and OPT-1273 for the treatment of RTIs, both of which have been out-licensed to Cempra Pharmaceuticals, Inc. Product candidates outside of our core anti-infective area include the OPT-822/OPT-821 combination therapy for the treatment of breast cancer and OPT-88 for the treatment of osteoarthritis. We currently retain all development and marketing rights to the OPT-822/OPT-821 combination therapy and OPT-88.

Our Drug Discovery Platform

OPopS is the core of our proprietary drug discovery platform. We acquired worldwide rights to the technology underlying OPopS from The Scripps Research Institute in July 1999. We have built approximately 500 carbohydrate building blocks, and through our proprietary OptiMer software program, we are able to rapidly and reliably produce a wide variety of carbohydrate-based molecules. With OPopS, we are able to reduce the time required for the synthesis of these molecules from weeks or months to hours. We intend to use our drug discovery platform, including the OPopS technology, to identify additional novel carbohydrate-based product candidates with significant commercial potential.

4

Our Strategy

Our principal objective is to become a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative anti-infective compounds, with an initial focus on gastrointestinal infections and related diseases. To achieve these objectives, our strategy includes the following key elements:

•

Build a branded anti-infective franchise through current and in-licensed product candidates;



•

Develop our lead product candidates for clinical and regulatory approval;



•

Build marketing and sales capabilities in our core markets; and



•

Leverage our internal discovery capabilities and expertise in carbohydrate chemistry to expand our portfolio of product candidates.

Risks Related to Our Business

We are a relatively early-stage biopharmaceutical company and our business and our ability to execute our business strategy are subject to a number of risks that you should be aware of before you decide to buy our common stock. In particular, you should consider the following risks, which are discussed more fully in "Risk Factors" beginning on page 10:

•

We are a company with limited sources of revenues, and we are largely dependent on the success of our lead product candidate Difimicin and, to a lesser degree, our other lead product candidate Prulifloxacin;



•

We have no products approved for commercial sale and, to date, we have not generated any revenues from product sales;



•

We have incurred significant operating losses since inception, including an accumulated deficit of approximately $47.5 million as of September 30, 2006, and anticipate that we will incur continued losses for the foreseeable future;



•

If we fail to obtain additional financing, we may be unable to complete the development and commercialization of Difimicin and Prulifloxacin and other product candidates, or continue our other research and development programs;



•

The clinical and commercial success of Difimicin depends on our ability to develop and commercialize in collaboration with Par or in the event that we repurchase Par's rights to develop and commercialize Difimicin as currently contemplated, on our own or with a future partner;



•

If we are unable to obtain FDA approval of our product candidates, we will not be able to commercialize them in the United States, and our ability to generate revenues and achieve and sustain profitability will be significantly diminished;



•

Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results;

5

•

Delays in clinical trials are common and have many causes, and any such delays could result in increased costs to us and jeopardize or delay our ability to achieve regulatory approval and commence product sales as currently contemplated; and



•

If we fail to gain and maintain approval from regulatory authorities in international markets for Difimicin and any future product candidates for which we have rights in international markets, our market opportunities will be limited.

Corporate Information

We were incorporated under the laws of the state of Delaware on November 18, 1998. Our principal executive offices are located at 10110 Sorrento Valley Road, Suite C, San Diego, CA 92121, and our telephone number is (858) 909-0736. Our web site address is http://www.optimerpharma.com. The information contained in, or that can be accessed through, our web site is not part of this prospectus.

The names "Optimer" and "Optimer Pharmaceuticals" are trademarks for which we have filed applications. The name "OPopS" is our registered service mark. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

6

   
THE OFFERING

The number of shares of common stock that will be outstanding immediately after this offering is based on 14,747,659 shares of common stock outstanding as of September 30, 2006 and excludes:

•

1,584,300 shares of common stock issuable upon the exercise of options under our 1998 stock plan outstanding as of September 30, 2006, with a weighted average exercise price of $1.09 per share;



•

43,843 shares of common stock issuable upon the exercise of options granted under our 1998 stock plan after September 30, 2006, with a weighted average exercise price of $2.17;



•

282,073 shares of common stock reserved for future issuance as of September 30, 2006 under our 1998 stock plan and will no longer be available under our 1998 stock plan upon the completion of this offering;



•

46,153 shares of common stock held by us as treasury stock;



•

2,200,000 shares of common stock reserved for future issuance under our employee stock purchase plan and 2006 equity incentive plan, each of which will become effective upon the completion of this offering, and both of which contain provisions that automatically increase the number of shares reserved each year, as more fully described in "Management — Employee Benefit Plans"; and



•

1,186,386 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2006, with a weighted average exercise price of $1.37 per share.

Except as otherwise indicated, all information in this prospectus assumes:

•

a 1-for-2.1667 reverse split of our capital stock to occur prior to the completion of this offering;



•

the conversion of all our outstanding shares of preferred stock into 12,215,507 shares of common stock upon the completion of this offering;



•

the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering; and



•

no exercise of the underwriters' over-allotment option.

7

   
SUMMARY CONSOLIDATED FINANCIAL DATA

We have derived the following summary of our consolidated statements of operations data for the years ended December 31, 2003, 2004 and 2005 from our audited consolidated financial statements appearing elsewhere in this prospectus. We have derived the following summary of our consolidated statements of operations data for the nine months ended September 30, 2005 and 2006 and the consolidated balance sheet data as of September 30, 2006 from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, which include only normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the accompanying notes to those statements, as well as "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing elsewhere in this prospectus.

The pro forma as adjusted balance sheet data reflects the balance sheet data as of September 30, 2006, as adjusted for the sale of 5,250,000 shares of our common stock in this offering at an assumed initial offering price to the public of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the automatic conversion of all preferred stock into common stock upon the completion of this offering.

(1)

Please see Note 1 to our notes to consolidated financial statements for an explanation of the method used to calculate the historical and pro forma net loss attributable to common stockholders per share and the number of shares used in the computation of the per share amounts.

8

(2)

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, respectively, the amount of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders' equity (deficit) by $4.9 million, assuming the number of shares offered by us in this offering, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

Excludes the $20.0 million payment we intend to make to Par in connection with our repurchase of Par's rights to develop and commercialize Difimicin substantially concurrent with the completion of this offering.

9

   
RISK FACTORS

You should carefully consider the risks described below, which we believe are the material risks of our business and this offering, before making an investment decision. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this prospectus, including our financial statements and accompanying notes.

Risks Related to Our Business

We are a company with limited sources of revenue, and we are largely dependent on the success of our lead product candidate Difimicin and, to a lesser degree, our other lead product candidate Prulifloxacin.

We are a biopharmaceutical company with no products approved for commercial sale and, to date, we have not generated any revenues from product sales. Our ability to generate future revenues depends heavily on our success in:

•

developing and securing U.S. and/or foreign regulatory approvals for Difimicin and Prulifloxacin and, to a lesser extent, other product candidates;



•

commercializing any product candidates for which we receive approval from the FDA; and



•

generating a pipeline of innovative product candidates utilizing our drug discovery platform or through licensing strategies.

Our product candidates will require extensive additional clinical study and evaluation, regulatory approval in multiple jurisdictions, substantial investment and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities. We have not submitted an NDA, or received marketing approval for either Difimicin or Prulifloxacin, and we cannot be certain that either of these product candidates will be successful in clinical trials or receive regulatory approval. If we do not receive regulatory approval for and successfully commercialize Difimicin and Prulifloxacin, we will not generate any revenues from product sales for several years, if at all, and we may not be able to continue our operations.

We believe our initial success will be more dependent on Difimicin than Prulifloxacin, because we believe that our market for the treatment of Clostridium difficile-associated diarrhea, or CDAD, is larger than our market for the treatment of infectious diarrhea. Even if we successfully obtain regulatory approval to market Difimicin or Prulifloxacin, our revenues for either drug candidate are dependent upon the size of the markets in the territories for which we have commercial rights. If the markets for the treatment of CDAD or infectious diarrhea are not as significant as we estimate, our business and prospects will be harmed.

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

We have experienced significant operating losses since our inception in 1998. As of September 30, 2006, we had an accumulated deficit of approximately $47.5 million. We have generated no revenues from product sales to date. We have funded our operations to date from the sale of approximately $70.0 million of our securities and through research funding pursuant to collaborations with partners

10

or government grants. We expect to continue to incur substantial additional operating losses for the next several years as we advance our clinical trials and research and development initiatives and build our marketing and sales capabilities. Because of the numerous risks and uncertainties associated with developing and commercializing antibiotics, we are unable to predict the extent of any future losses. We may never successfully commercialize our product candidates and thus may never have any significant future revenues or achieve and sustain profitability.

If we fail to obtain additional financing, we may be unable to complete the development and commercialization of Difimicin, Prulifloxacin and other product candidates, or continue our other research and development programs.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to:

•

complete the clinical development of Difimicin and Prulifloxacin;



•

license or acquire additional product candidates;



•

launch and commercialize any product candidates for which we receive regulatory approval, including building our own sales force to address certain markets; and



•

continue our research and development programs to advance our product pipeline.

We estimate that our net proceeds from this offering will be approximately $62.0 million, based upon an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We expect that the net proceeds from this offering, together with our existing cash, cash equivalents and short-term investments will be sufficient to fund our capital requirements for at least the next twelve months including to use $20.0 million of the net proceeds from this offering to repurchase Par's rights to develop and commercialize Difimicin. We will require additional capital to complete the development and commercialization of our current lead product candidates Difimicin and Prulifloxacin. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may require us to pledge our assets as collateral or involve restrictive covenants, such as limitations on our ability to incur additional indebtedness, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could negatively impact our ability to conduct our business. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates or one or more of our other research and development initiatives. We also could be required to:

•

seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or



•

relinquish or license on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.

Any of the above events could significantly harm our business and prospects and could cause our stock price to decline.

11

The clinical and commercial success of Difimicin depends on our ability to develop and commercialize in collaboration with Par, on our own or with one or more future partners upon our repurchase of commercial rights associated with Difimicin. Our inability to collaborate effectively with Par or one or more future partners for the development and commercialization of Difimicin or any adverse developments in any such relationships could materially harm our business and prospects.

In January 2007, we entered into a prospective buy-back agreement with Par pursuant to which we intend to use a portion of the net proceeds of this offering to repurchase Par's rights to develop and commercialize Difimicin in North America and Israel. Upon such repurchase, our April 2005 collaboration agreement with Par would terminate, and we would be free to develop on our own or seek one or more new partners for the development and commercialization of Difimicin. We currently plan to build our own marketing and sales force for Prulifloxacin in the United States and upon our repurchase of Par's rights to develop and commercialize Difimicin with a portion of the net proceeds of this offering, we may decide to focus our marketing and sales capabilities on the commercialization of Difimicin in the United States and Canada. Whether or not we decide to use our own marketing and sales force for Difimicin in the United States and Canada, we may seek one or more new partners for commercialization of Difimicin. We cannot be certain that we would be successful in attracting any such partners, due to our continuing obligations to pay royalties to Par, other terms of the prospective buy-back agreement or other factors. If we were not able to find appropriate partners for the continued development and commercialization of Difimicin, we would either have to delay these initiatives, or raise significant additional funds to develop clinical and commercialization capabilities internally. In either case, our business and prospects would be harmed.

If we do not repurchase Par's rights to develop and commercialize Difimicin, either because we fail to raise sufficient funds in this offering or due to other developments, then our April 2005 collaboration agreement with Par will remain in full force and effect, and we and Par will continue to collaborate exclusively in the development and commercialization of Difimicin. Under the terms of the April 2005 collaboration agreement, we have limited or no control over the amount and timing of resources that Par will dedicate to the development, approval and marketing of Difimicin. Additionally, in the event the FDA approves Difimicin, Par will have responsibility for manufacturing, marketing and selling the approved product in the United States. It is also possible that Par would seek to sublicense its rights to Difimicin to another company, in which case we would need to collaborate with a new party and may face even greater risks in the development and potential commercialization of this product candidate.

We are subject to a number of additional risks associated with our dependence on collaborations with third parties. Conflicts may arise between us and collaborators, such as conflicts concerning the interpretation of clinical data, the achievement of milestones, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any such conflicts arise, a collaborator could act in its own self-interest, which may be adverse to our best interests. Any such disagreement between us and a collaborator could result in one or more of the following, each of which could delay or prevent the development or commercialization of Difimicin, and in turn prevent us from generating sufficient revenues to achieve or maintain profitability:

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reductions in the payment of royalties or other payments we believe are due pursuant to the applicable collaboration arrangement or agreement;



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uncertainties regarding ownership of intellectual property rights arising from our collaborative activities, which could prevent us from entering into additional collaborations or commercializing such rights upon any termination of our collaboration with Par;

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actions taken by a collaborator inside or outside our collaboration which could negatively impact our rights or benefits under our collaboration; or



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unwillingness on the part of a collaborator to keep us informed regarding the progress of its development and commercialization activities or to permit public disclosure of the results of those activities.

In addition, a collaborator may shift its research, development, manufacturing and commercialization resources to other product opportunities including those that might be competitive with Difimicin.

Par or a future collaborator could also fail to manage effectively the manufacturing relationship with Biocon Limited, or Biocon, the supplier of the active pharmaceutical ingredient, or API, for Difimicin. Biocon, located in India, will continue as the manufacturer of API for Difimicin regardless of whether or not the prospective buy-back agreement becomes effective. As such, Biocon will be subject to ongoing periodic unannounced inspections by the FDA and other agencies for compliance with current good manufacturing practices regulations, or cGMP, and similar foreign standards. Par or a future collaborator could fail to monitor Biocon's compliance with these regulations and standards and Biocon's failure to comply could result in a temporary or permanent shutdown of Biocon's manufacturing operations, which would interrupt clinical or commercial supplies of Difimicin. In such event, we or our collaborator would be required to find and qualify an alternative supply of Difimicin, which might not be available in the necessary quantities or on suitable terms for our clinical or commercial needs. Any alternative manufacturer would be required to be approved by the FDA and other regulatory authorities. In addition, the search for an alternative supply of Difimicin could be time consuming, causing distraction on the part of our management team and potential delay of clinical trials, regulatory approvals or subsequent commercial sales of Difimicin.

Par has the right to assign its rights under the April 2005 collaboration agreement without our consent to an entity which acquires substantially all of its assets or its business relating to Difimicin. In addition, Par has the right to sublicense its rights under the collaboration agreement without our consent. If such an event were to occur, we would have no ability to determine the party that would assume Par's obligations under the collaboration agreement. There can be no assurance that the assignee or sublicensee of Par's rights would develop and commercialize Difimicin to the same extent that Par would have or, in any case, to our satisfaction. If any assignee or sublicensee of Par does not expend efforts to further develop and commercialize Difimicin, our ability to commercialize Difimicin would be significantly harmed, which would adversely affect our business and prospects. Although we are entitled to a percentage of the net amounts received by Par from any sublicensee, including upfront payments and royalties, these amounts may not be as significant as if Par were to commercialize Difimicin itself and pay us royalties on net sales. To the extent that Par does not sublicense its rights under the collaboration on favorable terms or the sublicensee does not successfully commercialize Difimicin, our potential payments under the collaboration agreement could be adversely affected. We could be required to give future collaborators similar rights subsequent to our repurchase of Par's rights to develop and commercialize Difimicin.

