S-1 1 d255425ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 25, 2011

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

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   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed Maximum

Aggregate

Offering Price (1)

 

Amount of

Registration
Fee (2)

Common Stock, $0.001 par value per share

  $80,000,000   $9,168

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of additional shares that the underwriters have the option to purchase.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the Registrant.

 

 

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 November 25, 2011

 

PRELIMINARY PROSPECTUS  

 

LOGO

                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 $         and $         per share. We intend to list our common stock on the NASDAQ Global Market under the symbol “RIBX.”

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                     additional shares of common stock to cover over-allotments.

The underwriters expect to deliver the shares on                , 2012.

Deutsche Bank Securities

William Blair & Company

Lazard Capital Markets

Needham & Company, LLC

The date of this prospectus is                , 2012


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TABLE OF CONTENTS

 

      Page  

Prospectus Summary

     1   

Risk Factors

     12   

Cautionary Note Regarding Forward-Looking Statements

     42   

Use of Proceeds

     44   

Dividend Policy

     45   

Capitalization

     46   

Dilution

     48   

Selected Financial Data

     51   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     54   

Business

     81   

Management

     116   

Executive Compensation

     124   
      Page  

Certain Relationships and Related Person Transactions

     143   

Principal Stockholders

     151   

Description of Capital Stock

     156   

Shares Eligible for Future Sale

     163   

Material U.S. Federal Tax Considerations for Non-U.S. Holders

     167   

Underwriting

     171   

Legal Matters

     175   

Experts

     175   

Where You Can Find Additional Information

     175   

Index to Financial Statements

     F-1   
 

 

 

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, statistical 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. While we believe that the information from these publications, studies and surveys are reliable, we have not independently verified, and make no representation as to the accuracy of, such information. This prospectus also includes data based on our own internal estimates. While we believe that our internal company research is reliable and that our internal estimates are reasonable, no independent source has verified such research or estimates. We caution you not to give undue weight to such projections, assumptions and estimates.


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PROSPECTUS SUMMARY

This summary provides an overview of selected information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our common stock. You should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, including the information discussed under “Risk Factors” and our financial statements and related notes appearing elsewhere in this prospectus. Unless otherwise indicated herein, the terms “we,” “our,” “us,” or “the Company” refer to Rib-X Pharmaceuticals, Inc.

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 three Phase 2 clinical trials, and we have fully enrolled our Phase 2b clinical trial of delafloxacin for the treatment of acute bacterial skin and skin structure infections, or ABSSSI. We expect to receive Phase 2b top-line data at the end of 2011 and plan to commence Phase 3 development in the second half of 2012. Subject to the results of Phase 3 clinical trials, we anticipate submitting a New Drug Application for delafloxacin for the treatment of ABSSSI as early as 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 development of RX-04, our preclinical program partnered with Sanofi, S.A., which has produced new classes of antibiotics that target a novel binding site within the bacterial ribosome and are designed to combat the most difficult-to-treat, multi-drug resistant Gram-positive and Gram-negative bacteria. Because its protein building function is essential for the life of infection-causing bacterium, the bacterial ribosome is the target of most marketed antibiotics, which work by binding to the ribosome and inhibiting its function. 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 believe one of our key competitive advantages is our focus on the three-dimensional properties of antibiotics, which is enabled by our proprietary drug discovery platform. Unlike traditional approaches to antibiotic discovery, which generally rely on random screening of chemical libraries to identify potential compounds, our discovery team combines sophisticated and exclusive computational tools with patent-protected, atomic-level insights into the structure of the ribosome to systematically engineer novel antibiotics to avoid resistance and optimize potency, spectrum, efficacy and safety. As a result, we have created a highly efficient and productive drug development engine based on our unique design strategy that effectively leverages structure-based drug design, preparative medicinal chemistry, ribosome biochemistry, molecular biology and pharmacology.

 

 

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According to Datamonitor, in the seven major pharmaceutical markets, which consist of the United States, Japan, the United Kingdom, Germany, France, Italy and Spain, antibiotic product sales totaled approximately $20 billion in 2009 and, within the hospital market, approximately $10 billion was generated from antibiotic sales in 2006. Staphylococcus skin and soft tissue infections in the United States alone accounted for on average nearly 12 million physician and emergency department visits annually in the years from 2001 to 2003 according to the Centers for Disease Control, or CDC. In addition, the Infectious Disease Society of America, or IDSA, estimated in 2004 that nearly two million infections are developed in the hospital setting annually in the United States, resulting in the deaths of 90,000 patients each year. Of these infections, 70% are caused by bacteria that are resistant to one or more antibiotics used to treat them, including those caused by MRSA. The CDC estimated that MRSA alone caused 94,000 life-threatening infections and almost 19,000 deaths in 2005 in the United States, exceeding the number of deaths caused by HIV/AIDS in that year. We estimate that the use of antibiotics to treat MRSA has increased at a compounded annual growth rate of 18% for the years from 2005 to 2009 and is forecasted to continue growing through 2019.

The three major branded antibiotics used for the treatment of serious infections, Zyvox (linezolid), Cubicin (daptomycin) and Tygacil (tigecycline), generated U.S. sales in 2010 of $613 million, $600 million and $164 million, respectively. In addition, there were over four million courses of vancomycin, a generic drug used to treat serious infections caused by resistant Gram-positive bacteria like MRSA, dosed in 2009.

Hospitals are generally required to begin administering antibiotics to patients with serious infections within six hours of presentation to the hospital, well in advance of the 24 to 48 hours required to diagnose the particular bacteria causing the infection. As a result, this first-line antibiotic therapy needs to offer a broad spectrum of antibacterial coverage that includes MRSA. Because there is no single broad-spectrum antibiotic available that is safe for first-line use and also has potency against MRSA, the current first-line standard of care for serious infections is an antibiotic cocktail consisting of the twice-daily intravenous, or IV, administration of vancomycin for MRSA coverage, and one or more additional antibiotics to broaden the overall spectrum of coverage. The use of vancomycin, a narrow-spectrum Gram-positive treatment, has been increasingly limited due to its risk of adverse side effects and the rise of vancomycin-resistant bacterial strains in recent years. These limitations often require the use of a second-line treatment, such as Cubicin or Zyvox, for MRSA and other resistant Gram-positive bacteria. However, Cubicin is only available in an IV form and requires laboratory monitoring at least weekly for toxic side effects. Although Zyvox has an available oral form, it requires active monitoring for use beyond two weeks due to the potential for significant adverse side effects, including bone marrow suppression, or myelosuppression, and nerve damage, or neurotoxicity. In addition, Cubicin and Zyvox have also been associated with increasing drug resistance. Tygacil, a broad-spectrum antibiotic, is generally utilized as a third- or fourth-line antibiotic due to its greater risk of mortality as compared to the active comparators in its clinical studies, and the high rates of vomiting and nausea.

We believe that antibiotic resistance has eroded the efficacy and exacerbated the limitations of current treatments, creating significant unmet needs for new antibiotics that represent new treatment paradigms. In particular, these include:

 

   

the need for an effective and convenient first-line, broad-spectrum antibiotic with coverage of MRSA that can be administered as a single treatment, or monotherapy, primarily in hospitals during the critical early period of a patient’s care when a specific diagnosis is not yet available;

 

 

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the need for a potent antibiotic with a safety profile permitting long-term treatment of resistant infections, including MRSA;

 

   

the need for drugs that treat multi-drug resistant bacteria, which are generally the most difficult to treat; and

 

   

the ongoing need for new drugs to combat the continuing problem of drug resistance.

Our unique drug discovery approach serves as the foundation for our pipeline of clinical and earlier-stage product candidates, set forth below, that we believe can address these unmet needs for the treatment of serious infections.

LOGO

Delafloxacin. Delafloxacin is intended for use as an effective and convenient first-line antibiotic primarily in hospitals prior to the availability of a specific diagnosis. Unlike current first-line treatments, delafloxacin has the potential to offer broad-spectrum coverage as a monotherapy, including for MRSA, with both IV and oral formulations. We believe that the following key attributes demonstrate the potential of delafloxacin to become a new standard of care for first-line treatment of serious infections and thereby reduce the need to switch to second-line, narrow-spectrum antibiotics:

 

   

Increased potency at infection site. Our in vitro testing suggests that, in contrast to many other antibiotics, delafloxacin becomes up to 32 times more potent in acidic environments, such as are common at the site of infection, than in normal pH

 

 

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environments within the human body. Moreover, delafloxacin kills bacteria more rapidly than Zyvox, Tygacil and vancomycin.

 

   

Expanded spectrum agent. In addition to strong Gram-positive potency, including against MRSA, delafloxacin has shown excellent in vitro activity against most Gram-negative bacteria commonly found in the hospital setting, as well as against atypical and anaerobic pathogens. As a result of this expanded broad-spectrum coverage, delafloxacin has the potential to be used as a first-line monotherapy for ABSSSI, bacterial pneumonias, aspiration pneumonias, complicated intra-abdominal infections, or cIAI, and complicated urinary tract infections.

 

   

Favorable safety profile. Over 1,200 subjects have received delafloxacin in clinical trials to date and it has been generally well tolerated. In addition, delafloxacin has not exhibited the significant side effects associated with the leading MRSA treatments, including Zyvox, vancomycin, Cubicin and Tygacil.

 

   

Convenient IV-to-oral switch. We are developing both IV and oral formulations of delafloxacin to enable patients who begin IV treatment in the hospital setting to transition to oral dosing for more convenient home-based care. We believe this IV-to-oral switch has the potential to increase patient convenience, lower the overall cost of treatment and reduce the length of hospital stays.

 

   

Lower probability of bacterial resistance. We believe that delafloxacin’s ability to equally target two bacterial enzymes will reduce the probability of resistance to delafloxacin because resistance development would require multiple mutations in both of these enzymes. In clinical trials to date, we have not seen the development of bacterial resistance to delafloxacin.

Radezolid. Radezolid is a next-generation oxazolidinone designed to meet the need for a potent antibiotic with both IV and oral formulations and a safety profile suitable for the treatment of serious infections, including ABSSSI and severe community-acquired bacterial pneumonia, or CABP, including those caused by MRSA, as well as long-term treatment of underserved serious infections, such as osteomyelitis and prosthetic and joint infections. We believe that the following attributes demonstrate the potential of radezolid to become the antibiotic of choice for such serious infections:

 

   

Greater potency against Zyvox-resistant Gram-positive bacteria. Radezolid has several attributes allowing it to overcome known oxazolidinone resistance mechanisms and have increased activity compared to oxazolidinones currently on the market or known by us to be in development. In a recent study that compared the potency of radezolid to that of the only marketed oxazolidinone, Zyvox, and another investigational oxazolidinone, tedizolid, against a collection of Gram-positive bacteria with genetically defined mechanisms of oxazolidinone resistance, radezolid demonstrated enhanced activity against the collection’s 90 strains.

 

   

Broader spectrum. Like all oxazolidinones, radezolid has excellent activity against resistant Streptococcus pneumoniae and MRSA. Unlike Zyvox and tedizolid, radezolid is also effective against Haemophilus influenzae, Legionella pneumophila and Moraxella catarrhalis, and all other common causes of CABP.

 

   

Enhanced delivery to the site of infection. Our in vitro studies have shown that, unlike Zyvox, radezolid concentrates within cells, including macrophages, other immune cells, and lung epithelial cells, and remains at high concentrations and active within cells long

 

 

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after concentrations in the blood decrease following therapy withdrawal. These heightened cell concentrations enable enhanced killing of intracellular pathogens and may convey greater drug quantities to infection sites through immune cell trafficking, potentially making radezolid effective at lower and less frequent dosing.

 

   

Improved safety profile. In preclinical evaluations and clinical trials to date, radezolid administered at therapeutic doses has not demonstrated any significant safety issues, such as the myelosuppression commonly associated with oxazolidinones, potentially making radezolid the only long-term oxazolidinone therapy available for difficult-to-treat MRSA and other resistant infections. Moreover, we believe that, unlike Zyvox, radezolid does not cross the blood-brain barrier thus lowering the potential for certain adverse drug-drug interactions.

 

   

Convenient IV-to-oral once daily dosing regimen. Radezolid can be administered in either IV or oral formulations. Unlike Zyvox, radezolid has the potential to be administered once daily and at lower doses, which may improve patient compliance with the oral treatment regimen following discharge from the hospital and therefore increase the likelihood of treatment success.

RX-04 Program. Our most advanced preclinical program, the RX-04 program, is focused on using one novel binding site within the ribosome to design and develop new classes of antibiotics to treat some of the most deadly and difficult-to-treat, multi-drug resistant Gram-positive and Gram-negative infections. Using our proprietary drug discovery platform, we have developed three novel classes of antibiotics in less than three years that bind to this ribosomal site. We are designing candidates through the RX-04 program to have the following characteristics:

 

   

Activity against the most difficult-to-treat infections. We believe, based on published studies, that RX-04 is the only drug development program that has produced compounds with demonstrated in vitro coverage of all of the ESKAPE pathogens, six bacteria named by the IDSA as posing the most deadly public health threat. Many of these pathogens are resistant to every antibiotic except colistin, a 1950s-era drug that is the treatment of last resort because of its high toxicity.

 

   

Lower potential for resistance. We expect that the activity of the RX-04 compounds will be unaffected by cross-resistance to current therapies and will result in lower potential resistance as compared to current therapies because these compounds bind to a novel site on the ribosome that has never before been exploited by antibiotics and because they have proprietary chemical characteristics distinct from all current classes of broad-spectrum or Gram-negative therapies.

 

   

Lower potential for toxicity. Our discovery process allows for optimization of molecular properties that have the potential not only for greater potency, but also greater safety. We intend to use our compound-optimization abilities to design compounds which reduce the probability of adverse drug-drug interactions, cardiovascular toxicity, mutagenicity, and undesired pharmacological interactions.

 

   

Potential for IV-to-oral dosing. The RX-04 compounds are small molecules that provide us with the potential to develop an IV-to-oral switch for maximum flexibility.

In June 2011, we entered into a collaboration and license agreement with Sanofi related to our RX-04 program that ranks among the largest preclinical agreements in terms of upfront and potential milestone payments in the antibiotic industry in recent years. Under this agreement,

 

 

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Sanofi has the right to license an unlimited number of product candidates targeting this discrete binding site within the ribosome. We retain all rights pertaining to our proprietary drug discovery platform, including all other binding sites within the ribosome and all future programs, as well as to any RX-04 compound that Sanofi does not exercise its option to develop during the three-year term of the collaboration. We have received $19.0 million to date in upfront and milestone payments under the collaboration and, for each RX-04 product developed by Sanofi, we are eligible for up to $86.0 million in potential research, development and regulatory milestone payments, up to $100.0 million in potential commercial milestone payments, and up to double-digit percentage royalties on any commercial sales. We also have the right under the collaboration to co-commercialize one RX-04 product of our choosing with Sanofi in the United States. We are collaborating with Sanofi on preclinical development and lead generation, and the first group of compounds from the RX-04 program that demonstrated strong potency and efficacy are now being profiled in vitro and in vivo as part of a comprehensive safety assessment. We expect the results of these studies to inform the selection of a lead compound in 2012 for toxicology studies followed by Phase 1 studies in humans.

Our Strategy

Our objective is to discover, develop and commercialize best-in-class and new classes of anti-infectives with superior coverage, safety and convenience to provide new standards of care for patients with serious and life-threatening infections. The critical components of our business strategy are:

 

   

Complete the clinical development of delafloxacin. Subject to the results of our Phase 2b trial, we plan to initiate Phase 3 development of delafloxacin in ABSSSI in the second half of 2012, with the goal of submitting applications for marketing approval to the U.S. Food and Drug Administration and European Medicines Agency as early as 2014. We also intend to seek approval for additional indications for delafloxacin, including CABP and cIAI.

 

   

Advance the clinical development of radezolid. Having successfully completed Phase 2 studies with an oral formulation of radezolid in uncomplicated skin and skin structure infections, or uSSSI, and in CABP, we intend to initiate a Phase 2 study for the treatment of ABSSSI and a 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, including as a result of orthopedic surgery.

 

   

Advance the development of multiple product candidates from our RX-04 program through our collaboration with Sanofi. 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. We expect that the product candidates that emerge from the RX-04 program will target a variety of uses, including the treatment of the most deadly and difficult-to-treat, multi-drug resistant Gram-positive and Gram-negative pathogens.

