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As filed with the Securities and Exchange Commission on May 1, 2012

Registration No. 333-178188

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Amendment No. 6

To

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Rib-X Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		2834		06-1599437
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(IRS Employer Identification No.)

300 George Street, Suite 301

New Haven, Connecticut 06511

(203) 624-5606

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Mark Leuchtenberger

President and Chief Executive Officer

Rib-X Pharmaceuticals, Inc.

300 George Street, Suite 301

New Haven, Connecticut 06511

(203) 624-5606

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Jonathan L. Kravetz, Esq. Daniel H. Follansbee, Esq. Megan N. Gates, Esq. John T. Rudy, Esq. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 (617) 542-6000		Michael D. Maline, Esq. Edward A. King, Esq. Goodwin Procter LLP 620 Eighth Avenue New York, NY 10018 (212) 813-8800

 

 

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

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

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.    ¨             

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 registration statement for the same offering.    ¨            

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 registration statement for the same offering.    ¨            

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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 Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated May 1, 2012

 

PRELIMINARY PROSPECTUS

 

5,770,000 Shares

Common Stock

This is the initial public offering of shares of the common stock of Rib-X Pharmaceuticals, Inc. We are offering shares of our common stock. We anticipate the initial public offering price will be between $12.00 and $14.00 per share. We have applied to list our common stock on the NASDAQ Global Market under the symbol “RIBX.”

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk Factors” beginning on page 12.

Neither the Securities and Exchange Commission nor any other state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

		Per Share				Total
Public offering price		$				$
Underwriting discounts and commissions		$				$
Proceeds, before expenses, to us		$				$

We have granted the underwriters the right to purchase up to 865,500 additional shares of common stock to cover over-allotments.

Certain of our existing stockholders and their affiliated entities have indicated an interest in purchasing up to approximately $20.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing stockholders and any of these existing stockholders could determine to purchase more, less or no shares in this offering.

The underwriters expect to deliver the shares on                , 2012.

Deutsche Bank Securities

William Blair & Company

Lazard Capital Markets

Needham & Company

The date of this prospectus is                , 2012

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock.

Until                    , 2012 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

This prospectus includes estimates, statistics and other industry and market data that we obtained from industry publications, research, surveys and studies conducted by third parties and publicly available information. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. This prospectus also includes data based on our own internal estimates. We caution you not to give undue weight to such projections, assumptions and estimates.

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, including our financial statements and related notes, before deciding whether to invest in shares of our common stock. The occurrence of any of the following adverse developments described in the following risk factors could materially and adversely harm our business, financial condition, results of operations or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating Our Financial Position and Need for Additional Capital

We have never been profitable. Currently, we have no products approved for commercial sale, and to date we have not generated any revenue from product sales. As a result, our ability to reduce our losses and reach profitability is unproven, and we may never achieve or sustain profitability.

We have never been profitable and do not expect to be profitable in the foreseeable future. We have incurred net losses in each year since our inception, including net losses of $28.2 million, $26.8 million and $53.5 million for 2009, 2010 and 2011, respectively. As of December 31, 2011, we had an accumulated deficit of $244.3 million. We have devoted most of our financial resources to research and development, including our preclinical development activities and clinical trials. We have not completed development of any product candidate and we have therefore not generated any revenues from product sales. We expect to incur increased expenses if and as we commence Phase 3 development of delafloxacin, satisfy our obligations under our agreement with Sanofi, advance our other product candidates and expand our research and development programs. We also expect an increase in our expenses associated with seeking regulatory approvals and preparing for commercialization of our product candidates, and adding infrastructure and personnel to support our product development efforts and operations as a public company. As a result of the foregoing, we expect to continue to experience net losses and negative cash flows for the foreseeable future. These net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. In addition, our expenses could increase if we are required by the United States Food and Drug Administration, or FDA, to perform studies in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of any of our product candidates. The amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. To date, our only source of revenue has been our collaboration and license agreement with Sanofi. Future payments from Sanofi under this collaboration are uncertain because Sanofi may choose not to continue research or development of activities for one or more potential RX-04 product candidates under the collaboration, we may not achieve milestones under the agreement with Sanofi, Sanofi may not exercise its option to license any RX-04 product candidates, and RX-04 product candidates may not be approved or, if they are approved, may not be accepted in the market. If we are unable to develop and commercialize one or more of our product candidates, either alone or with collaborators, or if revenues from any such collaboration product candidate that receives marketing approval are insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

 

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If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. We expect to incur increased expenses as we commence Phase 3 development of delafloxacin, satisfy our obligations under our agreement with Sanofi, advance our other product candidates and expand our research and development programs. Moreover, proceeds from this offering will not be sufficient to complete the development and commercialization of our lead product candidate, delafloxacin, or to continue the development of radezolid. For instance, to complete Phase 3 development of delafloxacin, we estimate that our two planned ABSSSI Phase 3 studies will each cost approximately $33.0 million. Accordingly, we will need to obtain additional funding beyond the proceeds of this contemplated offering to complete the development and commercialization of delafloxacin as well as to continue to advance the development of radezolid and our other clinical and preclinical candidates. If the FDA requires that we perform additional studies beyond those that we currently believe will be required, our expenses would further increase beyond what we currently anticipate and the anticipated timing of any potential product approvals may be delayed. Under our collaboration and license agreement with Sanofi, we are required to use personnel and other resources in the conduct of a joint development plan directed toward identifying and optimizing product candidates thereunder meeting mutually agreed target product profiles. We currently have no commitments or arrangements to fund our research and development programs other than future contingent milestone or royalty payments from Sanofi, which require the successful development, regulatory approval and commercialization of one or more product candidates thereunder and may not be received for several years. We believe that the net proceeds from this offering, together with amounts we anticipate receiving under our collaboration with Sanofi and existing cash and cash equivalents and interest thereon, will be sufficient to fund our projected operating requirements through the first quarter of 2014.

Our future funding requirements, both short-term and long-term, will depend on many factors, including, but not limited to:

 

•

the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates and potential product candidates, including initiation of Phase 3 development for delafloxacin;

 

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the success of our collaboration with Sanofi and receipt of milestones and royalty payments, if any, thereunder;

 

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the number and characteristics of product candidates that we pursue;

 

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the outcome, timing and costs of regulatory approvals;

 

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the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

 

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the costs and timing of completion of commercial-scale outsourced manufacturing activities;

 

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the costs of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval;

 

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the timing, receipt and amount of any sales, or royalties on, our product candidates, if any; and

 

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the terms and timing of any future collaborative, licensing or other arrangements that we may establish.

 

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Unless and until we can generate a sufficient amount of revenue from our product candidates, we expect to finance future cash needs through public or private equity offerings, debt financings or regional collaborations and licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. We may be required to access the public or private capital markets from time to time when conditions are unfavorable, or we may seek to access them when conditions are favorable even if we do not have an immediate need for additional capital.

We have a limited operating history and we expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

Our operations to date have been primarily limited to developing our technology and undertaking preclinical studies and clinical trials of our product candidates. We have not yet obtained regulatory approvals for any of our product candidates. Consequently, any predictions made about our future success or viability may not be as accurate as they could be if we had a longer operating history or approved products on the market. Our financial condition and operating results have varied significantly in the past and are expected to continue to significantly fluctuate from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include:

 

•

our ability to obtain additional funding to develop our product candidates;

 

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the need to obtain and maintain regulatory approval in the United States as well as other significant non-U.S. markets for delafloxacin, radezolid, or any of our other product candidates;

 

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delays in the commencement, enrollment and timing of clinical trials;

 

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the success of our clinical trials through all phases of clinical development, including our Phase 3 clinical trials of delafloxacin;

 

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any delays in regulatory review and approval of product candidates in clinical development;

 

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potential side effects of our product candidates that could delay or prevent commercialization or cause an approved drug to be taken off the market;

 

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our ability to identify and develop additional product candidates;

 

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market acceptance of our product candidates;

 

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our ability to establish an effective sales and marketing infrastructure;

 

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competition from existing products or new products that may emerge;

 

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the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products;

 

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our dependency on third-party manufacturers to manufacture our products or key ingredients;

 

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our ability to establish or maintain collaborations, licensing or other arrangements;

 

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the costs to us, and our ability and a third party’s ability to obtain, maintain and protect intellectual property rights;

 

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costs related to and outcomes of potential intellectual property litigation;

 

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our ability to adequately support future growth;

 

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our ability to attract and retain key personnel to manage our business effectively;

 

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our ability to build our finance infrastructure and improve our accounting systems and controls;

 

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potential product liability claims;

 

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potential liabilities associated with hazardous materials; and

 

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our ability to maintain adequate insurance policies.

Accordingly, the results of any quarterly or annual periods should not be relied upon as indications of future operating performance.

The timing of milestone, royalty and other payments we are required to make under our license agreements are uncertain and could adversely affect our cash flows and results of operations.

We are obligated, including pursuant to an exclusive license and supply agreement with CyDex Pharmaceuticals, Inc. (now a wholly owned subsidiary of Ligand Pharmaceuticals Incorporated, both hereafter referred to as Ligand), an exclusive license agreement with Wakunaga Pharmaceutical Co., Ltd., or Wakunaga, and an exclusive license agreement with Yale University, to make milestone payments and pay royalties and other fees in connection with the development and commercialization of our product candidates. The timing of our achievement of these milestones and the corresponding milestone payments is subject to factors relating to the clinical and regulatory development and commercialization of our product candidates, which are difficult to predict and for which many are beyond our control. We may become obligated to make a milestone or other payment at a time when we do not have sufficient funds to make such payment, which could result in the loss of required intellectual property rights to further develop or commercialize one or more of our product candidates, or at a time that would otherwise require us to use funds needed to continue to operate our business, which could delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us. In addition, disputes with a licensor regarding compliance with the requirements of our agreements could result in our making milestone, royalty or other payments when we do not believe they are due to avoid potentially expensive litigation. If we are unable to make any payment when due or if we fail to use commercially reasonable efforts to achieve certain development and commercialization milestones within the timeframes required by these agreements, the other party may have the right to terminate the agreement and all of our rights to develop and commercialize product candidates using the applicable technology.

Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern.

Based on our cash balances, recurring losses, net capital deficiency, and significant debt outstanding as of December 31, 2011 and our projected spending in 2012, which raise substantial doubt about our ability to continue as a going concern, our independent registered

 

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public accounting firm has included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2011 regarding this uncertainty. We believe that the net proceeds from this offering, together with proceeds of $15.0 million from a loan agreement entered into in February 2012 and amounts we have received and anticipate receiving under our collaboration with Sanofi and existing cash and cash equivalents and interest thereon, will be sufficient to fund our projected operating requirements through the first quarter of 2014. However, if we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. Amounts due under the February 2012 loan agreement may become immediately due and payable upon the occurrence of a material adverse change, as defined under the loan agreement. Under the terms of the loan agreement, we are subject to operational covenants, including limitations on our ability to incur liens or additional debt, pay dividends, redeem stock, make specified investments and engage in merger, consolidation or asset sale transactions, among other restrictions. In addition, the inclusion of a going concern statement by our auditors, our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties.

Risks Relating to Regulatory Review and Approval of Our Product Candidates

We cannot be certain that delafloxacin, radezolid, our RX-04 product candidates or any of our other product candidates will receive regulatory approval, and without regulatory approval we will not be able to market our product candidates.

We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidates, especially delafloxacin. Our ability to generate revenue related to product sales, if ever, will depend on the successful development and regulatory approval of these product candidates.

While it is not required, we plan to request a special protocol assessment, or SPA, for our clinical protocol for each of our planned Phase 3 clinical trials of delafloxacin for the treatment of ABSSSI from the FDA. An SPA is intended to provide assurance that if the agreed upon clinical trial protocols are followed, the clinical trial endpoints are achieved, and there is a favorable risk-benefit profile, the data may serve as the primary basis for an efficacy claim in support of an NDA. However, SPA agreements are not a guarantee of an approval of a product candidate or any permissible claims about the product candidate. In particular, SPAs are not binding on the FDA if previously unrecognized public health concerns arise during the performance of the clinical trial, other new scientific concerns regarding product candidate safety or efficacy arise or if the sponsoring company fails to comply with the agreed upon clinical trial protocols. We cannot predict whether we will be able to reach agreement with the FDA on an SPA or, if we do reach agreement, whether any issues will arise during the clinical trial that would negate that agreement. In addition, we do not know how the FDA will interpret the commitments under the agreed upon SPA and how it will interpret the data and results.

We currently have no products approved for sale and we cannot guarantee that we will ever have marketable products. The development of a product candidate and issues relating to its approval and sale are subject to extensive regulation by the FDA in the United States and regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA. We have not submitted an NDA for any of our product candidates. An NDA must include extensive preclinical and clinical data and supporting

 

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information to establish the product candidate’s safety and effectiveness for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and may not be obtained. The FDA review process typically takes years to complete and approval is never guaranteed. If we submit an NDA to the FDA, the FDA must decide whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA. Even if a product is approved, the FDA may limit the indications for which the product may be marketed, include extensive warnings on the product labeling or require expensive and time-consuming post-approval clinical trials or reporting as conditions of approval. Foreign regulatory authorities also have requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure that we will be able to obtain regulatory approval in other countries. In addition, delays in approvals or rejections of marketing applications in the United States or foreign countries may be based upon many factors, including regulatory requests for additional analyses, reports, data and studies, regulatory questions regarding or different interpretations of data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding our product candidates or other products. Also, regulatory approval for any of our product candidates may be withdrawn. If delafloxacin, radezolid or any of our other product candidates do not receive regulatory approval, we may not be able to generate sufficient revenue to become profitable or to continue our operations.

Delays in the commencement, enrollment and completion of clinical trials could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.

Delays in the commencement, enrollment and completion of clinical trials could increase our product development costs or limit the regulatory approval of our product candidates. We plan to commence the first of two planned Phase 3 trials of delafloxacin for the treatment of ABSSSI in the second half of 2012. However, the timing of the second planned Phase 3 clinical trial will depend upon obtaining additional funding beyond the proceeds of this offering. We may be unable to initiate or complete such development on schedule, if at all. In addition, we do not know whether any future trials or studies of our other product candidates will begin on time or will be completed on schedule, if at all. The commencement, enrollment and completion of clinical trials can be delayed for a variety of reasons, including:

 

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inability to obtain sufficient funds required for a clinical trial;

 

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inability to reach agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

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clinical holds, other regulatory objections to commencing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in those countries that require such approvals;

 

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inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication as our product candidates;

 

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inability to obtain approval from institutional review boards, or IRBs, to conduct a clinical trial at their respective sites;

 

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severe or unexpected drug-related adverse effects experienced by patients;

 

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inability to timely manufacture sufficient quantities of the product candidate required for a clinical trial;

 

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difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indication as our product candidates; and

 

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inability to retain enrolled patients after a clinical trial is underway.

Changes in regulatory requirements and guidance may also occur and we or any of our partners may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments may require us or any of our partners to resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. In addition, a clinical trial may be suspended or terminated at any time by us, our current or future partners, the FDA or other regulatory authorities due to a number of factors, including:

 

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failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

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unforeseen safety issues or any determination that a clinical trial presents unacceptable health risks;

 

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lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions; and

 

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upon a breach or pursuant to the terms of any agreement with, or for any other reason by, current or future partners that have responsibility for the clinical development of any of our product candidates, including Sanofi upon exercise of its rights to develop and commercialize any RX-04 compounds.

In addition, if we or any of our partners are required to conduct additional clinical trials or other testing of our product candidates beyond those contemplated, our ability to obtain regulatory approval of these product candidates and generate revenue from their sales would be similarly harmed.

Clinical failure can occur at any stage of clinical development and we have never conducted a Phase 3 trial or submitted an NDA before. The results of earlier clinical trials are not necessarily predictive of future results and any product candidate we, Sanofi or our potential future partners advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.

Clinical failure can occur at any stage of our clinical development. Clinical trials may produce negative or inconclusive results, and we or our partners may decide, or regulators may require us, to conduct additional clinical or preclinical testing. In addition, data obtained from tests are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical testing and early clinical trials does not ensure that subsequent clinical trials will generate the same or similar results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. Frequently, product candidates that have shown promising results in early clinical trials have suffered significant setbacks in subsequent clinical trials. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If delafloxacin, radezolid or our other product candidates are found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for them and our

 

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business would be harmed. For example, if the results of our planned Phase 3 clinical trials of delafloxacin do not achieve the primary efficacy endpoints or demonstrate expected safety, the prospects for approval of delafloxacin would be materially and adversely affected. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 3 clinical trials, even after seeing promising results in earlier clinical trials.

In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether any Phase 2, Phase 3 or other clinical trials we or any of our partners may conduct will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates.

Our product candidates may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales.

We refer to those adverse events observed in our clinical trials with an incidence rate equal to or greater than 5% of the subjects in a clinical trial as common adverse events. The common adverse events observed in clinical trials of delafloxacin were nausea, diarrhea, vomiting, pruritus, fatigue, headache, dizziness, infusion site pain, insomnia, constipation, rhinitis and dry mouth. The common adverse events observed in clinical trials of radezolid were nausea, diarrhea, headache, dizziness and fungal infection. Three patients receiving delafloxacin in our clinical trials have had serious adverse events that were thought by the investigator to be possibly related to delafloxacin therapy. One patient with a previously non-disclosed recent onset seizure disorder had a further seizure on delafloxacin. One patient with a complicated medical history was hospitalized with abdominal pain and diarrhea. A third patient had a single episode of mouth swelling and shortness of breath. Two patients receiving radezolid in our clinical trials have had serious adverse events that were thought by the investigator to be possibly related to radezolid therapy. One patient with lung cancer had a pneumonia that did not respond to radezolid therapy. A second patient with prior peptic ulcer disease discontinued ulcer therapy prior to enrolling in a radezolid trial and had a recurrent ulcer with perforation. Additional or unforeseen side effects from these or any of our other product candidates could arise either during clinical development or, if approved, after the approved product has been marketed. Our product candidates are being developed for the systemic treatment of multi-drug resistant and extremely-drug resistant infections caused by Gram-positive and Gram-negative bacteria and are still in the early stages of clinical development. The range and potential severity of possible side effects from systemic therapies is significant. The results of future clinical trials may show that our product candidates cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval from the FDA and other regulatory authorities with restrictive label warnings.

If any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such products:

 

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regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;

 

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

 

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we may be subject to limitations on how we may promote the product;

 

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sales of the product may decrease significantly;

 

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regulatory authorities may require us to take our approved product off the market;

 

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we may be subject to litigation or product liability claims; and

 

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our reputation may suffer.

Any of these events could prevent us, Sanofi or our potential future partners from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our products.

Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our products, it is less likely that our products will be widely used.

Market acceptance and sales of delafloxacin, radezolid, or any other product candidates that we develop will depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and establish payment levels. We cannot be certain that reimbursement will be available for delafloxacin, radezolid, or any other product candidates that we develop. Also, we cannot be certain that reimbursement policies will not reduce the demand for, or the price paid for, our products. If reimbursement is not available or is available on a limited basis, we may not be able to successfully commercialize delafloxacin, radezolid, or any other product candidates that we develop.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs.

The United States and several foreign jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We expect to experience pricing pressures in connection with the sale of delafloxacin and radezolid and any other products that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, ACA, became law in the U.S. The goal of ACA is to reduce the cost of health care and substantially change the way health care is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on our business specifically, the ACA may result in downward pressure on pharmaceutical reimbursement,

 

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which could negatively affect market acceptance of delafloxacin, radezolid or any future product candidates. Members of the U.S. Congress and some state legislatures are seeking to overturn at least portions of the legislation and we expect they will continue to review and assess this legislation and possibly alternative health care reform proposals. We cannot predict whether new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.

Proposed legislation before Congress specific to antibiotics may have a material impact on antibiotic drug development.

In the past few months, identical bills intended to encourage development of antibiotics were introduced in the U.S. House and Senate. The Generating Antibiotic Incentives Now Act, or GAIN, would provide incentives for the development of infectious disease products to address the growing epidemic of antibiotic resistant infections. The bill recommends that qualified infectious disease products receive both Fast Track designation and Priority Review from the FDA and an additional five year period of market protection at the end of existing exclusivity periods. While GAIN may have a positive impact on our business if enacted, there is no guarantee that it will be enacted in its current form or that we would benefit from it for delafloxacin, radezolid, or any of our other product candidates. Furthermore, GAIN may have a disproportionately favorable effect for our competitors’ products compared to delafloxacin, radezolid, and our other product candidates which will make it harder for our product candidates to compete in the antibiotic market.

If we do not obtain protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA marketing approval of delafloxacin, radezolid, and our RX-04 and other product candidates, one or more of our U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially. In the event that we are unable to obtain any patent term extensions, the issued composition of matter patents for delafloxacin, delafloxacin meglumine and radezolid are expected to expire in 2016, 2027 and 2024, respectively, and, if issued, the pending composition of matter patents for our RX-04 compounds would be expected to expire in 2030, in each case assuming the appropriate maintenance, renewal, annuity or other governmental fees are paid.

If we market products in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties.

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare laws commonly referred to as “fraud and abuse” laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry.

 

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These laws include false claims and anti-kickback statutes. At such time as we market our products and our products are paid for by governmental programs, it is possible that some of our business activities could be subject to challenge under one or more of these laws.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Most states also have statutes or regulations similar to the federal anti-kickback law and federal false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Administrative, civil and criminal sanctions may be imposed under these federal and state laws.