Furthermore, if we do not repurchase Par's rights to develop and commercialize Difimicin, the April 2005 collaboration agreement shall remain in effect. Under the April 2005 collaboration agreement, Par could terminate such collaboration agreement upon our material breach of the agreement, in the event of our bankruptcy, upon 60 days' prior written notice at its discretion or upon 90 days' prior written notice if Par provides written notice of its determination to discontinue or not to pursue regulatory approval and/or commercial sale of Difimicin for its territory. If we cannot commercialize Difimicin, we will have to rely solely on Prulifloxacin and earlier stage product candidates for any future revenues, and our ability to achieve and sustain profitability will be materially and adversely

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harmed. If either we or Par do not perform our respective obligations under, or devote sufficient resources to, our collaboration, or if we and Par do not work effectively together, Difimicin may not be successfully approved and commercialized. If our collaboration were to be terminated, we would need to establish an alternative collaboration and may not be able to do so on acceptable terms or at all. We do not currently have the resources necessary to develop and market Difimicin on our own.

If we are unable to obtain FDA approval of our product candidates, we will not be able to commercialize them in the United States.

We need FDA approval prior to marketing our product candidates in the United States. If we fail to obtain FDA approval to market our product candidates, we will be unable to sell our product candidates in the United States, which will significantly impair our ability to generate any revenues.

This regulatory review and approval process, which includes evaluation of pre-clinical studies and clinical trials of our product candidates as well as the evaluation of our manufacturing processes and our third-party contract manufacturers' facilities, is lengthy, expensive and uncertain. To receive approval, we must, among other things, demonstrate with substantial evidence from well-controlled clinical trials that the product candidate is both safe and effective for each indication for which approval is sought. Satisfaction of the approval requirements typically takes several years and the time needed to satisfy them may vary substantially, based on the type, complexity and novelty of the pharmaceutical product. We cannot predict if or when we might receive regulatory approvals for any of our product candidates currently under development. Moreover, any approvals that we obtain may not cover all of the clinical indications for which we are seeking approval, or could contain significant limitations in the form of narrow indications, warnings, precautions or contra-indications with respect to conditions of use. In such event, our ability to generate revenues from such products would be greatly reduced and our business would be harmed.

The FDA has substantial discretion in the approval process and may either refuse to consider our application for substantive review or may form the opinion after review of our data that our application is insufficient to allow approval of our product candidates. If the FDA does not consider or approve our application, it may require that we conduct additional clinical, pre-clinical or manufacturing validation studies and submit that data before it will reconsider our application. Depending on the extent of these or any other studies, approval of any applications that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be successful or considered sufficient by the FDA for approval or even to make our applications approvable. If any of these outcomes occur, we may be forced to abandon one or more of our applications for approval, which might significantly harm our business and prospects.

Even if we do receive regulatory approval to market a product candidate, any such approval may be subject to limitations on the indicated uses for which we may market the product. It is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain the appropriate regulatory approvals necessary for us or our collaborators to commence product sales. Moreover, recent events, including complications arising from FDA-approved drugs such as Vioxx and Ketek, have raised questions about the safety of marketed drugs and may result in increased cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory approvals. This increased scrutiny by regulatory authorities may result in significant delays in obtaining regulatory approvals, as well as more stringent product labeling and post-marketing testing requirements. Any delay in obtaining, or an inability to obtain, applicable regulatory approvals would prevent us from commercializing our product candidates, generating revenues and achieving and sustaining profitability.

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Although the FDA has granted Fast Track status to Difimicin and selected it for participation in a CMA Pilot 2 Program, we cannot be certain that we will receive any benefits from these designations or that the designations will expedite regulatory review or approval of Difimicin. Participation in these programs will not eliminate any phase of clinical development. Moreover, our participation in the CMA Pilot 2 Program will involve frequent scientific discussions and other interactions with the staff of the FDA during the investigational new drug phase of our development of Difimicin. These frequent discussions could subject Difimicin to a greater level of scrutiny than it might otherwise have received or require us to make more frequent submissions and endure other burdens that would have been avoided if we had not participated in the program. Therefore, despite any potential benefits of Difimicin's Fast Track and CMA Pilot 2 Program designations, significant uncertainty remains regarding the clinical development and regulatory approval process for Difimicin.

Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is uncertain. Failure can occur at any time during the clinical trial process. The results of pre-clinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical testing. The time required to obtain approval by the FDA and similar foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials, depending upon numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change. We have not obtained regulatory approval for any product candidate.

Our product candidates could fail to receive regulatory approval for many reasons, including the following:

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we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for any indication;



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the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;



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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;



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we may be unable to demonstrate that a product candidate's clinical and other benefits outweigh its safety risks;



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we may be unable to demonstrate that a product candidate presents an advantage over existing therapies, or over placebo in any indications for which the FDA requires a placebo-controlled trial;



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the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or clinical trials;



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the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a new drug application or other submission or to obtain regulatory approval in the United States or elsewhere;



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the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators contract for clinical and commercial supplies; and

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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

Delays in clinical trials are common and have many causes, and any such delays could result in increased costs to us and jeopardize or delay our ability to achieve regulatory approval and commence product sales as currently contemplated.

We may experience delays in clinical trials of our product candidates. Difimicin is currently in a Phase 2b/3 clinical trial for the treatment of CDAD. We anticipate receiving data from this trial in the fourth quarter of 2007. We plan to initiate a second Phase 3 pivotal trial of the same design in the first half of 2007 and anticipate receiving data from this trial in the first half of 2008. If both trials are successful, we intend to file an NDA in the second half of 2008. In addition, we and third parties such as independent investigators at Oxford University are currently planning to conduct clinical and proof-of-concept clinical trials for other indications of Difimicin. Prulifloxacin is in two Phase 3 trials for the treatment of travelers' diarrhea. We intend to conduct a Phase 4 trial of Prulifloxacin subsequent to NDA submission to compare Prulifloxacin to ciprofloxacin. We do not know whether planned clinical trials will begin on time, will need to be redesigned or will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a trial, in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, in obtaining institutional review board approval at each site, in recruiting suitable patients to participate in a trial, in having patients complete a trial or return for post-treatment follow-up, in clinical sites dropping out of a trial, in adding new sites or in obtaining sufficient supplies of clinical trial materials. Many factors affect patient enrollment, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials, clinicians' and patients' perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating and whether the clinical trial design involves comparison to placebo. Several of our principal investigators have stated that the enrollment rate in the clinical trials for Difimicin has been less than projected. Our original projections were based on enrollment rates for our Phase 2a trial of Difimicin. The enrollment rate for the current Difimicin trial has been approximately half of our original projections. We have now added additional sites and expect to be able to continue to add additional sites in order to enroll the appropriate number of patients for these trials. As a result, we now expect to transition the trial to Phase 3 in the first quarter of 2007 as opposed to the fourth quarter of 2006 as originally scheduled. If we continue to experience lower than expected enrollment in the trials, the trials may not be completed as currently scheduled. Furthermore, with respect to the clinical trials conducted by third parties, we will have no control over their timing or success.

We could encounter delays if prescribing physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of our product candidates in lieu of prescribing existing antibiotics that have established safety and efficacy profiles or with administering placebo to patients in our placebo-controlled trials. Further, a clinical trial may be suspended or terminated by us, our collaborators, the FDA or other regulatory authorities due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. In addition, our Prulifloxacin product candidate treats bacterial infections which tend to peak during high travel seasons. As a result, during certain times of the year, it is more difficult to enroll patients in our trials for Prulifloxacin. If we experience delays in the completion of, or termination of, any clinical trial of our product candidates,

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the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly.

We may be required to suspend or discontinue clinical trials due to adverse events, adverse side effects or other safety risks that could preclude approval of our product candidates.

Our clinical trials may be suspended at any time for a number of reasons. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to participants. In previous clinical trials of Difimicin, certain patients experienced non-drug related adverse events. Patients treated with Prulifloxacin have experienced drug-related side effects including abdominal pain, diarrhea, nausea, renal toxicities, cardiac arrhythmias, photosensitivity, rash, excessive flushing of the skin and central nervous system effects, such as seizures. The FDA recommended that we conduct a study to determine the effect, if any, of Prulifloxacin on the prolongation of the QT interval, a condition that is associated with potentially life-threatening cardiac arrhythmias. Our future clinical trials will involve testing in larger patient populations, which could reveal a high prevalence of these or other side effects. In such event, our trials would be interrupted, delayed or halted and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. Even if we believe our product candidates are safe, our data is subject to review by the FDA, which may disagree with our conclusions and delay or deny approval of our product candidates which would significantly harm the commercial prospects of such product candidates. Moreover, we could be subject to significant liability if any volunteer or patient suffers, or appears to suffer, adverse side effects as a result of participating in our clinical trials. Any of these occurrences may harm our business and prospects significantly.

We and our collaborators rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we and our collaborators may not be able to obtain regulatory approval for or commercialize our product candidates.

We and our collaborators have entered into agreements with third-party CROs, such as Advanced Biologics, LLC, or Advanced Biologics, to provide monitors for and to manage data for our on-going clinical programs. We and the CROs conducting clinical trials for our product candidates are required to comply with current good clinical practices, or GCPs, regulations and guidelines enforced by the FDA for all of our products in clinical development. The FDA enforces GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or the CROs conducting clinical trials of our product candidates fail to comply with applicable GCPs, the clinical data generated in the clinical trials may be deemed unreliable and the FDA may require additional clinical trials before approving any marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any clinical trials of our product candidates comply with GCPs. In addition, our clinical trials must be conducted with product produced under cGMP regulations, and will require a large number of test subjects. Our failure to comply with these regulations may require us to repeat clinical trials, which would be costly and delay the regulatory approval process and commercialization of our product candidates.

Typically, the CROs conducting clinical trials of our product candidates have the right to terminate their agreements with us or our collaborators upon notice in the event of an uncured material breach. In addition, some CROs have an ability to terminate their respective agreements with us if we fail to

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perform our obligations, if it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignment for the benefit of our creditors or if we are liquidated. Advanced Biologics has been heavily involved in the clinical development and regulatory approval process for our lead product candidates and possesses significant experience with the regulatory process. We substantially rely on Advanced Biologics to conduct the clinical trials for Difimicin and Prulifloxacin. Advanced Biologics has also subcontracted with other third-party CRO's for various aspects of the clinical trials. If any relationships with Advanced Biologics or these other third-party CROs terminate, we or our collaborators may not be able to enter into arrangements with alternative CROs or we may enter into arrangements with alternative CROs that do not have the expertise or relationships that Advanced Biologics has with government agencies. In addition, these third-party CROs are not our employees, and we cannot control whether or not they devote sufficient time and resources to our on-going clinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could harm our competitive position. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

If we fail to gain and maintain approval from regulatory authorities in international markets for Difimicin and any future product candidates for which we have rights in international markets, our market opportunities will be limited.

Sales of our product candidates outside of the United States will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries must also approve the manufacturing and marketing of our product candidates in those countries. This is particularly important for the commercialization of Difimicin for which we currently only have exclusive rights to market the product candidate outside the United States, and for which we have the right to receive royalties in Canada, Puerto Rico and Israel. In addition, upon our repurchase of Par's rights to Difimicin, we will own all commercial rights to Difimicin in Canada, Puerto Rico and Israel. Approval in one jurisdiction does not ensure approval in any other jurisdictions. Obtaining foreign regulatory approvals could result in significant delays, difficulties and costs for us and require additional pre-clinical studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay the introduction of our products in those countries. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. In addition, our failure to obtain regulatory approval in any country may delay or have negative effects on the process for regulatory approval in others. Other than Prulifloxacin, which is sold by other parties in Japan, Italy and certain other European countries, none of our product candidates is approved for sale in any international market for which we have rights, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in our international markets or to obtain and maintain required approvals, our target market will be reduced and our ability to generate revenues will be diminished, which would significantly harm our business, results of operations and prospects.

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  We currently have no marketing and sales organization and have no experience in marketing drug products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenues.

We currently do not have a sales organization for the marketing, sales and distribution of pharmaceutical products. In order to commercialize any products, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If approved by the FDA, Par will have the exclusive right to market Difimicin in the United States, Puerto Rico and Canada and potentially Israel under our current April 2005 collaboration agreement. However, pursuant to our prospective buy-back agreement with Par, if we consummate this offering and repurchase Par's rights to develop and commercialize Difimicin, our April 2005 collaboration agreement with Par will terminate and we will retain all rights to market Difimicin in the United States, Puerto Rico, Canada and Israel. We and Par have, and may in the future, engage in discussions with potential partners in order to maximize the commercialization potential of Difimicin. We plan to build our own marketing and sales force to commercialize Difimicin in our core markets and will seek third-party partners in our non-core markets. We own exclusive rights to commercialize Prulifloxacin in the United States, and we contemplate establishing our own sales force or seeking third-party partners to sell Prulifloxacin in the United States. Upon our repurchase of Par's rights to develop and commercialize Difimicin, we instead plan to leverage our Difimicin sales force in the United States to commercialize Prulifloxacin in this market. The establishment and development of our own sales force to market any products we may develop will be expensive and time consuming and could delay any product launch, and we cannot be certain that we will be able to successfully develop this capability. We will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. To the extent we rely on third parties, such as Par or its potential sublicensees, to commercialize our approved products, if any, we will receive less revenues than if we commercialized these products ourselves. In addition, we may have little or no control over the sales efforts of Par or any other third parties involved in our commercialization efforts. In the event we are unable to develop our own marketing and sales force or collaborate with a third-party marketing and sales organization, we would not be able to commercialize our product candidates which would negatively impact our ability to generate product revenues.

We may not be able to adequately build our own marketing and sales capabilities or enter into acceptable agreements to market and commercialize Difimicin successfully in international markets.

If appropriate regulatory approvals are obtained, we intend to commercialize Difimicin in international markets by building our own marketing and sales force and through collaboration arrangements with third parties. Our current collaboration with Par, which we contemplate will terminate in connection with the closing of this offering upon our repurchase of Par's rights to develop and commercialize Difimicin, does not cover any markets outside of the United States, Puerto Rico, Canada and Israel. We may not be able to enter into collaboration arrangements in international markets on favorable terms or at all. In addition, there can be no guarantee that if we enter into these collaboration arrangements with other parties that they will be successful or result in more revenues than we could obtain by marketing Difimicin on our own. We also plan to develop our own marketing and sales force. We anticipate marketing Difimicin in a number of countries in Europe and Latin America to hospital-based and long-term care physicians, including gastroenterologists, infectious disease specialists and internists. These efforts may not be successful as we have no relationships among such hospital-based and long-term care physicians. There is no guarantee that we will be able to develop an effective international sales force to successfully commercialize our products in these international markets. If we are unable to develop an effective international sales force and fail to enter into collaboration

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arrangements for our products, our ability to generate product revenues would be limited, which would adversely affect our business, financial condition, results of operations and prospects.