 

   

Leverage our discovery platform to continue to expand our pipeline of anti-infective product candidates. We intend to continue to pursue active discovery programs using our proprietary platform to identify new binding sites within the ribosome and additional product candidates with broad-spectrum efficacy and safety to

 

 

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combat resistance mechanisms. In particular, we intend to demonstrate evidence of potency enabling lead identification and optimization in our RX-05 antibiotic program and our RX-06 antifungal program in 2012.

 

   

Build in-house commercialization capabilities in the United States and opportunistically seek partners for the commercialization of our drug candidates outside of the United States. We have retained worldwide rights to our drug discovery platform and all of our drug discovery and development programs other than the RX-04 program, where we maintain U.S. co-commercialization rights for one product candidate of our choosing. Outside of the United States, we expect to seek strategic partnerships for the further development and commercialization of our product candidates. We also intend to explore additional funded collaborations leveraging our drug discovery platform.

Risks Relating to Our Business

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

 

   

we have never been profitable, have no products approved for commercial sale and may never achieve profitability;

 

   

we will need to obtain substantial additional financing prior to the commercialization of delafloxacin and our other product candidates, including to conduct future clinical trials of our product candidates;

 

   

we have never conducted a Phase 3 clinical trial for any of our product candidates and cannot be certain that delafloxacin or any of our other product candidates will receive regulatory approval for commercial sale;

 

   

we may be subject to delays in our clinical trials, which could result in increased costs and delay or limit our ability to obtain regulatory approval for our product candidates;

 

   

because the results of earlier studies and clinical trials of our product candidates may not be predictive of future clinical trial results, our product candidates may not have favorable results in future clinical trials, which would delay or limit their future development;

 

   

we may be unable to successfully identify, develop, license or commercialize any product candidates under our collaboration with Sanofi, or to establish and maintain other development and commercialization collaborations, which would adversely affect our ability to realize the expected benefits of such collaborations and further develop our product candidates;

 

   

we may be unable to maintain and protect our proprietary intellectual property assets, which could impair our drug discovery platform and commercial opportunities; and

 

   

we have incurred significant losses since our inception resulting in an accumulated deficit of $238.3 million as of September 30, 2011 and expect to incur losses for the foreseeable future, which, among other things, raises substantial doubt about our ability to continue as a going concern.

 

 

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Corporate Information

We were incorporated in Delaware in October 2000 under the name Rib-X Designs, Inc. and changed our name to Rib-X Pharmaceuticals, Inc. in December 2000. Our primary executive offices are located at 300 George Street, Suite 301, New Haven, CT 06511-6663, and our telephone number is (203) 624-5606. Our website address is http://www.rib-x.com. The information contained on, or that can be accessed through, our website is not part of this prospectus.

“Rib-X Pharmaceuticals,” “Rib-X Pharmaceuticals, Antibiotics in Three Dimensions,” and the Rib-X Pharmaceuticals logo are trademarks or registered trademarks of Rib-X Pharmaceuticals, Inc. Other trade names, trademarks and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names in this prospectus are referred to without the ® and TM symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

 

 

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THE OFFERING

 

Common stock offered by us

             shares

 

Common stock to be outstanding after this offering

             shares

 

Use of proceeds

We intend to use the net proceeds of this offering to advance the development of our product candidates. See “Use of Proceeds.”

 

Proposed NASDAQ Global Market symbol

RIBX

The information above is based on              shares of our common stock outstanding as of September 30, 2011. It does not include:

 

   

             shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2011 at a weighted average exercise price of $         per share;

 

   

             shares of our common stock issuable upon the exercise of stock options granted under our 2011 Equity Incentive Plan pursuant to our Management Bonus Plan in connection with this offering, at an exercise price equal to the initial public offering price;

 

   

             additional shares of our common stock that will be available for future issuance under our 2011 Equity Incentive Plan; and

 

   

             shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2011 at a weighted average exercise price of $         per share.

Unless otherwise indicated, all information contained in this prospectus assumes and reflects the following:

 

   

the adoption of our restated certificate of incorporation and restated by-laws in connection with the consummation of this offering;

 

   

the issuance of              shares of our common stock upon the conversion of all outstanding shares of our convertible preferred stock and accumulated dividends thereon upon the closing of this offering, assuming an initial public offering price per share of $            , the mid-point of the price range set forth on the cover page of this prospectus, and that the closing occurs on                     , 2012;

 

   

the issuance of              shares of our common stock upon the conversion of all outstanding principal and interest accrued on our senior convertible demand promissory notes, senior subordinated convertible demand promissory notes and subordinated convertible promissory notes, which we refer to collectively as our convertible notes, upon the closing of this offering, assuming an initial public offering price per share of $            , the mid-point of the price range set forth on the cover page of this prospectus, and that the closing occurs on                     , 2012;

 

   

a 1-for     reverse split of our common stock to be effected prior to the completion of this offering; and

 

   

no exercise of the underwriters’ over-allotment option.

 

 

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Summary Financial Data

You should read this summary financial data together with our audited and unaudited financial statements and the related notes thereto included elsewhere in this prospectus and the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We derived the statement of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited financial statements included elsewhere in this prospectus. We derived the statement of operations data for the nine months ended September 30, 2010 and 2011 and the balance sheet data as of September 30, 2011 from our unaudited financial statements included elsewhere in this prospectus. Our interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to a fair statement of our financial position as of September 30, 2011 and the results of its operations for the nine months ended September 30, 2010 and 2011. The results for the nine months ended September 30, 2011 are not necessarily indicative of results to be expected for the year ending December 31, 2011, any other interim periods or any future period or year.

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010      2011  
                       (unaudited)  
     (in thousands, except per share amounts)  

Statement of Operations Data:

           

Revenues:

           

Contract revenues

   $      $      $      $       $ 1,393   

Operating expenses:

           

Research and development

     29,182        17,592        12,422        7,945         26,104   

General and administrative

     4,813        3,888        5,152        3,980         4,421   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     33,995        21,480        17,574        11,925         30,525   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loss from operations

     (33,995     (21,480     (17,574     (11,925      (29,132

Other income (expense):

           

Interest income

     707        68        11        8         11   

Interest expense

     (2,061     (6,952     (10,290     (4,477      (18,427

Other income

     174        160        1,098        89         86   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total other income (expense)

     (1,180     (6,724     (9,181     (4,380      (18,330
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss

     (35,175     (28,204     (26,755     (16,305      (47,462

Convertible preferred stock dividends

     (13,130     (14,180     (15,314     (11,486      (12,405
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss attributable to common stockholders

   $ (48,305   $ (42,384   $ (42,069   $ (27,791    $ (59,867
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss per share, basic and diluted

   $ (4.89   $ (4.18   $ (4.10   $ (2.71    $ (5.84
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding, basic and diluted

     9,870        10,140        10,249        10,248         10,253   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Pro forma net loss per share, basic and diluted (unaudited) (1)

           
      

 

 

      

 

 

 

Weighted average shares used in computing pro forma net loss per share, basic and diluted (unaudited) (1)

           
      

 

 

      

 

 

 
(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, in each case, assuming an initial public offering price per share of $            , 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, 2010 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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The summary unaudited pro forma as adjusted balance sheet as of September 30, 2011 has been prepared 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, in each case, assuming an initial public offering price per share of $         , 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, (iv) elimination of the common stock warrant exercise price protection term and (v) sale of shares of common stock in this offering after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us at an assumed initial public offering price per share of $            , the mid-point of the range set forth on the cover page of this prospectus, assuming in all cases, as if each had occurred on September 30, 2011. The summary unaudited pro forma as adjusted balance sheet is for informational purposes only and does not purport to indicate balance sheet information as of any future date.

 

     As of September 30, 2011
     Actual      Pro Forma as
Adjusted
     (unaudited)
     (in thousands)
Balance Sheet Data:      

Cash, cash equivalents and marketable securities

   $ 9,690      

Total assets

     11,805      

Convertible notes payable (1)

     58,043      

Accrued interest on convertible notes payable (1)

     12,253      

Put rights

     27,568      

Deferred revenue, net of current portion (2)

     11,688      

Convertible preferred stock

     122,428      

Accumulated equity (deficit)

     (238,265   

Total stockholders’ equity (deficit)

     (234,170   

 

(1)   Convertible notes payable and accrued interest on convertible notes payable were current liabilities as of September 30, 2011.

 

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

 

 

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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 $35.2 million, $28.2 million and $26.8 million for 2008, 2009 and 2010, respectively. For the nine months ended September 30, 2011, we incurred a net loss of $47.5 million, and as of September 30, 2011, we had an accumulated deficit of $238.3 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. 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 until                 . Moreover, proceeds from this offering are not expected to be sufficient to complete the development and commercialization of our lead product candidate, delafloxacin. Accordingly, we will need to obtain additional funding after this offering to complete the development and commercialization of delafloxacin as well as substantial funds to continue to advance the development of our other clinical and preclinical candidates.

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;

 

   

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

 

   

the number and characteristics of product candidates that we pursue;

 

   

the outcome, timing and cost of regulatory approvals;

 

   

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;

 

   

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

 

   

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

 

   

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

 

   

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

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,

 

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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;

 

   

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;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our ability to identify and develop additional product candidates;

 

   

market acceptance of our product candidates;

 

   

our ability to establish an effective sales and marketing infrastructure;

 

   

competition from existing products or new products that may emerge;

 

   

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

 

   

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;

 

   

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

 

   

costs related to and outcomes of potential intellectual property litigation;

 

   

our ability to adequately support future growth;

 

   

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

 

   

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

 

   

potential product liability claims;

 

   

potential liabilities associated with hazardous materials; and

 

   

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), an exclusive license agreement with Wakunaga Pharmaceutical Company, Inc. 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. From time to time, disputes have arisen, and could occur in the future, with a licensor regarding compliance with the requirements of our agreements, which could result in our making milestone, royalty or other payments when we do not believe they are due to avoid potentially expensive litigation. In addition, 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, 2010 and our projected spending in 2011, which raise substantial doubt about our ability to continue as a going concern, our independent registered public accounting firm has included an explanatory paragraph in its report on our financial

 

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statements as of and for the year ended December 31, 2010 regarding this uncertainty. We believe that the net proceeds from this offering, together with 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 until                     . 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. 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 Phase 3 clinical protocol for delafloxacin 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 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

 

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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 Phase 3 development of delafloxacin in the second half of 2012. However, 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:

 

   

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;

 

   

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;

 

   

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;

 

   

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

 

   

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

 

   

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

 

   

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

 

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time by us, our current or future partners, the FDA or other regulatory authorities due to a number of factors, including:

 

   

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

 

   

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

 

   

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

 

   

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 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

 

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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.

Unforeseen side effects from any of our 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:

 

   

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

 

   

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

 

   

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

 

   

sales of the product may decrease significantly;

 

   

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

 

   

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

 

   

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.

 

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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, 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.

 

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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.

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. 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

 

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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. 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:

 

   

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

 

   

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

 

   

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.

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

 

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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:

 

   

issue warning letters;

 

   

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

 

   

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;

 

   

impose other civil or criminal penalties;

 

   

suspend regulatory approval;

 

   

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

 

   

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

 

   

seize or detain products.

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.

 

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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:

 

   

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

 

   

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

 

   

limitations in the approved clinical indications for our product candidates;

 

   

demonstrated clinical safety and efficacy compared to other products;

 

   

lack of significant adverse side effects;

 

   

sales, marketing and distribution support;

 

   

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

 

   

timing of market introduction and perceived effectiveness of competitive products;

 

   

the degree of cost-effectiveness;

 

   

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

 

   

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

 

   

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;

 

   

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

 

   

convenience and ease of administration of our products; and

 

   

potential product liability claims.

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-

 

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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 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,

 

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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 Pharmaceuticals, 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 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. Consequently, we plan to establish collaborations for development and commercialization of product candidates and research programs. For example, we have entered into a research collaboration with Sanofi with respect to product candidates developed in our

 

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RX-04 program. 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 is prone to the risks of failure 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

 

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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.

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:

 

   

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

 

   

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

 

   

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 “Compensation Discussion and Analysis—Change of Control and Severance Agreements” 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.

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 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 will be required to comply with Section 404 of the Sarbanes-Oxley Act in connection with our Annual Report on Form 10-K for the year ending December 31, 2013. We may be unable to do so on a timely basis. Until we are able to expand our finance and administrative capabilities and establish necessary financial reporting

 

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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.

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:

 

   

withdrawal of clinical trial participants;

 

   

termination of clinical trial sites or entire trial programs;

 

   

costs of related litigation;

 

   

substantial monetary awards to patients or other claimants;

 

   

decreased demand for our product candidates and loss of revenues;

 

   

impairment of our business reputation;

 

   

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

 

   

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. As such,

 

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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.

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. 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

 

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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.

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:

 

   

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;

 

   

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;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

As of September 30, 2011, we are the owner of record of over 15 issued or granted U.S. and foreign patents with claims directed to pharmaceutical compounds, pharmaceutical

 

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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 are also the owner of record of over 100 pending U.S. and foreign patent applications in these areas.

As of September 30, 2011, we are 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 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

 

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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 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

 

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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.

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 mark(s), “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. It is possible that one or more of the applications could be subject to opposition or cancellation after the marks are registered. 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.

 

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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.

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. 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:

 

   

results of our clinical trials;

 

   

results of clinical trials of our competitors’ products;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

competition from existing products or new products that may emerge;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

additions or departures of key management or scientific personnel;

 

   

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

 

   

announcement or expectation of additional financing efforts;

 

   

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

 

   

market conditions for biopharmaceutical stocks in general; and

 

   

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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After this offering, affiliates of Warburg Pincus will have the ability to control all matters submitted to our stockholders for approval.

When this offering is completed, affiliates of Warburg Pincus LLC, or Warburg Pincus, will beneficially own shares representing approximately     % of our common stock, assuming that the closing of the offering made hereby occurs with an initial public offering price per share of $    , the mid-point of the price range set forth on the cover page of this prospectus. As a result, Warburg Pincus will be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, Warburg Pincus will 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. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire. 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”.

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 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, changing laws, regulations and standards 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. 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

 

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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 approximately $             per share in the price you pay for shares of our common stock as compared to its net tangible book value, based on the initial public offering price of $             per share. To the extent outstanding options to purchase shares of common stock 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              outstanding shares of common stock based on the number of shares outstanding as of                         . Of these shares,              shares other than those shares purchased by our affiliates may be resold in the public market immediately and the remaining              shares are currently restricted under securities laws or as a result of lock-up agreements but will be able to be resold after the offering as described in the “Shares Eligible for Future Sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of              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              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

 

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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.

We have options to purchase              shares outstanding under our 2001 Stock Option and Incentive Plan, or 2001 Stock Plan. In addition, pursuant to the terms of our Management Bonus Plan, we expect to grant options to purchase              shares of our common stock under our 2011 Equity Incentive Plan in connection with this offering, assuming an initial public offering price per share of $         , the mid-point of the range set forth on the cover page of this prospectus. We are also authorized to grant equity awards, including stock options, to our employees, directors and consultants, covering up to              shares of our common stock, pursuant to our 2011 Equity Incentive Plan. We plan to register the number of shares available for issuance under our 2001 Stock Plan and 2011 Equity Incentive 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.

 

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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 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.

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 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              shares of common stock in this offering will be approximately $             million after deducting estimated offering expenses and underwriting discounts and commissions and assuming an initial public offering price of $         per share. If the over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $             million.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $             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.

We intend to use the net proceeds of this offering to advance the development of our product candidates. Pending specific utilization of the net proceeds as described above, we intend to invest the net proceeds of the offering in short-term investment grade and U.S. government securities.

 

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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 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 September 30, 2011:

 

   

on an actual basis;

 

   

on an unaudited pro forma as adjusted basis to give effect to the (i) issuance of shares of common stock upon the 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, in each case, assuming an initial public offering price per share of $         , 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              shares of common stock in this offering at an assumed initial public offering price of $             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 September 30, 2011.

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 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 September 30, 2011
         Actual         Pro Forma as
Adjusted (1)
     (unaudited)
     (in thousands, except share
amounts)

Cash and cash equivalents

   $ 9,690     
  

 

 

   

 

Convertible notes payable

     58,043     

Accrued interest on convertible notes payable

     12,253     

Common stock warrants

     63     

Preferred stock warrants

     1     

Put rights

     27,568     

Convertible preferred stock, $0.001 par value; 478,329,525 shares authorized; 199,799,907 shares issued and outstanding, actual;      no shares authorized, no shares issued and outstanding, pro forma as adjusted

     122,428     
  

 

 

   

Stockholders’ equity (deficit):

    

Common stock, $0.001 par value; 650,000,000 shares authorized, 10,252,529 shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma as adjusted

     10     

Additional paid-in capital

     4,085     

Accumulated deficit

     (238,265  
  

 

 

   

 

Total stockholders’ equity (deficit)

     (234,170  
  

 

 

   

 

Total capitalization

   $ (13,814  
  

 

 

   

 

 

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(1)   A $1.00 increase (decrease) in the assumed initial public offering price of $             per share 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 $             million, 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.