Over the past few years, a number of pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates.

If the FDA does not approve the manufacturing facilities of any future manufacturing partners for commercial production, we may not be able to commercialize any of our product candidates.

We do not intend to manufacture the pharmaceutical products that we plan to sell. We may not be able to identify and reach arrangement with a contract manufacturer to manufacture delafloxacin, radezolid or any of our other product candidates. For example, we have not yet reached agreement with a third-party manufacturer for the supply of delafloxacin for our planned Phase 3 clinical trials for the treatment of ABSSSI. Additionally, the facilities used by any contract manufacturer to manufacture delafloxacin, radezolid or any of our other product candidates must be the subject of a satisfactory inspection before the FDA approves an NDA for the product candidate manufactured at that facility. We are completely dependent on these third-party manufacturing partners for compliance with the FDA’s requirements for manufacture of our finished products. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the FDA’s current good manufacturing practice requirements, our product candidates will not be approved or, if already approved, may be subject to recalls. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured the product candidates, including:

 

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the possibility that we are unable to enter into a manufacturing agreement with a third party to manufacture our product candidates;

 

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the possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and

 

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the possibility of termination or nonrenewal of the agreements by the third parties before we are able to arrange for a qualified replacement third-party manufacturer.

 

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Any of these factors could cause the delay of approval or commercialization of our products, cause us to incur higher costs or prevent us from commercializing our product candidates successfully. Furthermore, if any of our product candidates are approved and contract manufacturers fail to deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices and we are unable to find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality and on a timely basis, we would likely be unable to meet demand for our products and could lose potential revenue. It may take several years to establish an alternative source of supply for our product candidates and to have any such new source approved by the FDA.

Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.

Our product candidates will also be subject to ongoing regulatory requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMPs. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMPs. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and to comply with certain requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. Accordingly, we may not promote our products for indications or uses for which they are not approved.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing, or labeling of a product, it may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

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issue warning letters;

 

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mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

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require us or our partners to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

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impose other civil or criminal penalties;

 

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suspend regulatory approval;

 

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refuse to approve pending applications or supplements to approved applications filed by us, Sanofi or our potential future partners;

 

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

 

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seize or detain products.

 

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We will need to obtain FDA approval of any proposed product names, and any failure or delay associated with such approval may adversely affect our business.

Any name we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the United States Patent and Trademark Office, or USPTO. The FDA typically conducts a review of proposed product names, including an evaluation of the potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies medical claims. If the FDA objects to any of our proposed product names, we may be required to adopt an alternative name for our product candidates. If we adopt an alternative name, we would lose the benefit of our existing trademark applications for such product candidate and may be required to expend significant additional resources in an effort to identify a suitable product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our product candidates.

Risks Relating to Our Business

Even if approved, if any of our product candidates do not achieve broad market acceptance among physicians, patients and the medical community, our revenues generated from their sales will be limited.

The commercial success of delafloxacin, radezolid, our RX-04 product candidates and our other product candidates will depend upon their acceptance among physicians, patients and the medical community. The degree of market acceptance of our product candidates will depend on a number of factors, including:

 

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

 

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changes in the standard of care for the targeted indications for any of our product candidates;

 

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limitations in the approved clinical indications for our product candidates;

 

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demonstrated clinical safety and efficacy compared to other products;

 

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lack of significant adverse side effects;

 

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sales, marketing and distribution support;

 

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availability of reimbursement from managed care plans and other third-party payors;

 

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timing of market introduction and perceived effectiveness of competitive products;

 

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the degree of cost-effectiveness;

 

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availability of alternative therapies at similar or lower cost, including generics and over-the-counter products;

 

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

 

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

 

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adverse publicity about our product candidates or favorable publicity about competitive products;

 

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convenience and ease of administration of our products; and

 

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potential product liability claims.

 

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If our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, patients and the medical community, sufficient revenue may not be generated from these products, and we may not become or remain profitable. In addition, efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

Bacteria might develop resistance to any of our product candidates, which would decrease the efficacy and commercial viability of those product candidates.

Drug resistance is primarily caused by the genetic mutation of bacteria resulting from sub-optimal exposure to antibiotics where the drug does not kill all of the bacteria. While antibiotics have been developed to treat many of the most common infections, the extent and duration of their use worldwide has resulted in new mutated strains of bacteria resistant to current treatments. We are developing product candidates to treat patients infected with drug-resistant bacteria. If physicians, rightly or wrongly, associate the resistance issues of other products of the same class as our product candidates, physicians might not prescribe our product candidates for treating a broad range of infections. If our product candidates are improperly dosed, bacteria might develop resistance to those product candidates causing the efficacy of these product candidates to decline, which would negatively affect our potential to generate revenues from those product candidates.

We currently have no sales and marketing infrastructure and have no experience in marketing drug products, and if we are unable to establish an effective sales force and marketing infrastructure, or enter into acceptable third-party sales and marketing or licensing arrangements, we may not be able to commercialize our product candidates successfully.

We plan to develop a sales and marketing infrastructure to market and sell our products in the United States. We currently do not have any sales, distribution and marketing capabilities, the development of which will require substantial resources and will be time consuming. These costs may be incurred in advance of any approval of our product candidates. In addition, we may not be able to hire a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target. If we are unable to establish our sales force and marketing capability, our operating results may be adversely affected. In addition, we plan to enter into sales and marketing or licensing arrangements with third parties for international sales of any approved products. If we are unable to enter into any such arrangements on acceptable terms, or at all, we may be unable to market and sell our products in these markets.

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical and generic drug companies and universities and other research institutions. Many of our competitors have greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing organizations. 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. Our competitors may succeed in developing, acquiring or licensing on an exclusive

 

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basis, technologies and drug products that are more effective or less costly than delafloxacin, radezolid, or any other product candidates that we are currently developing or that we may develop, which could render our products obsolete and noncompetitive.

The competition in the market for antibiotics is intense. If approved, our product candidates will face competition from commercially available antibiotics such as vancomycin, marketed as a generic by Abbott Laboratories and others; daptomycin, marketed by Cubist Pharmaceuticals, Inc. as Cubicin; linezolid, marketed by Pfizer Inc. as Zyvox; ceftaroline, marketed by Forest Laboratories, Inc. as Teflaro; tigecycline, marketed as Tygacil by Pfizer; and telavancin, marketed by Theravance, Inc. and Astellas Pharma, Inc. as Vibativ. Vancomycin has been a widely used and well known antibiotic for over 40 years and is sold in a relatively inexpensive generic IV form. Vancomycin, daptomycin, ceftaroline, tigecycline, linezolid and telavancin are all approved treatments for serious Gram-positive infections such as ABSSSI. Additionally, daptomycin is an approved treatment for bacteremia, tigecycline is an approved treatment for cIAI and CABP, linezolid is an approved treatment for pneumonia and vancomycin is an approved treatment for both bacteremia and pneumonia. If we are unable to obtain regulatory approval of our product candidates for some or all of the indications for which our competitors are approved, we may not be able to compete effectively with such antibiotics.

In addition, if approved, our product candidates may face additional competition from antibiotics currently in clinical development. Other antibiotics currently in development include ceftobiprole, under development by Basilea Pharmaceutica AG and approved in Canada and Switzerland, CEM-102, under development by Cempra, Inc., dalbavancin, under development by Durata Therapeutics, Inc., tedizolid, under development by Trius Therapeutics, Inc., NXL-103, under development by AstraZeneca PLC, oritavancin, under development by The Medicines Company, and PTK 0796, previously under development by Paratek Pharmaceuticals, Inc. and Novartis AG, which, if approved, would compete in the antibiotic market. In addition, our product candidates may each face competition from product candidates currently in clinical development and product candidates that could receive regulatory approval before our product candidates in countries outside the United States and the European Union. If we are unable to demonstrate the advantages of our product candidates over competing products and product candidates, we will not be able to successfully commercialize our product candidates and our results of operations will suffer.

Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make delafloxacin, radezolid or any other product candidates that we develop obsolete. As a result of all of these factors, our competitors may succeed in obtaining patent protection and/or FDA approval or discovering, developing and commercializing antibiotics before we do.

If approved, delafloxacin and radezolid will face competition from less expensive generic versions of branded antibiotics of competitors, and if we are unable to differentiate the benefits of delafloxacin or radezolid over these less expensive alternatives, we may never generate meaningful product revenues.

Generic antibiotic therapies are typically sold at lower prices than branded antibiotics and are generally preferred by insurers and other third party payors. We anticipate that, if approved, delafloxacin and radezolid will face increasing competition in the form of generic versions of branded products of competitors that have lost or will lose their patent exclusivity. For example, both delafloxacin and radezolid, if approved, will initially face competition from the inexpensive generic forms of vancomycin that are currently available and, in the future, may face additional competition from generic forms of other antibiotics and from generic versions of our product

 

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after any applicable marketing exclusivity periods expire. If we are unable to demonstrate to physicians and payors that the key differentiating features of delafloxacin and radezolid translate to overall clinical benefit or lower cost of care, we may not be able to compete with generic antibiotics.

We may not be successful in establishing and maintaining development and commercialization collaborations, which could adversely affect our ability to develop certain of our product candidates and our financial condition and operating results.

Developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval, establishing manufacturing capabilities and marketing approved products is expensive. For example, we have entered into a research collaboration with Sanofi with respect to product candidates developed in our RX-04 program. We plan to establish additional collaborations for development and commercialization of product candidates and research programs, including to fund the continued development of delafloxacin and radezolid. Additionally, if delafloxacin, radezolid or any of our other product candidates receives marketing approval, we intend to enter into sales and marketing arrangements with third parties for international sales, and to develop our own sales force in the United States. If we are unable to maintain our existing arrangements or enter into any new such arrangements on acceptable terms, if at all, we may be unable to effectively market and sell our products in our target markets. We expect to face competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements for the development of our product candidates. When we partner with a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. Our collaboration partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration that we enter into, including our collaboration with Sanofi, may be unsuccessful in the development and commercialization of our product candidates. In some cases, we may be responsible for continuing preclinical and initial clinical development of a partnered product candidate or research program, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach agreements with suitable collaborators for our product candidates, we would face increased costs, we may be forced to limit the number of our product candidates we can commercially develop or the territories in which we commercialize them and we might fail to commercialize products or programs for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations, our operating results and financial condition will be materially and adversely affected.

If we fail to develop delafloxacin and radezolid for additional indications, our commercial opportunity will be limited.

To date, we have focused primarily on the development of delafloxacin for the treatment of ABSSSI. A key element of our strategy is to pursue clinical development of delafloxacin for other indications, including CABP and cIAI. Although we believe there is substantial commercial opportunity for the treatment of ABSSSI alone, our ability to generate and grow revenues will be highly dependent on our ability to successfully develop and commercialize delafloxacin for the treatment of these additional indications. The development of delafloxacin for these additional indications will require substantial additional funding beyond that needed to commercialize delafloxacin for the treatment of ABSSSI and is prone to the risks of failure

 

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inherent in drug development and we cannot provide you any assurance that we will able to successfully advance any of these programs through the development process. Even if we receive FDA approval to market delafloxacin for the treatment of any of these additional indications, we cannot assure you that any such additional indications will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and commercialize delafloxacin for these additional indications, our commercial opportunity will be limited and our business prospects will suffer.

We currently plan to develop radezolid initially for the treatment of ABSSSI. A key element of our strategy is to pursue clinical development of radezolid for other indications, including severe CABP, and long-term treatment of serious infections, such as osteomyelitis and prosthetic and joint infections. Although we believe there is substantial commercial opportunity for the treatment of ABSSSI alone, our ability to generate and grow revenues will be highly dependent on our ability to successfully develop and commercialize radezolid for the treatment of these additional indications. The development of radezolid for these additional indications is prone to the risks of failure inherent in drug development and we cannot provide you any assurance that we will be able to successfully advance any of these programs through the development process. Even if we receive FDA approval to market radezolid for the treatment of any of these additional indications, we cannot assure you that any such additional indications will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and commercialize radezolid for these additional indications, our commercial opportunity will be limited and our business prospects will suffer.

We depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves.

We outsource substantial portions of our operations to third-party service providers, including the conduct of preclinical studies and clinical trials, chemical synthesis, biological screening and manufacturing. Our agreements with third-party service providers and clinical research organizations are on a study-by-study basis and are typically short-term. In all cases, we may terminate the agreements with notice and are responsible for the supplier’s previously incurred costs. In addition, any contract research organization that we retain will be subject to the FDA’s regulatory requirements and similar foreign standards and we do not have control over compliance with these regulations by these providers. Consequently, if these providers do not adhere to the governing practices and standards, the development and commercialization of our product candidates could be delayed, which could severely harm our business and financial condition.

Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves the risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. There is a limited number of third-party service providers that specialize or have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult, time consuming and cause delays in our development programs. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service providers in the future, our business may be adversely affected.

 

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

As we increase the number of ongoing product development programs and advance our product candidates through preclinical studies and clinical trials, we will need to increase our product development, scientific and administrative headcount to manage these programs. In addition, to meet our obligations as a public company, we will need to increase our general and administrative headcount. Our management, personnel and systems currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:

 

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successfully attract and recruit new employees with the expertise and experience we will require;

 

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manage our clinical programs effectively, which we anticipate being conducted at numerous clinical sites;

 

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develop a marketing and sales infrastructure; and

 

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continue to improve our operational, financial and management controls, reporting systems and procedures.

If we are unable to successfully manage this growth, our business may be adversely affected.

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

We may not be able to attract or retain qualified management, finance, scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development, regulatory, commercialization and business development expertise of our executive officers and key employees identified in the “Management” section of this prospectus. If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. We intend to enter into change of control and severance agreements with each of our officers as part of our retention efforts. The terms of these agreements are described in the “Executive Compensation—Potential Payments upon Termination or Change in Control” section of this prospectus. However, any of our executive officers or key employees may terminate their employment at any time. Replacing executive officers and key employees may be difficult 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, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel. Our failure to retain key personnel could materially harm our business.

 

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We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.

Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.

As a public company, we will operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.

We have begun implementing our system of internal controls over financial reporting and preparing the documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. Although we will need to hire additional finance personnel and build our financial infrastructure as we transition to operating as a public company, including complying with the requirements of Section 404 of the Sarbanes-Oxley Act, we have recently taken actions to improve our financial infrastructure, including the hiring of a corporate controller and an accounting staff person. Following this offering as we begin

 

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operating as a public company, we will continue improving our financial infrastructure with the hiring of additional financial and accounting staff, the enhancement of internal controls, and additional training for our financial and accounting staff.

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.

Until we are able to expand our finance and administrative capabilities and establish necessary financial reporting infrastructure, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with the Sarbanes-Oxley Act or existing or new reporting requirements. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with federal and state health care fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the health care industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We intend to adopt a code of conduct prior to the completion of this offering, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

 

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We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of any products for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us or our partners by participants enrolled in our clinical trials, patients, health care providers or others using, administering or selling our products. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

 

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withdrawal of clinical trial participants;

 

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termination of clinical trial sites or entire trial programs;

 

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costs of related litigation;

 

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substantial monetary awards to patients or other claimants;

 

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decreased demand for our product candidates and loss of revenues;

 

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impairment of our business reputation;

 

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diversion of management and scientific resources from our business operations; and

 

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the inability to commercialize our product candidates.

We have obtained limited product liability insurance coverage for our clinical trials domestically and in selected foreign countries where we are conducting clinical trials. Our product liability insurance coverage is currently limited to $5 million per occurrence with an annual aggregate limit of $5 million. As such, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash resources and adversely affect our business.

Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. For example, we do not carry earthquake insurance. In the event of a major earthquake in our region, our business could suffer significant and uninsured damage and loss. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

 

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Our operations involve hazardous materials, which could subject us to significant liabilities.

Our research and development processes involve the controlled use of hazardous materials, including chemicals. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of exposure of individuals to hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of these materials and our liability may exceed our total assets. We have general liability insurance of up to $2 million per occurrence with an annual aggregate limit of $2 million, which excludes pollution liability. We also have umbrella liability insurance of up to $5 million per occurrence with an annual aggregate limit of $5 million, which excludes product liability. This coverage may not be adequate to cover all claims related to our biological or hazardous materials. Furthermore, if we were to be held liable for a claim involving our biological or hazardous materials, this liability could exceed our insurance coverage, if any, and our other financial resources. Compliance with environmental and other laws and regulations may be expensive and current or future regulations may impair our research, development or production efforts.

Risks Relating to Our Intellectual Property

Our ability to pursue the development and commercialization of delafloxacin depends upon the continuation of our license from Wakunaga.

Our license agreement with Wakunaga provides us with a worldwide exclusive license to develop and sell delafloxacin. In particular, we obtained an exclusive license to certain patents, patent applications and proprietary information covering the composition of matter to delafloxacin, and rights to other patents and applications, which license requires us to make certain payments to Wakunaga. If we are unable to make the required milestone and royalty payments under the license agreement, or if we do not use commercially reasonable efforts to achieve certain development and commercialization milestones for delafloxacin within the timeframes required by the license agreement, our rights to develop and commercialize delafloxacin could be terminated and would revert to Wakunaga. In addition, either we or Wakunaga may terminate the license agreement upon a material breach of the license agreement not cured within 90 days from notice of breach. If our license agreement with Wakunaga were terminated, we would lose our rights to develop and commercialize delafloxacin, which would materially and adversely affect our business, results of operations and future prospects.

It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If our patent position does not adequately protect our product candidates, others could compete against us more directly, which would harm our business, possibly materially.

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our ribosome-based discovery platform and of our current and future product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products and ribosome-based discovery platform is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.

 

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The patent positions of pharmaceutical 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 pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. Changes in either the patent laws or interpretations of patent laws in the United States and foreign jurisdictions may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be enforced in the patents that may be issued from the applications we currently or may in the future own or license from third parties. Further, if any patents we obtain or license are deemed invalid and unenforceable, our ability to commercialize or license our technology could be adversely affected.

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:

 

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others may be able to develop a platform similar to, or better than, ours in a way that is not covered by the claims of our patents;

 

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others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents;

 

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we might not have been the first to make the inventions covered by our pending patent applications;

 

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

 

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

 

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any patents that we obtain may not provide us with any competitive advantages;

 

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

 

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

As of March 31, 2012, we were the owner of record of over 15 issued or granted U.S. and foreign patents with claims directed to pharmaceutical compounds, pharmaceutical compositions, methods of making these compounds, and methods of using these compounds in various indications, and also to ribosome-based technology platforms and drug discovery methods. We were also the owner of record of over 150 pending U.S. and foreign patent applications in these areas.

As of March 31, 2012, we were the licensee of over 40 issued or granted U.S. and foreign patents and over 20 pending U.S. and foreign patent applications, with claims directed to pharmaceutical compounds, pharmaceutical compositions, methods of making these compounds, methods of using these compounds in various indications, and also to ribosome-based technology platforms and drug discovery methods.

Due to the patent laws of a country, or the decisions of a patent examiner in a country, or our own filing strategies, we may not obtain patent coverage for all of our product candidates or methods involving these candidates or for our ribosome-based technology platform in the parent patent application. We plan to pursue divisional patent applications or continuation patent applications in the United States and many other countries to obtain claim coverage for inventions which were disclosed but not claimed in the parent patent application.

We may also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or feasible. However, trade secrets are difficult to

 

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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 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.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

If we choose to go to court to stop another party from using the inventions claimed in any patents we obtain, that individual or company has the right to ask the court to rule that such patents are invalid or should not be enforced against that third party. These lawsuits are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. In addition, there is a risk that the court will decide that such patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of such 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 such patents. In addition, the U.S. Supreme Court has recently modified some tests used by the USPTO in granting patents over the past 20 years, which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license.

We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our products.

Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. Patents of which we are not aware, and that our products infringe, may be issued. Additionally, patents that we believe we do not infringe, but that we may ultimately be found to infringe, could be issued. 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 or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and scientific 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 that event, we or our commercialization partners may not have a viable way around the patent and may need to halt commercialization of the relevant product with it. 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. In the future, we may agree to indemnify our commercial partners against certain intellectual property infringement claims brought by third parties. The pharmaceutical and biotechnology industries have 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 either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these

 

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proceedings, we may incur substantial costs and divert management’s time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid, we may incur substantial monetary damages, encounter significant delays in bringing our product candidates to market and be precluded from manufacturing or selling our product candidates.

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 the priority date, 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 pending applications, or that we were the first to invent the technology. Our 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 patent applications, which 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 USPTO 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 if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.

Patents covering the composition of matter of delafloxacin expire in 2016, excluding any additional term for patent term adjustments or patent term extensions. We expect that the other patents and patent applications in the delafloxacin portfolio, if issued, and if the appropriate maintenance, renewal, annuity or other governmental fees are paid, would expire between 2025 and 2029. Patents covering the composition of matter of radezolid expire in 2024, excluding any additional term for patent term adjustments or patent term extensions. We expect the other patents and patent applications in the radezolid portfolio, if issued, and if the appropriate maintenance, renewal, annuity or other governmental fees are paid, to expire between 2024 and 2031. Our patent applications and patents include or support claims on other aspects of delafloxacin and radezolid such as pharmaceutical formulations containing delafloxacin and radezolid, methods of using delafloxacin and radezolid to treat disease and methods of manufacturing delafloxacin and radezolid. Without patent protection on the composition of matter of delafloxacin or radezolid, our ability to assert our patents to stop others from using or selling delafloxacin or radezolid in a non-pharmaceutically acceptable formulation may be limited.