If our product candidates are unable to compete effectively with branded and generic antibiotics, our commercial opportunity would be reduced or eliminated.

If approved, our lead product candidates will compete against both branded antibiotic therapies, such as Vancocin Pulvules with respect to Difimicin and Xifaxan® with respect to Prulifloxacin, and generic antibiotics such as metronidazole and vancomycin with respect to Difimicin and ciprofloxacin with respect to Prulifloxacin. In addition, we anticipate that Difimicin will compete with other antibiotic and anti-infective product candidates currently in development for the treatment of CDAD, such as Tolevamer™, a toxin absorber being developed by Genzyme Corporation, and Xifaxan®, an antibiotic being developed by Salix Pharmaceuticals, Ltd. Many of these products have been or will be developed and marketed by major pharmaceutical companies, who have significantly greater financial resources and expertise in research and development, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals, manufacturing and marketing approved products than we do. As a result, these companies may obtain regulatory approval more rapidly than we are able to and may be more effective in selling and marketing their products as well. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.

We anticipate that, if approved, Difimicin and Prulifloxacin will face increasing competition in the form of generic versions of branded products of competitors that will lose their patent exclusivity. For example, Difimicin, if approved, will immediately face steep competition from an inexpensive generic form of metronidazole. Difimicin currently faces generic oral vancomycin competition in Europe and may face competition from generic oral vancomycin in the United States in 2008. Generic antibiotic therapies typically are sold at lower prices than branded antibiotics and are generally preferred by managed care providers of health services. For example, because metronidazole is sold at such a low price, we believe it will be difficult to sell Difimicin as a first-line therapy for the treatment of CDAD. If we are unable to demonstrate to physicians and patients that, based on experience, clinical data, side-effect profiles and other factors, our products are preferable to these generic antibiotic therapies, we may never generate meaningful product revenues. In addition, many antibiotics experience bacterial resistance over time because of their continued use. There can be no guarantee that bacteria would not develop resistance to Difimicin, Prulifloxacin or any of our other product candidates. Our commercial opportunity would also be reduced or eliminated if our competitors develop and commercialize generic or branded antibiotics that are safer, more effective, have fewer side effects or are less expensive than our product candidates.

We currently depend, and will in the future continue to depend, on third parties to manufacture our product candidates, including Difimicin and Prulifloxacin. If these manufacturers fail to provide us and our collaborators with adequate supplies of clinical trial materials and commercial product or neglect to comply with the requirements of regulatory authorities, we may be unable to develop or commercialize our products.

We outsource all manufacturing of clinical trial supplies of our product candidates to third parties. Our collaborators have arrangements with third-party manufacturers, including Biocon, for clinical trial supplies but we currently do not have long-term supply arrangements with any third-party contract manufacturers. However, pursuant to our prospective buy-back agreement with Par, if we consummate this offering and repurchase Par's rights to develop and commercialize Difimicin and our April 2005 collaboration agreement with Par is terminated, Par's rights under its supply agreement with Biocon will be assigned to us and we will be obligated under such supply agreement to purchase

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certain amounts of the API for Difimicin from Biocon. We intend to continue this practice of outsourcing the manufacture of our product candidates to third parties for any future clinical trials and large-scale commercialization of any product candidates that receive regulatory approval and become commercial drugs.

Our ability to develop and commercialize Difimicin and Prulifloxacin and any other product candidates depends in part on our ability to arrange for collaborators or other third parties to manufacture our products at a competitive cost, in accordance with strictly enforced regulatory requirements and in sufficient quantities for clinical testing and eventual commercialization. We have not yet manufactured commercial batches of Difimicin, Prulifloxacin or any of our other product candidates. Collaborators or third-party manufacturers that we select to manufacture our product candidates for clinical testing or on a commercial scale may encounter difficulties with the small- and large-scale formulation and manufacturing processes required for such manufacture. Such difficulties could result in delays in clinical trials, regulatory submissions, or commercialization of our product candidates. The inability of us or our collaborators to enter into and maintain agreements with third-party manufacturers on acceptable terms, would cause shortages of clinical trial supplies of our product candidates, thereby delaying or preventing regulatory approval and/or commercialization of the affected product candidate, and adversely affecting our ability to generate revenues. Once a product candidate is approved and being marketed, such difficulties could also result in the later recall or withdrawal of the product from the market. Further, development of large-scale manufacturing processes will require additional validation studies, which the FDA must review and approve. Even if we are able to establish additional or replacement manufacturers, identifying these sources and entering into definitive supply agreements and obtaining regulatory approvals may take a substantial amount of time and cost and such supply arrangements may not be available on acceptable economic terms.

In addition, we, our collaborators and other third-party manufacturers of our products must comply with current strictly enforced cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance and the maintenance of records and documentation. We and Par rely on Biocon to manufacture Difimicin drug supplies, and we rely on Nippon Shinyaku, which contracts with Juzen Chemical Corporation, or Juzen, and Angelini ACRAF/SpA, or Angelini, to manufacture Prulifloxacin drug supplies. The manufacturing facilities of Biocon and Juzen have been inspected and approved by the FDA for other companies' drug products; however, neither Biocon's nor Juzen's facilities have yet been approved for the manufacture of our drug supplies. Angelini's facilities have not been inspected or approved by the FDA. We, our collaborators or other third-party manufacturers of our products may be unable to comply with cGMP requirements and with other FDA, state, local and foreign regulatory requirements. We and our collaborators have little control over third-party manufacturers' compliance with these regulations and standards. A failure to comply with these requirements by our third-party manufacturers, including Biocon, Juzen and Angelini, could result in the issuance of untitled letters and/or warning letters from authorities, as well as sanctions being imposed on us, including fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall or withdrawal of product approval. In addition, we have no control over these manufacturers' ability to maintain adequate quality control, quality assurance and qualified personnel. If the safety of any quantities supplied by third parties is compromised due to their failure to adhere to applicable laws or for other reasons, we may not be able to obtain or maintain regulatory approval for or successfully commercialize one or more of our product candidates, which would harm our business and prospects significantly.

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The commercial success of our product candidates will depend upon attaining significant market acceptance of these product candidates among physicians, patients, healthcare payors and the medical community.

None of our product candidates has been commercialized for any indication in territories for which we have rights. Even if our product candidates are approved by the appropriate regulatory authorities for marketing and sale, physicians may not prescribe our product candidates, which would prevent us from generating revenues or becoming profitable. Market acceptance of Difimicin, Prulifloxacin and any of our future product candidates by physicians, patients and healthcare payors will depend on a number of factors, many of which are beyond our control, including:

•

the clinical indications for which the product candidate is approved;



•

acceptance by physicians and patients of each product candidate as a safe and effective treatment;



•

perceived advantages over alternative treatments;



•

the cost of treatment in relation to alternative treatments, including numerous generic antibiotics;



•

the extent to which the product candidate is approved for inclusion on formularies of hospitals and managed care organizations;



•

the extent to which bacteria develop resistance to the product candidate, thereby limiting its efficacy in treating or managing infections;



•

whether the product candidate is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particular infections;



•

the availability of adequate reimbursement by third parties, such as insurance companies and other healthcare payors;



•

limitations or warnings contained in a product's FDA-approved labeling;



•

relative convenience and ease of administration; and



•

prevalence and severity of adverse side effects.

Because Difimicin is a differentiated antibiotic for the treatment of CDAD, it may encounter additional hurdles to market acceptance by physicians, who may be skeptical about its clinical benefits or healthcare payors who may resist reimbursing a premium-priced therapeutic particularly in light of the availability of generic alternatives.

We plan to target our marketing of Prulifloxacin primarily to high-prescribing physicians of antibiotics for travelers' diarrhea, including those at travel clinics. Because of the number of these physicians in the United States, we will be required to expend significant time and resources to obtain broad market acceptance of Prulifloxacin among these physicians. We do not have experience in marketing to this population of physicians and do not currently have the resources to be able to conduct such marketing efforts on our own. As such, we may not be successful in any of these marketing efforts which would limit the commercial success of Prulifloxacin. In addition, because Prulifloxacin has already been

22

marketed by other companies to treat a wide range of bacterial infections, including infectious diarrhea, urinary tract infections, or UTIs and RTIs, patients may be able to obtain Prulifloxacin from these other companies, and not from us, if Prulifloxacin is approved in the market where the patient is located. We have rights to Prulifloxacin only in the United States. These patients may obtain Prulifloxacin in these other markets from other companies even if these patients are from the United States.

If we fail to develop and commercialize other products or product candidates, we may be unable to grow our business.

A key element of our strategy is to commercialize a portfolio of new anti-infective products in addition to Difimicin and Prulifloxacin. As a significant part of our growth strategy, we intend to develop and commercialize additional products and product candidates through our discovery research program using our proprietary technology, including OPopS. The success of this strategy depends upon our ability to identify, select and acquire pharmaceutical product candidates and products that fit into our development plans on terms that are acceptable to us.

Any product candidate we identify may require additional development efforts prior to commercial sale, including pre-clinical studies, extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to the risks of failure that are inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, we cannot assure you that any such products that are approved will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace or be more effective than other commercially available alternatives.

A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development.

If we are unable to develop suitable potential product candidates through internal research programs or by obtaining rights to novel therapeutics from third parties, our business and prospects will suffer.

Our focus on drug discovery and development using our technology platform, including our patented proprietary OPopS drug discovery platform, is novel and unique. As a result, we cannot be certain that our product candidates will produce commercially viable drugs that safely and effectively treat infectious diseases or other diseases. To date, our technology platform has yielded only a small number of anti-infective product candidates. In addition, we do not have significant clinical data with respect to any of these potential product candidates. Even if we are successful in completing clinical development and receiving regulatory approval for one commercially viable drug for the treatment of one disease using our technology platform and carbohydrate chemistry focus, we cannot be certain that we will also be able to develop and receive regulatory approval for other drug candidates for the treatment of other forms of that disease or other diseases. If we fail to develop and commercialize viable drugs using our platform and specialized focus, we will not be successful in developing a pipeline of potential product candidates to follow Difimicin and Prulifloxacin, and our business prospects would be harmed significantly.

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Our future growth depends on our ability to identify and acquire or in-license products. If we do not successfully identify and acquire or in-license related product candidates or integrate them into our operations, we may have limited growth opportunities.

We in-licensed the U.S. rights to Prulifloxacin from Nippon Shinyaku who, along with Meiji-Seika Kaisha Ltd., conducted the initial development of this product candidate. An important part of our business strategy is to continue to develop a pipeline of product candidates by acquiring or in-licensing products, businesses or technologies that we believe are a strategic fit for our business. Future in-licenses or acquisitions, however, may entail numerous operational and financial risks, including:

•

exposure to unknown liabilities;



•

disruption of our business and diversion of our management's time and attention to develop acquired products or technologies;



•

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



•

higher than expected acquisition and integration costs;



•

increased amortization expenses;



•

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



•

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



•

inability to retain key employees of any acquired businesses.

We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. In particular, we may compete with larger pharmaceutical companies and other competitors in our efforts to establish new collaborations and in-licensing opportunities. These competitors likely will have access to greater financial resources than us and may have greater expertise in identifying and evaluating new opportunities. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.

If we do not find collaborators for our future product candidates, we may be required to reduce or delay our rate of product development and commercialization and/or increase our expenditures.

Our strategy to develop and commercialize our product candidates in pre-clinical studies or early clinical trials includes entering into relationships with pharmaceutical or biotechnology companies to advance our programs. We may not be able to negotiate collaborations with these partners on acceptable terms. If we are not able to establish collaborative arrangements, we may be required to reduce or delay further development of some of our programs and/or increase our expenditures and undertake the development activities at our own expense.

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If we are able to identify and reach agreement with collaborators for our product candidates, those relationships will also be subject to a number of risks, including:

•

collaborators may not pursue further development and commercialization of product candidates resulting from our collaboration or may elect not to renew research and development programs;



•

collaborators may delay clinical trials, underfund a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct additional clinical trials or require the development of a new formulation of a product candidate for clinical testing;



•

a collaborator with marketing and distribution rights to one or more of our products may not commit sufficient resources to the marketing and distribution of our products, limiting our potential revenues from the commercialization of these products; and



•

disputes may arise delaying or terminating the research, development or commercialization of our product candidates, or result in significant litigation or arbitration.

Even if we successfully establish collaborations or commercial agreements, these relationships may never result in the successfully development or commercialization of any product candidates or the generation of sales or royalty revenues.

Our ability to pursue the development and commercialization of Prulifloxacin, our other product candidates and our future product candidates depends upon the continuation of our licenses from third parties.

Our license agreement with Nippon Shinyaku provides us with an exclusive license to develop and commercialize Prulifloxacin for any indication in the United States, with a right to sublicense to third parties. In the event Nippon Shinyaku is not able to supply us with Prulifloxacin, the license agreement provides us with a non-exclusive, worldwide right and license to manufacture or have Prulifloxacin manufactured for us. Either we or Nippon Shinyaku may terminate the license agreement immediately upon the bankruptcy or dissolution of the other party or upon a breach of any material provision of the agreement if the breach is not cured within 60 days following written notice. In addition, we are entitled to terminate the agreement in the event that the FDA compels us to cease sales of Prulifloxacin in the United States. If our license agreement with Nippon Shinyaku terminates, we will lose our rights to develop, manufacture and commercialize Prulifloxacin and our potential revenues would be limited. Similarly, if our agreement with The Scripps Research Institute, or TSRI, for the license of our OPopS technology is terminated, we will not be able to further develop future product candidates using our OPopS technology.

If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

We face an inherent risk of product liability lawsuits related to the testing of our product candidates, and will face an even greater risk if product candidates are introduced commercially. An individual may bring a liability claim against us if one of our product candidates causes, or merely appears to have caused, an injury. If we cannot successfully defend ourselves against the product liability claim, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

•

decreased demand for our product candidates;



•

injury to our reputation;

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•

termination of clinical trial sites or entire clinical trial programs;



•

withdrawal of clinical trial participants;



•

significant litigation costs;



•

substantial monetary awards to or costly settlement with patients;



•

product recalls;



•

loss of revenues; and



•

the inability to commercialize our product candidates.

We may become dependent upon consumer perceptions of us and the safety and quality of our product candidates. We could be adversely affected if we or our product candidates are subject to negative publicity. We could also be adversely affected if any of our potential products or any similar products distributed by other companies prove to be, or are asserted to be, harmful to consumers. Also, because of our dependence upon consumer perceptions, any adverse publicity associated with illness or other adverse effects resulting from consumers' use or misuse of our potential products or any similar products distributed by other companies could have a material adverse impact on our results of operations.