The number of shares of our common stock to be outstanding after this offering is based on              shares outstanding as of September 30, 2011. It does not include:

 

   

             shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2011 at a weighted average exercise price of $             per share;

 

   

             shares of our common stock issuable upon the exercise of stock options granted under our 2011 Equity Incentive Plan pursuant to the Management Bonus Plan in connection with this offering, at an exercise price equal to the initial public offering price;

 

   

             additional shares of our common stock that will be available for future issuance under our 2011 Equity Incentive Plan; and

 

   

             shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2011 at a weighted average exercise price of $             per share.

 

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DILUTION

If you invest in our common stock, your interest in our net tangible book value will be diluted to the extent of the difference between the initial public offering price and the net pro forma as adjusted 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 book value per share attributable to the existing stockholders for the presently outstanding stock. As of September 30, 2011, our net tangible book value was $        , or $         per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less total liabilities and convertible preferred stock, divided by 10,252,529, the number of common shares outstanding on September 30, 2011.

Our pro forma net tangible book value as of September 30, 2011 was $        , or $     per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of our common stock outstanding, as of September 30, 2011, after giving effect to the (i) issuance of shares of our common stock upon the 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, in each case, assuming an initial public offering price per share of $         , 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, in all cases assuming each occurred on September 30, 2011.

After giving effect to the sale of              shares of our common stock in this offering, assuming an initial public offering price of $         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, our pro forma as adjusted net tangible book value as of September 30, 2011 would have been $        , or $         per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $         per share to new investors purchasing shares of our common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after the offering from the amount of cash that a new investor 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

   $                

Historical net tangible book value (deficit) per share

  

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

  

Pro forma net tangible book value per share as of September 30, 2011 before this offering

  

Increase in net tangible book value per share attributable to cash payments by new investors in this offering

  

Pro forma as adjusted net tangible book value per share after this offering

  

Dilution in pro forma net tangible book value per share to new investors

   $     
  

 

 

 

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 the offering would be $         per share. This represents an increase in pro forma as adjusted net tangible book value of $         per share to existing stockholders and dilution in pro forma as adjusted net tangible book value of $         per share to new investors.

A $1.00 increase (decrease) in the assumed initial public offering price of $        , 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 $         million and the pro forma as adjusted net tangible book value per share after this offering by $         per share and would increase (decrease) the dilution per share to new investors in this offering by $         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 and assuming the closing of the offering made hereby occurs on             , 2012. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of the offering determined at pricing.

The following table shows, as of September 30, 2011, the differences between the number of shares purchased from us, the total consideration paid to us and the average price per share that existing stockholders and new investors paid at an assumed initial public offering price of $         per share 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

               $                         $            

New investors

            
  

 

  

 

 

   

 

  

 

 

   

 

Total

               $             $
  

 

  

 

 

   

 

  

 

 

   

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase

 

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(decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $        , $         and $        , respectively, 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 and assuming the closing of the offering made hereby occurs on            , 2012.

The discussion and tables 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     % of the total number of shares of our common stock to be outstanding after the offering, and the number of shares of our common stock held by investors participating in the offering will be further increased to     % of the total number of shares of our common stock to be outstanding after the offering.

In addition, except as noted, the above discussion and table assume no exercise of stock options or warrants to purchase common stock after September 30, 2011. As of September 30, 2011, we had outstanding options to purchase a total of              shares of our common stock at a weighted-average exercise price of $         per share,              shares of common stock issuable upon the exercise of outstanding warrants at a weighted-average exercise price of $         per share and              shares of convertible preferred stock issuable upon the exercise of outstanding warrants at an exercise price of $         per share (which shall be exercisable for an equivalent number of shares of common stock following the offering made hereby). If all such options and warrants had been exercised as of September 30, 2011, pro forma as adjusted net tangible book value per share would be $         per share and dilution to new investors would be $         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 new investors.

 

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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 and unaudited 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, 2008, 2009 and 2010, and the balance sheet data as of December 31, 2009 and 2010, 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, 2006 and 2007, and the balance sheet data as of December 31, 2006, 2007 and 2008, from our audited financial statements that are not included in this prospectus. We derived the statement of operations data for the nine months ended September 30, 2010 and 2011, and the balance sheet data as of September 30, 2011, from our unaudited financial statements and the related notes thereto included elsewhere in this prospectus. Our interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to a fair statement of our financial position as of September 30, 2011 and the results of our operations for the nine months ended September 30, 2010 and 2011. The results for the nine months ended September 30, 2011 are not necessarily indicative of results to be expected for the year ending December 31, 2011, any other interim periods or any future period or year.

 

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     Years Ended December 31,     Nine Months Ended
September 30,
 
     2006     2007     2008     2009     2010     2010     2011  
                                   (unaudited)  
     (in thousands, except per share amounts)  
Statement of Operations Data:               

Revenues:

              

Grant revenues

   $ 770      $      $      $      $      $      $   

Contract revenues

                                               1,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     770                                           1,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

              

Research and development

     20,057        29,404        29,182        17,592        12,422        7,945        26,104   

General and administrative

     3,778        4,069        4,813        3,888        5,152        3,980        4,421   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     23,835        33,473        33,995        21,480        17,574        11,925        30,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (23,065     (33,473     (33,995     (21,480     (17,574     (11,925     (29,132
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

              

Interest income

     2,106        2,404        707        68        11        8        11   

Interest expense

     (206     (460     (2,061     (6,952     (10,290     (4,477     (18,427

Other income

     171        362        174        160        1,098        89        86   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     2,071        2,306        (1,180     (6,724     (9,181     (4,380     (18,330
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (20,994     (31,167     (35,175     (28,204     (26,755     (16,305     (47,462

Convertible preferred stock dividends

     (9,635     (12,157     (13,130     (14,180     (15,314     (11,486     (12,405
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (30,629   $ (43,324   $ (48,305   $ (42,384   $ (42,069   $ (27,791   $ (59,867
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (5.30   $ (4.86   $ (4.89   $ (4.18   $ (4.10   $ (2.71   $ (5.84
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted

     5,776        8,919        9,870        10,140        10,249        10,248        10,253   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited) (1)

              
          

 

 

     

 

 

 

Weighted average shares used in computing pro forma net loss per share, basic and diluted (unaudited) (1)

              
          

 

 

     

 

 

 

 

(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, in each case, assuming an initial public offering price per share of $            , 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, 2010 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,     As of
September 30,
 
     2006     2007     2008     2009     2010     2011  
     (in thousands)     (unaudited)  

Balance Sheet Data:

            

Cash, cash equivalents and marketable securities

   $ 54,951      $ 38,623      $ 8,441      $ 11,273      $ 1,408      $ 9,690   

Total assets

     58,912        42,655        11,551        13,311        3,891        11,805   

Convertible notes payable (1)

                          34,608        47,092        58,043   

Accrued interest on convertible notes payable (1)

                          2,591        7,067        12,253   

Put rights

                          2,525        11,044        27,568   

Deferred revenue, net of current portion (2)

                                        11,688   

Convertible preferred stock

     122,428        122,428        122,428        122,428        122,428        122,428   

Accumulated deficit

     (69,502     (100,669     (135,844     (164,048     (190,803     (238,265

Total stockholders’ deficit

     (69,039     (98,877     (133,299     (160,476     (186,908     (234,170

 

(1)   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 September 30, 2011.

 

(2)   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 three Phase 2 clinical trials, and we have fully enrolled our Phase 2b clinical trial of delafloxacin for the treatment of acute bacterial skin and skin structure infections, or ABSSSI. We expect to receive Phase 2b top-line data at the end of 2011 and plan to commence Phase 3 development in the second half of 2012. Subject to the results of Phase 3 clinical trials, we anticipate submitting a New Drug Application for delafloxacin for the treatment of ABSSSI as early as 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 preclincial 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 September 30, 2011, we have received an aggregate of $208.4 million in such funding, which includes:

 

   

$122.4 million from the sale of convertible preferred stock;

 

   

$64.5 million from the sale 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              shares of common stock upon the closing of this offering, assuming an initial public offering price per share of $            , the mid-point of the price range set forth on the cover page of this prospectus, and that the closing occurs on                             , 2012.

During 2009, 2010 and 2011, we borrowed $35.0 million, $15.0 million and $14.5 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              shares of common stock immediately prior to the closing of this offering, assuming an initial public offering price per share of $            , the mid-point of the price range set forth on the cover page of this prospectus, and that the closing occurs on                 , 2012. This conversion will occur prior to our grant of options pursuant to our Management Bonus Plan to purchase             additional shares of our common stock in connection with this offering, assuming such initial public offering price. 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              shares of our common stock at a weighted-average exercise price of $            , 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 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. We may receive up to $9.0 million for the achievement of near-term research milestones, up to $86.0 million per product for the achievement of research, development and regulatory milestones, and up to $100.0 million per product for the achievement of commercial milestones. We may also receive up to double-digit percentage royalties 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

 

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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, 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 $35.2 million, $28.2 million and $26.8 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $16.3 million and $47.5 million for the nine months ended September 30, 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 September 30, 2011, we had an accumulated deficit of $238.3 million and cash and cash equivalents of $9.7 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 or 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, 2010, 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, 2010 with respect to this uncertainty.

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 nine months ended September 30, 2011, we have recognized $1.4 million of contract revenues under the collaboration. We estimate that as we continue to recognize revenues under the collaboration, our revenues for the next twelve months will be approximately $6.0 million. In the future, contract revenues under our collaboration with Sanofi may also include payments for achieving near-term 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.

 

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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.

The following table summarizes our research and development expenses for the years ended December 31, 2008, 2009 and 2010, and the nine months ended September 30, 2010 (unaudited) and 2011 (unaudited):

 

    Years Ended
December 31,
    Nine Months Ended
September  30,
 
    2008     2009     2010     2010     2011  
    (In thousands)  

Outsourced discovery and development costs:

 

Delafloxacin

  $ 8,703      $ 3,896      $ 2,935      $ 873      $ 15,361   

Radezolid

    8,800        3,605        141        100        2,179   

RX-04

    817        879        1,035        652        1,970   

Other

    426        2                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total outsourced discovery and development costs

    18,746        8,382        4,111        1,625        19,510   

Personnel costs

    6,729        6,227        5,175        4,047        3,762   

Other internal costs

    3,707        2,983        3,136        2,273        2,832   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total research and development expenses

  $ 29,182      $ 17,592      $ 12,422      $ 7,945      $ 26,104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, and additional financing transactions or collaboration arrangements, if any. 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 initiate Phase 3 development in ABSSSI in the second half of 2012, with the goal of submitting applications for marketing approval to the U.S. Food and Drug Administration and the European Medicines Agency as early as 2014. We also intend to seek approval for additional indications for delafloxacin, including CABP and cIAI.

Radezolid. We intend to initiate a Phase 2 study for the treatment of ABSSSI and a 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 for CABP and indications for which long-term treatment is required, such as osteomyelitis and prosthetic and joint infections. We will seek partnerships for the further development and commercialization of radezolid.

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.

 

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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 convertible 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 includes 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 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, 2010, we had federal and state net operating loss carryforwards of approximately $179.0 million each, and federal and state research and development tax credit carryforwards of approximately $6.0 million and $3.0 million, respectively. Our federal and state net operating loss carryforwards will begin to expire in 2030 if not used, and our federal and state research and development tax credit carryforwards will begin to expire in 2030 and 2025, respectively, if not used.

The Tax Reform Act of 1986 provides for a limitation on the annual use of 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 annual limitations under Section 382.

 

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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.

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

 

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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 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 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.

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. If we receive milestone payments in the future under the collaboration with Sanofi, we will recognize such payments under the milestone method.

 

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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 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

 

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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.

The following table summarizes our assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2008, 2009 and 2010, and the nine months ended September 30, 2010 (unaudited) and 2011 (unaudited):

 

     Years Ended
December 31,
     Nine Months Ended
September 30,
 
     2008      2009      2010          2010          2011  

Risk free interest rate

     2.24% - 3.75%         2.29% - 2.92%         2.51% - 2.83%         2.83%         1.13% - 2.35%   

Expected dividend yield

     0%         0%         0%         0%         0%   

Expected term—employee awards

     5 - 7 years         6 years         6 years         6 years         6 years   

Expected term—non-employee awards

     10 yrs         10 years         N/A         N/A         10 years   

Expected volatility

     70%         80%         76%         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, 2008, 2009 and 2010, and the nine months ended September 30, 2010 (unaudited) and 2011 (unaudited) as follows:

 

     Years Ended
December 31,
     Nine Months Ended
September 30,
 
     2008      2009      2010      2010      2011  
     (In thousands)  

Research and development

   $ 338       $ 406       $ 160       $ 131       $ 48   

General and administrative

     385         544         162         118         152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 723       $ 950       $ 322       $ 249       $ 200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Based on stock options outstanding as of December 31, 2010 and September 30, 2011, we had unrecognized stock-based compensation expense for employees, net of estimated forfeitures, of $0.4 million and $0.3 million (unaudited), respectively, which will be recognized over a weighted-average period of 2.9 and 2.3 (unaudited) years, respectively.

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.

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 October 1, 2010:

 

Grant Date

   Number
of
Shares
     Exercise Price
per Share
     Fair Value
Estimate per
Common Share
 

December 15, 2010

     30,000       $ 0.0700       $ 0.0014   

January 31, 2011

     200,000       $ 0.0700       $ 0.0014   

March 19, 2011

     20,000       $ 0.0060       $ 0.0014   

September 1, 2011

     425,000       $ 0.0016       $ 0.0016   

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, initial publics offerings, or IPOs, and the market performance of similar companies in the pharmaceutical and biotechnology industry sectors;

 

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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—2010 and 2011. Valuations of our common stock were completed as of December 31, 2009, November 19, 2010, December 31, 2010 and June 30, 2011. During 2009, 2010 and 2011, we issued an aggregate of $64.5 million of convertible notes payable, with associated common stock warrants, with exercise prices at the then 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 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 value is allocated among the various convertible debt and equity classes expected to be outstanding at the liquidity event 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.

Based on these valuations, the fair value of our common stock as of December 31, 2009 was determined to be $0.07, the fair value of our common stock as of November 19, 2010 and December 31, 2010 was determined to be $0.0014, and the fair value of our common stock as of June 30, 2011 was determined to be $0.0016.

The decrease in the fair value from December 31, 2009 to November 19, 2010 and December 31, 2010 can be mainly attributed to the dilutive effect of the issuances during 2010 of $15.0 million, 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 from December 31, 2010 to June 30, 2011 can be attributed to 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-positive and Gram-negative infections; 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.

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

 

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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 could 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 conversion of the outstanding convertible 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 stock options in connection with this offering under the Management Bonus Plan as more fully described in Note 14 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. It is currently anticipated that after issuing such number of shares of common stock to affect the conversion of the 2009 Notes, 2010 Notes and 2011 Notes, we will effect a reverse stock split that would materially impact 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 receive if the outstanding debt amount converted into shares of common stock immediately prior to repayment. These put rights are considered derivative instruments that require liability classification and mark-to-market accounting at each balance sheet date.

Therefore, upon each convertible notes payable closing, we determined the fair values of the put rights using the PWERM valuation analysis method consistent with the discussion above for the common stock valuations, and recorded the put rights as a liability on the balance sheets and as debt discount to be amortized to interest expense through the earliest date upon which we could have been required to repay the amounts outstanding for each respective convertible notes payable issuance. The fair values of the put rights associated with the 2009 Notes were amortized to interest expense through January 8, 2010, which was the original earliest date at which we could have been required to repay all amounts outstanding under the 2009 Notes. During the year ended December 31, 2010, the fair values of the put rights associated with the 2010 Notes were amortized to interest expense through March 31, 2011, which was the original earliest date at which we could have been required to repay all amounts outstanding under the

 

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2010 Notes. Subsequent to the amendment of the 2010 Notes in connection with the January 2011 Financing, which amended the original earliest date at which we could have been required to repay all amounts outstanding under the 2010 Notes from March 31, 2011 to June 30, 2012, the unamortized debt discount remaining at January 2011 is being amortized to interest expense through June 30, 2012. The fair values of the put rights associated with the 2011 Notes are being amortized to interest expense through June 30, 2012, which is the earliest date at which we can be required to repay all amounts outstanding under the 2011 Notes.