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.

 

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

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

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

We have filed trademark applications with the USPTO for our marks, “Rib-X” and “Rib-X Pharmaceuticals Antibiotics in Three Dimensions” for use in connection with our services and anticipate also filing with respect to these marks at the appropriate time in conjunction with our goods. We also anticipate filing foreign trademark applications for the same marks for goods and services outside the United States. The “Rib-X” mark has been approved for publication by the USPTO, but is subject to a 30-day public opposition period, which can be extended by an additional 90 days upon the request of an interested party. It is possible that the marks could be opposed or cancelled after registration. The registrations will be subject to use and maintenance requirements. We have not yet registered all of our trademarks in all of our potential markets, and it is also possible that there are names or symbols other than “Rib-X” and “Rib-X Pharmaceuticals Antibiotics in Three Dimensions” that may be protectable marks for which we have not sought registration, and failure to secure those registrations could adversely affect our business. We cannot assure you that opposition or cancellation proceedings will not be filed against our trademarks or that our trademarks would survive such proceedings.

We have not yet registered trademarks for any of our product candidates in any jurisdiction. When we file trademark applications for our product candidates in the U.S., our trademark applications in the U.S. and any other jurisdictions where we may file may not be allowed for registration, and registered trademarks may not be obtained, maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings.

 

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We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and products could be significantly diminished.

As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks Relating to Owning Our Common Stock

No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. Certain of our existing stockholders and their affiliated entities have indicated an interest in purchasing up to approximately $20.0 million in shares of our common stock in this offering at the initial public offering price. To the extent these existing stockholders are allocated and purchase shares in this offering, such purchases would reduce the available public float for our shares because these existing stockholders will be restricted from selling the shares under the lock-up agreements described in the “Shares Eligible for Future Sale” section of this prospectus. As a result, the liquidity of our common stock could be significantly reduced from what it would have been if these shares had been purchased by investors that were not affiliated with us. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

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Our share price may be volatile, which could subject us to securities class action litigation and prevent you from being able to sell your shares at or above the offering price.

The initial public offering price for our shares will be determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

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results of our clinical trials;

 

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results of clinical trials of our competitors’ products;

 

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regulatory actions with respect to our products or our competitors’ products;

 

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actual or anticipated fluctuations in our financial condition and operating results;

 

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actual or anticipated changes in our growth rate relative to our competitors;

 

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actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;

 

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competition from existing products or new products that may emerge;

 

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

 

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issuance of new or updated research or reports by securities analysts;

 

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fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

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additions or departures of key management or scientific personnel;

 

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

 

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announcement or expectation of additional financing efforts;

 

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sales of our common stock by us, our insiders or our other stockholders;

 

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market conditions for biopharmaceutical stocks in general; and

 

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general economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. In addition, such fluctuations could subject us to securities class action litigation, which could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

 

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We have a significant stockholder, which will limit your ability to influence corporate matters and may give rise to conflicts of interest.

When this offering is completed, affiliates of Warburg Pincus LLC, or Warburg Pincus, are expected to beneficially own shares representing approximately 44.4% of our common stock, assuming that the closing of the offering made hereby occurs with an initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus, and the conversion of our preferred stock and accumulated dividends thereon and convertible notes and accrued interest thereon into common stock occurs on May 8, 2012. Accordingly, Warburg Pincus will exert significant influence over us and any action requiring the approval of the holders of our common stock, including the election of directors and approval of significant corporate transactions. This concentration of voting power makes it less likely that any other holder of common stock will be able to affect the way we are managed or directors of our business and could delay or prevent an acquisition of us on terms that other stockholders may desire. In addition, if Warburg Pincus acquires additional shares of our common stock such that it holds a majority of our common stock, Warburg Pincus would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, in such instance, Warburg Pincus would control the election of directors and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization. In addition, if Warburg Pincus were to hold a majority of our common stock, we would be deemed a “controlled company” for purposes of the NASDAQ listing requirements. Under the NASDAQ rules, a “controlled company” may elect not to comply with certain NASDAQ corporate governance requirements, including (i) the requirement that a majority of our board of directors consist of independent directors, (ii) the requirement that the compensation of our officers be determined or recommended to the board by a majority of independent directors or a compensation committee that is composed entirely of independent directors, and (iii) the requirement that director nominees be selected or recommended to the board by a majority of independent directors or a nominating committee that is composed of entirely independent directors.

Furthermore, the interests of Warburg Pincus may not always coincide with your interests or the interests of other stockholders and Warburg Pincus may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock. Pursuant to our fourth amended and restated securityholders agreement, dated January 10, 2011, we are required to nominate and use our best efforts to elect to our board of directors up to three individuals designated by an affiliate of Warburg Pincus, as more specifically described in “Description of Capital Stock – Voting Rights.” Our board of directors, which currently consists of six directors and one vacancy, has the power to set the number of directors on our board from time to time.

We have broad discretion in the use of net proceeds from this offering and may not use them effectively.

Although we currently intend to use the net proceeds from this offering in the manner described in “Use of Proceeds” elsewhere in this prospectus, we will have broad discretion in the application of the net proceeds. Our failure to apply these funds effectively could affect our ability to continue to develop and eventually to manufacture and sell our products.

Being a public company will increase our expenses and administrative burden.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to

 

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perform additional tasks. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures, retain a transfer agent, adopt an insider trading policy and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws.

In addition, laws, regulations and standards applicable to public companies relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the Securities and Exchange Commission and the NASDAQ Global Market, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.

We are currently evaluating and monitoring these rules and proposed changes to rules, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management’s time and attention from product development activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. In connection with this offering, we are increasing our directors’ and officers’ insurance coverage which will increase our insurance cost. In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price will be substantially higher than the net tangible book value per share of shares of our common stock based on the total value of our tangible assets less our total liabilities immediately following this offering. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $9.47 per share in the price you pay for shares of our common stock as compared to its pro forma as

 

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adjusted net tangible book value, assuming an initial public offering price of $13.00 per share, the mid-point of the price range set forth on the cover page of this prospectus. To the extent outstanding options to purchase shares of common stock that are in the money are exercised, there will be further dilution. For further information on this calculation, see “Dilution” elsewhere in this prospectus.

A significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur in the future. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. After this offering, we will have 15,664,597 outstanding shares of common stock based on the number of shares outstanding as of March 31, 2012, assuming an initial public offering price of $13.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, and that the conversion of our preferred stock and accumulated dividends thereon and convertible notes and accrued interest thereon into common stock occurs on May 8, 2012. Of these shares, 5,770,342 shares, excluding any shares purchased by our affiliates, may be resold in the public market immediately and the remaining 9,894,255 shares are currently restricted under securities laws or as a result of lock-up agreements but will be able to be resold after this offering as described in the “Shares Eligible for Future Sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of 9,878,775 shares of our common stock will have rights, subject to certain 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. We also intend to register all 2,663,857 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 and once vested, subject to the 180 day lock-up periods under the lock-up agreements described in the “Underwriting” section of this prospectus.

Future sales and issuances of our common stock or rights to purchase common stock pursuant to our equity incentive plans could result in additional dilution of the percentage ownership of our stockholders and could cause our share price to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

As of March 31, 2012, we had options to purchase 3,857 shares outstanding under our 2001 Stock Option and Incentive Plan, or 2001 Stock Plan, and options to purchase 26 shares outstanding under our 2011 Equity Incentive Plan. We are authorized to grant equity awards, including stock options, to our employees, directors and consultants, covering up to an aggregate of 2,500,000 shares of our common stock, pursuant to our 2011 Equity Incentive Plan which includes the increase in the number of shares reserved under our 2011 Equity Incentive Plan in April 2012. Pursuant to the terms of our Bonus Plan and our Non-Employee Director

 

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Bonus Plan, we expect to grant restricted stock units for 653,826 additional shares and 16,346 additional shares, respectively, of our common stock under our 2011 Equity Incentive Plan in connection with this offering. We have also agreed to grant an option to purchase an expected 156,768 shares of common stock to our newly appointed Chief Development Officer under our 2011 Equity Incentive Plan in connection with this offering. In addition, there will be 160,000 shares of our common stock available for issuance under our 2012 Employee Stock Purchase Plan. We plan to register the number of shares available for issuance under our 2001 Stock Plan, 2011 Equity Incentive Plan and 2012 Employee Stock Purchase Plan. Sales of such shares may result in material dilution to our existing stockholders, which could cause our share price to fall.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

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 or increase the cost of acquiring us, even if doing so would benefit our stockholders. These provisions include:

 

•

authorizing the issuance of “blank check” convertible 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;

 

•

creating a staggered board of directors;

 

•

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

 

•

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

 

•

permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; and

 

•

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 also frustrate or prevent any attempts by our stockholders to replace or remove our current management or members of our board of directors. 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 an interested stockholder for a period of three years following the date on which the stockholder

 

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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. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.

We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

We do not anticipate paying cash dividends in the future. As a result, only appreciation of the market price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2011, we had federal net operating loss carryforwards of $203.8 million which will begin to expire in 2021 and federal research and development tax credit carryforwards of $7.4 million which will begin to expire in 2021. Our ability to utilize our federal net operating losses and federal tax credits may be limited under Sections 382 and 383 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain shareholders increase their aggregated ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). We may already be subject to Section 382 limitations due to previous ownership changes. In addition, future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation. Due to the significant complexity and cost associated with a change in control study, and the expectation of continuing to incur losses whereby the net operating losses and federal tax credits are not anticipated to be used in the foreseeable future, we have not assessed whether there have been changes in control since our formation. If we have experienced changes in control at any time since our formation, utilization of its net operating losses or research and development credit carryforwards would be subject to annual limitations under Section 382. Any limitation may result in expiration of a portion of the net operating loss or research and development credit carryforwards before utilization which would reduce our gross deferred tax assets and corresponding valuation allowance. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset United States federal taxable income may be subject to significant limitations, which could potentially result in increased future tax liability to us.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

•

our ability to obtain additional financing;

 

•

our use of the net proceeds from this offering;

 

•

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

 

•

the success and timing of our preclinical studies and clinical trials;

 

•

our ability to obtain and maintain regulatory approval of delafloxacin, radezolid and any other product candidates we may develop, and the labeling under any approval we may obtain;

 

•

the ability of our proprietary drug discovery platform to develop new product candidates;

 

•

regulatory developments in the United States and foreign countries;

 

•

the performance of third-party manufacturers;

 

•

our plans to develop and commercialize our product candidates;

 

•

our ability to obtain and maintain intellectual property protection for our proprietary drug discovery platform and our product candidates;

 

•

the successful development of our sales and marketing capabilities;

 

•

the size and growth of the potential markets for our product candidates and our ability to serve those markets;

 

•

the rate and degree of market acceptance of any future products;

 

•

the success of competing drugs that are or become available; and

 

•

the loss of key scientific or management personnel.

These forward-looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, so you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our

 

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business, financial condition and operating results. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual future results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

Our forward-looking statements in this prospectus represent our views only as of the date of this prospectus. We disclaim any intent or obligation to update forward-looking statements made in this prospectus to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of 5,770,000 shares of common stock in this offering will be approximately $66.2 million after deducting estimated offering expenses and underwriting discounts and commissions and assuming an initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover of this prospectus. If the over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $76.7 million. A $1.00 increase (decrease) in the assumed initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $5.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets. We intend to use the net proceeds from this offering as follows:

 

•

approximately $32.0 million to fund the remaining estimated cost of our first planned Phase 3 clinical trial with the IV formulation of delafloxacin for the treatment of ABSSSI;

 

•

approximately $16.0 million to fund ongoing research and development activities for our RX-04, RX-05 and RX-06 programs;

 

•

approximately $9.7 million to pay scheduled principal and interest through April 2014 under our loan agreement with Oxford Finance LLC bearing interest at a rate of 9.1% per annum and maturing on June 1, 2015, the proceeds from which have been used and will continue to be used to fund our ongoing operations through the consummation of this offering and, following this offering, for general corporate purposes; and

 

•

the remainder for working capital and other general corporate purposes, including for additional costs and expenses associated with being a public company.

We believe that the net proceeds from this offering, the amount we anticipate receiving under our collaboration with Sanofi, and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund the continued development of delafloxacin and RX-04 through the following events:

 

•

receipt of top-line data from our initial Phase 3 clinical trial of the IV dosage form of delafloxacin for the treatment of ABSSSI; and

 

•

identification of a clinical candidate from the RX-04 program and submission of an Investigational New Drug, or IND, application.

The amount and timing of our actual expenditures will depend upon numerous factors, including the ongoing status and results of the initial Phase 3 clinical trial for delafloxacin and progress on the RX-04 program in collaboration with Sanofi. In particular, we will need to obtain additional funding beyond the proceeds of this contemplated offering in order to continue to advance the development of radezolid.

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual use of net proceeds will vary depending on numerous factors, including our ability to obtain additional financing, the relative success and

 

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cost of our research, preclinical and clinical development programs, the amount and timing of revenues, if any, received from our collaboration with Sanofi and whether we are able to enter into anticipated future collaborations. As a result, management will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds of this offering. In addition, we might decide to postpone or not pursue other clinical trials or any number of our research and development programs if the proceeds from this offering and the other sources of cash are less than expected.

Pending their use, we plan to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.

 

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DIVIDEND POLICY

We have never paid or declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, certain of our outstanding warrants and our secured loans contain restrictions on the payment of dividends. We intend to retain all available funds and any future earnings to fund the development and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2011:

 

•

on an actual basis;

 

•

on an unaudited pro forma basis to give effect to the (i) issuance of 63,583 shares of common stock upon the conversion of all outstanding shares of our convertible preferred stock and accumulated dividends thereon and 9,392,524 shares upon the conversion of all outstanding principal and accrued interest on the convertible notes payable assuming an initial public offering price per share of $13.00, the mid-point of the range set forth on the cover page of this prospectus, (ii) settlement of the put rights upon conversion of the convertible notes payable, (iii) conversion of the preferred stock warrants into common stock warrants, and (iv) elimination of the common stock warrant exercise price protection term, assuming in all cases that each had occurred on December 31, 2011; and

 

•

on an unaudited pro forma as adjusted basis to give effect to the (i) issuance of 63,583 shares of common stock upon the conversion of all outstanding shares of our convertible preferred stock and accumulated dividends thereon and 9,392,524 shares upon the conversion of all outstanding principal and accrued interest on the convertible notes payable assuming an initial public offering price per share of $13.00, the mid-point of the range set forth on the cover page of this prospectus, (ii) settlement of the put rights upon conversion of the convertible notes payable, (iii) conversion of the preferred stock warrants into common stock warrants, (iv) elimination of the common stock warrant exercise price protection term, and (v) sale of 5,770,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriters discounts and commissions and estimated offering expenses payable by us, assuming in all cases that each had occurred on December 31, 2011.

 

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You should read this table together with our financial statements and the related notes thereto, as well as the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The unaudited pro forma and pro forma as adjusted information below is prepared for illustrative purposes only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price, the closing of the offering made hereby and other terms of the offering determined at pricing.

 

		As of December 31, 2011 (1)
		Actual				Pro Forma (2)				Pro Forma as Adjusted (3)(4)
						(unaudited)				(unaudited)
		(in thousands, except share amounts)
Cash and cash equivalents		$	8,019			$	8,019			$	74,515
Convertible notes payable			62,143				—				—
Accrued interest on convertible notes payable			14,182				—				—
Common stock warrants			66				—				—
Preferred stock warrants			1				—				—
Put rights			28,223				—				—
Convertible preferred stock, $0.001 par value; 478,329,525 shares authorized; 199,799,907 shares issued and outstanding, actual; 1,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted			122,428				—				—
Stockholders’ equity (deficit):
Common stock, $0.001 par value; 650,000,000 shares authorized, 1,808 shares issued and outstanding, actual; 100,000,000 shares authorized, 9,457,915 shares issued and outstanding, pro forma; 100,000,000 shares authorized, 15,227,915 shares issued and outstanding, pro forma as adjusted			—				9				15
Additional paid-in capital			4,967				231,826				298,079
Accumulated deficit			(244,264	)			(244,264	)			(244,264	)
Total stockholders’ equity (deficit)			(239,297	)			(12,429	)			53,830
Total capitalization		$	(12,254	)		$	(12,429	)		$	53,830

 

 

(1)

The above table does not reflect the impact of $15,000 we borrowed under a loan and security agreement entered into in February 2012. As a result, our cash and cash equivalents balance as of March 31, 2012 was $14,276. The aggregate principal amount outstanding under the loan and security agreement as of March 31, 2012 was $15,000. See Note 17 to our audited financial statements included elsewhere in this prospectus for further details regarding this loan and security agreement.

(2)

The pro forma balance sheet data in the table above gives effect to the elimination of $175 of unamortized debt issuance costs upon conversion of the convertible notes payable to stockholders as described in the paragraph above.

(3)

A $1.00 increase (decrease) in the assumed initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) each of the pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $5,366, assuming the shares offered by us as set forth on the cover of this prospectus remain the same and after deducting the estimated underwriters discounts and commissions and estimated offering costs payable by us.

(4)

The pro forma as adjusted balance sheet data in the table above gives effect to the reclassification of $1,851 of deferred initial public offering costs recognized as of December 31, 2011 that will be charged to additional paid-in capital as a reduction of proceeds received in connection with this offering. As of December 31, 2011, we had made payments totaling $237 and had accrued $1,614 related to these costs.

 

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The number of shares of our common stock to be outstanding after this offering is based on 9,457,915 shares outstanding as of December 31, 2011. It does not include:

 

•

4,015 shares of our common stock issuable upon the exercise of stock options outstanding as of December 31, 2011 at a weighted average exercise price of $638.51 per share;

 

•

653,826 shares of our common stock issuable upon the vesting of restricted stock units granted under our 2011 Equity Incentive Plan pursuant to our Bonus Plan in connection with this offering, assuming an initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus;

 

•

16,346 shares of our common stock issuable upon the vesting of restricted stock units granted under our 2011 Equity Incentive Plan pursuant to our Non-Employee Director Bonus Plan in connection with this offering, assuming an initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus;

 

•

3,540 additional shares of our common stock that were available for future issuance as of December 31, 2011 under our 2011 Equity Incentive Plan; and

 

•

6,341 shares of our common stock issuable upon the exercise of warrants outstanding as of December 31, 2011 at a weighted average exercise price of $1,010.37 per share.

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price and the pro forma as adjusted net tangible book value per share of our common stock immediately after the completion of this offering. Dilution results from the fact that the initial public offering price is substantially in excess of the net tangible book value (deficit) per share attributable to the existing stockholders for the presently outstanding stock.

Our historical net tangible book value (deficit) as of December 31, 2011 was $(241.3) million, or $(133,475) per share of common stock. Historical net tangible book value (deficit) per share represents the amount of our total tangible assets less total liabilities and convertible preferred stock, divided by 1,808, the shares of common stock outstanding as of December 31, 2011.

Our pro forma net tangible book value (deficit) as of December 31, 2011 was $(14.3) million, or $(1.51) per share of common stock. Pro forma net tangible book value (deficit) per share represents the amount of our total tangible assets less our total liabilities, divided by 9,457,915, the number of shares of our common stock outstanding, as of December 31, 2011, after giving effect to the (i) issuance of 63,583 shares of our common stock upon the conversion of all outstanding shares of our convertible preferred stock and accumulated dividends thereon, (ii) issuance of 9,392,524 shares of our common stock upon conversion of all outstanding principal and accrued interest on the convertible notes payable assuming an initial public offering price per share of $13.00, the mid-point of the range set forth on the cover page of this prospectus, (iii) settlement of the put rights upon conversion of the convertible notes payable, (iv) conversion of the preferred stock warrants into common stock warrants and (v) elimination of the common stock warrant exercise price protection term, in all cases assuming each occurred on December 31, 2011.

Investors participating in this offering will incur immediate and substantial dilution. After giving effect to the sale of 5,770,000 shares of our common stock in this offering, assuming an initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriters’ discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2011 would have been $53.8 million, or $3.53 per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $5.04 per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $9.47 per share to investors participating in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that an investor participating in this offering paid for a share of common stock.

 

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The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share						$	13.00
Historical net tangible book value (deficit) per share as of December 31, 2011		$	(133,475	)
Increase in net tangible book value per share attributable to the issuance of common stock upon the conversion of all convertible preferred stock and accrued dividends thereon and all outstanding principal and accrued interest on the convertible notes payable, the conversion of all preferred stock warrants to common stock warrants, the elimination of the common stock warrant exercise price protection term, and the settlement of the put rights upon conversion of the convertible notes payable			133,474
Pro forma net tangible book value (deficit) per share as of December 31, 2011 before this offering			(1.51	)
Increase in pro forma net tangible book value per share attributable to cash payments by investors participating in this offering			5.04
Pro forma as adjusted net tangible book value per share after this offering							3.53
Dilution in pro forma as adjusted net tangible book value per share to investors participating in this offering						$	9.47

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $4.00 per share. This represents an increase in pro forma as adjusted net tangible book value of $5.51 per share to existing stockholders and dilution in pro forma as adjusted net tangible book value of $9.00 per share to investors participating in this offering.