We have global clinical trial liability insurance that covers our clinical trials up to a $6.0 million annual aggregate limit. Our current or future insurance coverage may prove insufficient to cover any liability claims brought against us. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for our product candidates, which would increase our insurance premiums. Because of the increasing costs of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or obtain insurance coverage that will be adequate to satisfy any liability that may arise.

Even if we receive regulatory approval for our product candidates, we will be subject to ongoing significant regulatory obligations and oversight.

Even if we receive regulatory approval to sell our product candidates, the FDA and foreign regulatory authorities will likely impose significant restrictions on the indicated uses or marketing of such products, or impose ongoing requirements for potentially costly post-approval studies. In addition, following any regulatory approval of our product candidates, we and our collaborators will be subject to continuing regulatory obligations, such as requirements for storage, recordkeeping and safety reporting, and additional post-marketing obligations, including regulatory oversight of the labeling, packaging, promotion and marketing of our products. If we or our collaborators become aware of previously unknown problems with any of our product candidates here or overseas or at our third-party manufacturers' facilities, a regulatory agency may impose restrictions on our products, our third-party manufacturers or on us, including requiring us to reformulate our products, conduct additional clinical trials, make changes in the labeling of our products, implement changes to, or obtain re-approvals of, our third-party manufacturers' facilities, or withdraw the product from the market. In addition, we or our collaborators may experience a significant drop in the sales of the affected products and our product revenues will be reduced, our reputation in the marketplace may suffer and we may become the target of lawsuits, including class action suits. Moreover, if we or our collaborators or third-party manufacturers fail to comply with applicable regulatory requirements, we may be subject to civil or criminal fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, costly new manufacturing requirements and criminal prosecution. Any of these events could harm or prevent sales of the affected products and reduce our related revenues or could substantially increase the costs and expenses of commercializing and

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marketing these products, which would significantly harm our business, financial condition and prospects.

If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. We are highly dependent upon our senior management and scientific staff, particularly Michael N. Chang, Ph.D., our President and Chief Executive Officer, Tessie M. Che, Ph.D., our Senior Vice President, Corporate Affairs, Youe-Kong Shue, Ph.D., our Vice President, Clinical Development, and Kevin P. Poulos, our Vice President, Marketing and Sales. The loss of services of any of Dr. Chang, Dr. Che, Dr. Shue or Mr. Poulos or one or more of our other members of senior management could delay or prevent the successful completion of our planned clinical trials or the commercialization of our product candidates. Replacing key employees may be difficult and costly and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop and commercialize products successfully. We do not maintain "key person" insurance policies on the lives of these individuals or the lives of any of our other employees. We employ these individuals on an at-will basis and their employment can be terminated by us or them at any time, for any reason and with or without notice.

We will need to hire additional personnel as we expand our clinical development and commercial activities. We may not be able to attract or retain qualified management and scientific personnel on acceptable terms in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Diego, California area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our research and development objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose any members of our senior management team, we may not be able to find suitable replacements, and our business and prospects may be harmed as a result.

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

We are a small company with 39 employees as of January 15, 2007. To continue our clinical trials and commercialize our product candidates, we will need to expand our employee base for managerial, operational, marketing, sales, financial and other resources. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees and may take time away from running other aspects of our business, including development and commercialization of our product candidates. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:

•

manage our development efforts effectively;



•

manage our current clinical trials for Difimicin and Prulifloxacin effectively;



•

integrate additional management, administrative and manufacturing personnel;



•

build a marketing and sales organization; and

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•

maintain sufficient administrative, accounting and management information systems and controls.

We may not be able to accomplish these tasks, and accordingly, may not achieve our research, development and commercialization goals. Our failure to accomplish any of these goals could harm our financial results and prospects.

Third-party payor coverage and reimbursement may be insufficient or unavailable altogether for our product candidates, which could diminish our sales or affect our ability to sell our products profitably.

Market acceptance and sales of our product candidates will depend on reimbursement policies and may be affected by future healthcare reform measures. Government third-party payors, such as the Medicare and Medicaid programs, and private payors, including health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels for these drugs. Because third-party payors increasingly are challenging prices charged and the cost-effectiveness of medical products, significant uncertainty exists as to the ability of our product candidates to receive adequate coverage and reimbursement. We cannot be sure that third-party payors will place our product candidates on approved formularies or that reimbursement will be available in whole or in part for any of our product candidates. Also, we cannot be sure that insufficient reimbursement amounts will not reduce the demand for, or the price of, our products.

Many healthcare providers, such as hospitals, receive a fixed reimbursement amount per procedure or other treatment therapy, and these amounts are not necessarily based on the actual costs incurred. As a result, these healthcare providers may choose only the least expensive therapies regardless of efficacy. We cannot guarantee that our product candidates will be the least expensive alternative and thus providers may decide not to use them or buy them for treatment.

We have not commenced efforts to have our product candidates reimbursed by government or third-party payors. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize our products successfully or at all, which would harm our business and prospects.

Recent proposed legislation may permit re-importation of drugs from foreign countries into the United States, including foreign countries where the drugs are sold at lower prices than in the United States, which could materially adversely affect our operating results and our overall financial condition.

We may face competition for our products from lower priced products from foreign countries that have placed price controls on pharmaceutical products. The Medicare Modernization Act of 2003, or MMA, contains provisions that may change U.S. importation laws and expand consumers' ability to import lower priced versions of our and competing products from Canada, where there are government price controls. These changes to U.S. importation laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changes will lead to substantial savings for consumers and will not create a public health safety issue. The Secretary of Health and Human Services has not yet announced any plans to make the required certification. Even if the changes do not take effect, and other changes are not enacted, imports from Canada and elsewhere may continue to increase due to market and political forces, and the limited enforcement resources of the FDA, the U.S. Customs Service, and other government agencies. For example, Pub. L. No. 109-295, which was signed into law on October 4, 2006 and provides appropriations for the Department of Homeland Security for fiscal year 2007, expressly prohibits the U.S. Customs Service from using funds to prevent individuals from importing from Canada less than a 90-day supply of a prescription drug for personal use, when the drug otherwise complies with the Federal Food, Drug and Cosmetic Act. Further, several states and local governments have implemented importation schemes for their citizens, and, in the absence of federal action to curtail such activities, we expect other states and local governments to

28

launch importation efforts. The importation of foreign products that compete with our own product candidates could negatively impact our business and prospects.

Current healthcare laws and regulations and future legislative or regulatory reforms to the healthcare system may affect our ability to sell our product candidates profitably.

In both the United States and certain foreign jurisdictions, there have been, and we anticipate there will continue to be, a number of legislative and regulatory changes to the healthcare system that could impact our ability to sell our products profitably. In particular, the MMA added an outpatient prescription drug benefit to Medicare, publicly funded health insurance program in the United States generally for the elderly and disabled, which became effective on January 1, 2006. Drug benefits under this new benefit are administered through private plans that negotiate price concessions from pharmaceutical manufacturers. We cannot be certain that Difimicin and Prulifloxacin or other current or future drug candidates will successfully be placed on the list of drugs covered by particular health plan formularies, nor can we predict the negotiated price for our drug candidates, which will be determined by market factors.

The MMA also changed the formula for determining payment for certain drugs, including injectable drugs provided in physician offices and other outpatient settings. Further, with respect to the Medicaid program, the Deficit Reduction Act of 2005 made changes to certain formulas used to calculate pharmacy reimbursement under Medicaid, the health insurance program in the United States generally for individuals and families with low incomes and resources, that are scheduled to go into effect on January 1, 2007. These changes could lead to reduced payments to pharmacies. Many states have also created preferred drug lists and include drugs on those lists only when the manufacturers agree to pay a supplemental rebate. If Difimicin and Prulifloxacin or other current or future drug candidates are not included on these preferred drug lists, physicians may not be inclined to prescribe them to their Medicaid patients, thereby diminishing the potential market for our products.

As a result of legislative proposals and the trend towards managed healthcare in the United States, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs. They may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse for newly-approved drugs, which in turn will put pressure on the pricing of drugs. Further, we do not have experience in ensuring approval by applicable third-party payors outside of the United States for reimbursement of our products. The availability of numerous generic antibiotics at lower prices than branded antibiotics can also be expected to substantially reduce the likelihood of reimbursement for Difimicin and Prulifloxacin. We also anticipate pricing pressures in connection with the sale of our products due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.

We must comply with federal and state "fraud and abuse" laws, and, if we are unable to fully comply with such laws, we could face substantial penalties, which may adversely affect our business, financial condition and results of operations.

We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid, and the curtailment or restructuring of operations. We believe that our operations are in material compliance with such laws. However, because of the far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws. In addition, there can be no assurance that the occurrence of one or more violations of these laws or regulations would not result in a material adverse effect on our financial condition and results of operations.

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

Our third-party manufacturers' activities and, to a lesser extent, our own activities involve the controlled storage, use and disposal of hazardous materials, including the components of our product candidates and other hazardous compounds. We and our manufacturers are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. We currently have insurance coverage in the amount of approximately $250,000 for damage claims arising from contamination on our property. These amounts may not be sufficient to adequately protect us from liability for damage claims relating to contamination. If we are subject to liability exceeding our insurance coverage amounts, our business and prospects would be harmed. In the event of an accident, state or federal authorities may also curtail our use of these materials and interrupt our business operations.

Our business and operations would suffer in the event of computer, telecommunications or other system failure.

Despite the implementation of security measures, our internal computer systems are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Any system failure, accident or security breach that causes interruptions in our operations could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed or ongoing clinical trials for Difimicin or Prulifloxacin could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we may incur liability and the further development of our product candidates may be delayed.

Risks Related to Our Intellectual Property

It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection.

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of the use, formulation and structure of our product candidates, and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges, including those from generic drug manufacturers. Our ability to protect our product candidates from unauthorized making, using, selling, offering to sell or importing by third parties is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. The biotechnology patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict

30

the breadth of claims that may be allowed or enforced in our licensed patents, our patents or in third-party patents.

The degree of future protection for our proprietary rights is uncertain, because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

•

others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our pending patent applications or licensed patents, or for which we are not licensed under our license agreements;



•

others may be able to make competing pharmaceutical formulations containing our product candidates or components of our product formulations but that are not covered by the claims of our licensed patents, or for which we are not licensed under our license agreements;



•

we or our licensors might not have been the first to make the inventions covered by our pending patent applications or the pending patent applications and issued patents of our licensors;



•

we or our licensors might not have been the first to file patent applications for these inventions;



•

others may independently develop similar or alternative technologies or duplicate any of our technologies;



•

it is possible that our pending patent applications or our licensed patent applications will not result in issued patents;



•

our pending patent applications or the pending patent applications and issued patents of our licensors may not provide us with any competitive advantages, may be designed around by our competitors, including generic drug companies, or may be held invalid or unenforceable as a result of legal challenges by third parties;



•

we may not develop additional proprietary technologies that are patentable; or



•

the patents of others may have an adverse effect on our business.

In addition, to the extent we are unable to obtain and maintain patent protection for one of our lead product candidates or in the event such patent protection expires, it may no longer be cost effective to extend our portfolio by pursuing additional development of a product candidate for follow-on indications. While we have filed patent applications for Difimicin with respect to formulations and manufacturing processes, we do not yet have any issued patents for Difimicin. Even if these patent applications become issued patents, our competitors, including generic drug companies, may be able to design around our manufacturing processes and formulations for Difimicin. As a result, our competitors may be able to develop competing products more effectively or less expensively. In addition, although we have patent protection on the use and formulations of Difimicin, patent protection is no longer available on the active ingredient of Difimicin without regard to formulation. As a result, our competitors, including generic drug companies, may be able to design more effective or less costly formulations of the active ingredient of Difimicin. In addition, assuming our clinical trials are successful and completed in a timely manner, we plan to launch Prulifloxacin for the treatment of

31

infectious diarrhea no earlier than late 2008. However, the patent covering Prulifloxacin is scheduled to expire in February 2009, and due to this short remaining patent life we may be forced to abandon plans to pursue development and approval of Prulifloxacin for any indications, including infectious diarrhea. Although we currently plan to apply for an extension of this patent term until 2014, we cannot assure you that the U.S. Patent and Trademark Office, or PTO, will grant the extension for the full additional five years, or at all. In either event, our business and prospects would be harmed significantly.

We depend, in part, on our licensors and collaborators to protect a portion of our proprietary rights. In such cases, our licensors and collaborators may be primarily or wholly responsible for the maintenance of patents and prosecution of patent applications relating to important areas of our business. For example, under our current collaboration with Par, Par may develop or have other parties develop pharmaceutical formulations or manufacturing processes for Difimicin. In such cases, Par will be primarily or wholly responsible for the maintenance of patents and prosecution of patent applications relating to such technology. We currently contemplate that our April 2005 collaboration agreement with Par will terminate in connection with the closing of this offering upon our repurchase of Par's rights to develop and commercialize Difimicin and, thereafter, we will be responsible for the maintenance of patents and prosecution of patent applications relating to Difimicin. In addition, Nippon Shinyaku, Sloan-Kettering Institute for Cancer Research, or SKI, TSRI and Cempra Pharmaceuticals, Inc., or Cempra, are responsible for the maintenance of patents and prosecution of patent applications relating to Prulifloxacin, OPT-822/OPT-821 combination therapy, our OPopS technology, and OPT-1068 and OPT-1273, respectively. If any of these parties fail to adequately protect these products with issued patents, our business and prospects would be harmed significantly.

Under our agreement with Nippon Shinyaku, in the event Nippon Shinyaku fails to take all steps necessary to seek extension of the patents licensed to us in the United States 180 days after we request such action be taken, then we have the right to take all necessary actions to extend the licensed patents. Our agreements with Par, SKI, TSRI and Cempra do not have explicit provisions regarding our rights to take necessary action with respect to maintenance of patents and prosecution of patent applications nor do such agreements provide us with any legal recourse in the event such parties do not so maintain and/or prosecute. If any of these parties fails to adequately maintain patents and prosecute patent applications relating to technology licensed to or from us, we may be required to take further action on our own to protect this technology. However, we may not be successful in maintaining such patents or prosecuting such patent applications and if so, our business and prospects would be harmed significantly.

We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third-party entity illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

If we or our licensors fail to obtain or maintain patent protection or trade secret protection for our product candidates or our technologies, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and attain profitability.

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We may incur substantial costs as a result of litigation or other proceedings relating to our patent, trademark and other intellectual property rights, and we may be unable to protect our rights to, or use, our technology.

If we choose to go to court to stop someone else from using our inventions, that individual or company has the right to ask the court to rule that the underlying patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if we were successful in stopping the infringement of these patents. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other party's activities do not infringe our rights to these patents.