At the end of each reporting period, the fair values of the put rights are determined by management using the PWERM valuation analysis method consistent with the discussion above for the common stock valuations, and the recorded value adjusted, with any changes recorded as a component of interest expense. We will continue to adjust the fair values of the put rights at each period end for changes in fair value until the earlier of conversion or repayment of the associated convertible notes payable or the completion of this offering.

Fair Values of Common Stock Warrants

As part of the 2009 Financing, 2010 Financing and 2011 Financing, we issued warrants for the purchase of common stock. The 2009 warrants include a provision that provides for a reduction in the warrant exercise price if we subsequently issue additional shares of common stock for consideration per share less than the warrant exercise price. The 2010 and 2011 warrants include provisions that provide for a reduction in the warrant exercise price and an increase in the number of exercisable warrants if we subsequently issue additional shares of common stock for consideration per share less than the warrant exercise prices. As a result, the warrants have been deemed to be derivative instruments that require liability classification and mark-to-market accounting at each balance sheet date. Subsequent to the completion of an IPO, the provisions described above will no longer be applicable, and as such the requirements for liability classification and mark-to-market adjustments will cease.

Upon issuance, we estimated the fair values of these warrants using a multiple scenario probability-weighted option-pricing model with the following inputs: the estimated fair value of the underlying common stock at the valuation measurement date; the risk-free interest rates; the expected dividend rates; the remaining contractual terms of the warrants; the expected volatility of the price of the underlying common stock; and the probability of various liquidity events. Our estimates are based, in part, on subjective assumptions and could differ materially in the future. The fair values of these warrants were recorded as liabilities on the balance sheets and as debt discount to be amortized to interest expense through the earliest date upon which we could have been required to repay the amounts outstanding for each respective convertible notes payable issuance. The fair values of the warrants issued in connection with the 2009 Financing were amortized to interest expense through January 8, 2010, which was the original earliest date at which we could have been required to repay all amounts outstanding under the 2009 Notes. During the year ended December 31, 2010, the fair values of the warrants issued in connection with the 2010 Financing were being amortized to interest expense through March 31, 2011, which was the original earliest date at which we could have been required to repay all amounts outstanding under the 2010 Notes. As a result of the amendment of the 2010 Notes in connection with the 2011 Financing, which amended the original earliest date at which we could have been required to repay all amounts outstanding under the 2010 Notes from March 31, 2011 to June 30, 2012, the unamortized debt discount remaining at January 2011 is being amortized to interest expense through June 30, 2012. The fair values of the warrants issued in connection with the 2011 Financing are being amortized to interest expense through June 30, 2012, which is the earliest date at which we can be required to repay all amounts outstanding under the 2011 Notes.

 

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At the end of each reporting period, the fair values of the warrants are determined by management using a multiple scenario probability-weighted option-pricing model using the following inputs: the estimated fair value of the underlying common stock at the valuation measurement date; the risk-free interest rates; the expected dividend rates; the remaining contractual terms of the warrants; the expected volatility of the price of the underlying common stock; and the probability of various liquidity events with any changes in value during the period recorded as a component of interest expense. We will continue to adjust the fair values of the warrants at each period end for changes in fair value until the earlier of the exercise or expiration of the applicable common stock warrants or the completion of this offering.

Results of Operations

Comparison of the Nine Months Ended September 30, 2010 (unaudited) and 2011 (unaudited)

Revenues

The following table summarizes our revenues for the nine months ended September 30, 2010 and 2011:

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
     %
Increase
(Decrease)
 
     2010      2011        
     (In thousands, except percentages)  

Contract revenues

   $       $ 1,393       $ 1,393         100
  

 

 

    

 

 

    

 

 

    

We did not record revenue during the nine months ended September 30, 2010. During the nine months ended September 30, 2011, we recognized $1.4 million of contract revenues under the collaboration with Sanofi, based on the level of efforts expended during the period.

Research and Development Expenses

The following table summarizes our research and development expenses for the nine months ended September 30, 2010 and 2011:

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
     %
Increase
(Decrease)
 
      2010      2011        
     (In thousands, except percentages)  

Research and development expenses

   $ 7,945       $ 26,104       $ 18,159         229 %
  

 

 

    

 

 

    

 

 

    

Research and development expenses increased $18.2 million from the nine months ended September 30, 2010 to the nine months ended September 30, 2011. This increase was primarily due to a $17.9 million increase in outsourced development costs in connection with delafloxacin, radezolid and our RX-04 program. During the nine months ended September 30, 2011, we initiated enrollment in a Phase 2b clinical trial for delafloxacin for the treatment of ABSSSI to evaluate the new Food and Drug Administration objective endpoint measurements and also conducted various Phase 1 clinical trials for delafloxacin in preparation for Phase 3 clinical trials anticipated to begin in the second half of 2012. During the nine months ended September 30, 2011, we completed a Phase 1 clinical trial for radezolid with an IV formulation and a long-term preclinical study of radezolid to further evaluate its safety. With respect to our RX-04 program, during the nine months ended September 30, 2011, we accrued an estimated

 

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sub-license payment to a third party in connection with the collaboration with Sanofi. The overall $18.2 million increase in research and development expenses also included: a $0.3 million decrease in personnel costs resulting from a slight decrease in headcount; a $0.1 million increase in professional and consulting fees due to increased consulting fees for our regulatory, clinical and preclinical activities; and a $0.4 million increase in travel and other costs.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2010 and 2011:

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
     %
Increase
(Decrease)
 
     2010      2011        
     (In thousands, except percentages)  

General and administrative expenses

   $ 3,980       $ 4,421       $ 441         11 %
  

 

 

    

 

 

    

 

 

    

The $0.4 million increase in general and administrative expenses from the nine months ended September 30, 2010 to the nine months ended September 30, 2011 was primarily due to: a $0.4 million decrease in personnel costs resulting from lower executive recruitment and severance costs; a $0.7 million net increase in consulting costs related to increased legal, accounting and tax services, including higher legal costs incurred for the ongoing pursuit of patent protection of our intellectual property, offset by lower business development and investor relation costs; and a $0.1 million increase in travel and other costs.

Interest Income

The following table summarizes our interest income for the nine months ended September 30, 2010 and 2011:

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
     %
Increase
(Decrease)
 
     2010      2011        
     (In thousands, except percentages)  

Interest income

   $ 8       $ 11       $ 3         38 %
  

 

 

    

 

 

    

 

 

    

Interest income was essentially unchanged for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010, due to the similar amounts of cash and cash equivalents available for investment during the periods. During both the nine months ended September 30, 2010 and 2011, our interest income was not significant due to nominal cash and cash equivalent balances.

 

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Interest Expense

The following table summarizes our interest expense for the nine months ended September 30, 2010 and 2011:

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2010     2011       
     (In thousands, except percentages)  

Cash interest expense:

         

Notes payable

   $ 261      $       $ (261     (100 )%

Convertible notes payable

     3,126        5,185         2,059        66
  

 

 

   

 

 

    

 

 

   

Sub-total cash interest expense

     3,387        5,185         1,798        53
  

 

 

   

 

 

    

 

 

   

Non-cash interest expense:

         

Convertible notes payable—debt discount amortization

     1,560        4,956         3,396        218

Convertible notes payable—mark-to-market adjustments

     (889     8,036         8,925        1,004

Debt issuance costs amortization

     359        250         (109     (30 )% 

Notes payable

     60                (60     (100 )% 
  

 

 

   

 

 

    

 

 

   

Sub-total non-cash interest expense

     1,090        13,242         12,152        1,115
  

 

 

   

 

 

    

 

 

   

Total interest expense

   $ 4,477      $ 18,427       $ 13,950        312
  

 

 

   

 

 

    

 

 

   

The $14.0 million increase in interest expense in the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 was primarily due to: the increase of $2.1 million of cash interest expense resulting from the 2010 Financing as interest was payable for the full nine month period ended September 2011 and the increase in outstanding convertible notes payable due to the 2011 Financings; an increase of $3.4 million in non-cash interest expense primarily resulting from debt discount amortization of the initial fair values for the put rights in connection with the 2010 Financing and 2011 Financing; and an increase of $8.9 million in non-cash interest expense primarily as a result of mark-to-market adjustments of the put rights, as further described above and under “Fair Values of Change of Control and Liquidation Put Rights” reflecting an increase in the fair values of the put rights during the nine months ended September 30, 2011.

Other Income

The following table summarizes our other income for the nine months ended September 30, 2010 and 2011:

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2010      2011       
     (In thousands, except percentages)  

Other income

   $ 89       $ 86       $ (3     (3 )%
  

 

 

    

 

 

    

 

 

   

Other income was the result of the Connecticut research and development tax credit exchange and was essentially unchanged for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010, due to the similar amounts of qualifying research and development expenses for both periods.

 

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Comparison of the Years Ended December 31, 2009 and 2010

Revenues

We did not record revenue during the years ended December 31, 2009 and 2010.

Research and Development Expenses

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

 

     Years Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2009      2010       
     (In thousands, except percentages)  

Research and development expenses

   $ 17,592       $ 12,422       $ (5,170     (29 )%
  

 

 

    

 

 

    

 

 

   

Research and development expenses decreased $5.2 million from 2009 to 2010. The decrease was primarily due to a $4.3 million decrease in outsourced discovery and development costs in connection with delafloxacin, radezolid and our RX-04 program. This decrease was partially due to a $1.5 million milestone payment made to Wakunaga during 2009 for delafloxacin with no corresponding payment during 2010, as well as a decrease in preclinical toxicology studies for delafloxacin. In connection with radezolid, we completed during 2009 a Phase 2 clinical trial for community acquired bacterial pneumonia and there were no further costs incurred during 2010. In addition, there was a decrease in preclinical toxicology studies for radezolid. We increased our discovery activities for our RX-04 program by $0.2 million during 2010 as compared to 2009. The overall $5.2 million decrease in research and development expenses also included: a $1.1 million decrease in personnel costs resulting from a reduction in headcount affected in the second quarter of 2009 and lower stock-based compensation costs in 2010 due to the decrease in our common stock value; offset by a $0.1 million increase in professional and consulting fees in connection with costs for European Union regulatory consulting services; and a $0.1 million increase in travel and other costs.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the years ended December 31, 2009 and 2010:

 

     Years Ended
December 31,
     Increase
(Decrease)
     %
Increase
(Decrease)
 
      2009      2010        
     (In thousands, except percentages)  

General and administrative expenses

   $ 3,888       $ 5,152       $ 1,264         33 %
  

 

 

    

 

 

    

 

 

    

The $1.3 million increase in general and administrative expenses from 2009 to 2010 was primarily due to: a net increase of $0.6 million in personnel costs including recruitment and severance costs incurred during 2010, offset by lower stock-based compensation costs in 2010 due to the decrease in our common stock value; a $0.4 million increase in consulting costs related to additional accounting and tax services in 2010 as compared to 2009, human resources training efforts during 2010, additional business development and investor relation activities and legal fees during 2010 in connection with the ongoing pursuit of patent protection of our intellectual property, offset by lower board of directors’ fees during 2010; and a $0.2 million increase in travel and other costs.

 

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Interest Income

The following table summarizes our interest income for the years ended December 31, 2009 and 2010:

 

     Years Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2009      2010       
     (In thousands, except percentages)  

Interest income

   $ 68       $ 11       $ (57     (84 )%
  

 

 

    

 

 

    

 

 

   

The $0.1 million decrease in interest income for 2010 as compared to 2009 was the result of decreased cash and cash equivalents balances available for investment. During both 2009 and 2010, our interest income was not significant due to nominal cash and cash equivalent balances.

Interest Expense

The following table summarizes our interest expense for the years ended December 31, 2009 and 2010:

 

     Years Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2009     2010       
     (In thousands, except percentages)  

Cash interest expense:

         

Notes payable

   $ 1,055      $ 261       $ (794     (75 )%

Convertible notes payable

     2,591        4,476         1,885        73 %
  

 

 

   

 

 

    

 

 

   

Sub-total cash interest expense

     3,646        4,737         1,091        30 %
  

 

 

   

 

 

    

 

 

   

Non-cash interest expense:

         

Convertible notes payable—debt discount amortization

     7,831        3,845         (3,986     (51 )% 

Convertible notes payable—mark-to-market adjustments

     (4,917     1,407         6,324        129

Debt issuance costs amortization

     613        246         (367     (60 )%

Notes payable

     (221     55         276        125
  

 

 

   

 

 

    

 

 

   

Sub-total non-cash interest expense

     3,306        5,553         2,247        68 %
  

 

 

   

 

 

    

 

 

   

Total interest expense

   $ 6,952      $ 10,290       $ 3,338        48 %
  

 

 

   

 

 

    

 

 

   

The $3.3 million increase in interest expense in 2010 as compared to 2009 was primarily due to: an additional $1.9 million in cash interest expense during 2010 on the 2009 Notes and 2010 Notes; a reduction in non-cash interest expense of $4.0 million in connection with debt discount amortization as a result of the lower initial fair values for the put rights and common stock warrants in connection with the 2010 Notes as compared to the 2009 Notes; and an increase of $6.3 million in non-cash interest expense as a result of the mark-to-market adjustments reflecting increasing values of the put rights during 2010 versus decreasing values during 2009.

 

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Other Income

The following table summarizes our other income for the years ended December 31, 2009 and 2010:

 

     Years Ended
December 31,
     Increase
(Decrease)
     %
Increase
(Decrease)
 
     2009      2010        
     (In thousands, except percentages)  

Other income

   $ 160       $ 1,098       $ 938         586 %
  

 

 

    

 

 

    

 

 

    

The $0.9 million increase in other income in 2010 as compared to 2009 was primarily the result of our receipt of approximately $1.0 million in 2010 under the QTDP program.

Comparison of the Years Ended December 31, 2008 and 2009

Revenues

We did not record revenue during the years ended December 31, 2008 and 2009.

Research and Development Expenses

The following table summarizes our research and development expenses for the years ended December 31, 2008 and 2009:

 

     Years Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2008      2009       
     (In thousands, except percentages)  

Research and development expenses

   $ 29,182       $ 17,592       $ (11,590     (40 )%
  

 

 

    

 

 

    

 

 

   

Research and development expenses decreased $11.6 million from 2008 to 2009. This decrease was primarily due to a $10.4 million decrease in outsourced discovery and development costs in connection with delafloxacin and radezolid. The decrease was partially due to the completion of Phase 2 clinical trials for delafloxacin in cSSSI and radezolid in uSSSI during 2008. In addition, there was a decrease in preclinical toxicology studies for delafloxacin and a decrease in ongoing formulation development activities for radezolid. The overall $11.6 million decrease in research and development expenses also included: a $0.5 million decrease in personnel costs resulting from a reduction in employee headcount affected in mid 2009; a $0.2 million decrease in professional and consulting fees due to a reduction in consulting fees for our regulatory, clinical and preclinical activities; and a $0.5 million decrease in travel and other costs.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the years ended December 31, 2008 and 2009:

 

     Years Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2008      2009       
     (In thousands, except percentages)  

General and administrative expenses

   $ 4,813       $ 3,888       $ (925     (19 )%
  

 

 

    

 

 

    

 

 

   

 

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The $0.9 million decrease in general and administrative expenses from 2008 to 2009 was primarily due to: a $0.4 million decrease in personnel costs in connection with lower executive recruitment costs in 2009 as compared to 2008; a net decrease of $0.4 million in consulting costs partially due to lower board of directors’ fees during 2009 and lower legal costs incurred for patent protection of our intellectual property, offset by additional accounting and tax services in 2009 as compared to 2008; and a $0.1 million decrease in travel and other costs.

Interest Income

The following table summarizes our interest income for the years ended December 31, 2008 and 2009:

 

     Years Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2008      2009       
     (In thousands, except percentages)  

Interest income

   $ 707       $ 68       $ (639     (90 )%
  

 

 

    

 

 

    

 

 

   

The $0.6 million decrease in interest income for 2009 as compared to 2008 was the result of decreased cash and cash equivalent balances available for investment during 2009.