A $1.00 increase (decrease) in the assumed initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value after this offering by $5.4 million and the pro forma as adjusted net tangible book value per share after this offering by $0.35 per share, and would increase (decrease) the dilution per share to investors participating in this offering by $0.65 per share, in each case, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering cost payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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The following table summarizes, on a pro forma as adjusted basis as described above as of December 31, 2011, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid to us by existing stockholders and by investors participating in this offering at an assumed initial public offering price per share of $13.00, the mid-point of the range set forth on the cover page of this prospectus and before deducting estimated underwriting discounts and commissions and estimated offering costs payable by us.

 

		Shares Purchased								Total Consideration								Average Price per Share
		Number				Percentage				Amount				Percentage
Existing stockholders			9,457,915				62.1	%		$	309,197,715				80.5	%		$	32.69
Investors participating in this offering			5,770,000				37.9				75,010,000				19.5			$	13.00
Total			15,227,915				100.0	%		$	384,207,715				100.0	%		$	25.23

A $1.00 increase (decrease) in the assumed initial public offering price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by investors participating in this offering by $5.8 million, and increase (decrease) the percentage of total consideration paid to us by investors participating in this offering by 1.19%, before deducting estimated underwriting discounts and estimated offering expenses payable by us, and assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The discussion and table above assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of our common stock held by existing stockholders will be further reduced to 59% of the total number of shares of our common stock to be outstanding after this offering, and the number of shares of our common stock held by investors participating in this offering will be further increased to 41% of the total number of shares of our common stock to be outstanding after this offering.

In addition, except as noted, the above discussion and table assume no exercise of stock options or warrants to purchase common stock after December 31, 2011. As of December 31, 2011, we had outstanding options to purchase a total of 4,015 shares of our common stock at a weighted-average exercise price of $638.51 per share, 6,170 shares of common stock issuable upon the exercise of outstanding warrants at a weighted-average exercise price of $941.12 per share and 171 shares of common stock issuable upon the exercise of outstanding convertible preferred stock warrants at an exercise price of $3,509.57 per common share. If all such options and warrants had been exercised as of December 31, 2011, pro forma as adjusted net tangible book value per share would have been $4.12 per share and dilution to investors participating in this offering would be $8.88 per share. To the extent we grant options to our employees in the future and those options are exercised or other issuances of common stock are made, there will be further dilution to investors participating in this offering.

Certain of our existing stockholders and their affiliated entities have indicated an interest in purchasing up to approximately $20.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing stockholders and any of these existing stockholders could determine to purchase more, less or no shares in this offering. The foregoing discussion and tables do not reflect any potential purchases by these existing stockholders and their affiliated entities.

 

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SELECTED FINANCIAL DATA

The following table sets forth our selected financial data for the periods, and as of the dates, indicated. You should read the following selected financial data in conjunction with our audited financial statements and the related notes thereto included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

We derived the statement of operations data for the years ended December 31, 2009, 2010 and 2011, and the balance sheet data as of December 31, 2010 and 2011, from our audited financial statements that are included elsewhere in this prospectus. We derived the statement of operations data for the fiscal years ended December 31, 2007 and 2008, and the balance sheet data as of December 31, 2007, 2008 and 2009, from our audited financial statements that are not included in this prospectus.

 

		Years Ended December 31,
		2007				2008				2009				2010				2011
		(in thousands, except share and per share amounts)
Statement of Operations Data:
Revenues:
Contract revenues		$	—			$	—			$	—			$	—			$	2,705
Operating expenses:
Research and development			29,404				29,182				17,592				12,422				31,206
General and administrative			4,069				4,813				3,888				5,152				5,723
Total operating expenses			33,473				33,995				21,480				17,574				36,929
Loss from operations			(33,473	)			(33,995	)			(21,480	)			(17,574	)			(34,224	)
Other income (expense):
Interest income			2,404				707				68				11				14
Interest expense			(460	)			(2,061	)			(6,952	)			(10,290	)			(19,497	)
Other income			362				174				160				1,098				246
Total other income (expense)			2,306				(1,180	)			(6,724	)			(9,181	)			(19,237	)
Net loss			(31,167	)			(35,175	)			(28,204	)			(26,755	)			(53,461	)
Convertible preferred stock dividends			(12,157	)			(13,130	)			(14,180	)			(15,314	)			(16,540	)
Net loss attributable to common stockholders		$	(43,324	)		$	(48,305	)		$	(42,384	)		$	(42,069	)		$	(70,001	)
Net loss per share, basic and diluted		$	(27,542.28	)		$	(27,745.55	)		$	(23,704.70	)		$	(23,281.13	)		$	(38,717.37	)
Weighted average shares outstanding, basic and diluted			1,573				1,741				1,788				1,807				1,808
Pro forma net loss per share, basic and diluted (unaudited) (1)																		$	(4.63	)
Weighted average shares used in computing pro forma net loss per share, basic and diluted (unaudited) (1)																			7,402,239

 

(1)

The pro forma net loss per share and weighted average shares have been calculated to give effect to the (i) issuance of shares of common stock upon conversion of all outstanding shares of our convertible preferred stock and accumulated dividends thereon and upon conversion of all outstanding principal and accrued interest on the convertible notes payable assuming an initial public offering price per share of $13.00, the mid-point of the range set forth on the cover page of this prospectus, (ii) settlement of the put rights upon the conversion of the convertible notes payable, (iii) conversion of the preferred stock warrants into common stock warrants and (iv) elimination of the common stock warrant exercise price protection term, in all cases, assuming each had occurred on the later of January 1, 2011 or where applicable, the issuance date of the convertible notes payable. See Note 2 to our financial statements included elsewhere in the prospectus.

 

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		As of December 31,
		2007				2008				2009				2010				2011
		(in thousands)
Balance Sheet Data: (1)
Cash and cash equivalents		$	14,855			$	8,441			$	10,523			$	1,408			$	8,019
Marketable securities			23,768				—				750				—				—
Total assets			42,655				11,551				13,311				3,891				11,690
Convertible notes payable (2)			—				—				34,608				47,092				62,143
Accrued interest on convertible notes payable (2)			—				—				2,591				7,067				14,182
Put rights			—				—				2,525				11,044				28,223
Deferred revenue, net of current portion (3)			—				—				—				—				9,997
Convertible preferred stock			122,428				122,428				122,428				122,428				122,428
Accumulated deficit			(100,669	)			(135,844	)			(164,048	)			(190,803	)			(244,264	)
Total stockholders’ deficit			(98,877	)			(133,299	)			(160,476	)			(186,908	)			(239,297	)

 

(1)

The balance sheet data does not reflect the impact of $15,000 we borrowed under a loan and security agreement entered into in February 2012. As a result, our cash and cash equivalents balance as of March 31, 2012 was $14,276. The aggregate principal amount outstanding under the loan and security agreement as of March 31, 2012 was $15,000. See Note 17 to our audited financial statements included elsewhere in this prospectus for further details regarding this loan and security agreement.

 

(2)

Convertible notes payable and accrued interest on convertible notes payable were long-term obligations as of December 31, 2010 and were current liabilities as of December 31, 2009 and December 31, 2011.

 

(3)

Deferred revenue is related to the collaboration and license agreement with Sanofi. See Note 3 to our audited financial statements included elsewhere in this prospectus.

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a biopharmaceutical company developing new antibiotics to provide superior coverage, safety and convenience for the treatment of serious and life-threatening infections. Our proprietary drug discovery platform, which is based on Nobel Prize-winning science, provides an atomic-level, three-dimensional understanding of interactions between drug candidates and their bacterial targets and enables us to systematically engineer antibiotics with enhanced characteristics.

Our most advanced product candidate, delafloxacin, is intended for use as an effective and convenient first-line therapy primarily in hospitals prior to the availability of a specific diagnosis. Unlike currently available first-line treatments, delafloxacin has the potential to offer broad-spectrum coverage as a monotherapy, including for methicillin-resistant Staphylococcus aureus, or MRSA, with both intravenous and oral formulations. Delafloxacin has completed four Phase 2 clinical trials, including a Phase 2b clinical trial for the treatment of acute bacterial skin and skin structure infections, or ABSSSI. Based on the results from the Phase 2b clinical trial, we plan to commence the first of two planned Phase 3 trials for the treatment of ABSSSI in the second half of 2012. The timing of our second planned Phase 3 clinical trial will depend upon obtaining additional funding beyond the proceeds of this contemplated offering. Based on our current expectations regarding the availability of such funding and subject to the results of these two trials, we anticipate submitting a New Drug Application for delafloxacin for the treatment of ABSSSI as early as the fourth quarter of 2014 and for additional indications thereafter.

Our second product candidate, radezolid, is a next-generation, IV/oral oxazolidinone, designed to be a potent antibiotic with a safety profile permitting long-term treatment of resistant infections, including those caused by MRSA. We have completed two Phase 2 clinical trials of radezolid. We are also pursuing RX-04, our preclinical program partnered with Sanofi, S.A., which has produced new classes of antibiotics designed to combat the most difficult-to-treat, multi-drug resistant Gram-positive and Gram-negative bacteria. In addition, our pipeline includes RX-05, an antibacterial discovery program, and RX-06, an antifungal discovery program, both of which target newly discovered binding sites within ribosomes.

We have funded our operations primarily through private placements of convertible preferred stock and convertible debt, upfront and milestone payments under our collaboration with Sanofi, government tax credit programs and research grants. Since our inception in October 2000 through December 31, 2011, we have received an aggregate of $214.9 million in such funding, which includes:

 

•

$122.4 million from the sales of convertible preferred stock;

 

•

$71.0 million from the issuance of convertible notes and common stock warrants;

 

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•

$19.0 million in upfront and milestone payments under our collaboration with Sanofi; and

 

•

$2.5 million in government tax credit payments and research grants.

Prior to 2007, we received an aggregate of $122.4 million from sales of Series A, Series B and Series C convertible preferred stock. The holders of our convertible preferred stock are entitled to a cumulative dividend at the rate of 8.0% per annum. All of our outstanding convertible preferred stock and accumulated dividends thereon will convert into 65,333 shares of common stock, assuming that such conversion occurs on May 8, 2012.

During 2009, 2010 and 2011, we borrowed $35.0 million, $15.0 million and $21.0 million, respectively, through multiple issuances of convertible notes payable to stockholders and warrants for the purchase of our common stock, which we refer to as the 2009 Financing, 2010 Financing and 2011 Financing, respectively. The convertible notes issued in the 2009 Financing, 2010 Financing and 2011 Financing, which we refer to as the 2009 Notes, 2010 Notes and 2011 Notes, respectively, accrue interest at a rate of 10% per annum. The outstanding principal and accrued but unpaid interest on the convertible notes will automatically convert into 9,827,456 shares of common stock, assuming an initial public offering, or IPO, price per share of $13.00, the mid-point of the price range set forth on the cover page of this prospectus, and that such conversion occurs on May 8, 2012. This conversion will occur prior to our grant of restricted stock units pursuant to our Bonus Plan and our Non-Employee Director Bonus Plan for 653,826 additional shares and 16,346 additional shares, respectively, of our common stock in connection with this offering. Each of the 2009, 2010 and 2011 Notes also contains a provision, or put right, that entitles the holders to receive specified preferential redemption payments upon a change of control or liquidation. In addition, as part of the 2009 Financing, 2010 Financing and 2011 Financing, we issued warrants to purchase 6,072 shares of our common stock at a weighted-average exercise price of $899.91, which unless otherwise exercised prior to the expiration of their respective 10-year terms by the holders thereof will remain outstanding following this offering. The warrants are entitled to anti-dilution protection if we subsequently issue additional shares of common stock for consideration per share less than the respective warrant exercise prices. The put rights of the convertible notes and the anti-dilution provisions of the warrants have been deemed to result in derivative instruments which require liability classification and mark-to-market accounting at each balance sheet date. These anti-dilution and put rights will terminate upon the closing of this offering.

In February 2012, we entered into a Loan and Security Agreement, or loan agreement, pursuant to which we borrowed an aggregate principal amount of $15.0 million. We are obligated to make monthly interest only payments in arrears, at a rate of 9.1% per annum, for a period of nine months commencing on April 1, 2012. Commencing on January 1, 2013, and continuing on the first day of each month through and including June 1, 2015, we will make consecutive equal monthly payments of principal and interest. We paid a 0.5% facility fee at the inception of the loan, and upon repayment of the total amount borrowed, we will be required to pay an amount equal to 4.5% of the total amount borrowed, both of which will be recognized as additional interest expense over the term of the loan. Amounts due under the loan agreement may become immediately due and payable upon the occurrence of a material adverse change, as defined under the loan agreement. Under the terms of the loan agreement, we are subject to operational covenants, including limitations on our ability to incur liens or additional debt, pay dividends, redeem stock, make specified investments and engage in merger, consolidation or asset sale transactions, among other restrictions. Additionally, in February 2012, in connection with the issuance of secured promissory notes pursuant to the loan agreement in February

 

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2012, we also issued warrants to purchase 1,889 shares of our common stock. These warrants have a seven-year term and are immediately exercisable at an exercise price of $396.95 per share.

In June 2011, we entered into an exclusive, three year worldwide research collaboration and license agreement with Sanofi for novel classes of antibiotics resulting from our RX-04 program. During the three year research term, the parties will each conduct research on a best efforts basis with each party being responsible for its own assigned research and development costs. Under the collaboration, we received in July 2011 a non-refundable, upfront payment of $10.0 million, and a payment of $9.0 million for the achievement of research milestones. In addition, we received an additional payment of $3.0 million from Sanofi in January 2012 for the achievement of a research milestone. For each RX-04 product developed by Sanofi, we are eligible for up to $9.0 million in potential research milestone payments, up to $27.0 million in potential development milestone payments relating to initiation of Phase 1, 2 and 3 clinical trials, up to $50.0 million in potential regulatory milestone payments relating to approvals in various jurisdictions including the United States, the European Union and Japan, and up to $100.0 million in potential commercial milestone payments. We may also receive tiered percentage royalties of up to 10% on sales from products commercialized under the agreement, if any. Sanofi has the right to develop an unlimited number of products provided that Sanofi exercises, during the research term, a development and commercialization option, or option, to obtain each licensed compound. Upon each option exercise, we will grant to Sanofi an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to develop, market and sell the licensed compound, and Sanofi will assume responsibility for the development and commercialization of the licensed compound. We retain all rights pertaining to the discovery platform and all future programs, and also have the right to opt into a co-development and co-commercialization arrangement with Sanofi, which provides an equal sharing of profits in the United States for one product of our choice.

We have never been profitable and have incurred significant net losses since our inception. We incurred net losses of $28.2 million, $26.8 million and $53.5 million for the years ended December 31, 2009, 2010 and 2011, respectively. These losses have resulted principally from costs incurred in connection with research and development activities, general and administrative costs associated with our operations and interest expense in connection with our convertible notes payable. As of December 31, 2011, we had an accumulated deficit of $244.3 million and cash and cash equivalents of $8.0 million.

We expect to continue to incur operating losses for the next several years as we work to discover, develop and commercialize our product candidates. As a result, we will seek to fund our operations through public or private equity offerings, debt financings and corporate collaborations and licensing arrangements. We cannot ensure that such funds will be available on terms favorable to us, if at all. The terms of any financing may adversely affect the holdings or rights of our stockholders and debt holders. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may never successfully complete development of any of our product candidates, obtain adequate patent protection for our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we may be required to curtail our operations, and we may be unable to continue as a going concern. Our cash and cash equivalent balances as of December 31, 2011, significant debt outstanding, net capital deficiency and recurring losses from operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2011 with respect to this uncertainty.

 

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Financial Overview

Revenues

Our 2011 revenues are solely comprised of contract revenues resulting from our collaboration with Sanofi. In July 2011, in connection with our collaboration, we received a non-refundable, upfront payment of $10.0 million, and a payment of $9.0 million for the achievement of certain research milestones, the majority of which we are recognizing over the three year research term. For the year ended December 31, 2011, we recognized $2.7 million of contract revenues under the collaboration. We estimate that as we continue to recognize revenues under the collaboration, our contract revenues for the next twelve months will be approximately $9.0 million, including the recognition in January 2012 of contract revenues of $3.0 million as a result of the payment received for the achievement of a research milestone. In the future, contract revenues under our collaboration with Sanofi may include additional payments for achieving research milestones, license payments for product candidates, as well as payments for such licensed product candidates achieving development, regulatory and commercial milestones, and product royalties.

We have no products approved for sale, have not generated any revenues from product sales since our inception and do not expect to generate any revenue from the sale of products in the near future. If our discovery or development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for any of our product candidates, we may generate revenues from those product candidates.

Research and Development Expenses

The majority of our operating expenses to date have been for research and development activities related to delafloxacin, radezolid and our discovery/preclinical programs. We record all research and development expenses, including those paid to third parties, to operations as incurred.

Research and development expenses consist primarily of costs associated with our product discovery and development efforts, including preclinical and clinical trials. Research and development expenses include:

 

•

outsourced discovery and development expenses incurred through agreements with contract research organizations, or CROs, contract manufacturers and medicinal chemistry service providers, and milestone and license payments made under licensing arrangements;

 

•

personnel costs, including salaries, benefits and stock-based compensation;

 

•

the cost of laboratory and other supplies;

 

•

rent and other facilities costs;

 

•

professional and consulting fees; and

 

•

travel and other costs.

We have been developing delafloxacin, radezolid and our discovery programs in parallel, and typically use our employee and infrastructure resources across multiple research and development programs. We track outsourced discovery and development costs by specific discovery programs and development compounds but do not allocate personnel or other internal costs related to research and development to specific discovery programs or development compounds. These expenses are included in personnel costs and other internal costs, respectively, in the table below.

 

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The following table summarizes our research and development expenses for the years ended December 31, 2009, 2010 and 2011:

 

		Years Ended December 31,
		2009				2010				2011
		(In thousands)
Outsourced discovery and development costs:
Delafloxacin		$	3,896			$	2,935			$	19,123
Radezolid			3,605				141				2,485
RX-04			879				1,035				593
Other			2				—				402
Total outsourced discovery and development costs			8,382				4,111				22,603
Personnel costs			6,227				5,175				5,035
Other internal costs			2,983				3,136				3,568
Total research and development expenses		$	17,592			$	12,422			$	31,206

Since acquiring delafloxacin from Wakunaga Pharmaceutical Co., Ltd., or Wakunaga, in 2006 and through December 31, 2011, we have incurred outsourced discovery and development costs for delafloxacin of approximately $48.0 million, including the initial license fee of $1.5 million paid in May 2006. Through December 31, 2011, we have incurred outsourced discovery and development costs of approximately $30.8 million for radezolid and $3.3 million for RX-04. Through December 31, 2011, the outsourced discovery and development costs for other product candidates and preclinical and discovery programs were immaterial.

The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, due to the inherently unpredictable nature of preclinical and clinical development, and given the early stage of our discovery programs, we cannot reasonably estimate or know the nature, specific timing or estimated costs of the efforts that will be necessary to complete the development of our product candidates. However, we expect that our research and development expenses will increase significantly in future periods as we continue the clinical development of delafloxacin and radezolid, and conduct research and development activities on our RX-04 preclinical program and our discovery programs. We expect to fund our research and development expenses from our cash and cash equivalents, a portion of the net proceeds from this offering, milestone payments received from the collaboration with Sanofi, if any, additional financing transactions and collaboration arrangements that we intend to enter into. We cannot forecast with any degree of certainty which product candidates or preclinical programs may be subject to future collaborations or contracts, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Delafloxacin. We plan to commence the first of two planned Phase 3 trials for the treatment of ABSSSI in the second half of 2012. The timing of our second planned Phase 3 clinical trial will depend upon obtaining additional funding beyond the proceeds of this contemplated offering. Based on our current expectations regarding the availability of such funding and subject to the results of these two trials, we anticipate submitting applications for marketing approval to the U.S. Food and Drug Administration and the European Medicines Agency as early as the fourth quarter of 2014. We also intend to seek approval for additional indications for delafloxacin, including CABP and cIAI.

Radezolid. Subject to obtaining sufficient additional funding beyond the proceeds of this contemplated offering, we intend to initiate a Phase 2 study for the treatment of ABSSSI and a

 

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Phase 1 long-term safety study in humans to demonstrate what we believe is a long-term safety advantage over Zyvox. Following these studies, we also intend to perform additional clinical trials of radezolid in ABSSSI and CABP and for indications that require long-term treatment, such as osteomyelitis and prosthetic and joint infections.

RX-04. We intend to work with Sanofi under our collaboration agreement to identify and develop multiple RX-04 product candidates. In addition to the development and commercial milestone payments for which we are eligible for each RX-04 product candidate, we intend to exercise our right to co-commercialize one RX-04 product of our choosing in the United States.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, including salary, benefits and stock-based compensation, for employees in administration, finance and business development, as well as costs associated with recruitment efforts. Other significant expenses include: rent and other facilities costs; professional and consulting fees for accounting and tax services, business development activities and general legal services, including legal expenses to pursue patent protection of our intellectual property; and travel and other costs. We expect general and administrative expenses to increase significantly as we begin operating as a public company and continue to build our corporate infrastructure in support of continued development of delafloxacin, radezolid, our RX-04 preclinical program and our discovery programs. These increases may impact: personnel costs; legal, accounting and consultant fees; expenses related to compliance with the Sarbanes-Oxley Act of 2002; expenses related to filing annual, quarterly and other reports and documents with the Securities and Exchange Commission; increased directors’ and officers’ insurance premiums; fees for investor relations services; expenses related to listing and transfer agent fees; and expenses for implementing enhanced business systems.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents, though, since 2009, our interest income has not been significant due to nominal cash and cash equivalent balances. We anticipate that our interest income will increase following the receipt of the proceeds from this offering.