Furthermore, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party's patent rights and may go to court to stop us from engaging in our normal operations and activities, including making, using or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we or our commercialization partners are infringing the third party's patents and would order us or our partners to stop the activities covered by the patents. In addition, there is a risk that a court will order us or our partners to pay the other party damages for having violated the other party's patents. We have indemnified our commercial partners against patent infringement claims and thus would be responsible for any of their costs associated with such claims and actions. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

Although we have conducted searches of third-party patents with respect to Difimicin and Prulifloxacin, these searches may not have identified all third-party patents relevant to those products and we have not conducted an extensive search of patents issued to third parties with respect to our other product candidates. Consequently, no assurance can be given that third-party patents containing claims covering our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, we believe there is a significant risk that third parties may allege they have patent rights encompassing our products, technology or methods. In addition, we have not conducted an extensive search of third-party trademarks, so no assurance can be given that such third-party trademarks do not exist, have not been filed, could not be filed or issued, or could not exist under common trademark law. While we have filed a trademark application for the names "Optimer" and "Optimer Pharmaceuticals," we are aware that the name "Optimer" has been registered as a trademark with the PTO by more than one third party, including one in the biotechnology space. As such, we believe there is a significant risk that third parties may allege they have trademark rights encompassing the names for which we have applied for protection.

Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our licensors' issued patents or our pending applications or our licensors' pending applications, or that we or our licensors were the first to invent the technology. Our

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competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our or our licensors' patent applications and could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the PTO, to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our U.S. patent position with respect to such inventions.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

Risks Related to This Offering and Ownership of Our Common Stock

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has not been a public market for our common stock. We cannot assure you that an active trading market for our common stock will develop upon the completion of this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market.

The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

•

announcement of FDA or comparable foreign regulatory agency approval or non-approval of our product candidates, or specific label indications for their use, or delays in the FDA or comparable foreign regulatory agency review process;



•

actions taken by the FDA or other regulatory agencies with respect to our product candidates, clinical trials, manufacturing process or marketing and sales activities;



•

changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;



•

the success of our development efforts and clinical trials, particularly with respect to Difimicin and Prulifloxacin;



•

announcements by our collaborators with respect to clinical trial results and communications from the FDA or comparable foreign regulatory agencies;



•

the success of our efforts to acquire or in-license additional products or product candidates;



•

developments concerning our collaborations and partnerships, including but not limited to those with our sources of manufacturing supply and our commercialization partners;



•

actual or anticipated variations in our quarterly operating results;

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•

announcements of technological innovations by us, our collaborators or our competitors;



•

new products or services introduced or announced by us or our commercialization partners, or our competitors and the timing of these introductions or announcements;



•

third-party coverage or reimbursement policies;



•

actual or anticipated changes in earnings estimates or recommendations by securities analysts;



•

conditions or trends in the biotechnology and biopharmaceutical industries;



•

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;



•

general economic and market conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors;



•

changes in the market valuations of similar companies;



•

sales of common stock or other securities by us or our stockholders in the future;



•

additions or departures of key scientific or management personnel;



•

disputes or other developments relating to intellectual property, proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; and



•

trading volume of our common stock.

In addition, the stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme price and volume fluctuations that have often been unrelated and/or disproportionate to the operating performance of those companies. These broad market and industry factors may significantly harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management's attention and resources, which could significantly harm our business, financial condition and prospects.

Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over matters subject to stockholder approval.

Our executive officers, directors and principal stockholders, together with their respective affiliates, currently own approximately 44.6% of our voting stock, and upon completion of this offering that same group will hold approximately 31.3% of our outstanding voting stock (assuming no exercise of the underwriters' over-allotment option). Accordingly, even after this offering, these stockholders will likely be able to influence the composition of our board of directors, influence the approval all matters requiring stockholder approval and continue to have significant influence over our operations. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could cause the market value of our common stock to decline.

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

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. Until we are able to implement comprehensive accounting policies and procedures, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with existing or new reporting requirements. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the Nasdaq Global Market, or Nasdaq, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to maintain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, commencing in fiscal 2008, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We currently have two employees dedicated full-time and one employee dedicated part-time to accounting and finance matters. We currently contemplate hiring at least two more full-time employees in the accounting and finance department to assist in ensuring we have effective internal controls over financial reporting and disclosure controls and procedures. We also hire consultants from time to time to address these matters. If we are unable to hire adequate accounting and finance personnel, we may not be able to meet our public company reporting and governance obligations, including those set forth under the Sarbanes-Oxley Act. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources.

Future sales of our common stock in the public market could cause our stock price to decline.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. After this offering, we will have 21,308,367 shares of common stock outstanding assuming the exercise of all in-the-money warrants that terminate upon closing of this offering.

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Substantially all of our existing stockholders are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders' ability to transfer shares of our common stock for at least 180 days from the date of this prospectus. The lock-up agreements, together with restrictions under the securities laws described in "Shares Eligible for Future Sale" limit the number of shares of common stock that may be sold immediately following the public offering. All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, except for any shares purchased by our affiliates as defined in Rule 144 under the Securities Act. Rule 144 defines an affiliate as a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, us and would include persons such as our directors and executive officers.

As a result of the lock-up agreements between our underwriters and our security holders and the provisions of Rule 144, Rule 144(k) and Rule 701 under the Securities Act, the shares of our common stock (excluding the shares sold in this offering) that will be available for sale in the public market are as follows:

•

11,153,690 shares will be eligible for sale under Rule 144(k) or Rule 701 upon the expiration of the lock-up agreements, beginning 180 days after the date of this prospectus;



•

3,690,025 shares will be eligible for sale under Rule 144 upon the expiration of the lock-up agreements, subject to volume limitations, manner of sale requirements and other restrictions, beginning 180 days after the date of this prospectus;



•

1,124,456 shares will be eligible for sale, upon exercise of vested options, upon the expiration of the lock-up agreements, beginning 180 days after the date of this prospectus; and



•

1,142,759 shares will be eligible for sale, upon exercise of outstanding warrants, upon the expiration of the lock-up agreements, beginning 180 days after the date of this prospectus.

Moreover, after this offering, holders of approximately 12,246,212 shares of common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. These rights will continue upon the completion of this offering and will terminate five years following the completion of this offering. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the "Underwriting" section of this prospectus.

If you purchase shares of common stock sold in this offering, you will experience immediate dilution. You will experience further dilution if we issue shares in future financing transactions or upon exercise of options or warrants.

If you purchase shares of common stock in this offering, you will experience immediate dilution of $8.77 per share because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Investors purchasing shares of common stock in this offering will contribute approximately 49.4% of the total amount we have raised since inception, and will only own approximately 26.3% of our total common stock immediately following completion of this offering, assuming the underwriters do not exercise their over-allotment option.

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If we raise additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, our stockholders will experience additional dilution, and new investors could have rights superior to existing stockholders.

Pursuant to our 2006 equity incentive plan, we have reserved a total of 2,000,000 shares of our common stock to be issued upon exercise of stock options issued to our employees, directors and consultants. Pursuant to our employee stock purchase plan, we have also reserved a total of 200,000 shares of our common stock to be granted to our employees. In addition, as of September 30, 2006, we also have options outstanding to purchase 1,584,300 shares of our common stock and warrants outstanding to purchase 1,186,386 shares of our common stock on an as-converted basis. You will incur dilution upon exercise of any outstanding stock options or warrants or upon grant of any shares under our stock plans.

We have broad discretion to use the net proceeds from this offering and our investment of these proceeds may not yield a favorable return.

Our management has broad discretion as to how to spend and invest the proceeds we receive from this offering, and we may spend or invest these proceeds in ways with which our stockholders may not agree and that do not necessarily improve our operating results or enhance the value of our common stock. Accordingly, you will need to rely on our judgment with respect to the use of these proceeds, and you will not have the opportunity as part of your investment decision to assess whether they are being used or invested appropriately. Until the net proceeds are used, we plan to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, or remove our current management. These provisions include:

•

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



•

authorizing the issuance of "blank check" preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;



•

limiting the removal of directors by the stockholders;



•

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;



•

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



•

eliminating the ability of stockholders to call a special meeting of stockholders; and

38

•

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with a stockholder owning 15% or more of our outstanding voting stock for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Such a delay or prevention of a change of control transaction could cause the market price of our stock to decline.

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FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements include, but are not limited to, statements about:

•

our ability to successfully complete pre-clinical and clinical development of our product candidates and demonstrate their safety and efficacy in clinical trials within anticipated time frames, if at all;



•

our ability to obtain and maintain regulatory approval of our product candidates and their labeling under any approval we may obtain;



•

the success of our development and commercialization efforts on our own or with existing or future collaborators, and our ability to enter into new collaborations and strategic alliances;



•

our statements relating to the prospective buy-back agreement with Par and our expected activities related thereto;



•

the size and growth of the potential markets, including estimates regarding the monetary value and number of people with respect to such potential markets, for our product candidates and our ability to serve those markets;



•

the content and timing of submissions to and decisions made by the FDA and other regulatory agencies;



•

our use of the proceeds from this offering;



•

the accuracy of our estimates regarding expenses, future revenues and capital requirements;



•

our ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection for our product candidates;



•

our ability to develop a sufficient marketing and sales force or enter into agreements with third parties to market and sell any of our product candidates that may be approved for sale;



•

the success of competing drugs that are or become available;



•

our intent to license or develop specific product candidates;

40

•

our plans to initiate or continue clinical trials of our product candidates, and the expected size and timing of such trials;



•

our expectations regarding future research and development costs or other expenses;



•

our expectations about the future level of research and development activity by external service providers;



•

our ability to secure the manufacture of, sufficient amounts of our product candidates for clinical trials and, if approved, products for commercialization activities from our third-party manufacturers; and



•

our ability to raise additional funds in the capital markets, through arrangements with collaborators or from other sources.

In addition, you should refer to the "Risk Factors" section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 do not protect any forward-looking statements that we make in connection with this offering.

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the shares of our common stock in this offering will be approximately $62.0 million, based upon an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share would increase or decrease, respectively, our net proceeds by approximately $4.9 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses payable by us. If the underwriters exercise the over-allotment option in whole or in part, we will not receive any of the proceeds from the sale of those shares by the selling stockholder.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock, to facilitate our future access to the public equity markets and to provide liquidity for our existing stockholders.

We anticipate that we will use our net proceeds from this offering as follows:

•

approximately $25.0 million to fund certain of our obligations under our prospective buy-back agreement with Par relating to our repurchase of Par's rights to develop and commercialize Difimicin and related assets;



•

approximately $15.0 million to fund clinical trials and other research and development activities of Difimicin for the treatment of CDAD;



•

approximately $7.0 million to fund clinical trials and other research and development activities of Prulifloxacin for the treatment of travelers' diarrhea;



•

approximately $5.0 million to fund current and future clinical trials for our other product candidates and for Difimicin and Prulifloxacin for other indications;



•

approximately $5.0 million to fund commercialization activities, including conducting pre-launch preparations and initiating marketing and sales activities for Difimicin and Prulifloxacin; and



•

the remainder to fund working capital, capital expenditures and other general corporate purposes, including at least approximately $2.0 million for additional costs and expenses associated with being a public company, which also includes the cost of compliance with Sarbanes-Oxley Act internal control regulations such as costs for hiring additional employees, consultants, counsel and accountants.

We may also use a portion of our net proceeds from this offering to fund possible in-licenses and acquisitions of products or product candidates. To the degree that we pursue any of these transactions, the amount of proceeds that we have available for working capital, capital expenditures and other general corporate purposes may decrease. However, other than our prospective buy-back agreement with Par, we have no current agreements or commitments with respect to, and no portion of our net proceeds has been allocated for, any specific acquisition. Our management will have broad discretion in applying our net proceeds of this offering and a change in our plans or business condition could result in the application of our net proceeds from this offering in a manner other than described in this

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prospectus. We believe that our net proceeds from this offering, along with existing cash and cash equivalents, will be sufficient to meet our capital requirements for at least the next 12 months.

We anticipate that these proceeds will allow us to complete the ongoing Phase 2b/3 clinical trial and the planned second Phase 3 trial of Difimicin for the treatment of CDAD, as well as the two Phase 3 clinical trials of Prulifloxacin for the treatment of travelers' diarrhea. The foregoing use of our net proceeds from this offering represents our current intentions based upon our present plans and business condition. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our product development efforts and the amount of net proceeds actually raised by us in this offering.

Pending these uses, we intend to invest our net proceeds in money market funds and government agency securities.

   
DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2006:

•

on an actual basis,



•

on a pro forma as adjusted basis to reflect:

(a) the filing and effectiveness of an amended and restated certificate of incorporation to authorize 75,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock;

(b) the sale of 5,250,000 shares of common stock in this offering at an assumed initial offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us; and

(c) the conversion of all of our outstanding shares of preferred stock into 12,215,507 shares of common stock upon the completion of this offering.

You should read the information in this table together with our financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.

(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover of this prospectus, would increase or decrease, respectively, the amount of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders' equity (deficit) and total capitalization by $4.9 million, assuming the number of shares offered by us in this offering, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(2)

Excludes the $20.0 million payment we intend to make to Par in connection with our repurchase of Par's rights to develop and commercialize Difimicin substantially concurrent with the completion of this offering.

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The outstanding share information in the table above excludes:

•

1,584,300 shares of common stock issuable upon the exercise of options under our 1998 stock plan outstanding as of September 30, 2006, with a weighted average exercise price of $1.09 per share;



•

43,843 shares of common stock issuable upon the exercise of options granted under our 1998 stock plan after September 30, 2006, with a weighted average exercise price of $2.17;



•

282,073 shares of common stock reserved for future issuance as of September 30, 2006 under our 1998 stock plan and will no longer be available under our 1998 stock plan upon the completion of this offering;



•

2,200,000 shares of common stock reserved for future issuance under our employee stock purchase plan and 2006 equity incentive plan, each of which will become effective upon the completion of this offering, and both of which contain provisions that automatically increase the number of shares reserved each year, as more fully described in "Management — Employee Benefit Plans"; and



•

1,186,386 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2006, with a weighted average exercise price of $1.37 per share.

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock after this offering. As of September 30, 2006, we had a historical net tangible book deficiency of $42.9 million, or approximately $(10.57) per share, based on the number of shares of common stock outstanding as of September 30, 2006. Historical net tangible book deficiency per share is determined by dividing our total tangible assets less total liabilities, by the number of outstanding shares of our common stock, and the common equivalent shares issuable upon conversion of our series a preferred stock.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of 5,250,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and after giving effect to the conversion of all outstanding shares of preferred stock into 12,215,507 shares of common stock upon completion of this offering, our pro forma as adjusted net tangible book value as of September 30, 2006 would have been approximately $84.5 million, or approximately $4.23 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.71 per share to existing stockholders, and an immediate dilution of $8.77 per share to investors participating in this offering. The following table illustrates this per share dilution:

If the underwriters exercise their over-allotment option in full to purchase 787,500 additional shares of common stock in this offering, our pro forma as adjusted net tangible book value as of September 30, 2006 would have been $4.52 per share, the pro forma increase in net tangible book value attributable to investors in this offering would have been $3.00 per share and the dilution to new investors purchasing common stock in this offering would have been $8.48 per share.