Interest Expense

The following table summarizes our interest expense for the years ended December 31, 2008 and 2009:

 

     Years Ended
December 31,
    Increase
(Decrease)
    %
Increase
(Decrease)
 
     2008      2009      
     (In thousands, except percentages)  

Cash interest expense:

         

Notes payable

   $ 1,673       $ 1,055      $ (618     (37 )%

Convertible notes payable

             2,591        2,591        100 %
  

 

 

    

 

 

   

 

 

   

Sub-total cash interest expense

     1,673         3,646        1,973        118 %
  

 

 

    

 

 

   

 

 

   

Non-cash interest expense:

         

Convertible notes payable—debt discount amortization

             7,831        7,831        100

Convertible notes payable—mark-to-market adjustments

             (4,917     (4,917     (100 )% 

Debt issuance costs amortization

     226         613        387        171 %

Notes payable

     162         (221     (383     (236 )% 
  

 

 

    

 

 

   

 

 

   

Sub-total non-cash interest expense

     388         3,306        2,918        752 %
  

 

 

    

 

 

   

 

 

   

Total interest expense

   $ 2,061       $ 6,952      $ 4,891        237 %
  

 

 

    

 

 

   

 

 

   

The $4.9 million increase in interest expense in 2009 as compared to 2008 was primarily due to: cash interest expense of $2.6 million on the 2009 Notes; debt discount amortization of $7.8 million during 2009 as a result of the initial fair values of the put rights and common stock warrants issued in connection with the 2009 Financing; offset by a reduction in interest expense of $4.9 million as a result of the mark-to-market adjustments reflecting a decrease in the values of the put rights at the end of 2009 as compared to their initial valuations.

 

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Other Income

The following table summarizes our other income for the years ended December 31, 2008 and 2009:

 

     Years Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
     2008      2009       
     (In thousands, except percentages)  

Other income

   $ 174       $ 160       $ (14     (8 )%
  

 

 

    

 

 

    

 

 

   

The decrease in other income for 2009 as compared to 2008 was the result of a lower Connecticut research and development tax credit exchange in 2009 as compared to 2008 due to a reduction in the qualifying research and development expenses incurred in 2009 as compared to 2008.

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operation since our inception in October 2000, and as of September 30, 2011, we had an accumulated deficit of $238.3 million. We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may obtain from public or private equity, debt financings or other sources, such as corporate collaborations and licensing arrangements.

Since our inception in October 2000 through September 30, 2011, we have funded our operations principally through the receipt of $208.4 million from: the private placement of $122.4 million of preferred equity securities; the private placement of $64.5 million of convertible notes payable; funds received to date under the collaboration with Sanofi of $19.0 million; and receipt of $2.5 million from research grants and government tax credit payments. We had outstanding principal balances under our convertible notes payable of $64.5 million as of September 30, 2011. We had cash and cash equivalents of $9.7 million as of September 30, 2011. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in cash and money market accounts.

Cash Flows

The following table sets forth the major sources and uses of cash and cash equivalents for the years ended December 31, 2008, 2009 and 2010, and the nine months ended September 30, 2010 (unaudited) and 2011 (unaudited):

 

     Years Ended
December 31,
    Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
     (In thousands)  

Net cash used in operating activities

   $ (33,349   $ (24,213   $ (16,746   $ (11,825   $ (5,731

Net cash provided by (used in) investing activities

     23,598        (750     626        660        (150

Net cash provided by financing activities

     3,337        27,045        7,005        4,061        14,163   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (6,414   $ 2,082      $ (9,115   $ (7,104   $ 8,282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Net cash used in operating activities. During the years ended December 31, 2008, 2009 and 2010, and the nine months ended September 30, 2010 and 2011, our operating activities used cash of $33.3 million, $24.2 million, $16.7 million, $11.8 million and $5.7 million, respectively. The use of cash in all periods resulted from our net losses adjusted for non-cash items and changes in operating assets and liabilities. The cash used in operating activities of $33.3 million in 2008 was primarily due to a net loss of $35.2 million primarily attributed to research and development activities. The cash used in operating activities of $24.2 million in 2009 was primarily due to a net loss of $28.2 million primarily attributed to research and development activities and interest expense, and decreases in accounts payable and accrued expenses of $2.1 million and $1.3 million, respectively, offset by non-cash interest expense of $3.3 million and an increase in accrued interest of $2.5 million. The cash used in operating activities of $16.7 million in 2010 was primarily due to a net loss of $26.8 million primarily attributed to research and development activities and interest expense, offset by non-cash interest of $5.6 million and an increase in accrued interest of $4.5 million. The cash used in operating activities of $11.8 million in the nine months ended September 30, 2010 was primarily due to a net loss of $16.3 million primarily attributed to research and development activities and interest expense, offset by non-cash interest of $1.1 million and an increase in accrued interest of $3.1 million. The cash used in operating activities of $5.7 million in the nine months ended September 30, 2011 was primarily due to a net loss of $47.5 million primarily attributed to research and development activities and interest expense, offset by non-cash interest of $13.2 million and increases in accrued interest, accounts payable, accrued expenses and deferred revenue, in connection with our collaboration with Sanofi, of $5.2 million, $2.0 million, $3.0 million and $17.6 million, respectively.

Net cash provided by (used in) investing activities. During the years ended December 31, 2008 and 2010, and the nine months ended September 30, 2010, our investing activities provided cash of $23.6 million, $0.6 million and $0.7 million, respectively, and was primarily attributable to maturities in excess of purchases of marketable securities. During the year ended December 31, 2009, our investing activities used cash of $0.7 million, primarily attributable to purchases in excess of maturities of marketable securities. During the nine months ended September 30, 2011, the cash used in investing activities of $0.2 million was a result of the purchase of fixed assets.

Net cash provided by financing activities. During the years ended December 31, 2008, 2009 and 2010, and the nine months ended September 30, 2010 and 2011, our financing activities provided net cash of $3.3 million, $27.0 million, $7.0 million, $4.1 million and $14.2 million, respectively. The cash provided by financing activities of $3.3 million in 2008 was a result of the borrowing of $10.0 million in March 2008 under a credit and security agreement with two banks, offset by $6.7 million of repayments on borrowings under the credit and security agreement, as well as a construction loan entered into during 2007 with an investor who is also one of our stockholders. The construction loan was paid in full during September 2008. The cash provided by financing activities of $27.0 million in 2009 was a result of the private placement of $34.9 million of convertible notes payable, net of issuance costs, offset by $7.9 million of repayments on borrowings under the credit and security agreement. The net cash provided by financing activities of $7.0 million in 2010 was a result of the private placement of $14.2 million of convertible notes payable, net of issuance costs, offset by $7.2 million of repayments on borrowings under the credit and security agreement. The credit and security agreement was paid in full during October 2010. The net cash provided by financing activities of $4.1 million in the nine months ended September 30, 2010 was a result of the private placement of $10.5 million of convertible notes payable, net of issuance costs, offset by $6.5 million of repayments on borrowings under the credit and security agreement. The net cash provided by financing activities of $14.2 million in the nine months ended September 30, 2011 was a result of the private placement of $14.2 million of convertible notes payable, net of issuance costs.

 

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Future Funding Requirements

We anticipate that we will continue to incur net losses for the next several years due to expenses for our preclinical studies and clinical trials as we:

 

   

initiate Phase 3 development of delafloxacin in ABSSSI in the second half of 2012, with the goal of submitting applications for marketing approval to the U.S. Food and Drug Administration and European Medicines Agency as early as 2014;

 

   

initiate a Phase 2 study for radezolid in the treatment of ABSSSI and a long-term Phase 1 safety study for radezolid in humans to demonstrate what we believe is a differentiable, long-term safety advantage over Zyvox;

 

   

continue to progress our RX-04 preclinical program, in collaboration with Sanofi, to identify and develop multiple product candidates; and

 

   

continue to advance our RX-05 and RX-06 discovery programs into preclinical and clinical development.

We believe that the net proceeds from this offering, together with anticipated payments from the collaboration with Sanofi and our existing cash and cash equivalents, will be sufficient to fund our operations through             . We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. There can be no assurance that this offering will become effective or that any securities will be sold pursuant to it. If we are unable to raise sufficient additional capital, we may need to substantially curtail our planned operations.

Our forecasts of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.”

Because of the numerous risks and uncertainties associated with preclinical and clinical development, and given the early stage of our discovery programs, we are unable to estimate or know the nature of the efforts, specific timing or estimated costs that will be necessary to complete the development of our product candidates. Our future funding requirements, both short-term and long-term, will depend on numerous forward-looking 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;

 

   

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

 

   

the number and characteristics of product candidates that we pursue;

 

   

the outcome, timing and cost of regulatory approvals;

 

   

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;

 

   

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

 

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

 

   

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

 

   

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

Our cash and cash equivalent balances as of December 31, 2010, significant debt outstanding 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, 2010 with respect to this uncertainty. However, our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we became unable to continue as a going concern, we could be unable to continue operations and could have to liquidate our assets.

The net proceeds from this offering alone will not be sufficient to fund our operations through to the successful development and commercialization of any products we develop. As a result, we will need to raise additional capital in the future to fund our operations and continue to conduct clinical trials to support potential regulatory approval of our product candidates. To raise additional capital, we may seek to sell additional equity or debt securities, or incur indebtedness. The sale of additional equity and debt securities may result in additional dilution to our stockholders. We may also seek funding through collaborations or other similar arrangements with third parties.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2011 (unaudited) and the effect such obligations are expected to have on our liquidity and cash flow in future years.

 

     Payment by Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (In thousands)  

Operating leases (1)

   $ 2,188       $ 560       $ 1,628      $       $   

Convertible notes payable (2)

     64,516                         64,516           

Accrued interest on convertible notes payable (2)

     55,328                         55,328           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 122,032       $ 560       $ 1,628       $ 119,844       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Our share of operating expenses under our facility lease agreement is excluded.

 

(2)  

The convertible notes payable and accrued interest on convertible notes payable relate to the 2009 Financing, 2010 Financing and 2011 Financing. The amended terms of the 2009 Notes provide that unless previously converted or repaid, principal and interest shall become due and payable on the later of (i) January 8, 2014 and (ii) the 91st day following the earlier of (y) January 10, 2016 and (z) the date of payment or conversion in full of the 2011 Notes. The amended terms of the 2009 Notes also provide that upon a vote by the holders of 2009 Notes representing 60% of the outstanding principal amount of all 2009 Notes, the holders of the 2009 Notes can demand repayment after June 30, 2012, provided there are

 

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no 2011 Notes or 2010 Notes outstanding. The amended terms of the 2010 Notes provide that unless previously converted or repaid, principal and interest shall become due and payable on the later of (i) May 28, 2015 and (ii) the 91st day following the earlier of (y) January 10, 2016 and (z) the date of payment or conversion in full of the 2011 Notes. The amended terms of the 2010 Notes also provide that upon a vote by the holders of 2010 Notes representing a majority of the outstanding principal amount of all 2010 Notes, the holders of the 2010 Notes can demand repayment after the earlier of (i) June 30, 2012, provided there are no 2011 Notes outstanding, and (ii) the date on which we enter into an exclusive product licensing transaction providing at least $30.0 million in upfront net cash proceeds to us. The terms of the 2011 Notes provide that unless previously converted or repaid, principal and interest on the 2011 Notes shall become due and payable five years from the date of issuance. The terms of the 2011 Notes also provide that upon a vote by the holders of 2011 Notes representing a majority of the outstanding principal amount of all 2011 Notes, the holders of the 2011 Notes can demand repayment after the earlier of (i) June 30, 2012 and (ii) the date on which we enter into an exclusive product licensing transaction providing us with at least $30.0 million in upfront net cash proceeds. The amounts for the convertible notes payable and accrued interest on convertible notes payable in the table above are classified based on the stated maturity dates, and therefore do not reflect the earlier put dates of June 30, 2012.

The table above reflects only payment obligations that are fixed and determinable. We enter into contracts in the normal course of business with CROs for clinical trials and clinical supply manufacturing, and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore we believe that our non-cancelable obligations under these agreements are not material. Milestone payments and royalty payments under our license agreements are not included in the table above because we cannot, at this time, determine when or if the events triggering the commencement of payment obligations will occur.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in the use of off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued ASU 2009-13. ASC Topic 605-25 previously required companies to allocate revenue based on the fair value of each deliverable even though such deliverables may not be sold separately either by the company itself or other vendors. ASU 2009-13 eliminates (i) the residual method of revenue allocation and (ii) the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to items that already have been delivered. Allocation of consideration is now based on management’s best estimate of the selling price for an undelivered item where there is no other means to determine the fair value of that undelivered item. This revised accounting standard was effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We adopted this guidance as of January 1, 2011 and it was applicable to the Sanofi collaboration and license agreement we entered into in 2011.

In April 2010, the FASB amended ASU 2010-17, which provides guidance on the milestone method of revenue recognition for research or development arrangements. Under the amended ASU 2010-17, an entity can make an accounting policy election to recognize a payment that is

 

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contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The milestone method is not required and is not the only acceptable method of revenue recognition for milestone payments. This amended standard was effective prospectively for milestones achieved during annual and interim reporting periods beginning on or after June 15, 2010. Early application is permitted. We adopted this guidance as of January 1, 2011.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011. Early application is not permitted. We will adopt this amended guidance for the fiscal year beginning January 1, 2012. We are currently evaluating the disclosure requirements related to providing quantitative information about unobservable inputs used to measure the fair value of our contingent consideration liability.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

Quantitative and Qualitative Disclosures about Market Risk

Our cash and cash equivalents as of September 30, 2011 consisted primarily of cash and money market accounts. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of United States interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operation. The interest rates on our convertible notes payable are fixed and therefore not subject to interest rate risk. We do not have any foreign currency or other derivative financial instruments.

 

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BUSINESS

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 three Phase 2 clinical trials, and we have fully enrolled our Phase 2b clinical trial of delafloxacin for the treatment of acute bacterial skin and skin structure infections, or ABSSSI. We expect to receive Phase 2b top-line data at the end of 2011 and plan to commence Phase 3 development in the second half of 2012. Subject to the results of Phase 3 clinical trials, we anticipate submitting a New Drug Application for delafloxacin for the treatment of ABSSSI as early as 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 development of RX-04, our preclinical program partnered with Sanofi, S.A., which has produced new classes of antibiotics that target a novel binding site within the bacterial ribosome and are designed to combat the most difficult-to-treat, multi-drug resistant Gram-positive and Gram-negative bacteria. Because its protein building function is essential for the life of infection-causing bacterium, the bacterial ribosome is the target of most marketed antibiotics, which work by binding to the ribosome and inhibiting its function. 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 believe one of our key competitive advantages is our focus on the three-dimensional properties of antibiotics, which is enabled by our proprietary drug discovery platform. Unlike traditional approaches to antibiotic discovery, which generally rely on random screening of chemical libraries to identify potential compounds, our discovery team combines sophisticated and exclusive computational tools with patent-protected, atomic-level insights into the structure of the ribosome to systematically engineer novel antibiotics to avoid resistance and optimize potency, spectrum, efficacy and safety. As a result, we have created a highly efficient and productive drug development engine based on our unique design strategy that effectively leverages structure-based drug design, preparative medicinal chemistry, ribosome biochemistry, molecular biology and pharmacology.

The Antibiotic Market

Background

The growing issue of antibiotic-resistant bacterial infections has been widely recognized as an increasingly urgent public health threat, including by the World Health Organization, the Centers for Disease Control, or CDC, and the Infectious Disease Society of America, or IDSA. Antibiotic resistance has limited the effectiveness of existing drugs, and the discovery of new antibiotics to deal with resistance has not kept pace with the increasing incidence of difficult-to-treat microorganisms. Staphylococcus skin and soft tissue infections in the United States alone accounted for on average nearly 12 million physician and emergency department visits annually in the years from 2001 to 2003 according to the CDC. In addition, the IDSA estimated in 2004 that nearly two million infections are developed in the hospital setting

 

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annually in the United States, resulting in the deaths of 90,000 patients each year. Of these infections, 70% are caused by bacteria that are resistant to one or more antibiotics used to treat them, including those caused by MRSA. The CDC estimated that MRSA alone caused 94,000 life-threatening infections and almost 19,000 deaths in 2005 in the United States, exceeding the number of deaths caused by HIV/AIDS during the same time period. We estimate that the use of antibiotics to treat MRSA has increased at a compounded annual growth rate of 18% for the years from 2005 to 2009 and is forecasted to continue growing through 2019. In April 2011, IDSA issued a report published in Clinical Infectious Diseases warning that unless significant measures are taken now to increase the pipeline of new antibiotics active against drug resistant infections, people will start to die from common, formerly treatable infections, and medical interventions such as surgery, chemotherapy, organ transplantation and care of premature infants will become increasingly risky.