Interest Expense

Interest expense consists of: cash interest paid or accrued on notes payable and convertible notes payable; non-cash interest expense related to the amortization of debt issuance costs and debt discounts associated with the issuance of our notes payable and convertible notes payable; mark-to-market adjustments for changes in value of the preferred stock warrants issued in connection with our notes payable; mark-to-market adjustments for changes in the value of the common stock warrants issued in connection with the issuance of convertible notes payable; and mark-to-market adjustments for changes in the value of change of control and liquidation put rights associated with the issuance of our convertible notes payable. We anticipate that our interest expense will decrease significantly upon the completion of this offering when the convertible notes payable convert into shares of common stock.

Other Income

Other income for the year ended December 31, 2010 included income related to the Qualifying Therapeutic Discovery Project, or QTDP, program, which provided for reimbursement in 2010 of certain costs paid or incurred during 2009 and 2010 directly related to the conduct of a QTDP program. Other income for all periods also includes income received as a result of

 

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legislation in the State of Connecticut where companies have the opportunity to exchange certain research and development tax credit carryforwards for a cash payment of 65% of the research and development tax credit. We do not anticipate any further income related to the QTDP program, however, we will continue to record other income relating to the exchange of research and development tax credit carryforwards with the State of Connecticut, to the extent that the program continues.

Income Taxes

As of December 31, 2011, we had federal and state net operating loss carryforwards of $203.8 million and $203.5 million, respectively, and federal and state research and development tax credit carryforwards of $7.4 million and $3.5 million, respectively. Our federal and state net operating loss carryforwards and federal research and development tax credits will expire through 2031 if not used, and our state research and development tax credit carryforwards do not expire.

The Tax Reform Act of 1986 provides for a limitation on the annual use of federal net operating loss and research and development tax credit carryforwards following certain ownership changes, which could limit our ability to utilize these carryforwards. We may already be subject to Section 382 limitations due to previous ownership changes. In addition, future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation. Due to the significant complexity and cost associated with a change in control study, and the expectation of continuing to incur losses whereby the net operating losses and federal tax credits are not anticipated to be used in the foreseeable future, we have not assessed whether there have been changes in control since our formation. If we have experienced changes in control at any time since our formation, utilization of our net operating losses or research and development credit carryforwards would be subject to significant annual limitations under Section 382.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.

Revenue Recognition

During 2011, we entered into our first collaboration and license agreement with Sanofi for the research and development of novel classes of antibiotics under our RX-04 program The terms of the agreement include non-refundable upfront fees, and the potential for research, development, regulatory and commercial milestone fees, as well as royalties on product sales of licensed products, if and when such product sales occur.

 

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We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, services are performed or products have been delivered, the fee is fixed and determinable and collection is reasonably assured. Determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management’s judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions, revenue recognized could be adversely affected.

We recognize revenue related to collaboration and license arrangements in accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605-25, “Revenue Recognition – Multiple-Element Arrangements,” or ASC Topic 605-25. Additionally, we adopted effective January 1, 2011, Accounting Standards Update, or ASU, No. 2009-13, “Multiple Deliverable Revenue Arrangements,” or ASU 2009-13, which amended ASC Topic 605-25 and:

 

•

provided guidance on how deliverables in an arrangement should be separated and how the arrangement consideration should be allocated to the separate units of accounting;

 

•

required an entity to determine the selling price of a separate deliverable using a hierarchy of (i) vendor-specific objective evidence, or VSOE, (ii) third-party evidence, or TPE, or (iii) best estimate of selling price, or BESP; and

 

•

required the allocation of the arrangement consideration, at the inception of the arrangement, to the separate units of accounting based on relative fair value.

We evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables are separated into units of accounting. The arrangement consideration that is fixed and determinable at the inception of the arrangement is allocated to the separate units of accounting based on relative fair value. We may exercise significant judgment in determining whether a deliverable is a separate unit of accounting, as well as in estimating the selling prices of such unit of accounting.

To determine the selling price of a separate deliverable, we use the hierarchy as prescribed in ASC Topic 605-25 based on VSOE, TPE or BESP. VSOE is based on the price charged when the element is sold separately and is the price actually charged for that deliverable. TPE is determined based on third party evidence for a similar deliverable when sold separately and BESP is the price at which we would transact a sale if the elements of collaboration and license arrangements were sold on a stand-alone basis. We expect that establishing VSOE or TPE for the deliverables within collaboration and license arrangements will be difficult as we do not have a history of entering into such arrangements or selling the individual deliverables within such arrangements separately. In addition, there is significant differentiation in these arrangements, which indicates that comparable third party pricing may not be available. We expect the selling price for the deliverables within collaboration and license arrangements to be determined using BESP. The process for determining BESP involves significant judgment on our part and includes consideration of multiple factors such as estimated direct expenses and other costs, and available data.

For each unit of accounting identified within an arrangement, we determine the period over which the performance obligation occurs. Revenue is then recognized using either a proportional performance or straight-line method. We recognize revenue using the proportional performance method when the level of effort to complete our performance obligations under an

 

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arrangement can be reasonably estimated and such performance obligations are provided on a best-efforts basis. Direct labor hours or full time equivalents are typically used as the measurement of performance.

In connection with the collaboration with Sanofi, we were required to make numerous estimates and judgments, primarily related to the determination of deliverables, unit(s) of accounting and BESP. In particular, based on our judgment, we identified that the deliverables under the collaboration were (i) the research license, (ii) research services during the three year research term and (iii) joint steering committee, or JSC, participation, and determined that these deliverables should be accounted for as a single unit of accounting. We also concluded that the future ability by Sanofi to exercise an option is a substantive option as it is in the control of Sanofi, and therefore it was not considered to be a deliverable at the inception of the collaboration. Finally, we determined that the BESP for the single unit of accounting discussed above was $18.3 million by considering the number of personnel who will be dedicated to the research services and JSC participation during the three year research term, and the estimated costs of the personnel based on our annual historical direct costs, together with a market-based profit margin, which was determined based on an analysis of third-party data for companies providing a similar type of outsourced scientific personnel services.

Additionally, we considered that after the completion of the three year research term, the collaboration contains a two year follow-on period in which neither party will conduct any research or development activities on any RX-04 compound other than licensed compounds. Therefore, we determined that the remaining initial consideration of $0.7 million represents an upfront fee that will be recognized as contract revenues on a straight-line basis over the customer benefit period, which is five years.

Effective January 1, 2011, we adopted ASU No. 2010-17, “Milestone Method of Revenue Recognition,” or ASU 2010-17, which provides guidance on revenue recognition using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. The determination that a milestone is substantive is subject to considerable judgment. In January 2012, we received a $3.0 million payment from Sanofi for the achievement of a research milestone. We determined that the milestone was substantive and therefore recognized the amount as contract revenues in its entirety in January 2012. If we receive additional milestone payments in the future under the collaboration with Sanofi, we will recognize such payments under the milestone method.

Royalty revenues will be recognized based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. To date, none of our products has been approved, and therefore we have not earned any royalty revenue from product sales.

Research and Development

As part of the process of preparing our financial statements, we are required to estimate accrued and prepaid research and development expenses. We review new and open contracts, and communicate with applicable internal and vendor personnel to identify services that have been performed on our behalf and estimate the level of service performed and the associated costs incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost for accrued expenses. The majority of our service providers invoice us monthly in arrears for services performed, however, some require advanced payments. We also review, with applicable internal and vendor personnel, services that have been performed when payment was required in advance and estimate the level of service performed and the associated costs incurred. We make estimates of our accrued and prepaid expenses as of each balance sheet date

 

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in our financial statements based on facts and circumstances known to us. We also periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. To date, we have not adjusted our estimates at any particular balance sheet date in any material amount. Examples of estimated accrued and prepaid expenses include:

 

•

fees paid to CROs in connection with preclinical studies and clinical trials;

 

•

fees paid to investigative sites in connection with clinical trials;

 

•

fees paid to contract manufacturers in connection with the production of clinical trial materials;

 

•

fees paid for outsourced chemistry services;

 

•

obligations under licensing arrangements; and

 

•

professional service fees.

We base our accrued and prepaid expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended, all pursuant to contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. We estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust accordingly. If we do not identify costs that have been incurred or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Stock-Based Compensation

We account for stock-based compensation by measuring and recognizing compensation expense for all stock-based awards made to employees and directors based on grant date fair values. We use the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period. We estimate forfeitures at the time of grant based on our historical experience and revise, if necessary, in subsequent periods if actual forfeitures differ from estimates. We use the Black-Scholes option-pricing model as the most appropriate fair-value method for our stock-based awards. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected volatility, the expected term and the fair value of the underlying common stock on the date of grant.

We account for all stock-based awards issued to non-employees based on their fair value on the measurement dates using the Black-Scholes option-pricing model. Stock-based awards granted to non-employees are subject to periodic revaluation over their vesting terms. As a result, the charge to operations for non-employee options with vesting is affected each reporting period by changes in the fair value of our common stock.

 

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The following table summarizes our assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2009, 2010 and 2011:

 

		Years Ended December 31,
		2009				2010				2011
Risk free interest rate			2.29% - 2.92%				2.51% - 2.83%				1.13% - 2.35%
Expected dividend yield			0%				0%				0%
Expected term—employee awards			6 years				6 years				6 years
Expected term—non-employee awards			10 years				N/A				10 years
Expected volatility			80%				76%				70%

Risk-free Interest Rate. The risk-free interest rate was based on zero coupon United States Treasury instruments that had terms consistent with the expected term of our stock option grants.

Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future.

Expected Term. We utilize the “simplified” method for “plain vanilla” options to estimate the expected term of stock option grants to employees. Under this approach, the expected term is presumed to be the simple average of the vesting term and the contractual term of the option. We utilize the contractual term as the expected term for stock option grants to non-employees.

Expected Volatility. The expected volatility used to value stock option grants is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the pharmaceutical and biotechnology industry in a similar stage of development.

Stock-Based Compensation Summary. Stock-based compensation for stock option grants is reported in our statements of operations for the years ended December 31, 2009, 2010 and 2011 as follows:

 

		Years Ended December 31,
		2009				2010				2011
		(In thousands)
Research and development		$	406			$	160			$	59
General and administrative			544				162				198
Total stock-based compensation		$	950			$	322			$	257

Based on stock options outstanding as of December 31, 2011, we had unrecognized stock-based compensation expense for employees, net of estimated forfeitures, of $0.3 million which will be recognized over a weighted-average period of 2.08 years.

Assuming an IPO price per share of $13.00, the mid-point of the range set forth on the cover of this prospectus, the intrinsic value of the 4,015 outstanding vested and unvested options at December 31, 2011 would have been $398 (in whole dollars).

We expect to continue to grant stock options in the future, which may increase our stock-based compensation expense in future periods. The assumptions used above in the Black-Scholes option-pricing model represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, and we use different assumptions, our stock-based compensation could be materially different in the future.

 

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The following table shows the grant date, number of shares, exercise price per share and fair value estimate per common share of stock options granted since January 1, 2011:

 

Grant Date		Number of Shares				Exercise Price per Share				Fair Value Estimate per Common Share
January 31, 2011			35			$	396.95			$	7.94
March 19, 2011			4			$	34.02			$	7.94
September 1, 2011			75			$	9.07			$	9.07
November 18, 2011			26			$	9.07			$	9.07

Common Stock Fair Value

The fair value of our common stock underlying stock options granted has historically been determined by our board of directors, with assistance from management, based upon information available at the time of grant. The intention has been that all options granted be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. Given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, management and our board of directors have exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each stock option grant date. These factors included:

 

•

the progress of our research and development programs, including the status of clinical trials for our products;

 

•

achievement of enterprise milestones, including our entering into collaboration and licensing agreements;

 

•

our financial condition, including cash on hand and debt levels;

 

•

our need for future financing to fund operations;

 

•

the composition of, and changes to, our management team and board of directors;

 

•

the rights and preferences of our convertible preferred stock and convertible notes payable relative to our common stock;

 

•

the lack of marketability of our common stock;

 

•

an analysis of mergers and acquisitions, IPOs, and the market performance of similar companies in the pharmaceutical and biotechnology industry sectors;

 

•

the likelihood of achieving a discrete liquidity event, such as a sale or merger, or IPO, given prevailing market conditions;

 

•

the expected valuation in a potential sale or merger, or IPO; and

 

•

external market and economic conditions impacting the pharmaceutical and biotechnology industry sectors.

Grants— 2011. Valuations of our common stock were completed as of December 31, 2010, June 30, 2011, September 30, 2011 and December 31, 2011. During 2009, 2010 and 2011, we issued an aggregate of $71.0 million of convertible notes payable, with associated common stock warrants, with exercise prices not less than the per share fair value of our common stock. The terms of the notes, as discussed further below and under “—Liquidity and Capital Resources,” provided for varying economic outcomes for the debt holders depending on

 

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differing types of liquidity events, such as an IPO or a strategic transaction. In addition, management and the board of directors determined that, given the stage of development for its programs and the current outlook for them, there was a likelihood that there would be differing times to liquidity depending on whether the liquidity event would be an IPO or a strategic transaction.

We value our common stock using the probability-weighted expected return method, or PWERM. Under the PWERM, the value of a company’s common stock is estimated based upon an analysis of future enterprise values under various liquidity events. The future enterprise values are allocated among the various convertible debt and equity classes expected to be outstanding at the various liquidity events based on the rights and preferences of each class. The future value of the common stock under each liquidation event is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. A discount for lack of marketability, to account for the illiquidity of the common stock, is applied to the indicated common stock value to determine the fair value of the common stock.

In connection with the PWERM analyses as of December 31, 2010, June 30, 2011, September 30, 2011 and December 31, 2011, two types of future event scenarios were considered: an IPO and a strategic sale or merger. Three different IPO and four different sale/merger scenarios were considered for a total of seven scenarios as of each valuation date, in order to reflect a range of possible values. As of each valuation date, excluding December 31, 2011, our management and board of directors determined the total probability for the three IPO scenarios was 65%, with a corresponding total probability for the four sale/merger scenarios of 35%, based on an analysis of current market conditions and management and the board of directors’ expectations of the timing of future scientific progress with its product candidates and discovery programs. For the December 31, 2011 valuation date, our management and board of directors determined the total probability for the three IPO scenarios was 70%, with a corresponding total probability for the four sale/merger scenarios of 30%, based on an analysis of current market conditions and management and the board of directors’ evaluation of the continued progress of the IPO process. The future enterprise value for each scenario was estimated by management and the board of directors based on an analysis of IPOs or sales/mergers of companies in a similar stage of development as our own at each respective valuation date. For each scenario, the proceeds to the common stockholders were calculated based on the preferences and priorities between the convertible debt and preferred and common stock.

For purposes of the December 31, 2010 valuation, a discount for lack of marketability of 10% was applied to account for the lack of access to an active public market for the common stock and the fact that our common stock represents a minority interest in our company. Despite our early stage of development, we determined a discount of 10% was appropriate after giving consideration to the recent completion of several studies for Phase 2 clinical trials which were moving us closer to a liquidity event. For purposes of the June 30, 2011, September 30, 2011 and December 31, 2011 valuations, discounts of 5%, 5% and 2.5%, respectively, were applied for lack of marketability due to the passage of time resulting in a further reduction in the estimated time to an expected liquidity event from prior valuations.

Management and the board of directors increased its estimate of our probability-weighted future enterprise value as of December 31, 2010, as compared to December 31, 2009, based on the establishment of a final protocol for the delafloxacin Phase 2b study and the ongoing progress for a potential collaborative deal with RX-04. In connection with the June 30, 2011 valuation, management and the board of directors further increased its estimate of our probability-weighted future enterprise value based on the significant changes in the business

 

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from December 31, 2010 to June 30, 2011 as discussed below. For purposes of the September 30, 2011 valuation, as the Sanofi collaboration was still in its early stages and no additional data was available from either the delafloxacin Phase 2b clinical trial or the radezolid long-term preclinical study, management and the board of directors used the same probability-weighted future enterprise value as was used for the June 30, 2011 valuation. For purposes of the December 31, 2011 valuation, management and the board of directors decreased its estimate of our probability-weighted future enterprise value based on an analysis of then- current IPO valuations of similarly-situated companies.

Based on these valuations, the fair value of our common stock as of December 31, 2010 was determined to be $7.94, the fair value of our common stock as of June 30, 2011 and September 30, 2011 was determined to be $9.07, and the fair value of our common stock as of December 31, 2011 was determined to be $7.94.

The decrease in the fair value of our common stock from December 31, 2009 to December 31, 2010 can be mainly attributed to the dilutive effect of the issuances during 2010 of $15.0 million of convertible notes payable, and the anticipated issuance in January 2011 of approximately $20.0 million of additional convertible notes payable, with associated common stock warrants. The increase in the fair value of our common stock from December 31, 2010 to June 30, 2011 and September 30, 2011 can be attributed to the increase in the estimate of our probability-weighted future enterprise value which was based on the following significant changes in the business during the period from December 31, 2010 to June 30, 2011: we signed an exclusive, worldwide research agreement with Sanofi for novel classes of antibiotics resulting from the RX-04 program for the treatment of Gram-negative and Gram-positive bacteria; enrollment in the delafloxacin Phase 2b clinical trial was proceeding according to plan; and the radezolid long-term preclinical study was showing favorable evidence of radezolid’s long-term safety profile. The decrease in the fair value of our common stock from September 30, 2011 to December 31, 2011 can be attributed to the decrease in the estimate of our probability-weighted future enterprise value based on an analysis of then-current IPO valuations of similarly-situated companies.

Although the mid-point of the IPO price range set forth on the cover page of this prospectus of $13.00 per share is greater than the $7.94 fair value of our common stock that was determined by our board of directors on December 31, 2011, there are several factors that explain this difference. We filed the registration statement of which this prospectus is a part in November 2011 and our first amendment to the registration statement in December 2011. Subsequent to December 2011, we have filed three amendments to the registration statement, our second amendment in January 2012, our third amendment in March 2012 and our fourth amendment in April 2012. In addition, in February 2012, we entered into a financing agreement with Oxford Finance LLC under which we borrowed $15 million to provide liquidity through our anticipated IPO date. These facts signaled that an IPO scenario was becoming more likely, resulting in a significantly higher total probability for the IPO scenarios as compared to the sale/merger scenarios. Any increase in probabilities assigned to the IPO scenarios rather than the sale/merger scenarios results in an increase in the fair value of our common stock. Furthermore, the determination of the estimated IPO price range necessarily assumes that the IPO has occurred, a public market for our common stock has been created and that our preferred shares and convertible notes payable to stockholders have converted into common stock in connection with the IPO. The mid-point of the estimated range of the IPO price also excludes any discount for lack of marketability for our common stock, which was appropriately taken into account in the board’s fair market value determination as of December 31, 2011.

There are significant judgments and estimates involved in the determination of the above fair values of our common stock. These judgments and estimates include assumptions, among

 

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others, of: our future performance; the time to a liquidity event such as an IPO or a sale or merger; the probability and timing of our progress towards commercialization of our programs; the valuation of the future cash flows from our programs; and the appropriate valuation methods used in determining fair value. In addition to the significant judgments, estimates and assumptions noted above, a significant factor that impacts the fair valuation of our common stock is the conversion rights of our 2009 Notes, 2010 Notes and 2011 Notes. Such conversion rights provide that in the event of an IPO prior to maturity, the outstanding amounts of the 2009 Notes, 2010 Notes and 2011 Notes, including accrued interest, shall automatically convert immediately prior to the IPO into such number of shares of common stock that represent up to 99.2% of our outstanding common stock on a fully-diluted basis, but with the ultimate percentage to be determined by the offering price in the IPO and subject to the limitations of value equal to three times the outstanding principal and interest on the 2011 Notes and 2010 Notes and one and one-third times the outstanding principal and interest on the 2009 Notes, as more fully described in Note 6 to our financial statements appearing elsewhere in this prospectus. Accordingly, it is possible that in the event of an IPO, the outstanding shares of common stock, common stock options, common stock warrants and common stock issued in connection with the automatic conversion of the outstanding preferred stock and accrued dividends will, in aggregate, represent only 0.8% of the outstanding shares of our common stock on a fully-diluted basis prior to the IPO and prior to giving effect to the expected grant of restricted stock units in connection with this offering under the Bonus Plan and Non-Employee Director Bonus Plan as more fully described in Notes 14 and 17 to our financial statements appearing elsewhere in this prospectus. In order to effect such conversion rights, we will be required to issue to the holders of the 2009 Notes, 2010 Notes and 2011 Notes such number of shares of common stock as is required to effect such conversion rights. In April 2012, our board of directors and stockholders declared a 1-for-5,670.66 reverse stock split of our common stock that became effective on May 1, 2012. This reverse stock split materially impacted both the number of shares of common stock and common stock equivalents outstanding, as well as the exercise price of such options and other common stock equivalents.

If we had made different assumptions and estimates, the fair value of our common stock and the amount of our stock-based compensation expense could have been materially different. We believe that we have used reasonable approaches, methodologies and assumptions in determining the fair value of our common stock.