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2006, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by stockholders and by investors purchasing shares in this offering, at an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, and without deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

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The number of shares of common stock outstanding in the table above is based on the number of shares outstanding as of September 30, 2006 after giving effect to the conversion of all outstanding shares of preferred stock and assumes no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to 71.0% of the total number of shares of common stock to be outstanding after this offering and the number of shares of common stock held by investors purchasing shares in this offering will be increased to 6,037,500 shares or 29.0% of the total number of shares of common stock to be outstanding after this offering.

A $1.00 increase or decrease in the assumed public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, respectively, our pro forma as adjusted net tangible book value per share by $0.24, assuming the number of shares offered by us in this offering, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, a $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share would increase or decrease, respectively, the total consideration paid by investors purchasing shares in this offering and total consideration paid by all stockholders by $4.9 million, assuming that the number of shares offered by us in this offering, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The above discussion and tables also assume no exercise of any outstanding stock options or warrants. The information set forth above excludes:

•

1,584,300 shares of common stock issuable upon the exercise of options under our 1998 stock plan outstanding as of September 30, 2006, with a weighted average exercise price of $1.09 per share;



•

43,843 shares of common stock issuable upon the exercise of options granted under our 1998 stock plan after September 30, 2006, with a weighted average exercise price of $2.17;



•

282,073 shares of common stock reserved for future issuance as of September 30, 2006 under our 1998 stock plan and will no longer be available under our 1998 stock plan upon the completion of this offering;



•

46,153 shares of common stock held by us as treasury stock;



•

2,200,000 shares of common stock reserved for future issuance under our employee stock purchase plan and 2006 equity incentive plan, each of which will become effective upon the completion of this offering, and both of which contain provisions that automatically increase the number of shares reserved each year, as more fully described in "Management — Employee Benefit Plans"; and



•

1,186,386 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2006, with a weighted average exercise price of $1.37 per share.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2003, 2004 and 2005, and the selected consolidated balance sheet data as of December 31, 2004 and 2005, are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2001 and 2002, and the selected consolidated balance sheet data as of December 31, 2001, 2002 and 2003, are derived from our audited consolidated financial statements, which are not included in this prospectus. The selected consolidated statement of operations data for the nine months ended September 30, 2005 and 2006, and the selected consolidated balance sheet data as of September 30, 2006, are derived from our unaudited consolidated financial statements, appearing elsewhere in this prospectus. The unaudited financial statements include, in the opinion of management, all adjustments, which consist of normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future.

(1)

Please see Note 1 to our consolidated financial statements for an explanation of the method used to calculate the historical and pro forma net loss attributable to common stockholders per share and the number of shares used in the computation of the per share amounts.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our "Selected Consolidated Financial Data," and consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. This discussion and other parts of the prospectus may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under "Risk Factors" and elsewhere in this prospectus.

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing innovative anti-infective products. Our initial development efforts address products that treat gastrointestinal infections and related diseases where current therapies have limitations, including diminished efficacy, serious adverse side effects, drug-to-drug interactions, difficult patient compliance and bacterial resistance.

We currently have two late-stage anti-infective product candidates, Difimicin and Prulifloxacin. Difimicin, our lead product candidate, is an antibiotic currently in a Phase 2b/3 registration trial for the treatment of CDAD, the most common nosocomial diarrhea. Prulifloxacin is an antibiotic currently in two Phase 3 trials for the treatment of travelers' diarrhea. We are developing additional product candidates using our proprietary technology, including our OPopS drug discovery platform.

We were incorporated in November 1998. Since inception, we have focused on hiring our management team and initial operating employees and on developing our product candidates, including Difimicin and Prulifloxacin. We have never been profitable and have incurred significant net losses since our inception. As of September 30, 2006, we had an accumulated deficit of $47.5 million. These losses have resulted principally from costs incurred in connection with research and development activities, including the costs of clinical trial activities associated with our current lead product candidates, license fees and general and administrative expenses. We expect to continue to incur operating losses for the next several years as we pursue the clinical development and commercialization of our product candidates, as well as acquire or in-license additional products or product candidates, technologies or businesses that are complementary to our own.

In connection with our initial public offering, a 1-for-2.1667 reverse stock split of our common stock has been authorized by our board of directors and stockholders in January 2007, which has been given retroactive effect throughout this prospectus.

Financial Operations Overview

Collaboration and Grant Revenues

We have not generated any revenues from sales of commercial products. Since inception, we have generated revenues primarily as a result of various collaborations with pharmaceutical and biotechnology companies and grants from government agencies. We may also periodically recognize as revenues non-refundable payments for achieving certain milestones, during the term of our agreements.

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Research and Development Expense

Research and development expense consists of expenses incurred in connection with identifying and developing our drug candidates and developing and advancing our drug discovery technology. Our research and development expenses consist primarily of salaries and related employee benefits, costs associated with clinical trials managed by our CROs and costs associated with non-clinical activities and regulatory approvals. Our most significant costs are for clinical trials, including payments to vendors such as CROs, investigators, manufacturers of clinical supplies and related consultants. Our historical research and development expenses have related predominantly to clinical trials of Difimicin and Prulifloxacin, the development of our carbohydrate technology platform, including OPopS, in-licensing fees and general research activities. We charge all research and development expenses to operations as they are incurred because the underlying technology associated with these expenditures relates to our research and development efforts and has no alternative future uses. From inception through September 30, 2006, we incurred total research and development expenses of approximately $39.6 million.

We use our internal research and development resources across several projects, much of which is not allocable to a specific project. Accordingly, we do not account for all of our internal research and development costs on a project basis. We use external service providers and vendors to conduct our clinical trials, to manufacture our product candidates to be used in clinical trials and to provide various other research and development related products and services. These external costs are allocable to a specific project.

External costs are expensed as incurred. We incurred $2.8 million, $3.2 million and $10.2 million of expenses directly related to the development of Difimicin for the year ended December 31, 2005, the nine months ended September 30, 2006 and cumulatively through September 30, 2006, respectively. We incurred $935,000, $1.8 million and $3.9 million of expenses directly related to the development of Prulifloxacin for the year ended December 31, 2005, the nine months ended September 30, 2006 and cumulatively through September 30, 2006, respectively. All other research and development expenses were for other clinical programs.

We expect our research and development expenses to increase substantially following the completion of this offering as we expand our clinical trial activities with respect to Difimicin and Prulifloxacin, advance our other product candidates through the development process and invest in additional product opportunities and research programs. Clinical trials and pre-clinical studies are time-consuming and expensive. Our expenditures on current and future pre-clinical and clinical development programs are subject to many uncertainties. We test our product candidates in several pre-clinical studies, and we then conduct clinical trials for those product candidates that we determine to be the most promising. As we obtain results from clinical trials, we may elect to discontinue or delay trials for some product candidates in order to focus our resources on more promising product candidates. Completion of clinical trials may take several years and the length of time generally varies substantially according to the type, size of trial and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:

•

the number of patients who participate in the trials;



•

the number of sites included in the trials;



•

the length of time required to enroll trial participants;



•

the duration of patient treatment and follow-up;

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•

the costs of producing supplies of the product candidates needed for clinical trials and regulatory submissions; and



•

the costs, requirements and timing of, and the ability to secure, regulatory approvals.

As a result of the uncertainties discussed above, we are unable to determine with any significant degree of certainty the duration and completion costs of our research and development projects or when and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. However, while we do not have specific estimates for the costs of all of our projects, we currently estimate that we will incur external costs of approximately $14.2 million to complete the Phase 2b/3 and Phase 3 clinical trials for Difimicin to treat CDAD and approximately $6.6 million to complete the Phase 3 clinical trials for Prulifloxacin to treat infectious diarrhea, including travelers' diarrhea.

General and Administrative Expense

General and administrative expense consists primarily of compensation, including stock-based, and other expenses related to an allocated portion of facility cost, legal fees and other professional services expenses, our corporate administrative employees and insurance costs. We anticipate increases in general and administrative expense as we add personnel, comply with the reporting obligations applicable to publicly-held companies and continue to build our corporate infrastructure in support of our continued development of our product candidates and preparation for the potential commercialization of our product candidates.

Interest Income (Expense) and Other, Net

Interest income (expense) and other, net consists of interest earned on our cash, cash equivalents and short-term investments and other-than-temporary declines in the market value of available-for-sale securities and cash and non-cash interest charges related to bridge financings.

Net Operating Losses and Tax Credit Carryforwards

As of December 31, 2005, we had federal, state and foreign net operating loss carryforwards of approximately $32.2 million, $33.8 million and $5.5 million, respectively. If not utilized, the net operating loss carryforwards will begin expiring in 2020 for federal purposes and 2012 for state purposes. The foreign losses originate from our subsidiaries in Singapore and Taiwan. The losses from our subsidiary in Singapore have an indefinite carryforward while losses from our subsidiary in Taiwan expire five years after origination. As of December 31, 2005, we had both federal and state research and development tax credit carryforwards of approximately $1.3 million and $937,000, respectively. The federal tax credits will begin expiring in 2020 unless previously utilized and the state tax credits carryforward indefinitely. As of December 31, 2005, we had a state manufacturer's investment tax credit carryforward of approximately $103,000 which will begin to expire in 2011, unless previously utilized. Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net operating loss and tax credit carryforwards that could be utilized annually in the future to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses and tax credits before they expire. In each period since our inception, we have recorded a valuation allowance for the full amount of our deferred tax asset, as the realization of the deferred tax asset has not met the "more likely than not" threshold required under SFAS 109, Accounting For Income Taxes. As a result, we have not recorded any federal or state income tax benefit in our statement of operations.

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Critical Accounting Policies and Estimates

Our Management's Discussion and Analysis of our Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates.

While our significant accounting policies are described in more detail in Note 1 of the Notes to Consolidated Financial Statements appearing elsewhere in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Our collaboration agreements contain multiple elements, including non-refundable upfront fees, payments for reimbursement of third-party research costs, payments for ongoing research, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. We apply the revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues Task Force, or EITF, Issue 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21. In applying these revenue recognition criteria, we consider a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement.

When a payment is specifically tied to a separate earnings process, revenues are recognized when the specific performance obligation associated with the payment is completed. Performance obligations typically consist of significant and substantive milestones. Revenues from milestone payments may be considered separable from funding for research services because of the uncertainty surrounding the achievement of milestones for products in early stages of development. Accordingly, these milestone payments are allowed to be recognized as revenue if and when the performance milestone is achieved if they represent a substantive earnings process as described in EITF 00-21.

In connection with certain research collaboration agreements, revenues are recognized from non-refundable upfront fees, which we do not believe are specifically tied to a separate earnings process, ratably over the term of the agreement or the period over which we have significant involvement or perform services. Research fees are recognized as revenue as the related research activities are performed.

Revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with grants are recorded in compliance with EITF Issue 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, and EITF Issue 01-14, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred. According to the criteria established by these EITF Issues, in transactions where we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, we record revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the consolidated statements of operations.

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None of the payments that we have received from collaborators to date, whether recognized as revenue or deferred, are refundable even if the related program is not successful.

Accrued Clinical Trial Costs

A substantial portion of our on-going research and development activities are performed under agreements we enter into with external service providers, including CROs, who conduct many of our research and development activities. We accrue the costs incurred under these contracts based on factors such as estimates of work performed, milestones achieved, patient enrollment and costs historically incurred for similar contracts. As actual costs become known, we adjust our accruals. To date, our accruals have been within management's estimates, and no material adjustments to research and development expenses have been recognized. We expect to significantly expand the level of research and development activity to be performed by external service providers and our estimated accruals will be more material to our future operations. Subsequent changes in estimates may result in a material change in our accruals, which could also materially affect our results of operations.

Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share-Based Payment,which revises SFAS No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. Prior to SFAS No. 123(R), we disclosed the pro forma effects of applying SFAS No. 123 under the Black-Scholes method. We adopted SFAS No. 123(R) effective January 1, 2006, prospectively for new equity awards issued subsequent to December 31, 2005.

Under SFAS No. 123(R), we calculate the fair value of stock option grants using the Black-Scholes option-pricing model. The assumptions used in the Black-Scholes model were 6.1 years for the expected term, 65.8% for the expected volatility, 4.8% for the risk free rate and 0.0% for dividend yield for the nine months ended September 30, 2006. Future expense amounts for any particular quarterly or annual period could be affected by changes in our assumptions.

The weighted average expected option term for 2006 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin, or SAB, No. 107 which was issued in March 2005. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

Estimated volatility for fiscal 2006 also reflects the application of SAB No. 107 interpretive guidance and, accordingly, incorporates historical volatility of similar public entities.

As of September 30, 2006, we had approximately $2.3 million of unrecognized stock-based compensation costs related to non-vested equity awards. As of September 30, 2006, we had outstanding vested options to purchase 983,578 shares of our common stock and unvested options to purchase 600,722 shares of our common stock.

Prior to January 1, 2006, we applied the intrinsic-value-based method of accounting prescribed by APB Opinion No. 25 and related interpretations. Under this method, if the exercise price of the award equaled or exceeded the fair value of the underlying stock on the measurement date, no compensation expense was recognized. The measurement date was the date on which the final number of shares and exercise price were known and was generally the grant date for awards to employees and directors. If

53

the exercise price of the award was below the fair value of the underlying stock on the measurement date, then compensation cost was recorded, using the intrinsic-value method, and was generally recognized in the consolidated statements of operations over the vesting period of the award.

The fair value of our common stock has historically been established by our board of directors. We have considered the guidance in the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, to determine the fair value of our common stock for purposes of setting the exercise prices of stock options granted to employees and others. This guidance emphasizes the importance of the operational development in determining the value of the enterprise. We are at the early stage of our development, and to date, have been focused on research and development activities.

Our board of directors estimated the fair value of our common stock based upon several factors, including our financial condition, our cash burn rate and an analysis of the possible sources and costs of raising additional capital. We are at an early stage of development, primarily focused on product development while preparing for the potential commercialization of two late-stage product candidates. To date, we have been funded primarily by venture capitalists. Prior to filing the revised protocol for the Phase 2b/3 Difimicin clinical trial in late December 2005, and the FDA's opening of the Prulifloxacin Investigational New Drug, or IND, application in January 2006, we were considered to be in a stage of development, pursuant to the AICPA guidance where the preferences of the preferred stockholders, in particular the liquidation preferences, are very significant when compared to the value of the company. For these reasons, our common stock was valued at $1.08 per share. In April 2006, subsequent to achieving the two clinical development milestones mentioned above but prior to the initiation of the initial public offering process on October 5, 2006, our board of directors allocated additional enterprise value to our common stock and increased the common stock valuation to $2.17 per share.