Bacterial infections are caused by a variety of different types of bacteria that attack the body as they enter through the skin, lungs, nasal passages or gastrointestinal tract, and are not controlled by the body’s immune system. They can range from mild to serious, life threatening infections requiring immediate treatment. Bacteria are broadly categorized as Gram-positive, Gram-negative, atypical or anaerobic. Gram-positive bacteria possess a single membrane and a thick cell wall and turn dark-blue or violet when subjected to a laboratory staining method known as Gram’s method. Common causes of Gram-positive bacterial infections include species of Staphylococcus, such as MRSA, Streptococcus and Enterococcus. Gram-negative bacteria have two membranes with a thin cell wall and, when subjected to Gram’s method of staining, lose the stain or are decolorized. The most common cause of Gram-negative infection is Escherichia coli, or E. coli, which we estimate represents more than 50% of such infections. Less prevalent Gram-negative bacteria strains include species of Acinetobacter, Enterobacter and Pseudomonas. Atypical bacteria, such as Legionella species, have modified cell walls and are neither Gram-positive nor Gram-negative. Anaerobic bacteria, such as Bacteroides species, either cannot grow in the presence of oxygen or do not require oxygen to grow.

Many strains of bacteria have mutated over time to develop resistance to existing drugs, resulting in increasingly serious and more difficult to treat infections. The rates of infections caused by single- or multi-drug resistant microorganisms continue to rise globally. We estimate that approximately 30% of these infections contain multiple strains of bacteria, including Gram-positive and Gram-negative strains. The CDC estimates that the extra cost to the U.S. health care system in 2009 from health care associated infections ranged between $36 and $45 billion annually after adjusting to 2007 dollars using the Consumer Price Index for inpatient hospital services. According to the CDC, approximately 60% of certain common resistant infections acquired during hospital stays are caused by MRSA. Another resistant Gram-positive infection, vancomycin-resistant enterococci, or VRE, has also become increasingly common. From 1990 to 2003, the prevalence of VRE in enterococcal isolates from hospitalized patients increased from less than 1% to approximately 29%. While MRSA remains the single most common resistant bacterial infection, and MRSA and VRE together constitute a significant majority of resistant bacterial infections, resistant Gram-negative infections are also rapidly increasing. For example, in 1997, the SENTRY Antimicrobial Surveillance Program found that among Klebsiella pneumoniae strains isolated in the United States, resistance rates to ceftazidime and other third-generation cephalosporins were 7%, 10%, 5%, and 4% for bloodstream, pneumonia, wound, and urinary tract infections, respectively. However, by 2003, 21% of all Klebsiella pneumoniae isolates from intensive care units included in the National Nosocomial Infections Surveillance System were resistant to these drugs. In addition, Gram-negative strains of Acinetobacter, Enterobacter and Pseudomonas are particularly life threatening, having mortality rates of 21%, 12% and 14%, respectively, as of 2009.

 

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Antibiotics are also characterized by their basic molecular structure, which is known as their antibiotic “class”. Of the more than 20 different classes of antibiotics, only two new classes of hospital antibiotics have been commercialized in the last 40 years. Antibiotics are primarily differentiated based on their potency and effectiveness against particular strains of bacteria as well as the spectrum of bacterial strains against which they are active. For example, broad-spectrum antibiotics are active against both Gram-positive and Gram-negative bacteria and narrow-spectrum antibiotics are usually active against only a select subset of Gram-positive or Gram-negative bacteria. Because it usually takes from 24 to 48 hours to definitively diagnose a particular bacterial infection, effective first-line treatment in hospital emergency departments of serious infections requires the use of antibiotics with broad-spectrum coverage, including coverage of MRSA, until the bacterial infection can be diagnosed. In general, while physicians generally prefer narrower spectrum antibiotics once a pathogen has been identified, they will typically continue with broad-spectrum treatment to conclusion if a patient’s infection is improving. Other important characteristics in distinguishing among antibiotics include their safety and tolerability, the frequency and route of administration of their dosing and their likelihood of developing resistant bacterial strains.

Market Opportunity

According to Datamonitor, in the seven major pharmaceutical markets, which consist of the United States, Japan, the United Kingdom, Germany, France, Italy and Spain, antibiotic product sales totaled approximately $20 billion in 2009 and, within the hospital market, approximately $10 billion was generated from antibiotic sales in 2006. In 2009, the global market for products targeting MRSA was over $2.6 billion and the total Staphylococcal market was approximately $3 billion. We estimate that in 2010, sales in the United States of major antibiotics, such as vancomycin, daptomycin, marketed as Cubicin, and linezolid, marketed as Zyvox, which are designed to treat serious infections caused by resistant Gram-positive bacteria like MRSA, amounted to approximately $1.6 billion. We estimate that the use of antibiotics to treat MRSA has increased at a compounded annual growth rate of 18% for the years between 2005 and 2009 and is forecasted to continue growing through 2019. There have been no new classes of antibiotics approved with broad-spectrum coverage or to treat multi-drug resistant Gram-negative pathogens in the last 20 years.

The most widely prescribed antibiotics currently used by hospitals to treat multi-drug resistant infections, such as MRSA and Gram-negative bacteria, include:

 

   

Vancomycin. The current first-line standard of care in hospital emergency rooms for serious infections is an antibiotic cocktail consisting of vancomycin, a generic intravenous, or IV, therapy, and a Gram-negative therapy. Vancomycin is also used as focused therapy for certain Gram-positive infections. According to GlobalData, in 2009, vancomycin generated sales of approximately $164 million in the United States and represented the majority of courses prescribed. Vancomycin is associated with allergic reactions and can cause kidney damage, or renal toxicity, loss of balance, or vestibular toxicity, and loss of hearing, or oto-toxicity in certain patients. The rise of vancomycin-resistant bacterial strains in recent years, such as VRE, vancomycin intermediate-resistant Staphylococcus aureus, or VISA, and vancomycin-resistant Staphylococcus aureus, or VRSA, has also reduced the drug’s usefulness. These limitations of vancomycin are increasingly requiring a second-line treatment such as Zyvox (linezolid) or Cubicin (daptomycin) and additional days spent in the hospital.

 

   

Zyvox. Zyvox (linezolid), a twice-per-day IV/oral oxazolidinone, is a leading antibiotic for serious Gram-positive infections, including MRSA. It is used predominantly as a second-

 

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or third-line treatment and as a branded treatment alternative to vancomycin for resistant Gram-positive infections. In 2010, Pfizer Inc. reported Zyvox sales of $1.2 billion worldwide, including $613 million in the United States. Zyvox requires active monitoring for use beyond two weeks of therapy due to the potential for significant adverse side effects, including bone marrow suppression, or myelosuppression, and nerve damage, or neurotoxicity. Zyvox use has been associated with drug resistance, including increased incidence of Zyvox-resistant Staphylococcus aureus, or ZRSA, and Zyvox-resistant enterococci, or ZRE. Zyvox is also a narrow-spectrum drug, which prevents its use as a monotherapy for the first-line treatment of serious bacterial infections. In addition, Zyvox is contraindicated for use in people taking monoamine oxidase inhibitors, a class of drugs formerly commonly used as anti-depressants, and should not be used without careful observation in people taking selective serotonin reuptake inhibitors, a class of drugs commonly used as anti-depressants, among other uses. We believe that these issues will continue to limit the use of Zyvox, as well as any generic form of linezolid available in the future.

 

   

Cubicin. Cubicin (daptomycin), a lipopeptide, is another common antibiotic used as a second-line treatment and as a branded treatment alternative to vancomycin for infections due to resistant Gram-positive bacteria, particularly MRSA. In 2010, Cubist Pharmaceuticals, Inc. reported net revenues in the United States of $600 million for Cubicin. Cubicin is only available in an IV form and requires regular laboratory monitoring for toxic side effects in certain patients. Cubicin is also not indicated for the treatment of lung infections. In addition, bacterial resistance to Cubicin is increasing.

 

   

Tygacil. Tygacil (tigecycline), an IV-only glycylcycline, a sub-class of tetracyclines, was approved by the FDA in June 2005. Tygacil is a broad-spectrum antibiotic with coverage of resistant Gram-positive bacteria, such as MRSA, and Gram-negative bacteria, such as E. coli. Tygacil is generally utilized as a third- or fourth-line antibiotic due to its greater risk of mortality as compared to the active comparators in its clinical studies and high rates of vomiting and nausea. According to Pfizer, Tygacil generated sales of $324 million globally, including $164 million in the United States in 2010.

Our Strategy

Our objective is to discover, develop and commercialize best-in-class and new classes of anti-infectives with superior coverage, safety and convenience to provide new standards of care for patients with serious and life-threatening infections. The critical components of our business strategy are:

 

   

Complete the clinical development of delafloxacin. Subject to the results of our Phase 2b trial, we plan to initiate Phase 3 development of delafloxacin in ABSSSI in the second half of 2012, with the goal of submitting applications for marketing approval to the U.S. Food and Drug Administration, or FDA, and European Medicines Agency, or EMA, as early as 2014. We also intend to seek approval for additional indications for delafloxacin, including CABP and cIAI.

 

   

Advance the clinical development of radezolid. Having successfully completed Phase 2 studies with an oral formulation of radezolid in uncomplicated skin and skin structure infections, or uSSSI, and in CABP, we intend to initiate a Phase 2 study for the treatment of ABSSSI and a 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, including as a result of orthopedic surgery.

 

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Advance the development of multiple product candidates from our RX-04 program through our collaboration with Sanofi. 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. We expect that the product candidates that emerge from the RX-04 program will target a variety of uses, including the treatment of the most deadly and difficult-to-treat, multi-drug resistant Gram-positive and Gram-negative pathogens.

 

   

Leverage our discovery platform to continue to expand our pipeline of anti-infective product candidates. We intend to continue to pursue active discovery programs using our proprietary platform to identify new binding sites within the ribosome and additional product candidates with broad-spectrum efficacy and safety to combat resistance mechanisms. In particular, we intend to demonstrate evidence of potency, enabling lead identification and optimization in our RX-05 antibiotic program and our RX-06 antifungal program in 2012.

 

   

Build in-house commercialization capabilities in the United States and opportunistically seek partners for the commercialization of our drug candidates outside of the United States. We have retained worldwide rights to our drug discovery platform and all of our drug discovery and development programs other than the RX-04 program, where we maintain U.S. co-commercialization rights for one product candidate of our choosing. Outside of the United States, we expect to seek strategic partnerships for the further development and commercialization of our product candidates. We also intend to explore additional funded collaborations leveraging our drug discovery platform.

 

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Our Product Candidates

Our unique drug discovery approach serves as the foundation for our pipeline of clinical and earlier-stage product candidates, set forth below, that we believe can address the significant unmet needs for new antibiotics that represent new treatment paradigms.

LOGO

Delafloxacin

Our most advanced product candidate, delafloxacin, is intended for use as an effective and convenient first-line antibiotic primarily in hospitals prior to the availability of a specific diagnosis. Unlike current first-line treatments, delafloxacin has the potential to offer broad-spectrum coverage as a monotherapy, including for MRSA, with both IV and oral formulations. We believe that delafloxacin could treat many serious infections successfully and thus reduce the need for a switch to a narrow-spectrum therapy, because physicians are less likely to switch if the broad-spectrum treatment is proving effective. In addition, the convenient IV-to-oral switch offered by delafloxacin provides strong patient convenience and pharmacoeconomic benefits for maintaining this monotherapy.

In September 2011, we successfully completed enrollment in a Phase 2b clinical trial of delafloxacin for the treatment of ABSSSI, including infections caused by MRSA, and we expect data from this trial by the end of 2011. This study, comparing delafloxacin to each of Zyvox and vancomycin, enrolled 256 subjects with ABSSSI. We expect to initiate Phase 3 clinical testing of delafloxacin for the treatment of ABSSSI in the second half of 2012 under a protocol that we

 

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intend to submit to the FDA for evaluation under the Special Protocol Assessment, or SPA, process, and also to the EMA. Subject to the results of our trials, we anticipate submitting a New Drug Application for ABSSSI as early as 2014 and applications for additional indications thereafter.

Delafloxacin has been shown in in vitro testing to be more potent against MRSA than the current standard of care, first-line MRSA treatment, vancomycin, and comparable in potency to Zyvox, Cubicin and Tygacil, the current leading second-line treatments for MRSA. Total combined U.S. sales of Zyvox, Cubicin, vancomycin and Tygacil were approximately $1.6 billion in 2010. These compounds are predominantly used to treat MRSA or ABSSSI. Vancomycin is the most commonly used of any of these drugs and is prescribed as a first-line treatment for Staphylococcal infections or as part of a broad-spectrum cocktail when combined with a Gram-negative focused compound such as cefepime.

Over 1,200 subjects have received delafloxacin in clinical trials to date and it has been generally well tolerated. In studies to date, we have seen no myelosuppression, such as reported with the use of Zyvox, nor have we seen any adverse effects on muscles, which has been reported with the use of Cubicin and has resulted in required weekly monitoring of all patients taking Cubicin. In addition, delafloxacin targets with equal potency two key enzymes found within bacteria, thereby decreasing the probability of resistance. These attributes, combined with delafloxacin’s potential as a monotherapy and opportunity for a convenient IV-to-oral switch, provide a significant opportunity for widespread use of delafloxacin as a cost-effective, first-line treatment of serious Gram-positive and Gram-negative infections primarily in hospitals.

Differentiating Attributes

Key attributes differentiating delafloxacin from currently available antibiotics include:

 

   

Increased potency at infection site. Delafloxacin’s unique three-dimensional structure and electronic charge distribution enables enhanced potency in acidic environments, such as are common at the site of infection. Our in vitro testing suggests that delafloxacin becomes up to 32 times more potent in acidic environments than in normal pH environments within the human body, in contrast to many other antibiotics which become progressively less potent, as measured by the changes in their minimum inhibitory concentration, or MIC, a measure of antibacterial potency. Moreover, delafloxacin kills bacteria more rapidly than Zyvox, Tygacil and vancomycin.

 

   

Expanded spectrum agent. In addition to strong Gram-positive potency, including against MRSA, delafloxacin has shown excellent in vitro activity against most Gram-negative bacteria commonly found in the hospital setting, as well as against atypical and anaerobic pathogens. As a result of this expanded broad-spectrum coverage, delafloxacin has the potential to be used as a first-line monotherapy for ABSSSI, bacterial pneumonias, aspiration pneumonias, complicated intra-abdominal infections, or cIAI, and complicated urinary tract infections.

 

   

Favorable safety profile. Over 1,200 subjects have received delafloxacin in clinical trials to date and it has been generally well tolerated. The most common adverse events observed in clinical trials were mild to moderate and gastrointestinal in nature, most frequently diarrhea. In addition, delafloxacin has not shown a propensity for the toxicities that have been common in the fluoroquinolone class of antibiotics, such as sensitivity to light, or phototoxicity, impaired glucose regulation, or dysglycemia, and QT prolongation, a condition that may lead to or cause heart rhythm irregularities.

 

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Further, delafloxacin has not exhibited the significant side effects associated with the leading MRSA treatments. Active monitoring of Zyvox usage is required for use beyond two weeks of therapy due to the potential for adverse events such as myelosuppression and neurotoxicity. Vancomycin’s usage is limited by its side effect profile, including renal toxicity, vestibular toxicity, oto-toxicity and allergic reactions. Cubicin’s potential to cause adverse muscle effects requires weekly monitoring in all patients of creatine phosphokinase, or CPK, an enzyme that leaks out of damaged muscle cells. Tygacil’s side effect profile includes nausea, vomiting and an increased risk of mortality observed across all clinical studies.

 

   

Convenient IV-to-oral switch. We are developing both IV and oral formulations of delafloxacin to enable patients who begin IV treatment in the hospital setting to transition to oral dosing for more convenient home-based care. We refer to this transition from IV treatment to oral dosing, which has the potential to lower the overall cost of treatment and reduce the length of hospital stays, as the IV-to-oral switch. We believe this IV-to-oral switch has the potential to increase patient convenience, lower the overall cost of treatment and reduce the length of hospital stays.

 

   

Lower probability of bacterial resistance. Delafloxacin equally targets two enzymes found within bacteria, known as topoisomerase IV and DNA gyrase. Our in vitro testing has shown that this ability to target both of these enzymes requires multiple mutations in both enzymes to produce resistance, which we believe reduces the probability of resistance to delafloxacin. In clinical trials to date, we have not seen the development of bacterial resistance to delafloxacin.