Fair Values of Change of Control and Liquidation Put Rights

Each of the 2009 Financing, 2010 Financing and 2011 Financing contains a provision, or put right, which provides that upon a change of control or liquidation, as defined in the agreements, the noteholders are entitled to an amount that is equal to the greater of: (i) the sum of (y) 1.75x, 3.5x and 3.5x, respectively, of the principal amount plus (z) any accrued but unpaid interest and (ii) the amount the holder would be entitled to receiTYLE="font-family:ARIAL" SIZE="2">  

Debt issuance costs amortization

     613        246         334   

Notes payable (Note 5)

     (221 )      55         —      

 

 

   

 

 

    

 

 

 

Sub-total non-cash interest expense

     3,306        5,553         12,382      

 

 

   

 

 

    

 

 

 

Interest expense

   $ 6,952      $ 10,290       $ 19,497      

 

 

   

 

 

    

 

 

 

8. Fair Value Measurements

The provisions of the accounting standard for fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The transaction of selling an asset or transferring a liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant who holds the asset or owes the liability. Therefore, the objective of a fair value measurement is to determine the price that would be received when selling an asset or paid to transfer a liability (an exit price) at the measurement date. This standard classifies the inputs used to measure fair value into the following hierarchy:

 

Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2		Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3		Unobservable inputs for the asset or liability.

 

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The following table summarizes the non-financial assets and liabilities reported at fair value and measured on a recurring basis as of December 31, 2010 and 2011:

 

						Fair Value Measurements Using
		Total				Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Description
December 31, 2010
Preferred stock warrants		$	(1	)		$	—			$	—			$	(1	)
Common stock warrants			(30	)			—				—				(30	)
Put rights			(11,044	)			—				—				(11,044	)
Total assets (liabilities)		$	(11,075	)		$	—			$	—			$	(11,075	)
December 31, 2011
Preferred stock warrants		$	(1	)		$	—			$	—			$	(1	)
Common stock warrants			(66	)			—				—				(66	)
Put rights			(28,223	)			—				—				(28,223	)
Total assets (liabilities)		$	(28,290	)		$	—			$	—			$	(28,290	)

The preferred stock warrants were valued using the Black-Scholes option-pricing model (Notes 2 and 5), the common stock warrants were valued using a multiple scenario probability-weighted option-pricing model (Notes 2 and 6) and the Put rights were valued using the PWERM (Notes 2 and 6).

The following table summarizes changes in the fair value of the Company’s level 3 liabilities for the year ended December 31, 2009:

 

		Fair Value at December 31, 2008				Realized Gains (Losses)				Change in Unrealized Gains (Losses)				(Issuances) Settlements				Net Transfer in (out) of Level 3				Fair Value at December 31, 2009
Level 3 Liabilities
Preferred stock warrants		$	(507	)		$	42			$	391			$	—			$	—			$	(74	)
Common stock warrants			—				—				737				(1,518	)			—				(781	)
Put rights			—				—				4,180				(6,705	)			—				(2,525	)
Total liabilities at fair value		$	(507	)		$	42			$	5,308			$	(8,223	)		$	—			$	(3,380	)

 

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The following table summarizes changes in the fair value of the Company’s level 3 liabilities for the year ended December 31, 2010:

 

		Fair Value at December 31, 2009				Realized Gains (Losses)				Change in Unrealized Gains (Losses)				(Issuances) Settlements				Net Transfer in (out) of Level 3				Fair Value at December 31, 2010
Level 3 Liabilities
Preferred stock warrants		$	(74	)		$	—			$	73			$	—			$	—			$	(1	)
Common stock warrants			(781	)			—				1,064				(313	)			—				(30	)
Put rights			(2,525	)			—				(2,471	)			(6,048	)			—				(11,044	)
Total liabilities at fair value		$	(3,380	)		$	—			$	(1,334	)		$	(6,361	)		$	—			$	(11,075	)

The following table summarizes changes in the fair value of the Company’s level 3 liabilities for the year ended December 31, 2011:

 

		Fair Value at December 31, 2010				Realized Gains (Losses)				Change in Unrealized Gains (Losses)				(Issuances) Settlements				Net Transfer in (out) of Level 3				Fair Value at December 31, 2011
Level 3 Liabilities
Preferred stock warrants		$	(1	)		$	—			$	—			$	—			$	—			$	(1	)
Common stock warrants			(30	)			—				5				(41	)			—				(66	)
Put rights			(11,044	)			—				(4,397	)			(12,782	)			—				(28,223	)
Total liabilities at fair value		$	(11,075	)		$	—			$	(4,392	)		$	(12,823	)		$	—			$	(28,290	)

The change in unrealized gains (losses) for the preferred stock warrants (Note 5), common stock warrants (Note 6) and Put rights (Note 6) are recorded as increases or reductions to interest expense in the statements of operations.

 

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9. Convertible Preferred Stock

Under the Company’s amended and restated articles of incorporation, the Company’s convertible preferred stock is recorded at the fair value as of the date of issuance, net of issuance costs.

Convertible preferred stock at December 31, 2010 consisted of the following:

 

		December 31, 2010
		Shares								Proceeds, net of issuance costs				Liquidation Amounts
		Designated				Outstanding
Series A-1 Convertible Preferred Stock			7,422,443
Series A-1(A) Convertible Preferred Stock			4,695,832
Series A-L Convertible Preferred Stock			3,887,804
Sub-Total Series A Convertible Preferred Stock			16,006,079				16,006,079			$	9,291			$	19,897
Series B Convertible Preferred Stock			92,401,844
Series B-1 Convertible Preferred Stock			10,199,547
Sub-Total Series B Convertible Preferred Stock			102,601,391				102,601,391				63,226				115,395
Series C Convertible Preferred Stock			77,314,589
Series C-1 Convertible Preferred Stock			4,847,310
Sub-Total Series C Convertible Preferred Stock			82,161,899				81,192,437				49,911				71,451
Undesignated			277,138,876
			477,908,245				199,799,907			$	122,428			$	206,743

Convertible preferred stock at December 31, 2011 consisted of the following:

 

		December 31, 2011
		Shares								Proceeds, net of issuance costs				Liquidation Amounts
		Designated				Outstanding
Series A-1 Convertible Preferred Stock			3,635,482
Series A-1(A) Convertible Preferred Stock			8,482,793
Series A-L Convertible Preferred Stock			3,887,804
Sub-Total Series A Convertible Preferred Stock			16,006,079				16,006,079			$	9,291			$	21,489
Series B Convertible Preferred Stock			70,230,451
Series B-1 Convertible Preferred Stock			32,370,940
Sub-Total Series B Convertible Preferred Stock			102,601,391				102,601,391				63,226				124,627
Series C Convertible Preferred Stock			53,694,223
Series C-1 Convertible Preferred Stock			28,467,676
Sub-Total Series C Convertible Preferred Stock			82,161,899				81,192,437				49,911				77,167
Undesignated			277,560,156
			478,329,525				199,799,907			$	122,428			$	223,283

 

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The convertible preferred stock is classified outside of stockholders’ equity (deficit) because the shares contain liquidation features that are not solely within the control of the Company.

The Series C Convertible Preferred Stock together with the Series B Convertible Preferred Stock is hereinafter referred to as “Senior Convertible Preferred Stock.” The holders of Series A, Series B and Series C Convertible Preferred Stock (“Convertible Preferred Stock”) have the following rights and privileges:

Dividends

Dividends shall accrue to holders of Convertible Preferred Stock at the rate of 8%, compounding per annum (on the original issue price of $0.6189 per share of Convertible Preferred Stock). These dividends are cumulative, compounding and accrue to the holders of the Convertible Preferred Stock whether or not funds are legally available and whether or not declared by the Board of Directors. Such dividends have not been accrued into the carrying value of the Convertible Preferred Stock as redemption of such stock is not certain. As of December 31, 2010 and 2011, cumulative dividends payable to the holders of the Convertible Preferred Stock, but not yet declared, totaled $83,087 and $99,627, respectively.

Liquidation Rights

In the event of a liquidation, dissolution, merger, sale or winding up of the Company, the holders of the Convertible Preferred Stock are entitled to receive, prior to and in preference to the holders of common stock, from the assets of the Company available for distribution, an amount equal to $0.6189 per share of Convertible Preferred Stock (subject to certain anti-dilutive adjustments), respectively, plus any accrued but unpaid dividends in order of preference. Holders of the Senior Convertible Preferred Stock rank senior upon liquidation to the holders of the Series A Convertible Preferred Stock. Any net assets remaining after the payment of preferential amounts to the holders of Convertible Preferred Stock shall be shared ratably by the holders of the Convertible Preferred Stock with the common stockholders as if all preferred shares were converted into common stock at the time of the event, up to a limit of four times the original purchase price of the Convertible Preferred Stock. A consolidation or merger of the Company, or sale of all or substantially all of the assets, shall be regarded as a liquidation unless holders of at least 50% of the Senior Convertible Preferred Stock elect not to treat such a transaction as a liquidation.

Conversion

At the option of the holders of the Convertible Preferred Stock, shares may be converted to common stock at the initial rate of 0.00017635 shares of common stock for one share of Convertible Preferred Stock, subject to certain future adjustments. Any accrued but unpaid preferred dividends may be converted to common stock at an amount equal to $3,509.57 per common share. Certain holders of the Company’s Convertible Preferred Stock who chose not to purchase their pro rata portion of the 2009 Notes, 2010 Notes or 2011 Notes (Note 6) have forgone their future anti-dilution rights with respect to their Convertible Preferred Stock. The Convertible Preferred Stock, along with any accrued but unpaid preferred dividends, shall automatically convert into shares of common stock upon the closing of an IPO of the Company’s common stock (i) from which net proceeds to the Company equal or exceed $30,000 at a per share price of not less than $5,264.36 or (ii) on such other parameters as are consented to by holders of more than 50% of the then outstanding shares of Convertible Preferred Stock. Immediately prior, and subject to, an IPO each share of Convertible Preferred Stock converts into 0.00017635 shares of common stock and any accrued but unpaid preferred dividends

 

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convert into common stock at an amount equal to $3,509.57 per common share. See Note 6 under Conversion and Note 10 for additional information regarding the convertible notes payable to stockholders conversion details.

Voting and Other Rights

The Convertible Preferred Stock shall have certain voting rights equivalent to the common stockholders, and other rights including the right to appoint five directors to the Board (Note 6), the right of first refusal on the sale of Convertible Preferred Stock or common stock and the option to participate in any sale of Convertible Preferred Stock to a third-party purchaser by any holder of Convertible Preferred Stock. Each holder of Convertible Preferred Stock has the right to sell the same percentage of their shares as the stockholder who entered into the agreement.

10. Common Stock

The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue shares of $0.001 par value common stock. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Holders of the Company’s common stock are not entitled to receive dividends unless declared by the Board of Directors. Any such dividends would be subject to the preferential dividend rights of the holders of the Convertible Preferred Stock (Note 9). There have been no dividends declared to date.

The Company has reserved shares of common stock as follows:

 

		December 31,
		2010				2011
Conversion of Series A Convertible Preferred Stock (Note 9)			2,823				2,823
Conversion of Series B Convertible Preferred Stock (Note 9)			18,093				18,093
Conversion of Series C Convertible Preferred Stock (Note 9)			14,318				14,318
Conversion of accumulated Convertible Preferred Stock dividends (Note 9)			23,674				28,387
Conversion of convertible notes payable to stockholders (Note 6)			14,247				20,240
Conversion of accrued interest on convertible notes payable to stockholders (Notes 4 and 6)			2,014				4,041
Warrants outstanding:
Other warrants			98				98
Series C Warrants (Note 5) (on an as if converted basis)			171				171
2009 Warrants (Note 6)			2,992				2,992
2010 Warrants (Note 6)			1,282				1,282
2011 Warrants (Note 6)			—				1,798
Incentive stock awards issued and available for grant (Note 11)			7,555				7,555
Reserved shares of common stock			87,267				101,798

The shares of common stock for the conversion of the convertible notes payable to stockholders (Note 6) and accrued interest on convertible notes payable to stockholders (Notes 4 and 6) are based on an assumed conversion price of $3,509.57 per share. However, the ultimate number of shares of common stock that will be issued in connection with a potential IPO is subject to the calculation of the share conversion as further described in Note 6 under Conversion. Accordingly, the number of shares of common stock to be issued upon the conversion of convertible notes payable to stockholders and accrued interest on convertible notes payable to stockholders in connection with an IPO will significantly exceed the assumed number noted in the table above. In addition to the above, effective February 2012, 1,889 additional shares of common stock are reserved in connection with the warrants issued in connection with the Loan Agreement (Note 17).

 

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11. Stock-Based Compensation

2001 Stock Option and Incentive Plan

In 2001, the Company’s Board of Directors adopted the 2001 Stock Plan. The 2001 Stock Plan provided for the granting of incentive and non-qualified stock options and restricted stock bonus awards to officers, directors, employees and consultants of the Company. The maximum number of common shares that could be issued under the 2001 Stock Plan was 8,552. If shares granted under the 2001 Stock Plan expired unexercised, such shares were available for future grants, provided the cumulative number of shares re-issued did not exceed 8,552. As of December 31, 2011, the Company had 3,989 shares of common stock reserved under the 2001 Stock Plan for issuance upon exercise of stock options. No awards were to be granted under the 2001 Stock Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but awards previously granted may extend beyond that date. Therefore, no future awards will be made pursuant to the 2001 Stock Plan subsequent to September 2011.

2011 Equity Incentive Plan

In November 2011, the Company’s Board of Directors adopted the 2011 Equity Incentive Plan. The 2011 Equity Incentive Plan reserves for issuance the sum of (i) 3,534 shares of common stock which expired under the 2001 Stock Plan and (ii) any shares of common stock that are represented by awards granted under the 2001 Stock Plan that are forfeited, expire or are cancelled without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company on or after the date on which the Board of Directors adopts this Plan, provided, however, that no more than 4,021 shares shall be added to the Plan pursuant to this clause (ii). The 2011 Equity Incentive Plan provides for the granting of incentive stock options, non-qualified options, stock grants and stock-based awards to employees, directors and consultants of the Company. As of December 31, 2011, the Company has 3,566 shares of common stock reserved under the 2011 Equity Incentive Plan for issuance upon exercise of stock options.

Common Stock Subject to Repurchase

The Company allows employees to exercise options prior to vesting. The restricted shares issued upon early exercise of stock options are legally issued and outstanding. The Company has the right to repurchase, at the original purchase price, any unvested (but issued) common shares upon the termination of service of an employee. However, these restricted shares are only deemed outstanding for basic net loss per share computation purposes (Note 2) upon the respective repurchase rights lapsing. As of December 31, 2010 and 2011, no outstanding shares were subject to a repurchase right by the Company.

Stock Option Activity

The exercise price of each stock option issued under the 2001 Stock Plan and the 2011 Equity Incentive Plan shall be specified by the Board of Directors at the time of grant. In addition, the vesting period shall be determined by the Board of Directors at the time of the grant and specified in the applicable option agreement.

All options granted by the Company during the years ended December 31, 2009, 2010 and 2011 were granted with exercise prices not less than the fair market value of the Company’s common stock, as determined by the Company’s Board of Directors.

 

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A summary of the stock option activity under the 2001 Stock Plan is presented in the table and narrative below:

 

		Shares Available for Grant				Options Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term
Balance at December 31, 2010			2,618				4,937			$	793.89				7.06
Granted			(114	)			114				113.41
Exercised			N/A				—				—
Forfeited			53				(53	)			567.07
Expired			1,009				(1,009	)			1,134.13
Expired at expiration of 2001 Stock Plan			(3,534	)			N/A				N/A
Shares carried over to 2011 Equity Incentive Plan			(32	)			N/A				N/A
Balance at December 31, 2011			—				3,989			$	623.77				6.69
Options exercisable at December 31, 2011							2,502			$	793.89				5.77
Options vested and expected to vest at December 31, 2011							3,436			$	680.48				6.40

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the underlying options and the deemed fair value of the Company’s common stock for those shares that had exercise prices lower than the deemed fair value of the Company’s common stock. The aggregate intrinsic value of options exercised under the 2001 Stock Plan during the years ended December 31, 2009 and 2010 was $3 and $0, respectively, and there were no options exercised during the year ended December 31, 2011.

The Company received cash proceeds from the exercise of stock options under the 2001 Stock Plan of $35 and $1 in the years ended December 31, 2009 and 2010, respectively, and there were no options exercised under the 2001 Stock Plan during the year ended December 31, 2011. The weighted average grant date fair value of options granted under the 2001 Stock Plan during the years ended December 31, 2009, 2010 and 2011 was $567.07, $283.53 and $3.97, respectively. The grant date total fair value of employee options vested under the 2001 Stock Plan during the years ended December 31, 2009, 2010 and 2011 was $943, $245 and $362, respectively.

The following table summarizes additional information about stock options outstanding under the 2001 Stock Plan at December 31, 2011:

 

Exercise Price		Number Outstanding as of December 31, 2011				Weighted Average Remaining Contractual Term in Years of Options Outstanding				Number of Options Exercisable as of December 31, 2011
$9.07			75				9.67				—
$34.02			4				9.22				3
$396.95			2,358				8.22				1,031
$567.07			422				1.02				422
$793.89			276				7.42				206
$1,134.13			149				3.06				149
$1,417.67			705				5.14				691
			3,989								2,502

 

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A summary of the stock option activity under the 2011 Equity Incentive Plan is presented in the table and narrative below:

 

		Shares Available for Grant				Options Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term
Balance at December 31, 2010			—				—				N/A				N/A
Shares authorized for grant			3,534				N/A				N/A
Shares carried over from 2001 Stock Plan			32				N/A				N/A
Granted			(26	)			26			$	9.07
Exercised			N/A				—				—
Forfeited			—				—				—
Expired			—				—				—
Balance at December 31, 2011			3,540				26			$	9.07				9.89
Options exercisable at December 31, 2011							—				N/A				N/A
Options vested and expected to vest at December 31, 2011							19			$	9.07				9.87

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the underlying options and the deemed fair value of the Company’s common stock for those shares that had exercise prices lower than the deemed fair value of the Company’s common stock. There were no options exercised under the 2011 Equity Incentive Plan during the year ended December 31, 2011.

The weighted average grant date fair value of options granted under the 2011 Equity Incentive Plan during the year ended December 31, 2011 was $5.67. There were no options vested under the 2011 Equity Incentive Plan during the year ended December 31, 2011.

The following table summarizes additional information about stock options outstanding under the 2011 Equity Incentive Plan at December 31, 2011:

 

Exercise Price		Number Outstanding as of December 31, 2011		Weighted Average Remaining Contractual Term in Years of Options Outstanding		Number of Options Exercisable as of December 31, 2011
$9.07		26		9.89		—

 

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Stock-Based Compensation

As described in Note 2, upon adoption of ASC Topic 718, the Company selected the Black-Scholes option-pricing model for determining the estimated fair value for service or performance-based stock-based awards. The Black-Scholes option-pricing model requires the use of subjective assumptions in order to determine the fair value of stock-based awards.

The assumptions used to value option grants were as follows:

 

		Years Ended December 31,
		2009				2010				2011
Risk free interest rate			2.29% - 2.92	%			2.51% - 2.83	%			1.13% - 2.35	%
Expected dividend yield			0%				0%				0%
Expected term—employee awards			6 years				6 years				6 years
Expected term—non-employee awards			10 years				N/A				10 years
Expected volatility			80%				76%				70%

Risk free interest rate—The risk free interest rate is based on the United State Treasury yield curve in effect at the time of grant for zero coupon United States Treasury notes with maturities approximately equal to the option’s expected term.

Expected dividend yield—The Company has never declared or paid any cash dividends and does not expect to pay any cash dividends in the foreseeable future.

Expected term—The Company calculates expected term for employee awards using the “simplified” method for “plain vanilla” options, which is the simple average of the vesting period and the contractual term of the option. The Company uses the contractual term as the expected term for non-employee awards.

Expected volatility—As the Company has been privately-held since inception, there is no specific historical or implied volatility information available. Accordingly, the Company determines volatility based on an average of reported volatility of selected peer companies in the pharmaceutical and biotechnology industry in a similar stage of development.

For employee stock options, the Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The impact from a forfeiture rate adjustment will be recognized in full in the period of adjustment and, if the actual number of future forfeitures differs from that estimated by the Company, the Company may be required to record adjustments to stock-based compensation expense in future periods.

Each of the inputs discussed above is subjective and generally requires significant management judgment to determine.

The Company recognizes stock-based compensation expense for stock options grants to employees on a straight-line basis over the requisite service period of the individual grants, which is generally the vesting period, based on the estimated grant date fair values. Generally, stock options granted to employees fully vest four years from the grant date and have a term of 10 years.

Stock options granted to non-employees are accounted for based on their fair value on the measurement date using the Black-Scholes option-pricing model. Stock options granted to

 

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non-employees are subject to periodic revaluation over their vesting terms. As a result, the charge to operations for non-employee options with vesting is affected each reporting period by changes in the fair value of the Company’s common stock.

Stock-based compensation expense includes stock options granted to employees and non-employees as follows:

 

		Years Ended December 31,
		2009				2010				2011
Employees		$	921			$	305			$	257
Non-employees			29				17				—
Total operating expenses		$	950			$	322			$	257

During the years ended December 31, 2009, 2010 and 2011, the Company granted 455, 0 and 4 options, respectively, to non-employees.