In connection with the initiation of the public offering process, we retrospectively reassessed the estimated fair value of our common stock as of the dates of the issuance of equity instruments, dating back to June 30, 2005. We have not historically obtained contemporaneous valuations by an unrelated valuation specialist because, at the time of issuance of equity awards, we believed our estimates of the fair value of our common stock to be reasonable and consistent with our understanding of how similarly situated companies in our industry were valued. We determined that the fair value of our common stock was $1.08 per share during the period from June 30, 2005 through January 13, 2006, which was approximately the time when we achieved the clinical development milestones discussed above. In addition, in reassessing the value of common stock in 2005 and 2006, we considered the price we received in November 2005 for our Series D preferred stock of $7.80 per share, as to which approximately 54% of the proceeds were from new investors that were unrelated parties. This Series D preferred stock financing was completed at the same price and on other similar terms as the April 2005 Series C financing. Accordingly, we believe that the value of our common stock also remained constant during the same time period and until January 2006, or the time of achievement of the two clinical development milestones described above.

We believe that after the completion of the two clinical development milestones, the fair value of our common stock increased to $5.37 per share in January 2006 which represents 90% of the value of the Series D preferred stock, on an as-converted basis, after deducting the value of the common stock warrants and assigning no value to the preferences of the Series D preferred stock. In connection with the preparation of our financial statements necessary for this offering, we reassessed the estimated fair value of our common stock using a market based approach, which considered recently completed initial public offerings by companies with similar market size and in a similar stage of development. In determining the reassessed fair value of our common stock, we established $11.40 per share as the

54

reassessed fair value at October 5, 2006. We also then reassessed the estimated fair value of our common stock from January 2006 through October 5, 2006 based on the nature of our operations and the execution of our operating plan. Based on this assessment, including the fact that subsequent to the two clinical development milestones previously described, there were no other significant scientific or operational milestones during that period. As such, we ratably increased the estimated fair value of our common stock from $5.37 per share in January 2006 to $11.40 per share at October 5, 2006. On January 19, 2007, in connection with the execution of the prospective buy-back agreement with Par, pursuant to which we have the right to repurchase Par's rights to develop and commercialize Difimicin, we reassessed our fair value at that date to be $12.00 per share after consideration of this milestone. The reassessed fair values may not be reflective of the fair value which would result from the application of other valuations methods, including accepted valuation methods for tax purposes.

Based on our reassessed fair values of our common stock dating back to June 30, 2005, we concluded that the 35,076 stock options granted to employees between July 2005 and December 2005 were at fair value. We concluded that the stock options granted to employees and consultants in March, May and September of 2006, which were initially determined by our board of directors in good faith to have exercise prices at fair value, were at exercise prices below the reassessed values. Accordingly, for the 15,692 options granted at $1.08 per share in March 2006; the 600 options granted in May 2006 at $2.17 per share and the 71,999 options granted in September 2006 at $2.17 per share, the reassessed fair values were determined to be $6.72 per share, $8.06 per share and $10.75 per share, respectively. Furthermore, in July 2006, we granted 251,534 options at $2.17 per share related to hiring two executive officers as well as our annual stock option grants to members of our board of directors. The reassessed fair values of these July 2006 stock options were determined to be $9.40 per share.

Equity instruments issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123(R) and Emerging Issues Task Force 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period.

Results of Operations

Comparison of Nine Months Ended September 30, 2006 and 2005

Collaboration and Grant Revenues.    Collaboration and grant revenues decreased to $848,000 for the nine months ended September 30, 2006 from $1.5 million for the nine months ended September 30, 2005. The decrease of $603,000, or 42%, was primarily due to a decrease in revenue from Small Business Innovation Research Program, or SBIR, grants which generated $408,000 in the current period versus $692,000 for the same period in the prior year. In addition, we terminated the manufacturing supply agreement with Sloan-Kettering Institute for Cancer Research which generated $265,000 of revenue for the same period in the prior year.

Research and Development Expense.    Research and development expense increased to $7.3 million for the nine months ended September 30, 2006 from $4.6 million for the nine months ended September 30, 2005. The increase of $2.7 million, or 58%, was primarily due to costs incurred on our Difimicin Phase 2b/3 clinical trial which we initiated in May 2006. We also incurred certain start-up costs related to our Prulifloxacin Phase 3 clinical trial which was initiated in July 2006.

General and Administrative Expense.    General and administrative expense of $2.3 million for the nine months ended September 30, 2006 was relatively consistent with the $2.2 million for the nine months ended September 30, 2005.

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Interest Income (Expense) and Other, net.    Net interest income and other increased to $931,000 for the nine months ended September 30, 2006 from interest expense of $33,000 for the nine months ended September 30, 2005, an increase of $964,000. The increase was primarily due to higher cash and short-term investment balances resulting in an increase in interest income of $644,000, as well as a decrease in interest expense of $239,000 related to the fair value of warrants and the related beneficial conversion feature, in connection with our bridge financing, that was expensed in 2005.

Comparison of Years Ended December 31, 2005 and 2004

Collaboration and Grant Revenues.    Collaboration and grant revenues increased to $2.1 million for the year ended December 31, 2005 from $1.1 million for the year ended December 31, 2004. The increase of $1.0 million, or 93%, was primarily due to an increase in research grant revenues of $879,000 and an increase in collaboration revenues of $157,000. In 2005, we received three research grants to support certain antibiotic and osteoarthritis drug candidates.

Research and Development Expense.    Research and development expense decreased to $7.0 million for the year ended December 31, 2005 from $8.6 million for the year ended December 31, 2004. The decrease of $1.6 million, or 18%, was primarily due to reductions in research and development personnel.

General and Administrative Expense.    General and administrative expense of $2.8 million for the year ended December 31, 2005 was relatively consistent with the $2.7 million of expense for the year ended December 31, 2004.

Interest Income (Expense) and Other, net.    Net interest income (expense) and other of $237,000 for the year ended December 31, 2005 was relatively consistent with the $247,000 for the year ended December 31, 2004.

Comparison of Years Ended December 31, 2004 and 2003

Collaboration and Grant Revenues.    Collaboration and grant revenues increased to $1.1 million for the year ended December 31, 2004 from $542,000 for the year ended December 31, 2003. The increase of $569,000, or 105%, was primarily due to an increase in research revenues from collaborations of $533,000 and SBIR research grant revenues of $36,000. The increase in research revenues was primarily due to a one-year research agreement with a major biotechnology company.

Research and Development Expense.    Research and development expense increased to $8.6 million for the year ended December 31, 2004 from $7.9 million for the year ended December 31, 2003. The increase of $661,000, or 8%, was primarily due to expenses incurred to support the Phase 1 and Phase 2 clinical trials for Difimicin as well as a general increase in research and development activities.

General and Administrative Expense.    General and administrative expense of $2.7 million for the year ended December 31, 2004 was relatively consistent with the $2.9 million for the year ended December 31, 2003.

Interest Income (Expense) and Other, net.    Net interest income (expense) and other income decreased to $247,000 for the year ended December 31, 2004 from $441,000 for the year ended December 31, 2003. The decrease of $194,000 was primarily due to lower average cash and short-term investments balances in 2004 than in 2003.

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  Liquidity and Capital Resources

Sources of Liquidity

Since inception, our operations have been financed primarily through the private placement of equity securities. Through September 30, 2006, we received gross proceeds of approximately $69.9 million from the sale of shares of our preferred stock as follows:

•

in May 2000, we sold a total of 1.6 million shares of Series A preferred stock for proceeds of $3.4 million;



•

from March 2001 to December 2001, we sold a total of 4.1 million shares of Series B preferred stock for proceeds of $32.2 million;



•

in April 2005, we sold a total of 1.5 million shares of Series C preferred stock for proceeds of $12.0 million; and



•

from April 2005 to November 2005, we sold a total of 2.9 million shares of Series D preferred stock for proceeds of $22.3 million.

As of September 30, 2006, we had $23.7 million in cash, cash equivalents and short-term investments. We have invested a substantial portion of our available funds in money market funds and government agency securities for which credit loss is not anticipated. We have established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity.

Cash Flows

As of September 30, 2006, cash, cash equivalents and short-term investments totaled approximately $23.7 million as compared to $29.9 million as of December 31, 2005, a decrease of approximately $6.2 million. The decrease resulted from $6.1 million of net cash used in operating activities driven primarily by our net loss of $7.9 million, offset by non-cash charges and changes in net operating assets.

As of December 31, 2005, cash, cash equivalents and short-term investments totaled approximately $29.9 million as compared to $2.0 million as of December 31, 2004, an increase of approximately $27.9 million. The increase resulted primarily from $33.4 million of net cash received in our Series C and Series D preferred stock offerings, offset by $5.4 million of net cash used in operating activities driven primarily by our net loss of $7.4 million, offset by non-cash charges and changes in net operating assets.

We cannot be certain if, when or to what extent we will receive cash inflows from the commercialization of our product candidates. We expect our development expenses to be substantial and to increase over the next few years as we advance the development of our product candidates.

In June 2004, we entered into a license agreement with Nippon Shinyaku. Under the terms of this agreement, we acquired the non-exclusive right to import and purchase Prulifloxacin, and the exclusive right (with the right to sublicense), within the United States, to develop, make, use, offer to sell, sell and license products suitable for consumption by humans containing Prulifloxacin. Under this agreement, we paid Nippon Shinyaku an up-front fee in the amount of $1.0 million and will be required to make one future milestone payment in the amount of $1.0 million upon filing, if any, our first NDA in the United States. Under the agreement, we pay Nippon Shinyaku for certain materials. If

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Nippon Shinyaku is unable to supply us with the contracted amount of Prulifloxacin, then Nippon Shinyaku will grant us a non-exclusive, worldwide license to make or have made Prulifloxacin, in which event we will owe Nippon Shinyaku a royalty based on the amount of net sales of Prulifloxacin generated by us and our subsidiaries. Additionally, we will owe Nippon Shinyaku certain royalties based on the amount of net sales of Prulifloxacin less the amount of Prulifloxacin we buy from Nippon Shinyaku.

In April 2005, we entered into a collaboration agreement with Par pursuant to which we and Par exclusively collaborate in the development and commercialization of Difimicin. We granted to Par an exclusive royalty-bearing license, with the right to sublicense, promote, market, distribute and sell Difimicin in a territory composed of the United States, Canada and Puerto Rico, with an option to extend the territory to include Israel. We have rights to receive double-digit royalties for the first year of Difimicin sales by Par and royalties of over 20% each year thereafter. We are also entitled to royalties from Par's sublicensees which are based on a percentage of Par's revenue from such sublicensee, not on Difimicin sales. We also granted to Par a non-exclusive license to manufacture Difimicin for its territory. We retained all other rights to Difimicin in the rest of the world and we must pay Par royalties on our net sales of Difimicin in certain markets. At the time of the collaboration agreement, Par also purchased $12.0 million of our Series C preferred stock.

In January 2007, we entered into a prospective buy-back agreement with Par pursuant to which we have either the right or obligation to repurchase Par's rights to develop and commercialize Difimicin in North America and Israel. In the event of such repurchase, we would obtain worldwide rights to Difimicin. Upon completion of this offering, we intend to use a portion of the net proceeds to repurchase Par's rights to develop and commercialize Difimicin. Upon effectiveness of the prospective buy-back agreement, we would be required to pay Par a one-time $20.0 million upfront payment, and then our April 2005 collaboration agreement with Par would terminate, and we would be required to pay Par a one-time $5.0 million milestone payment, a 5% royalty on net sales by us, our affiliates or our licensees of Difimicin in North America and Israel, and a 1.5% royalty on net sales by us or our affiliates of Difimicin in the rest of the world. In addition, in the event we license our right to market Difimicin in the rest of the world, we will be required to pay Par a 6.25% royalty on net revenues we receive related to Difimicin. We are obligated to pay each of these royalties, if any, on a country-by-country basis for seven years commencing on the applicable commercial launch in each such country. In addition, Par would assign to us its supply agreement with Biocon regarding the API for Difimicin pursuant to which we may be obligated to pay to Biocon a $3.0 million prepayment subject to set-offs against future purchases by us of the API for Difimicin.

Funding Requirements

Our future capital uses and requirements depend on numerous factors including, but not limited to, the following:

•

the progress of our clinical trials, including expenses to support the trials and the milestone payment that may become payable to Nippon Shinyaku;



•

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



•

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



•

the costs and timing of regulatory approvals;

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•

the costs of establishing sales or distribution capabilities;



•

the success of the commercialization of our products; and



•

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

We believe that our existing cash and cash equivalents, along with the net proceeds from this offering, will be sufficient to meet our capital requirements for at least the next 12 months.

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities and collaborations and government grants. In addition, we may finance future cash needs through the sale of additional equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining additional collaboration agreements, in receiving milestone or royalty payments under new or existing collaboration agreements, in obtaining new government grants or in obtaining debt financing. In addition, we cannot be sure that our existing cash and investment resources will be adequate, that financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale-back or eliminate some or all of our development programs, relinquish some or even all of our rights to product candidates at an earlier stage of development or renegotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to operate as a going concern. If we raise funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise funds by incurring additional debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Contractual Obligations

The following table describes our long-term contractual obligations and commitments as of December 31, 2005:

We have contracted with a contract research organization, or CRO, for clinical research services for the Difimicin Phase 2b/3 clinical trials and Prulifloxacin Phase 3 clinical trials. We have issued purchase orders totaling $24.2 million for these services, $20.4 million of which were issued in 2006. We can terminate the service agreement at any time upon 60 days' written notice to the CRO. We have not included any amounts related to the CRO contract in the table above.

The contractual obligations table does not include (a) a potential future milestone payment in the amount of $1.0 million to Nippon Shinyaku due upon filing our first NDA in the United States for Prulifloxacin, (b) potential future milestone payments to Cempra in the amount of $1.0 million due upon the regulatory approval of each of the first two products we develop under our licensing agreement with Cempra in any country which is a member of the Association of Southeast Asian Nations, or ASEAN, (c) potential future milestone payments to SKI for each product licensed under

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the SKI agreement as follows: (i) $500,000 upon the commencement of Phase 3 clinical studies, (ii) $750,000 upon the filing of the first NDA, (iii) $1.5 million upon marketing approval in the United States and (iv) $1.0 million upon marketing approval in each and any of Japan and certain European countries, (d) potential future milestone payments of up to $14.0 million to TSRI due upon achievement of certain clinical milestones, the filing of NDAs or their foreign equivalents and government marketing and distribution approval, (e) a potential $20.0 million upfront payment, a future $5.0 million milestone payment and a potential approximately $1.9 million payment for Difimicin inventory to Par following effectiveness of the prospective buy-back agreement between us and Par or (f) a potential $3.0 million prepayment to Biocon, subject to future set-offs, following the assignment, if any, by Par to us of its supply agreement with Biocon. We may also be required to pay royalties on any net sales of Prulifloxacin, Difimicin and other licensed product candidates. The milestone and royalty payments under our license agreements are not included in the table above because we cannot, at this time, determine when or if the related milestones will be achieved or the events triggering the commencement of payment obligations will occur.