Our Phase 2b Trial in ABSSSI

In September 2011, we successfully completed enrollment in a Phase 2b clinical trial of delafloxacin for the treatment of ABSSSI, including infections caused by MRSA. We expect to receive top-line data from this trial by the end of 2011. The design of this trial grew out of extensive discussion with the FDA about new clinical trial endpoints at our End-Of-Phase 2 meeting in April 2010, and subsequent discussions during the FDA’s review of the trial protocol. This study enrolled 256 subjects with ABSSSI. We are using a 300 mg twice daily IV dose of delafloxacin based on the results of our Phase 2 testing and expect to use this dose for our Phase 3 testing. While the primary endpoint of this study is the clinician’s global assessment of cure, the study seeks to measure the endpoints that the FDA has recently issued as draft guidance for regulatory approval in ABSSSI. These include measurement of lesion spread cessation and fever abatement. A variety of techniques have been utilized for quantifying lesion size and severity, including digital computation of lesion area from manual tracing of the lesion, as well as more conventional measurements of lesion size and photography. These were applied to the infection sites twice each day for the first five days of treatment. The resulting data set permits the use of powerful statistical tools such as Kaplan-Meier survival analysis. This analysis is being combined with a detailed pharmacokinetic/pharmacodynamic analysis based upon antibiotic-level sampling throughout the study. We believe this combined analysis should permit a more precise and robust estimate of drug effect than has previously been possible with antibiotics testing. Besides delafloxacin, vancomycin and Zyvox were similarly studied in this protocol, allowing better estimation of the drug effect of those comparative agents. We believe that the application of these findings will enable us to optimize the design of our anticipated Phase 3 ABSSSI program.

Summary of Data from Previous Clinical Trials

Three previous Phase 2 studies and 16 Phase 1 studies of delafloxacin have been completed. One of the Phase 2 studies was completed with an IV formulation in complicated

 

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skin and skin structure infections, or cSSSI, the former classification of ABSSSI, one was conducted with an oral formulation against community-acquired bacterial pneumonia, or CABP, and one was conducted with an oral formulation against acute bacterial exacerbation of chronic bronchitis, or ABECB. Delafloxacin has been studied in more than 1,200 subjects to date. Across all completed studies, delafloxacin has been shown to be both clinically efficacious and well tolerated. Highlights of the clinical development of delafloxacin to date include:

 

   

An IV formulation of delafloxacin in a Phase 2 clinical trial in cSSSI, in which delafloxacin was compared to tigecycline, showed that delafloxacin was better tolerated with similar efficacy.

 

   

The oral formulation of delafloxacin has demonstrated excellent efficacy in once-daily dosing in Phase 2 clinical trials, for the treatment of CABP and ABECB.

 

   

Phase 1 studies show a low propensity for common fluoroquinolone toxicities such as phototoxicity, QT prolongation and dysglycemia, and no clinical adverse events at the 300 mg dose related to these have been seen in Phase 2 studies of delafloxacin, indicating an excellent safety profile.

Phase 2 Study for Complicated Skin and Skin Structure Infections

We evaluated the IV formulation of delafloxacin in a Phase 2 clinical trial for the treatment of cSSSI. This was a double-blind, multicenter, randomized study of IV delafloxacin compared with IV tigecycline for the treatment of cSSSI. In the study, as compared to tigecycline, delafloxacin was shown to be better tolerated with similar efficacy.

One hundred and fifty male and female patients of at least 18 years of age were randomly assigned to the treatment arms in a 1:1:1 ratio, to one of the following:

 

   

300 mg of delafloxacin every 12 hours;

 

   

450 mg of delafloxacin every 12 hours; or

 

   

tigecycline, in a dose of 100 mg initially, followed by 50 mg every 12 hours.

The duration of treatment was five to 14 days, subject to the investigator’s clinical judgment.

There were several analysis groups. The intent-to-treat, or ITT, group included all randomized patients who received at least one dose of drug. The clinically evaluable, or CE, group was the subset of ITT patients who met key inclusion and exclusion criteria, did not receive confounding antibiotics for other infections, were present for key visits, and had key assessments performed. The microbiologically evaluable, or ME, group were those patients that were clinically evaluable who also had a susceptible microbial pathogen identified at the screening visit, and met other specific criteria. The primary endpoint of this trial was the investigators’ assessment of clinical response at the test-of-cure time point in the CE group. The test-of-cure time point was three to five days after the completion of dosing when investigators performed the global clinical assessment of outcome and follow-up cultures for microbiology was obtained.

Response rates, as shown in the table below, were numerically higher in the delafloxacin groups than in the tigecycline group in the ITT, CE, and ME populations. In addition, the eradication rates for baseline pathogen and for baseline MRSA for the ME population were higher in the delafloxacin groups than in the tigecycline group. In the trial, 52% of all pathogens identified in the ME population were MRSA. In susceptibility testing performed on pathogens collected from patients in this study, delafloxacin had the lowest MIC90 of the 11 drugs tested.

 

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MIC90 values, which refer to the minimum concentration of a drug that will inhibit 90% of a pathogen in a particular population, are used as a measure of the level of potential susceptibility of a pathogen to an antibiotic. A lower MIC90 number indicates greater potency.

 

Response Rates

Efficacy at Test Of Cure

   Delafloxacin
300 mg BID
     Delafloxacin
450 mg BID
     Tigecycline
100/50 mg BID

Clinical Response Rates

            

ITT Response

   88% (43/49)      90% (46/51)      82% (41/50)

CE Response

   94% (33/35)      93% (37/40)      91% (31/34)

Microbiological Response Rates

            

ME Response

   97% (30/31)      94% (33/35)      89% (23/26)

The 300 mg dose of delafloxacin was well tolerated in this study and overall better tolerated than tigecycline. None of the patients in the 300 mg group discontinued the study because of an adverse event. Two patients in the 450 mg group discontinued from the study due to adverse events. One patient with a previously undisclosed, untreated and ongoing seizure disorder suffered a seizure during therapy and was discontinued. A second patient had moderately elevated liver enzymes which peaked at three to five times the upper limit of normal, and which returned to normal after discontinuation following ten days of therapy. Bilirubin levels in the second patient remained normal. The most common adverse events for both 300 mg and 450 mg groups were mild to moderate and gastrointestinal in nature, most frequently diarrhea.

Phase 2 Study for Community-Acquired Pneumonia

A seven-day oral course of delafloxacin was tested in a double-blind, multicenter, randomized Phase 2 study to determine its safety and efficacy in subjects with CABP. Three hundred nine subjects were randomized to one of three dosing groups: 100 mg, 200 mg or 400 mg delafloxacin once daily for seven days.

The analysis groups were defined as noted above. The primary endpoint of this trial was the investigators’ assessment of clinical response rate at the test-of-cure time point in the CE group. Clinical and microbiological response rates are presented in the table below. All doses tested showed similar excellent response rates in all of the analysis groups.

 

Response Rates

Efficacy at Test of Cure

   Delafloxacin
100 mg
     Delafloxacin
200 mg
     Delafloxacin
400 mg

Clinical Response Rates

            

ITT

   80% (83/104)      87% (79/91)      87% (90/104)

CE

   90% (83/92)      95% (79/83)      93% (90/97)

Microbiological Response Rates

            

ME

   90% (54/60)      96% (48/50)      94% (47/50)

Phase 2 Study for Acute Bacterial Exacerbation of Chronic Bronchitis.

A five-day oral course of delafloxacin was tested in a double-blind, multicenter, randomized, Phase 2 study to determine its safety and efficacy in subjects with ABECB. The trial also included a treatment arm in which subjects received a seven-day course of levofloxacin tablets, to compare the results of that antibiotic to those of delafloxacin. Two hundred eighty subjects were randomized to one of four dosing groups: 100 mg, 200 mg or 400 mg delafloxacin once daily for five days (QDx5 days) followed by two days of placebo, or 500 mg of levofloxacin once daily for seven days (QDx7 days).

 

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The analysis groups were similar to those defined above. The primary endpoint of this trial was the investigators’ global assessment of clinical response rate at the test-of-cure time point in the CE Group. Clinical response rates and microbiological response rates are presented in the table below. There was a trend toward better clinical and microbiological efficacy with the 200 mg and 400 mg delafloxacin groups compared to the 100 mg delafloxacin group. While the once-daily 400 mg dosing level achieved comparable efficacy, we have no plans to continue with this dosing level. We have chosen to use a twice-daily IV 300 mg dosing level, or an oral dose with an equivalent exposure, for our Phase 3 study.

 

Response Rates

Efficacy at Test of Cure

   Delafloxacin
100 mg
QDx5 days
   Delafloxacin
200 mg
QDx5 days
   Delafloxacin
400 mg
QDx5 days
   Levofloxacin
500 mg
QDx7 days

Clinical Response Rates

           

ITT

   72% (49/68)    69% (47/68)    79% (54/68)    75% (52/69)

CE

   83% (43/52)    84% (41/49)    88% (51/58)    91% (50/55)

Microbiological Response Rates

           

ME

   77% (20/26)    88% (22/25)    94% (31/33)    94% (33/35)

Phase 1 Clinical Studies

There have been a total of 16 Phase 1 studies conducted with delafloxacin to confirm safety or test various formulations of the drug. Key safety-oriented Phase 1 studies include:

 

   

a randomized, double-blind, placebo- and positive-controlled study designed to evaluate the potential effects of delafloxacin on the QT interval of healthy adult subjects. The QT interval is a measure of the length of time between electrical impulses in the heart, and is used to assess the potential for a drug to cause heart rhythm irregularities. This study was conducted according to the International Committee for Harmonization, or ICH, Guideline 14 for the conduct of QT-effect studies. A total of 52 subjects, male and female, received the following regimens: placebo, moxifloxacin 400 mg oral as the positive control, delafloxacin 300 mg IV, and the maximally tolerated delafloxacin dose of 900 mg IV. The data from this trial showed that delafloxacin did not prolong QT interval values at either the clinical dose of 300 mg IV or at the supra-therapeutic dose of 900 mg IV, and was similar to placebo. The positive control, moxifloxacin, showed a typical prolongation response. No serious adverse events or heart rhythm irregularities were reported during the study. This study also confirmed the 900 mg dose as the maximum tolerated dose of delafloxacin in an IV form.

 

   

a Phase 1, single-blind, placebo- and positive-controlled, randomized, parallel-group study in 52 healthy male and female volunteers. The study was designed to demonstrate the photosensitizing potential and wavelength dependency of delafloxacin by comparing the response of the skin to ultraviolet A, or UVA, ultraviolet B, or UVB, and visible radiation prior to and during administration of delafloxacin, lomefloxacin as the positive control, or placebo. Delafloxacin tablets were given in 200 mg and 400 mg once daily doses for six days and lomefloxacin was given in 400 mg once daily doses for six days. Delafloxacin was not different from the placebo, and did not demonstrate clinically significant phototoxic potential at any of the wavelengths tested, while the active comparator lomefloxacin demonstrated a moderate degree of phototoxicity at UVA wavelengths of 335 nm and 365 nm.

 

   

a Phase 1 study of two IV formulations of delafloxacin, which included the collection of serum insulin values and corresponding serum glucose values in both the 300 mg and placebo groups on day one and day 14 of the study, beginning immediately pre-dose, followed by once per hour for six hours. The analysis showed no difference between placebo and delafloxacin in respect to insulin secretion and glucose levels.

 

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Radezolid

Our second product candidate, radezolid, is a next-generation, IV/oral oxazolidinone designed to meet the need for a potent antibiotic with a safety profile permitting long-term treatment of resistant infections, including MRSA. Through a rational drug design process involving approximately 700 prototype compounds, we developed radezolid to have structural advantages that make it a candidate for use as a treatment for serious infections, such as ABSSSI and severe CABP, and long-term treatment of underserved serious infections, such as osteomyelitis and prosthetic and joint infections. We believe that the demonstrated broad- spectrum of coverage, potency and potential long-term safety profile of radezolid give it the potential to become the antibiotic of choice for multiple resistant bacterial infections, and for treatment in populations, such as the elderly and children, that might be vulnerable to myelosuppression caused by other oxazolidinone treatments.

We have successfully completed two Phase 2 studies of radezolid with an oral formulation in uSSSI and in CABP. In both studies, radezolid was shown to be well-tolerated and effective with a once-daily dosing regimen. We have also completed a Phase 1 study of an IV form of radezolid, to enable an IV- to-oral switch in future Phase 2 and Phase 3 studies. In in vitro studies, we have shown radezolid to be microbiologically more active than oxazolidinones currently on the market or known by us to be in development against Gram-positive microorganisms, including potent activity against Zyvox-resistant bacteria. We expect future clinical development of radezolid to involve an additional Phase 2 study in ABSSSI with the IV formulation and a long-term Phase 1 safety study with the oral formulation. With its enhanced potency against resistant strains of MRSA, improved safety profile, and expanded spectrum, radezolid has the potential to be an improved oxazolidinone as compared to Zyvox, the only currently marketed oxazolidinone and the leading branded antibiotic for serious Gram-positive infections, which generated worldwide sales of approximately $1.2 billion in 2010, as reported by Pfizer.

Differentiating Attributes

We believe that the structural advantages of radezolid confer the following attributes, which differentiate radezolid from Zyvox, tedizolid and other MRSA therapies and make it potentially suitable for the treatment of serious infections, such as ABSSSI and severe CABP, including those caused by MRSA, as well as long-term treatment of underserved serious infections such as osteomyelitis, prosthetic and joint infections and tuberculosis:

 

   

Greater potency against Zyvox-resistant Gram-positive bacteria. Radezolid has several attributes allowing it to overcome known oxazolidinone resistance mechanisms and have increased activity compared to oxazolidinones currently on the market or known by us to be in development. In a recent study presented in 2011 at the European Congress of Clinical Microbiology and Infectious Diseases, or ECCMID, JMI Laboratories compared the potency of radezolid to that of the only marketed oxazolidinone, Zyvox, and another investigational oxazolidinone, tedizolid, against a collection of Gram-positive bacteria with genetically defined mechanisms of oxazolidinone resistance. In this study, radezolid demonstrated enhanced activity against the collection’s 90 strains.

 

   

Broader spectrum. Like all oxazolidinones, radezolid has excellent activity against resistant Streptococcus pneumoniae and MRSA. Unlike Zyvox and tedizolid, radezolid is also effective against other common causes of CABP, such as Haemophilus influenzae, Legionella pneumophila and Moraxella catarrhalis. In addition, radezolid has shown potency and activity in animal models against Mycobacterium tuberculosis.

 

   

Enhanced delivery to the site of infection. Our in vitro studies have shown that, unlike Zyvox, radezolid concentrates within cells, including macrophages, other immune cells,

 

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and lung epithelial cells, and remains at concentrations and active within cells long after concentrations in the blood decrease following therapy withdrawal. These heightened cell concentrations enable enhanced killing of intracellular pathogens and may convey greater drug quantities to infection sites through immune cell trafficking, making radezolid effective at lower and less frequent dosing.

 

   

Improved safety profile. In preclinical evaluations and clinical trials to date, radezolid administered at therapeutic doses has not demonstrated any significant safety issues, such as the myelosuppression commonly associated with oxazolidinones, potentially making radezolid the only long-term oxazolidinone therapy available for difficult-to-treat MRSA and other resistant infections. We believe that, unlike Zyvox, radezolid does not enter the central nervous system. Therefore, it should not be subject to centrally-mediated effects due to monoamine oxidase inhibition and serotonin interaction, including those often seen with Zyvox in patients taking selective serotonin reuptake inhibitors, or SSRI, agents such as Prozac. We recently completed a long-term preclinical study of radezolid to further evaluate its safety. While the long-term safety of radezolid must be demonstrated in human clinical trials, the data from this preclinical study provided encouraging evidence of radezolid’s long-term safety profile.

 

   

Convenient IV-to-oral once daily dosing regimen. Radezolid can be administered in either IV or oral formulations. Moreover, unlike Zyvox, radezolid has the potential to be administered once daily and at lower doses, which may improve patient compliance with the oral treatment regimen following discharge from the hospital and therefore increase the likelihood of treatment success.