Stock-based compensation has been reported in the Company’s statements of operations as follows:

 

		Years Ended December 31,
		2009				2010				2011
Research and development		$	406			$	160			$	59
General and administrative			544				162				198
Total operating expenses		$	950			$	322			$	257

No related tax benefits of the stock-based compensation expense have been recognized and no related tax benefits have been realized from the exercise of stock options due to the Company’s net operating loss carryforwards.

Total aggregate unamortized stock-based compensation cost under the 2001 Stock Plan and the 2011 Equity Incentive Plan as of December 31, 2011, net of forfeitures, was $250, which will be recognized over the remaining weighted average vesting periods of 2.08 years at December 31, 2011.

12. Income Taxes

A reconciliation of the federal statutory income tax rate of 34% to the Company’s effective income tax rate as a percentage of net loss is as follows:

 

		Years Ended December 31,
		2009				2010				2011
Federal statutory income tax rate			34.0	%			34.0	%			34.0	%
State taxes, net of federal benefit			5.6	%			6.3	%			5.3	%
Federal research and development tax credit			2.4	%			2.0	%			2.2	%
Other			(1.2	)%			(0.8	)%			(0.1	)%
Valuation allowance			(40.8	)%			(41.5	)%			(41.4	)%
Effective income tax rate			0.0	%			0.0	%			0.0	%

 

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Significant components of the Company’s deferred tax assets (liabilities) are as follows:

 

		December 31,
		2010				2011
Gross deferred tax assets (liabilities)
Net operating loss carryforwards		$	69,860			$	79,356
Tax credit carryforwards			8,318				9,697
Deferred revenue			—				6,347
Fixed assets			905				992
Put rights			3,212				7,871
Warrants			(882	)			(795	)
Other			193				272
			81,606				103,740
Valuation allowance			(81,606	)			(103,740	)
Net deferred tax assets (liabilities)		$	—			$	—

The Company has established a full valuation allowance due to the uncertainty of the Company’s ability to generate sufficient taxable income to realize the deferred tax assets, and therefore has not recognized any benefits from the net operating losses, tax credits and other deferred tax assets. The Company’s valuation allowance increased $11,866, $11,110 and $22,134 for the years ended December 31, 2009, 2010 and 2011, respectively.

As of December 31, 2011, the Company had the following tax net operating loss carryforwards available to reduce future federal and Connecticut taxable income, and research and development tax credit carryforwards available to offset future federal and Connecticut income taxes:

 

		Amount				Expire Through
Tax net operating loss carryforwards:
Federal		$	203,778				2031
Connecticut		$	203,468				2031
Research and development tax credit carryforwards:
Federal		$	7,378				2031
Connecticut		$	3,514				Do not expire

The Company’s ability to utilize its federal net operating losses and federal tax credits may be limited under Sections 382 and 383 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain shareholders increase their aggregated ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). The Company may already be subject to Section 382 limitations due to previous ownership changes. In addition, future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation. Due to the significant complexity and cost associated with a change in control study, and the expectation of continuing to incur losses whereby the net operating losses and federal tax credits are not anticipated to be used in the foreseeable future, the Company has not assessed whether there have been changes in control since the Company’s formation. If the Company has experienced changes in control at any time since Company formation, utilization of its net operating losses or research and development credit carryforwards would be subject to annual limitations under Section 382. Any limitation may result in the expiration of a portion of the net operating loss or research and development credit carryforwards before utilization, which would reduce the Company’s gross deferred tax assets and corresponding valuation allowance.

 

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Effective January 1, 2007, the Company adopted the accounting guidance within ASC Topic 740 on uncertainties in income taxes. ASC Topic 740 prescribes a 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. The provisions of this guidance are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized upon adoption of ASC Topic 740.

The cumulative effect of the adoption of ASC Topic 740 resulted in no adjustment to accumulated deficit as of January 1, 2007. As of December 31, 2010 and 2011, the Company did not have any unrecognized tax benefit. To the extent penalties and interest would be assessed on any underpayment of income tax, the Company’s policy is that such amounts would be accrued and classified as a component of income tax expense in the financial statements. To date, the Company has not recorded any such interest or penalties.

The Company’s primary income tax jurisdictions are the United States and Connecticut. As a result of the Company’s net operating loss carryforwards, the Company’s federal and Connecticut statutes of limitations remain open for all tax years since 2000. The Company does not currently have any federal or Connecticut income tax examinations in progress, nor has the Company had any federal or Connecticut income tax examinations since inception.

13. Other Income

In 2010, the Company recognized other income related to the Qualifying Therapeutic Discovery Project (“QTDP”) program. The QTDP program was created by the United States Congress as part of the Patient Protection and Affordable Care Act and provided for reimbursement of certain costs paid or incurred during 2009 and 2010 directly related to the conduct of a QTDP. During the year ended December 31, 2010, the Company was awarded $980 related to this program, which is included in other income in the accompanying statement of operations.

Additionally, as a result of legislation in the State of Connecticut, companies have the opportunity to exchange certain research and development tax credit carryforwards for a cash payment of 65% of the research and development tax credit. The research and development expenses that qualify for Connecticut credits are limited to those costs incurred within Connecticut. The Company has elected to participate in the exchange program and, as a result, has recognized net benefits of $160, $118 and $246 for the years ended December 31, 2009, 2010 and 2011, respectively, which are included in other income in the accompanying statements of operations.

14. Commitments and Contingencies

Operating Leases

In March 2002, the Company entered into a lease agreement expiring on July 31, 2012 for its principal research and administrative facility at 300 George Street, New Haven, Connecticut. In August 2011, the Company amended this lease to extend the lease term to August 31, 2015 with two, three-year renewal options. The renewal options are executable by the Company upon delivering written notice to the landlord no later than nine months prior to the scheduled termination date, as such termination date may have been extended by the exercise of a previous renewal option.

The terms of the lease provide for rental payments on a graduated scale, and the Company recognizes rent expense on a straight-line basis over the non-cancellable lease term and records

 

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the difference between cash rent payments and the recognition of rent expense as a deferred rent liability included in accrued expenses. The Company is required to pay its share of operating expenses, and these amounts are not included in rent expense or minimum operating lease payments below. Rent expense under operating leases for facilities and equipment was $557, $559 and $552 for the years ended December 31, 2009, 2010 and 2011, respectively. As of December 31, 2011, minimum operating lease payments under non-cancelable leases (as amended) are as follows:

 

Years ending December 31:		Amount
2012		$	560
2013			560
2014			559
2015			369
2016			—
Total future minimum operating lease payments		$	2,048

License Agreements

In December 2001, the Company entered into an exclusive license agreement with Yale University (“Yale”) under which the Company obtained an exclusive right to use certain technology related to the high resolution X-ray crystal structure of a 50S ribosome through the term of Yale’s patent rights on such technology. In return, the Company issued 61 shares of the Company’s common stock. The fair value of the shares of $35 was charged to operations in 2001. In September 2004 and December 2009, the license agreement was amended to include additional 50S ribosome technology and also 70S ribosome technology owned by Yale. The Company is obligated to certain diligence requirements and has the right to grant sublicenses to third parties, although Yale is entitled to a portion of payments received from the sub-licensees. Under the license agreement, the Company may be required to make payments to Yale of up to $900 upon achieving certain regulatory approval milestones for each of the first three products developed under the license. In accordance with the license agreement, Yale is also entitled to receive royalty payments in the single digits based on net sales, if any, of products using the subject matter of the license. Upon the occurrence of certain events, Yale has the right to terminate the license agreement upon 60 days written notice to the Company, should the Company fail to make a material payment under the agreement, commit a material breach of the agreement, fail to carry insurance required by the agreement, cease to carry on the Company’s business or become subject to bankruptcy or similar insolvency event. The Company has the right to terminate the license agreement upon 90 days written notice to Yale. Unless earlier terminated, the agreement will continue in effect until the last of the licensed patents expires.

In March 2005, the Company entered into an exclusive license agreement with the Medical Research Council (“MRC”) under which the Company acquired rights to certain patent applications and other intellectual property related to the high resolution X-ray crystal structure of a 30S ribosome through the term of the MRC’s patent rights on such technology. Upon entering into the license agreement, the Company paid the MRC a license fee of $10. The Company is obligated to certain diligence requirements and has the right to grant sublicenses to third parties. Under the license agreement, the Company may be required to pay the MRC an aggregate of $610 upon the achievement of specified development and regulatory approval milestones for a pharmaceutical product and $100 for a diagnostic product. In accordance with the license agreement, the MRC is also entitled to receive royalty payments in the single digits based on net sales, if any, of licensed pharmaceutical and diagnostic products. The Company and the MRC have the right to terminate the license agreement upon 30 days written notice if

 

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the other party commits a material breach of the agreement or an insolvency event occurs with respect to the other party, and the MRC may terminate the agreement if the Company challenges the protection of the licensed patent rights and know how. Unless earlier terminated, the term of the agreement continues until the expiration of the last to expire claim of the licensed patent rights on a country-by-country basis.

In May 2006, the Company and Wakunaga Pharmaceutical Co., Ltd. (“Wakunaga”) executed a license agreement under which the Company acquired rights to certain patents, patent applications and other intellectual property related to delafloxacin. Upon execution of the agreement, the Company made a non-refundable payment to Wakunaga of $1,500. In June 2007 and September 2009, the Company made milestone payments to Wakunaga under the agreement of $2,000 and $1,500, respectively. Under the license, the Company has the right to grant sublicenses, although Wakunaga is entitled to a substantial portion of non-royalty income received from a sub-license of the Wakunaga technology. The license agreement also provides for potential additional future payments of up to $15,000 to Wakunaga upon the achievement of specified development and regulatory milestones, in addition to tiered royalty payments in the single digits on net sales, if any, of the licensed product. Wakunaga has certain termination rights, should the Company fail to perform its obligations under the agreement, the Company becomes subject to bankruptcy or similar events, or the Company’s business is transferred or sold and the successor requires the Company to terminate a substantial part of its development activities under the agreement. The Company has the right to terminate the license for cause upon six months written notice to Wakunaga. Unless earlier terminated, the license agreement will continue in effect on a country-by-country and product-by-product basis until the Company is no longer required to pay any royalties, which is the later of the date the manufacture, use or sale of a licensed product in a country is no longer covered by a valid patent claim, or a specified number of years following the first commercial sale in such country.

In November 2010, the Company entered into a license and supply agreement with CyDex Pharmaceuticals, Inc. (now a wholly owned subsidiary of Ligand Pharmaceuticals Incorporated, both hereafter referred to as Ligand) under which the Company obtained an exclusive right, under certain patents and patent applications, to use Ligand’s beta sulfobutyl cyclodextrin, Captisol, in the Company’s development and commercialization of a delafloxacin product. Also, under the terms of the license agreement, the Company obtained a non-exclusive license to Ligand’s Captisol data package. Upon entering into the license agreement, the Company made a non-refundable payment of $300 to Ligand. In January 2011, the Company made a milestone payment to Ligand under the agreement of $150. The Company is obligated to certain diligence requirements and has the right to grant sublicenses to third parties. The license agreement provides for payments of up to $4,100 to Ligand upon the achievement of future development and commercial milestones, and also obligations to make royalty payments in the single digits based on net sales, if any, of the licensed product. Additionally, the Company has agreed to purchase its requirements of Captisol from Ligand for use in a delafloxacin product, with pricing established pursuant to a tiered pricing schedule. Ligand has certain rights to terminate the agreement following a cure period, should the Company fail to perform its obligations under the agreement. In addition, Ligand may terminate the agreement immediately if the Company fails to pay milestones or royalties due under the agreement or if the Company becomes subject to bankruptcy or similar events. The Company has the right to terminate the license upon 90 days written notice to Ligand. Unless earlier terminated, the agreement will continue in effect until the expiration of the Company’s obligation to pay royalties. Such obligation expires, on a country-by-country basis, a specified number of years following the expiration date of the last valid claim of a licensed product in the country of sale, unless there has never been a valid claim of a licensed product in the country of sale, then such number of years after the first sale of the licensed product in such country.

 

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All payments made under these license agreements have been expensed as research and development expenses in the Company’s statements of operations.

2011 Bonus Plan

In August 2011, the Company put in place a Bonus Plan (“Bonus Plan”) intended to incentivize certain of the Company’s key employees to increase the value and attractiveness of the Company with the goal of achieving a transaction which is either (i) the consummation of a sale, merger, consolidation or series of related events which create a change in control of the Company (“Sale Event”) or (ii) the first to occur of an IPO or a reverse merger (“Non-Sale Event”) by providing these individuals an incentive payment tied to the accomplishment of this goal. Payment under the Bonus Plan is to occur upon achieving certain values of the Company in a sale, merger or IPO. On or prior to the first Sale Event or Non-Sale Event to occur during the term of this Bonus Plan in which the valuation equals or exceeds $52,500 (“Triggering Event”), the Bonus Pool shall be calculated as 10% of that portion of the Triggering Event Valuation in excess of $52,500. In connection with a Triggering Event, each participant’s bonus amount shall be equal to the amount, if any, by which (i) the participant’s target bonus amount exceeds (ii) the participant’s intrinsic stock option value as of the date of such Triggering Event. In the case of a Sale Triggering Event, the bonus amount earned under the Bonus Plan would be paid via cash, securities or other consideration, or combination thereof, to parallel the type of consideration received by the Company. In the case of a Non-Sale Triggering Event, the bonus amount earned under the Bonus Plan would be paid in the form of new options to acquire stock in the Company, which would be issued with an exercise price equal to the fair market value of the Company’s stock on the grant date. The number of shares of new options issued would be two times the bonus amount under the Bonus Plan divided by the fair market value of the Company’s stock, and would vest upon the later of (i) the first anniversary of the Triggering Event or (ii) the vesting schedule of the last Company stock options granted to the participant. The Administrator of the Bonus Plan, which is the Compensation Committee of the Board of Directors, shall determine which individuals will be participants and each such participant’s percentage of the bonus pool. The Bonus Plan terminates on June 30, 2012, provided however that the Administrator will determine by March 31, 2012 whether or not the Bonus Plan shall be extended. Notwithstanding the foregoing, if at any time the Company completes any debt or equity financing after August 2011, the Administrator may in its sole discretion modify the Bonus Plan and the Triggering Event Valuation equitably to reflect the implications of such financing. As of December 31, 2011, there have been no modifications made to the Bonus Plan (see Note 17).

2011 Non-Employee Director Bonus Plan

In November 2011, the Company put in place a Non-Employee Director Bonus Plan (“Director Bonus Plan”) intended to incentivize non-employee members of the Company’s Board of Directors to increase the value and attractiveness of the Company with the goal of achieving a transaction which is either (i) the consummation of a sale, merger, consolidation or series of related events which create a change in control of the Company (“Sale Event”) or (ii) the first to occur of an IPO or a reverse merger (“Non-Sale Event”) by providing these individuals an incentive payment tied to the accomplishment of this goal. Payment under the Director Bonus Plan is to occur upon achieving certain values of the Company in a sale, merger or IPO. On or prior to the first Sale Event or Non-Sale Event to occur during the term of the Director Bonus Plan in which the valuation equals or exceeds $52,500 (“Triggering Event Valuation”), the target bonus amount for each participant shall be calculated as 0.05% of that portion of the Triggering Event Valuation in excess of $52,500. As of November 2011, the Company had five non-employee members of the Company’s Board of Directors who are

 

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deemed to be participants for purposes of eligibility under the Director Bonus Plan. In connection with a Triggering Event, each participant’s target bonus amount shall be equal to the amount, if any, by which (i) the participant’s target bonus amount exceeds (ii) the participant’s intrinsic stock option value as of the date of such Triggering Event. In the case of a Sale Triggering Event, the bonus amount earned under the Director Bonus Plan would be paid via cash, securities or other consideration, or combination thereof, to parallel the type of consideration received by the Company. In the case of a Non-Sale Triggering Event, the bonus amount earned under the Director Bonus Plan would be paid in the form of new options to acquire stock in the Company, which would be issued with an exercise price equal to the fair market value of the Company’s stock on the grant date. The number of shares of new options issued would be two times the bonus amount under the Director Bonus Plan divided by the fair market value of the Company’s stock and would vest immediately. The Administrator of the Director Bonus Plan is the Compensation Committee of the Board of Directors. The Director Bonus Plan terminates on June 30, 2012, provided however that the Administrator will determine by March 31, 2012 whether or not the Director Bonus Plan shall be extended. Notwithstanding the foregoing, if at any time the Company completes any debt or equity financing after November 2011, the Administrator may in its sole discretion modify the Director Bonus Plan and the Triggering Event Valuation equitably to reflect the implications of such financing. As of December 31, 2011, there have been no modifications made to the Director Bonus Plan (see Note 17).

Contingencies

The Company may become subject to claims and assessments from time to time in the ordinary course of business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. The Company accrues liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. As of December 31, 2010 and 2011, the Company does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

15. Benefit Plan

In December 2002, the Company adopted a 401(k) Plan in which all of the Company’s employees are eligible to participate. Each year the Company may, but is not required to, make matching contributions to the 401(k) Plan. For the years ended December 31, 2009, 2010 and 2011, the Company did not make any contributions to the 401(k) Plan.

16. Related Party Transactions

The Company reimbursed legal fees paid by one of its principal stockholders in connection with the 2009 Financing, 2010 Financing and 2011 Financing (Note 6) of $681 and $243 for the years ended December 31, 2010 and 2011, respectively. As of December 31, 2010 and 2011, the Company had $0 and $30, respectively, in outstanding amounts payable in connection with the above reimbursements.

The Company has outstanding convertible notes payable (Note 6) to several of its principal stockholders.

 

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17. Subsequent Events

Notes Payable

In February 2012, the Company entered into a Loan and Security Agreement (“Loan Agreement”) pursuant to which it borrowed an aggregate principal amount of $15,000. The Company is obligated to make monthly payments in arrears of interest only, at a rate of 9.1% per annum, commencing on April 1, 2012 and continuing on the first day of each successive month thereafter through and including December 1, 2012. Commencing on January 1, 2013, and continuing on the first day of each month through and including June 1, 2015, the Company will make consecutive equal monthly payments of principal and interest. All unpaid principal and accrued and unpaid interest with respect to the Loan Agreement is due and payable in full on June 1, 2015. The loan is collateralized by substantially all of the Company’s assets, excluding its intellectual property. In connection with the Loan Agreement, the Company entered into a negative pledge arrangement in which the Company has agreed not to encumber its intellectual property. The Company paid a $75 facility fee at the inception of the loan which will be recognized as additional interest expense over the term of the loan. Subject to certain limited exceptions, amounts prepaid during the first, second and third year of the Loan Agreement are subject to a prepayment fee of 3%, 2% and 1%, respectively. In addition, upon repayment of the total amounts borrowed, the Company will be required to pay an exit fee equal to 4.5% of the total amount borrowed, or $675, which will be recognized as additional interest expense over the term of the loan. The amounts due under the Loan Agreement may become immediately due and payable upon the occurrence of a Material Adverse Change, as defined under the Loan Agreement. Under the terms of the Loan Agreement, the Company is subject to operational covenants, including limitations on the Company’s ability to incur liens or additional debt, pay dividends, redeem stock, make specified investments and engage in merger, consolidation or asset sale transactions, among other restrictions. In connection with the Loan Agreement, the holders of the 2009 Notes, the 2010 Notes and the 2011 Notes (Note 6) executed a subordination agreement whereby they cannot demand or receive payment until such time as all amounts due under the Loan Agreement are paid in full in cash, and there is no further commitment on the part of the lender under the Loan Agreement to lend any further funds to the Company.

In accordance with ASC Topic 470, the Company has determined that the change to the date on which the lenders can put the debt back to the Company is a modification of the 2009 Notes, 2010 Notes and 2011 Notes. As such, the unamortized debt discount (see Note 6 – Liquidation and Warrants for Common Stock) remaining as of February 2012 related to the 2009 Notes, 2010 Notes and 2011 Notes will be amortized to interest expense from the date of modification through June 1, 2015, the stated maturity date of the Loan Agreement (unaudited).

In February 2012, pursuant to the Loan Agreement, the Company issued warrants to purchase 1,889 shares of common stock of the Company. The warrants were all immediately exercisable at $396.95 per share and have a seven-year life.

2011 Bonus Plan and Non-Employee Director Bonus Plan (Unaudited)

In April 2012, the Bonus Plan and Non-Employee Director Bonus Plan were amended to change the type of equity to be issued in the case of a Non-Sale Event and to revise the associated vesting schedule. The bonus amount to be earned under both plans in the case of a Non-Sale Event will be paid in the form of restricted stock units (“RSUs”) granted to the participant that upon vesting will require the Company to issue common stock of the Company. The number of shares subject to each grant of RSUs shall be calculated by dividing the bonus amount by the Triggering Event Per Share Valuation and rounding down to the nearest whole

 

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share. The RSUs will vest as follows: (i) 50% of each grant shall vest on the first anniversary of the Triggering Event and (ii) the remainder of each grant will vest pro rata on a quarterly basis over the next three years, provided the participant remains employed by the Company or continues to serve as a member of the board of directors on the applicable vesting dates. In addition, each RSU award will vest in full upon a merger, reorganization or other consolidation of the Company, including the sale of substantially all of the Company’s assets, in which the Company is not the surviving entity and in which the persons holding the Company’s outstanding equity immediately prior to the transaction own less than 50% of the surviving entity’s total voting power immediately after the transaction, subject to the participant’s continuous employment by us or service as a member of the board of directors through the date of such merger, reorganization or other consolidation of the Company. In the case of a reverse merger in which the Triggering Event Valuation is less than the enterprise value of the constituent entities to the reverse merger other than the Company, the vesting of the RSUs would also be subject to full acceleration if the employee’s employment with the Company is terminated by the Company other than for cause, or by the employee for good reason, prior to the first anniversary of the reverse merger and for a director if he or she ceases to be a member of the board of directors for any reason other than removal for cause provided such resignation occurs prior to the first anniversary of the reverse merger.