Related Party Transactions

For a description of our related party transactions, see the "Related Party Transactions" section of this prospectus.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities.

Quantitative and Qualitative Disclosures about Market Risk

Our cash and cash equivalents and short-term investments as of September 30, 2006 consisted primarily of money market funds and government agency securities. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

Recently Issued Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt this interpretation as required. We do not believe that the adoption will have a material effect on our consolidated financial statements.

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In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, or SFAS 157, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the requirements of SFAS 157; however, we do not believe that our adoption will have a material effect on our consolidated financial statements.

In September 2006, the Staff of the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, SAB 108. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year's financial statements are materially misstated. SAB 108 is effective for our fiscal year beginning January 1, 2007. We are currently evaluating the requirements of SAB 108; however, we do not believe that our adoption of SAB 108 will have a material effect on our consolidated financial statements.

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BUSINESS

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing innovative anti-infective products. Our initial development efforts address products that treat GI infections and related diseases where current therapies have limitations, including diminished efficacy, serious adverse side effects, drug-to-drug interactions, difficult patient compliance and bacterial resistance. We currently have two late-stage anti-infective product candidates, Difimicin and Prulifloxacin. Difimicin, our lead product candidate, is an antibiotic currently in a Phase 2b/3 registration trial for the treatment of Clostridium difficile-associated diarrhea, or CDAD, the most common nosocomial, or hospital-acquired, diarrhea. Prulifloxacin is an antibiotic currently in two Phase 3 trials for the treatment of travelers' diarrhea, a form of infectious diarrhea. We are developing additional product candidates using our proprietary technology, including our Optimer One-Pot Synthesis, or OPopS, drug discovery platform.

Antibiotic Market Background

Infectious diseases can be caused by bacteria present in the environment that enter the body through the skin or mucous membranes of the lungs, nasal passages and GI tract. These bacteria can be pathogenic, or disease-causing, and can overwhelm the body's immune system by establishing themselves throughout the body in various tissues and organs where they proliferate. This can cause a number of serious and, in some cases, fatal infections, including those of the GI tract, urinary tract, respiratory tract, bloodstream, skin and heart.

Bacteria can be classified as either gram-positive or gram-negative depending on the ability of the bacteria's cell wall to retain a stain commonly used to identify unknown bacterial cultures. Gram- positive bacteria retain the stain while gram-negative bacteria do not. Antibiotics that treat bacterial infections can be classified as either broad-spectrum or narrow-spectrum. Currently used antibiotics are generally considered broad-spectrum, meaning they target a wide variety of bacteria. In contrast, narrow-spectrum antibiotics target a select group of bacteria such as gram-positive or gram-negative bacteria. Current research is increasingly focused on antibiotics that target specific bacteria, which may be beneficial for the treatment of certain infections.

Antibiotics used to treat bacterial infections work by interfering with necessary bacterial cellular activities, such as cell wall synthesis or protein synthesis. Antibiotics may be bacteriostatic or bactericidal. Bacteriostatic antibiotics stop the growth of bacteria, which prevents the infecting bacteria from multiplying and helps the patient's own immune system to eradicate the infecting bacteria. Bactericidal antibiotics work by directly killing the bacteria, which is particularly important for patients with weakened immune systems that cannot effectively eradicate the infecting bacteria on their own.

The anti-infective market is one of the largest therapeutic categories worldwide. According to IMS Health, the combined market for prescription antibacterial drugs in 2004 for the United States, Japan, Korea, Germany, France, Italy, the United Kingdom and Spain exceeded $20.0 billion. The market for anti-infective products is generally divided into two categories, nosocomial infections, which represent approximately 30% of the anti-infectives market, and community-acquired infections, which represent approximately 70% of the anti-infectives market. According to the U.S. Centers for Disease Control and Prevention, or CDC, approximately two million nosocomial infections occur annually in the United States and these infections can increase average length of hospital stays by approximately seven to nine days. Approximately four million nosocomial infections occur annually in Europe, three million in North America, two million in South America and two million in East Asia (excluding China).

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Nosocomial infections are costly to address, with an estimated annual aggregate healthcare cost in the United States and the United Kingdom of approximately $4.5 billion and $1.9 billion, respectively. In addition, in the United States, nosocomial infections cause approximately 80,000 deaths annually, making them one of the five leading causes of death in the United States. We believe that bacterial infections, especially infections caused by difficult-to-treat, drug resistant bacteria, cause or contribute to a substantial majority of these deaths.

Our Market Opportunity

Many marketed antibiotics used to treat infections have well documented shortcomings. For example, current antibiotics often fail to reach sufficient concentrations at the site of infection to adequately eliminate harmful bacteria. These antibiotics have also been associated with serious adverse side effects, including renal toxicities, heart rhythm abnormalities, phototoxicity, rashes and central nervous effects, such as seizures. These side effects limit the use of antibiotics for certain patients. In addition, certain antibiotics have interaction issues with frequently prescribed drugs, such as cholesterol lowering agents. Safety problems arise when increased doses of these antibiotics are needed to treat resistant bacteria. If bacteria develop resistance, the underlying infection can become difficult or impossible to treat, and may even lead to death. Patients also often fail to comply with treatment regimens due to many factors including the inability to tolerate an antibiotic due to its side effects, inconvenient method of dosing and high frequency and length of dosing. Because of these shortcomings, marketed antibiotics often do not provide adequate treatment.

Our Product Candidates

We believe that our product candidates may offer advantages over existing antibiotics in terms of efficacy, safety, potential for minimal bacterial resistance and more convenient dosing. We also believe that the markets for these product candidates present us with significant commercial opportunities.

Our product candidates are in various stages of clinical development and none have been approved by the FDA for sale by us. Our ability to obtain FDA approval of any of our product candidates requires us to successfully complete the clinical development of each such product candidate, including further clinical trials. Clinical trials involve a lengthy and expensive process with an uncertain outcome, and efficacy and safety data of earlier studies and trials may not be predictive of future trial results.

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Our current product candidate portfolio consists of the following:

(1)

We filed an investigational new drug application, or IND, with the FDA for Difimicin (OPT-80) in August 2003.

(2)

We have granted our partner Par Pharmaceutical, Inc., or Par, rights to market Difimicin in North America and, at its option, Israel. We have the right to receive royalties from Par on any sales of Difimicin. We intend to use a portion of the net proceeds of this offering to repurchase these commercial rights from Par following completion of this offering subject to our continuing obligation to pay Par royalties on sales of Difimicin and net revenues we receive from any future license of rights to Difimicin to another party. We own all other commercial rights to Difimicin.

(3)

A proof-of-concept trial is an exploratory clinical trial to provide or establish evidence that a product candidate is efficacious for a target indication. Although such trials may be categorized as Phase 2 clinical trials, certain trials may be more appropriately characterized as proof-of-concept trials, such as investigator-initiated trials, certain trials not conducted under a U.S. investigational new drug application or small trials that are exploratory in nature.

(4)

We filed an IND with the FDA for Prulifloxacin (OPT-99) in December 2005.

(5)

We have the right to receive royalties from Cempra Pharmaceuticals, Inc. on any sales of OPT-1068 and OPT-1273.

Anti-Infective Product Candidates

Difimicin (OPT-80)

Overview.    We are initially developing Difimicin for the treatment of infections caused by Clostridium difficile, or C. difficile bacteria. Difimicin is a differentiated antibiotic for the treatment of CDAD, the most common nosocomial diarrhea. Specifically, Difimicin has a narrow spectrum of activity against certain gram-positive bacteria. Pre-clinical data indicates that Difimicin is bactericidal and acts by inhibiting RNA polymerase, a bacterial enzyme. This data also shows that Difimicin inhibits the growth of other potentially harmful bacteria such as Staphylococci, common bacteria that reside on the skin and in the GI tract, and Enterococci, common bacteria that reside in the GI tract.

We are currently in a Phase 2b/3 registration trial for Difimicin for the treatment of CDAD. In April 2005, we entered into a collaboration agreement with Par pursuant to which we and Par exclusively collaborate in the clinical development and commercialization of Difimicin. In January 2007, we entered into a prospective buy-back agreement with Par. Upon completion of the offering, we intend to use a portion of the net proceeds to repurchase Par's rights to develop and commercialize Difimicin

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pursuant to the terms of the prospective buy-back agreement. Upon any such effectiveness, our April 2005 collaboration agreement with Par shall be terminated and thereafter, we would retain all development and commercialization rights to Difimicin. The FDA has granted Fast Track status for Difimicin in the treatment of CDAD. Fast Track designation indicates that Difimicin has the potential to treat life-threatening diseases with unmet medical needs. Difimicin was also chosen to be the only investigational new drug in the CMA Pilot 2 Program in the Division of Anti-Infective and Ophthalmology Products. The CMA designation offers several potential benefits, including a program of continuous FDA feedback designed to streamline the development process. Participation in these programs will not eliminate any phase of clinical development.

Currently, metronidazole and oral vancomycin are the two standard therapeutics used to treat CDAD. Both have shortcomings including lower efficacy, high recurrence rates, adverse side effects and poor compliance. Of these two therapeutics, only oral vancomycin is FDA-approved to treat CDAD.

Clostridium Difficile-Associated Diarrhea.    CDAD is a serious illness caused by infection of the lining of the colon by C. difficile, bacteria that produce toxins resulting in inflammation, severe diarrhea and, in serious cases, death. Outbreaks and illness related to C. difficile generally occur during or after therapy with broad-spectrum antibiotics. Broad-spectrum antibiotics can cause CDAD by disrupting normally occurring gastroinstestinal bacteria, or gut flora, thereby allowing C. difficile to proliferate. Recent studies have suggested that the use of proton pump inhibitors, or PPIs, a widely used group of heartburn drugs, may also be linked to C. difficile infections. CDAD accounts for approximately 20% of antibiotic-associated diarrhea incidences as well as many cases of antibiotic-associated colitis, or inflammation of the colon. C. difficile can be transmitted by direct or indirect contact with infected patients via spores that can live for months on dry surfaces. According to the CDC, CDAD is becoming more prevalent outside the hospital.

We estimate that CDAD affected over 500,000 patients in the United States in 2005. In the United Kingdom in 2005, the reported number of CDAD patients over 65 years of age was approximately 50,000, and we believe that CDAD incidence is growing in patients worldwide. We believe that the incidence of CDAD may be higher than what is currently being reported because many hospitals are not required to and do not report incidents of CDAD. Additionally, recent reports indicate that the incidence of community-acquired CDAD cases may be increasing. For example, a study conducted in one major U.S. city and cited at the 2006 Interscience Conference on Antimicrobial Agents and Chemotherapy, or ICAAC, reported that the percentage of CDAD cases found to be community-acquired increased from 12% in 2003 to 22% in 2004 and to 29% in 2005.

According to a study cited in the New England Journal of Medicine, the increased rates of CDAD and severity of the disease may be caused by a combination of factors including the excessive use of antibiotics and the emergence of a new hypervirulent strain of C. difficile known as North America Phenotype 1/027, or NAP1/027. A study published in the medical journal Lancet in September 2005 demonstrated that NAP1/027 produces 16 to 23 times more toxins in vitro than other strains. NAP1/027 has been reported in 23 states in the United States and is characterized by increased virulence, morbidity and mortality as well as potential antimicrobial resistance. According to the data presented at the 2006 ICAAC, NAP1/027 incidence in the United Kingdom increased an estimated 200% in the two years since mandatory surveillance of the disease was initiated in hospitals in 2004.

Generally, CDAD results in longer hospital stays and increases average patient cost by approximately $3,600 per patient in the United States, which is often not reimbursed to the hospital. In more complicated cases of CDAD, hospitalization may be prolonged by up to two weeks, which can increase average patient costs by approximately an additional $6,000 to $10,000 per patient in the United States. According to the data presented at the 2006 ICAAC, CDAD results in an estimated increase in

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average patient cost of over $6,000 per patient in the United Kingdom and the total projected annual cost for treating the disease in Europe is approximately $3.8 billion.

Physicians care for patients with CDAD by discontinuing previously administered broad-spectrum antibiotics, if possible, and providing supportive care such as fluid and electrolyte replacement. If these measures fail, the standard therapy for CDAD includes the administration of metronidazole and/or oral vancomycin.

Current Treatments and Limitations.    Metronidazole is generally used for patients in the United States and Europe experiencing their first episode or first recurrent episode of CDAD. Metronidazole is a generic drug that is used off-label to treat CDAD due to its low cost and historical efficacy. The typical treatment regimen for metronidazole is 250 mg every six hours, for a minimum of ten days. Metronidazole can be associated with significant adverse side effects such as seizures, toxic reactions to alcohol, leukopenia, or reduction of white blood cells, neuropathy, a disease affecting one or more nerves, unpleasant taste or dry mouth.

Oral vancomycin is used in the United States and also in Europe and Japan for the treatment of CDAD. As a result of its broad antibacterial activity, intravenously administered vancomycin is frequently used for certain other life-threatening infections caused by multi-drug resistant bacteria. In an effort to slow the continuing emergence of vancomycin-resistant bacteria, the medical community discourages the use of the drug for the treatment of CDAD except for patients who are not responding to metronidazole or for patients with severe, life-threatening colitis. Oral vancomycin's recommended treatment protocol is 125 mg or 250 mg doses every six hours, for approximately ten days.

Both metronidazole and oral vancomycin have shortcomings as treatments for CDAD including:

•

Poor Clinical Response. Recent clinical studies conducted in North America have shown that 10 to 15% of CDAD patients treated with oral vancomycin and 20 to 35% of CDAD patients treated with metronidazole do not respond to therapy, and these patients are at risk of developing more severe CDAD.



•

High Recurrence Rate. Approximately 20% of CDAD patients who initially respond to oral vancomycin and 30% of CDAD patients who initially respond to metronidazole experience a clinical recurrence following the cessation of antibiotic administration.



•

Bacterial Resistance. Widespread use of oral vancomycin is discouraged for the treatment of CDAD in some hospitals due to concerns over the development of cross-resistance, including vancomycin-resistant Enterococci, or VRE, and vancomycin-resistant Staphylococcus, which can also cause other serious nosocomial infections. Furthermore, C. difficile resistance to metronidazole has been reported in at least one recent study.



•

Adverse Side Effects. Metronidazole, which is systemically absorbed and must be administered in high doses to treat CDAD, may result in serious adverse side effects and complications, including seizures, toxic reactions to alcohol, leukopenia, neuropathy, unpleasant taste or dry mouth.



•

Inducement of CDAD. Oral vancomycin and metronidazole are both broad-spectrum antibiotics that disrupt the normal gut flora. Because normal and healthy gut flora generally suppress the growth of C. difficile, administration of oral vancomycin or metronidazole may actually induce the development of CDAD.

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•

Inconvenient Dosing and Difficult Compliance. The current treatment regimen for both oral vancomycin and metronidazole is inconvenient as both must be administered every six hours for a minimum of seven days, which may result in lower levels of patient compliance.