2012 Employee Stock Purchase Plan (Unaudited)

In April 2012, the Company’s board of directors and stockholders approved the 2012 Employee Stock Purchase Plan (“ESPP”). The maximum number of shares of common stock to be made available for sale under the ESPP shall be 160,000, subject to an annual increase beginning in fiscal year 2013. The offering period of the ESPP shall be a period of six months commencing on January 1 and July 1 of each year or the first business day thereafter. Each eligible employee, as defined, will be entitled to participate in the ESPP by authorizing the Company to make payroll deductions equal to amounts ranging from 1% to 10% of his or her compensation. Each participating employee shall be granted the right to purchase on the last business day of each offering period (“Exercise Date”) such number of shares of the common stock as determined by dividing (i) contributions accumulated prior to such Exercise Date by (ii) 85% of the fair market value of a share of common stock, as defined, on the first date of the offering period or on the Exercise Date, whichever is lower. The ESPP shall be effective upon the closing of the IPO of common stock and shall continue in effect for a term of ten years. The initial offering period will commence upon a future date to be determined by the Company’s board of directors. In addition, the board of directors may at any time terminate or amend the ESPP, except as limited by the provisions of the ESPP.

2011 Equity Incentive Plan, As Amended (Unaudited)

In April 2012, the Company’s board of directors and stockholders authorized an increase in the number of shares of common stock reserved for issuance under the 2011 Equity Incentive Plan to a total of 2,500,000 shares, subject to an annual increase beginning in fiscal year 2013.

The December 31, 2011 financial statements do not reflect the above transactions.

The Company evaluated subsequent events through March 2, 2012, which was the date the original financial statements were issued, and May 1, 2012, the date of reissuance of these financial statements.

 

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5,770,000 Shares

Rib-X Pharmaceuticals, Inc.

Common Stock

 

 

PROSPECTUS

 

 

Deutsche Bank Securities

William Blair & Company

Lazard Capital Markets

Needham & Company

Through and including                 , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

                , 2012

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13.

Other Expenses of Issuance and Distribution.

The following table indicates the expenses to be incurred in connection with the offering described in this registration statement, other than underwriting discounts and commissions, all of which will be paid by us. All of the amounts shown are estimated except for the SEC registration fee, the FINRA filing fee and the NASDAQ Global Market listing fee.

 

		Amount to be paid
SEC registration fee		$	10,646
NASDAQ Global Market listing fee		$	125,000
FINRA filing fee		$	9,790
Printing and mailing		$	175,000
Legal fees and expenses		$	2,200,000
Accounting fees and expenses		$	860,000
Blue sky fees and expenses		$	15,000
Transfer agent and registrar		$	7,000
Miscellaneous		$	97,564
Total		$	3,500,000

 

Item 14.

Indemnification of Directors and Officers.

Our restated certificate of incorporation and restated by-laws that will be effective upon completion of the offering provide that each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was one of our directors or officers or is or was serving at our request as a director, officer, or trustee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or trustee or in any other capacity while serving as a director, officer or trustee, shall be indemnified and held harmless by us to the fullest extent authorized by the Delaware General Corporation Law against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such.

Section 145 of the Delaware General Corporation Law permits a corporation to indemnify any director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding brought by reason of the fact that such person is or was a director or officer of the corporation, if such person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, if he or she had no reasonable cause to believe his or her conduct was unlawful. In a derivative action (i.e., one brought by or on behalf of the corporation), indemnification may be provided only for expenses actually and reasonably incurred by any director or officer in connection with the defense or settlement of such an action or suit if such person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification

 

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shall be provided if such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the Delaware Chancery Court or the court in which the action or suit was brought shall determine that such person is fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.

Pursuant to Section 102(b)(7) of the Delaware General Corporation Law, Article VI of our restated certificate of incorporation eliminates the liability of a director to us or our stockholders for monetary damages for such a breach of fiduciary duty as a director, except for liabilities arising:

 

•

from any breach of the director’s duty of loyalty to us or our stockholders;

 

•

from acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

 

•

under Section 174 of the Delaware General Corporation Law; and

 

•

from any transaction from which the director derived an improper personal benefit.

We will enter into indemnification agreements with our non-employee directors and certain officers, in addition to the indemnification provided for in our restated certificate of incorporation and restated by-laws, and intend to enter into indemnification agreements with any new directors and executive officers in the future. We have purchased and intend to maintain insurance on behalf of any person who is or was a director or officer against any loss arising from any claim asserted against him or her and incurred by him or her in any such capacity, subject to certain exclusions.

The foregoing discussion of our restated certificate of incorporation, restated by-laws, indemnification agreements, and Delaware law is not intended to be exhaustive and is qualified in its entirety by such restated certificate of incorporation, restated by-laws, indemnification agreements, or law.

Reference is made to our undertakings in Item 17 with respect to liabilities arising under the Securities Act. Reference is also made to the form of underwriting agreement filed as Exhibit 1.1 to this registration statement for the indemnification agreements between us and the underwriters.

 

Item 15.

Recent Sales of Unregistered Securities.

Set forth below is information regarding shares of common stock, convertible preferred stock and warrants, and options granted, by us within the past three years that were not registered under the Securities Act. Also included is the consideration, if any, received by us for such shares, notes, warrants and options and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

Original Issuances of Stock, Convertible Notes and Warrants

A. On January 8, 2009, we issued $25.0 million in aggregate principal amount of subordinated convertible promissory notes to 12 accredited investors. On December 11, 2009, we issued an additional $10.0 million in aggregate principal amount of subordinated convertible promissory notes to these accredited investors. Assuming an initial public offering price of $13.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, and that the conversion occurs on May 8, 2012, the $35.0 million in principal amount of the outstanding subordinated convertible promissory notes plus accrued interest

 

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thereon will convert into approximately 1,005,647 shares of our common stock. In connection with these issuances of subordinated convertible promissory notes, we issued warrants to purchase an aggregate of 2,992 shares of common stock to these 12 accredited investors.

B. In connection with the subordinated convertible promissory note financing described in Item A above, on January 8, 2009, we issued 1,817,741 shares of Series A-1(A) convertible preferred stock upon conversion of certain outstanding shares of Series A-1 convertible preferred stock which are convertible into 321 shares of our common stock upon consummation of the offering made hereby, we issued 4,645,339 shares of Series B-1 convertible preferred stock upon conversion of certain outstanding shares of Series B convertible preferred stock which are convertible into 819 shares of our common stock upon consummation of the offering made hereby, and we issued 4,847,310 shares of Series C-1 convertible preferred stock upon conversion of certain outstanding shares of Series C convertible preferred stock which are convertible into 855 shares of our common stock upon consummation of the offering made hereby.

C. On May 28, 2010, we issued $5.5 million in aggregate principal amount of senior subordinated convertible demand promissory notes to 16 accredited investors. On August 25, 2010 and November 19, 2010, we issued an additional $5.4 million and $4.1 million, respectively, in aggregate principal amount of senior subordinated convertible demand promissory notes to these accredited investors. Assuming an initial public offering price of $13.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, and that the conversion occurs on May 8, 2012, the $15.0 million in principal amount of the outstanding senior subordinated convertible demand promissory notes plus accrued interest thereon will convert into approximately 3,846,648 shares of our common stock. In connection with these issuances of the senior subordinated convertible demand promissory notes, we issued warrants to purchase an aggregate of 1,282 shares of common stock to these 16 accredited investors.

D. In connection with the senior subordinated convertible demand promissory note financing described in Item C above, on May 28, 2010, we issued 3,786,961 shares of Series A-1(A) convertible preferred stock upon conversion of certain outstanding shares of Series A-1 convertible preferred stock which are convertible into 668 shares of our common stock upon consummation of the offering made hereby, we issued 22,171,393 shares of Series B-1 convertible preferred stock upon conversion of certain outstanding shares of Series B convertible preferred stock which are convertible into 3,910 shares of our common stock upon consummation of the offering made hereby, and we issued 23,620,366 shares of Series C-1 convertible preferred stock upon conversion of certain outstanding shares of Series C convertible preferred stock which are convertible into 4,165 shares of our common stock upon consummation of the offering made hereby.

E. On January 12, 2011, January 18, 2011, January 20, 2011 and February 3, 2011, we issued $5.8 million in aggregate principal amount of senior convertible demand promissory notes to 11 accredited investors. On March 23, 2011, June 2, 2011 and December 28, 2011, we issued an additional $4.7 million, $4.0 million and $6.5 million, respectively, in aggregate principal amount of senior convertible demand promissory notes to 11, 12 and 12 accredited investors, respectively. Assuming an initial public offering price of $13.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, and that the conversion occurs on May 8, 2012, the $21.0 million in principal amount of the outstanding senior convertible demand promissory notes plus accrued interest thereon will convert into approximately 4,975,161 shares of our common stock. In connection with these issuances of the senior convertible demand promissory notes, we issued warrants to purchase an aggregate of 1,798 shares of common stock to 13 accredited investors.

 

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F. On February 17, 2012, we issued $15.0 million in aggregate principal amount of secured promissory notes and warrants to purchase an aggregate of 1,889 shares of common stock to one accredited investor.

G. From January 1, 2009 through March 31, 2012, we issued an aggregate of 32 shares of common stock upon the exercise of stock options issued under our 2001 Stock Option and Incentive Plan, as amended.

Stock Option Grants

From January 1, 2009 through March 31, 2012, we granted stock options under our 2001 Stock Option and Incentive Plan, as amended, and 2011 Equity Incentive Plan to purchase an aggregate of 2,742 shares of common stock, net of forfeitures, at a weighted-average exercise price of $423.34 per share, to certain of our employees, consultants and directors.

Securities Act Exemptions

We deemed the offers, sales and issuances of the securities described above under “—Original Issuances of Stock, Convertible Notes and Warrants” to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder, relative to transactions by an issuer not involving a public offering. All purchasers of securities in transactions exempt from registration pursuant to Regulation D represented to us that they were accredited investors and were acquiring the shares for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof and that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or an available exemption from such registration.

We deemed the grants of stock options described above under “—Stock Option Grants” to be exempt from registration under the Securities Act in reliance on Rule 701 of the Securities Act as offers and sales of securities under compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. Each of the recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business or other relationships, to information about us.

All certificates representing the securities issued in the transactions described in this Item 15 included appropriate legends setting forth that the securities had not been offered or sold pursuant to a registration statement and describing the applicable restrictions on transfer of the securities. There were no underwriters employed in connection with any of the transactions set forth in this Item 15.

 

Item 16.

Exhibits and Financial Statement Schedules.

(a) See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this registration statement on Form S-1, which Exhibit Index is incorporated herein by reference.

(b) Financial Statement Schedules

Financial Statement Schedules are omitted because the information is included in our financial statements or notes to those financial statements.

 

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Item 17.

Undertakings

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

 

(1)

For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

(2)

For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant certifies that it has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New Haven, State of Connecticut, on May 1, 2012.

 

Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Mark Leuchtenberger Mark Leuchtenberger		President, Chief Executive Officer and Director (principal executive officer)		May 1, 2012
/s/ Robert A. Conerly Robert A. Conerly		Chief Financial Officer (principal financial and accounting officer)		May 1, 2012
* George M. Milne, Jr.		Chairman of the Board		May 1, 2012
* C. Boyd Clarke		Director		May 1, 2012
* Cecilia Gonzalo		Director		May 1, 2012
* Jonathan S. Leff		Director		May 1, 2012
* Harry H. Penner, Jr.		Director		May 1, 2012

 

*By:		/s/ Mark Leuchtenberger Mark Leuchtenberger Attorney-in-fact				May 1, 2012

 

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EXHIBIT INDEX

 

Exhibit Number		Description of Exhibit
1.1		Form of underwriting agreement.
3.1.1+		Seventh amended and restated certificate of incorporation of the Registrant.
3.1.2		Certificate of amendment to the seventh amended and restated certificate of incorporation of the Registrant.
3.2+		Form of restated certificate of incorporation of the Registrant to be filed with the Secretary of State of the State of Delaware upon completion of this offering.
3.3+		By-laws of the Registrant.
3.4+		Form of restated by-laws of the Registrant to be effective upon completion of this offering.
4.1+		Form of common stock certificate.
4.2+		Warrants to purchase common stock issued by the Registrant to Connecticut Innovations, Incorporated in June 2002 and September 2007 and related documents containing amendments thereto.
4.3+		Form of warrant to purchase Series C convertible preferred stock issued by the Registrant in connection with the 2007 financing.
4.4+		Form of warrant to purchase common stock issued by the Registrant in connection with the first closing of the 2009 financing.
4.5+		Form of warrant to purchase common stock issued by the Registrant in connection with the second closing of the 2009 financing.
4.6+		Form of warrant to purchase common stock issued by the Registrant in connection with the first closing of the 2010 financing.
4.7+		Form of warrant to purchase common stock issued by the Registrant in connection with the second and third closings of the 2010 financing.
4.8+		Form of warrant to purchase common stock issued by the Registrant in connection with the first closing of the 2011 financing.
4.9+		Form of warrant to purchase common stock issued by the Registrant in connection with the second, third and fourth closings of the 2011 financing.
4.10+		Form of warrant to purchase common stock issued by the Registrant in connection with the 2012 secured loans.
5.1		Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel to the Registrant, with respect to the legality of securities being registered.
10.1.1@+		2001 stock option and incentive plan, as amended.
10.1.2@+		Form of incentive stock option agreement granted under 2001 stock option and incentive plan, as amended.
10.1.3@+		Form of employee non-qualified stock option agreement granted under 2001 stock option and incentive plan, as amended.
10.1.4@+		Form of consulting non-qualified stock option agreement granted under 2001 stock option and incentive plan, as amended.
10.2.1@+		2011 equity incentive plan, as amended.

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	10.2.2@+			Form of stock option agreement granted under 2011 equity incentive plan, as amended.
	10.2.3@+			Form of restricted stock unit agreement under 2011 equity incentive plan, as amended.
	10.3+			Form of subordinated convertible promissory note issued by the Registrant in connection with the first closing of the 2009 financing, which was subsequently amended by the senior subordinated convertible demand promissory note purchase agreement dated May 28, 2010 by and between the Registrant and the purchasers named therein listed below as Exhibit 10.8 and the senior convertible demand promissory note purchase agreement dated January 10, 2011 by and between the Registrant and the purchasers named therein, as amended, listed below as Exhibit 10.9.
	10.4+			Form of subordinated convertible promissory note issued by the Registrant in connection with the second closing of the 2009 financing, which was subsequently amended by the senior subordinated convertible demand promissory note purchase agreement dated May 28, 2010 by and between the Registrant and the purchasers named therein listed below as Exhibit 10.8 and the senior convertible demand promissory note purchase agreement dated January 10, 2011 by and between the Registrant and the purchasers named therein, as amended, listed below as Exhibit 10.9.
	10.5+			Form of senior subordinated convertible demand promissory note issued by the Registrant in connection with the first closing of the 2010 financing, which was subsequently amended by the senior convertible demand promissory note purchase agreement dated January 10, 2011 by and between the Registrant and the purchasers named therein, as amended, listed below as Exhibit 10.9.
	10.6+			Form of senior subordinated convertible demand promissory note issued by the Registrant in connection with the second closing of the 2010 financing, which was subsequently amended by the senior convertible demand promissory note purchase agreement dated January 10, 2011 by and between the Registrant and the purchasers named therein, as amended, listed below as Exhibit 10.9.
	10.7+			Form of senior subordinated convertible demand promissory note issued by the Registrant in connection with the third closing of the 2010 financing, which was subsequently amended by the senior convertible demand promissory note purchase agreement dated January 10, 2011 by and between the Registrant and the purchasers named therein, as amended, listed below as Exhibit 10.9.
	10.8+			Senior subordinated convertible demand promissory note purchase agreement dated May 28, 2010 by and between the Registrant and the purchasers named therein, which amended the subordinated convertible promissory notes.
	10.9+			Senior convertible demand promissory note purchase agreement dated January 10, 2011 by and between the Registrant and the purchasers named therein, as amended, which amended the senior subordinated convertible demand promissory notes and the subordinated convertible promissory notes.
	10.10+			Form of senior convertible demand promissory note issued by the Registrant in connection with the first closing of the 2011 financing.
	10.11+			Form of senior convertible demand promissory note issued by the Registrant in connection with the second closing of the 2011 financing.
	10.12+			Form of senior convertible demand promissory note issued by the Registrant in connection with the third closing of the 2011 financing.
	10.13+			Fourth amended and restated securityholders agreement dated January 10, 2011 by and among the Registrant and the securityholders named therein.

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	10.14+			Third amended and restated registration rights agreement dated June 8, 2006 by and among the Registrant and the purchasers named therein, as amended.
	10.15@+			Employment agreement dated March 19, 2010 by and between the Registrant and Mark Leuchtenberger.
	10.16@+			Non-statutory stock option agreement dated as of March 19, 2010 by and between the Registrant and Mark Leuchtenberger.
	10.17@+			Letter agreement dated May 1, 2002 by and between the Registrant and Robert A. Conerly.
	10.18@+			Letter agreement dated December 2, 2001 by and between the Registrant and Erin M. Duffy, Ph.D.
	10.19@+			Letter agreement dated September 17, 2007 by and between the Registrant and Jarrod Longcor.
	10.20@+			Letter agreement dated December 8, 2010 by and between the Registrant and Colleen Wilson.
	10.21@+			2011 bonus plan, as amended.
	10.22@+			2011 non-employee director bonus plan, as amended.
	10.23@+			Non-employee director compensation policy.
	10.24+			Lease agreement dated March 8, 2002 by and between the Registrant and WE George Street L.L.C., as amended.
	10.25#+			License agreement dated March 21, 2005 by and between the Registrant and Medical Research Council, as amended.
	10.26#+			License agreement dated May 12, 2006 by and between the Registrant and Wakunaga Pharmaceutical Co., Ltd., as amended.
	10.27#+			Patent prosecution control agreement dated April 11, 2008 by and between the Registrant and Abbott Laboratories.
	10.28#+			Collaboration and license agreement dated June 28, 2011 by and between the Registrant and Sanofi.
	10.29#+			License and supply agreement dated November 30, 2010 by and between the Registrant and CyDex Pharmaceuticals, Inc. (a wholly owned subsidiary of Ligand Pharmaceuticals Incorporated).
	10.30#+			License for the Analog program dated November 29, 2001 by and among the Registrant, Cemcomco and William L. Jorgensen.
	10.31#+			Yale exclusive license agreement dated December 6, 2001 by and between the Registrant and Yale University, as amended.
	10.32@+			Form of severance agreement.
	10.33+			Form of senior convertible demand promissory note issued by the Registrant in connection with the fourth closing of the 2011 financing.
	10.34@+			Letter agreement dated October 15, 2002 by and between the Registrant and Anthony D. Sabatelli, Ph.D., J.D.
	10.35+			Loan and security agreement dated February 17, 2012 by and among the Registrant, Oxford Finance LLC, as collateral agent, and the lenders named therein, including secured promissory notes issued in connection therewith.

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	10.36+			Subordination agreement dated February 17, 2012 by and among Oxford Finance LLC and the creditors named therein.
	10.37@+			Employee non-disclosure and developments agreement dated March 19, 2010 by and between the Registrant and Mark Leuchtenberger.
	10.38@+			Employee noncompetition, nondisclosure and developments agreement dated June 11, 2002 by and between the Registrant and Robert A. Conerly.
	10.39@+			Employee noncompetition, nondisclosure and developments agreement dated January 9, 2001 by and between the Registrant and Erin M. Duffy.
	10.40@+			Employee noncompetition, nondisclosure and developments agreement dated September 23, 2002 by and between the Registrant and Scott Hopkins.
	10.41@+			Employee noncompetition, nondisclosure and developments agreement dated December 9, 2002 by and between the Registrant and Anthony D. Sabatelli.
	10.42@+			Employee noncompetition, nondisclosure and developments agreement dated October 15, 2007 by and between the Registrant and Jarrod Longcor.
	10.43@+			Employee noncompetition, nondisclosure and developments agreement dated February 1, 2011 by and between the Registrant and Colleen Wilson.
	10.44@+			Letter agreement dated April 6, 2012 by and between the Registrant and Matthew A. Wikler, M.D.
	10.45@+			Employee noncompetition, nondisclosure and developments agreement dated April 2, 2012 by and between the Registrant and Matthew A. Wikler, M.D.
	10.46@+			Severance agreement dated March 28, 2012 by and between the Registrant and Matthew A. Wikler, M.D.
	10.47@+			Form of indemnification agreement by and between the Registrant and its directors and executive officers.
	10.48@+			2012 employee stock purchase plan.
	21.1+			Subsidiaries of the Registrant.
	23.1			Consent of PricewaterhouseCoopers LLP.
	23.2			Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see Exhibit 5.1).
	24.1+			Powers of Attorney (see signature page to initial filing).

 

+	Previously filed.

 

#	Confidential treatment has been requested for portions of this exhibit.

 

@	Denotes management compensation plan or contract.