Our Phase 2 Clinical Trials of the Oral Dosage Form of Radezolid

Phase 2 Trial in Uncomplicated Skin and Skin Structure Infections. Our first Phase 2 study of radezolid was a multicenter, randomized, open-label, comparative study to evaluate the safety and efficacy of radezolid as compared to Zyvox in the outpatient treatment of adult patients with uSSSI. A total of one hundred and fifty adult subjects with uSSSIs were randomized to one of three treatment groups: radezolid 450 mg once per day, radezolid 450 mg twice per day, or Zyvox 600 mg twice per day. Patients took either radezolid or Zyvox orally for five days and were then clinically evaluated on study day five. If, upon such evaluation, treatment for the uSSSI was still required, patients continued to take the study drug for up to an additional five days. ITT, CE, and ME analysis groups were as defined above. The primary endpoint of the study was clinical response at test-of-cure time point. Of the pathogens isolated in the ME population at baseline, 57% were MRSA. The results were similar across all treatment groups and infection types. The most common adverse events with radezolid were mild to moderate gastrointestinal complaints. No episodes of bone marrow suppression with radezolid were noted. One patient on Zyvox had a temporary reduction of platelets to below the lower limit of normal, while another had a temporary reduction of white blood count to below the lower limit of normal.

 

Response Rates

Efficacy at Test Of Cure

   Radezolid
450 mg QD
     Radezolid
450 mg BID
     Zyvox
600 mg BID

Clinical Response Rates

            

ITT Response

   82% (40/49)      76% (37/49)      83% (39/47)

CE Response

   97% (38/39)      94% (34/36)      97% (37/38)

Microbiological Response Rates

            

ME Response

   100% (20/20)      89% (23/26)      91% (21/23)

 

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Phase 2 Trial in Community-Acquired Bacterial Pneumonia. Our second Phase 2 study of radezolid was a double-blind, randomized, multicenter clinical trial conducted in adult patients with mild to moderately severe CABP. The objectives of the study were to assess the efficacy, safety, and tolerability of radezolid in this patient population. We enrolled and randomized a total of 160 patients who met the study criteria into one of three radezolid treatment groups: 300 mg orally once per day, 450 mg orally once per day or 450 mg orally twice per day, in each case for seven to 10 days. The primary endpoint of the study was clinician’s assessment of clinical response at test-of-cure time point. The most common adverse events among patients in all treatment groups were mild gastrointestinal complaints, most frequently diarrhea.

 

Response Rates

Efficacy at Test Of Cure

   Radezolid
300 mg QD
     Radezolid
450 mg QD
     Radezolid
450 mg BID

Clinical Response Rates

            

ITT Response

   80% (41/51)      80% (41/51)      70% (37/53)

CE Response

   92% (34/37)      84% (37/44)      78% (32/41)

Microbiological Response Rates

            

ME Response

   94% (16/17)      77% (20/26)      69% (18/26)

Other Clinical Studies

To date, we have tested the safety, tolerability, pharmacokinetics, food effect and age/gender effects of oral doses of radezolid in six Phase 1 studies. A total of 172 healthy volunteers were enrolled in these studies and 143 received radezolid. Data from the six Phase 1 studies demonstrated that single oral doses of up to 1200 mg of radezolid and repeat oral doses of up to 900 mg of radezolid for 14 days were well tolerated in healthy volunteers. The most common treatment-related adverse events experienced by the subjects in these trials were gastrointestinal symptoms such as diarrhea, loose stools and abdominal pain, together with headache, facial flushing and minor rash.

Three-month Rodent Toxicology Study

A three-month GLP rat toxicology study to support a future NDA submission was performed on our behalf by a third-party contract research organization, or CRO, to evaluate the long-term safety of radezolid dosed orally. Radezolid was dosed in three arms of 10, 50 and 200 mg/kg/day, with a separate vehicle-dosed control group. The study was designed such that the mid-dose approximated the efficacious exposure in humans, and the higher dose, at four-times the projected human efficacious exposure, was used to define an adverse event level. At the three-month time point, radezolid was found to be well-tolerated at all dose levels and resulted in no clinical observations, no changes in food consumption, and minimal changes in body weight. Therefore, the CRO concluded that the no observed adverse effect level was 200 mg/kg/day. The absence of observed adverse events over 90 days, at a dosing regimen four-times greater than the projected efficacious dose in humans, suggests that radezolid has strong potential as a long-term dosing option for resistant infections, although such potential must be confirmed through human clinical trials. The table below sets forth data with respect to dose, body weight and changes in blood parameters for each dosing group.

 

 

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Compound

   Dose (mg/kg/day)    Average body
weight at end of
study
     Hematology results at end of study  
         Reticulocytes
( x 103/µl)
     Neutrophils
( x 103/µl)
 

Control

   -      603 M / 324 F         209.2 M / 169.5 F         2.02 M / 1.02 F   

Radezolid

   200      504 M / 275 F         159.4 M / 127.9 F         1.62 M / 0.69 F   
   50      571 M / 293 F         203.9 M / 140.2 F         1.99 M / 0.68 F   
   10      573 M / 320 F         192.2 M / 180.3 F         1.53 M / 1.02 F   

In order to provide context for these results with respect to established findings for long-term use of oxazolidinones as a class, the same CRO evaluated the long-term safety in rats of linezolid and tedizolid dosed orally over the same three-month period in a contemporaneous non-GLP study. For this study, linezolid, having 99.7% purity as measured by high pressure liquid chromatography, or HPLC, was purchased from Alembic, Ltd., of India, and tedizolid, having 99.3% purity as measured by HPLC, was manufactured by a third party according to the procedure disclosed in the published patent application (#WO 2010/042887 A2) of Trius. Linezolid was dosed in two arms of 40 and 100 mg/kg/day, and tedizolid was dosed in two arms of 10 and 50 mg/kg/day. The study was designed such that the lower doses approximated the efficacious exposures in humans, with higher doses used to define adverse event levels. This study also had a separate vehicle-dosed control group. Male and female rats in the high-dose linezolid group (100 mg/kg/day) exhibited significant weight loss, and all were taken off the study after 75 days pursuant to predetermined guidelines for the ethical treatment of animals. Female rats in the high-dose tedizolid group (50 mg/kg/day) exhibited significant weight loss starting shortly after the commencement of dosing and for the duration of the study. After 12 days of dosing at 50 mg/kg/day, these animals were given a seven-day dosing holiday, followed by a lower dose of tedizolid at 30 mg/kg/day for the remainder of the study. Due to significant weight loss, all of these animals were taken off the study after 57 days, pursuant to the predetermined guidelines for the ethical treatment of animals. The table below sets forth data with respect to dose, body weight and changes in blood parameters for each of the dosing groups.

 

Compound

   Dose (mg/kg/day)    Average body
weight at end of
study or group
termination (Day*)
   Hematology results at end of study or
group termination (Day*)
         Reticulocytes
( x 103/µl)
   Neutrophils
( x 103/µl)

Control

   -    580 M / 303 F    250.1 M / 190.2 F    1.71 M / 0.80 F

Linezolid

   100    416 M / 213 F

(Day 71)

   126.0 M / 175.1 F
(Day 75)
   0.56 M / 0.71 F
(Day 75)
   40    569 M / 318 F

(Day 75)

   253.1 M / 218.9 F    1.52 M / 1.11 F

Tedizolid

   50 (or 50/30 for
females)
   505 M (Day 91) /
213 F (Day 57)
   198.9 M (Day 91)/
40.0 F (Day 58)
   1.14 M (Day 91)/
0.26 F (Day 58)
   10    586 M / 304 F    217.9 M / 198.4 F    1.75 M / 0.82 F

 

*   Termination day, or measurement day, as applicable, if group did not complete 13 week study.

RX-04 Program

Our most advanced preclinical program, the RX-04 program is focused on using a discrete, novel binding site within the ribosome to design and develop new classes of antibiotics to treat some of the most deadly and difficult-to-treat, multi-drug resistant Gram-positive and Gram-negative infections. Pathogens associated with these infections include E.coli, Klebsiella pneumoniae, Enterobacter species, Pseudomonas aeruginosa and Acinetobacter baumannii and

 

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MRSA. Using our proprietary drug discovery platform, we have developed three novel classes of antibiotics in less than three years that bind to this ribosome site, show high levels of antibacterial activity against a number of these pathogens, and show compelling efficacy in multiple animal models of infection. In June 2011, we entered into a collaboration and license agreement with Sanofi to develop multiple products targeting this discrete binding site within the ribosome. See “—Strategic Collaboration with Sanofi.”

We believe, based on published studies, that RX-04 is the only drug development program that has produced compounds with demonstrated in vitro coverage of all of the following multi- drug resistant Gram-positive bacteria: Enterococci, Streptococci and Staphylococci, including MRSA; and multi-drug resistant and extremely drug resistant Gram-negative bacteria: Klebsiella pneumoniae, Acinetobacter baumannii, Pseudomonas aeruginosa and E. coli. These pathogens account for a majority of hospital-acquired infections, are associated with high rates of morbidity and mortality and are increasingly multi-drug resistant, meaning that they are resistant to more than three classes of antibiotics. Because the RX-04 compounds bind to a novel site on the ribosome that has never before been exploited by marketed antibiotics and because they have proprietary chemical characteristics distinct from all current classes of broad-spectrum or Gram-negative therapies, we have shown that their activity is unaffected by cross-resistance to current therapies, and we expect lower resistance development than current therapies. These compounds are also small molecules, thereby providing us with the potential to ultimately offer an IV-to-oral switch for maximum flexibility. Furthermore, in vitro preclinical studies have shown that these compounds have little propensity for drug-drug interactions, have demonstrated no cardiovascular toxicity in in vitro models, are not mutagenic and do not appear to have undesired pharmacological interactions. Based on these characteristics, we believe that the RX-04 program has significant potential to produce drug candidates that directly address the urgent public health threat caused by the most difficult to treat pathogens.

Differentiating Attributes

To call attention to the critical unmet need for new and better antibiotics, the IDSA established the 10x’20 Initiative. The goal of the 10x’20 Initiative is to build a sustainable antibiotic research and development infrastructure and, in the short-term, to produce 10 new systemic antibiotics by 2020 that target the ESKAPE pathogens, the six species of drug-resistant bacteria that account for a majority of hospital-acquired infections, are associated with high rates of morbidity and mortality, and are increasingly multi-drug resistant, meaning that they are resistant to more than three classes of antibiotics. They consist of the following Gram-positive bacteria, which provide the acronym ESKAPE: Enterococci and Staphylococcus aureus, including MRSA; and Gram-negative bacteria: Klebsiella pneumoniae, Acinetobacter baumannii, Pseudomonas aeruginosa and Enterobacter species. Our RX-04 program demonstrates our commitment to this goal and, we believe, is well positioned to address the following desired attributes of these new antibacterial drugs:

 

   

Activity against extremely difficult-to-treat infections. We believe, based on published studies, that RX-04 may be the only drug development program that has produced compounds with demonstrated in vitro coverage of all of the ESKAPE pathogens. Many of the ESKAPE pathogens are resistant to every antibiotic except colistin, a 1950s-era drug that is the treatment of last resort because of its high toxicity.

 

   

Lower potential for resistance. Because the RX-04 compounds bind to a novel site on the ribosome that has never before been exploited by antibiotics and because they have proprietary chemical characteristics distinct from all current classes of broad-spectrum or Gram-negative therapies, we expect that their activity will be unaffected by cross-resistance to current therapies and will result in lower potential resistance as compared to current therapies.

 

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Lower potential for toxicity. Our discovery process allows optimization of molecular properties that have the potential not only for greater potency, but also greater safety. We intend to use our compound-optimization abilities to design compounds which reduce the probability of adverse drug-drug interactions, cardiovascular toxicity, mutagenicity and undesired pharmacological interactions.

 

   

Potential for IV-to-oral dosing. The RX-04 compounds are small molecules thereby providing us with the potential to develop an IV-to-oral switch for maximum flexibility.

Summary of Preclinical Data

Several RX-04 compounds show compelling in vitro potency against panels of multi-drug resistant and extremely drug resistant ESKAPE pathogens and have been unaffected by cross-resistance, including extended-spectrum beta-lactamase, or ESBL, Klebsiella pneumonia carbapenemase, or KPC, and New Delhi Metallo-beta-lactamase-1, or NDM-1, producing Enterobacteriaceae, multi-drug resistant and extremely drug resistant A. baumannii and P. aeruginosa, MRSA, Vancomycin-resistant enterococci, or VRE, Zyvox-resistant enterococci, or ZRE, Macrolide-resistant streptococci and staphylococci. Moreover, several compounds from this program have been shown to be efficacious when administered intravenously in mouse models of infection, including sepsis, skin and lung infections.

The table below compares the potency of two RX-04 program compounds, RX-7713 and RX-7999, to that of several marketed antibiotics against eight representative multi-drug resistant and extremely drug resistant strains of bacteria. Potency is measured by MIC data, with lower numbers indicating greater potency. Using our proprietary drug discovery platform, we were able to design structural improvements to RX-7713, which has excellent potency against many of these strains, resulting in RX-7999, which has excellent potency against all of these strains. This achievement was accomplished in six months and involved the design and testing of only 67 analog compounds.

 

Potency as Measured by MIC

 
 

Bacterial Strain

  Ceftriaxone     Ertapenem     Cipro     Gentamicin     Tigecycline     Colistin          RX-7713     RX-7999  

Representative multi-drug resistant (MDR)/extremely drug resistant (XDR) Gram-negative strains

 
E. coli 1705878
(ESBL, MDR)
    >128        0.008        >128        64        0.5        0.5            1        1   
 
K. pneumoniae 1705949 (KPC, MDR)     >128        >128        >128        >128        1      £ 0.25            0.5        0.5   
 
K. pneumoniae
NDM-1 CR3
(MBL, XDR)
    >128        >128        >128        8        >128        >128            0.5        1   
 
P. aeruginosa 1705904 (XDR)     >128        >128        >128        >128        >32        8            16        4   
 
A. baumannii 1705936 (MDR)     >128        >128        >128        >128        2        0.5            16        2   

Representative multi-drug resistant (MDR) Gram-positive strains

 
 
S. aureus 11540 (USA300, MRSA)     >128        8        >128        1        0.25        >128            0.5        0.5   
 
E. faecium A6439 (VRE, ZRE, MDR)     >128        >128        >128        >128      £ 0.06        NT            4        1   

 

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Several compounds from the RX-04 program showed efficacy in multiple animal models of infection. Set forth in the table below are mouse survival data from two sepsis models of infection, one with MRSA and the other with Acinetobacter baumannii. The results are expressed as PD50s, which is the amount of drug needed to ensure survival in half of the study animals, with lower numbers indicating a higher level of protection. In addition to these excellent survival results, RX-04 compounds have been shown to be highly efficacious in other models of animal infection, including an E. coli sepsis model, a Klebsiella pneumoniae, skin-and-soft-tissue model, and a MRSA kidney abscess model.

 

Compound

   MRSA 11540      A. baumannii
1705943
 
   MIC
(mg/mL)
     PD50
(mg/kg)
     MIC
(mg/mL)
     PD50
(mg/kg)
 

RX-7892

     0.5         <1.0         0.25         <0.5   

RX-8082

     0.125         <0.5         0.25         1.57   

RX-8119

     0.25         <0.5         0.25         0.99   

RX-8120

     0.25         <0.5         0.25         0.85   

Strategic Collaboration with Sanofi

In June 2011, we entered into a collaboration and license agreement with Sanofi related to our RX-04 program that ranks among the largest preclinical agreements in terms of upfront and potential milestone payments in the antibiotic industry in recent years. Under this agreement, Sanofi has the right to license an unlimited number of product candidates targeting a discrete binding site within the ribosome. We retain all rights pertaining to our proprietary drug discovery platform, including all other binding sites within the ribosome and all future programs, as well as to any RX-04 compound that Sanofi does not exercise its option to develop during the three-year term of the collaboration. We have received $19.0 million to date in upfront and milestone payments under the collaboration. We may receive up to $86.0 million per product for the achievement of research, development and regulatory milestones, up to $100.0 million per product for the achievement of commercial milestones, and up to double-digit percentage royalties on any commercial sales. We also have the right under the collaboration to co-commercialize one RX-04 product of our choosing with Sanofi in the United States. We are currently collaborating with Sanofi on ongoing preclinical development and lead generation, and the first cohort of leads from the RX-04 program that demonstrated strong potency and efficacy are now being profiled in vitro and in vivo as part of a comprehensive safety assessment. We expect the results of these studies to inform the selection of a lead compound for toxicology studies followed by Phase 1 studies in humans.

Either party may terminate the agreement in the event of a material breach by the other party, subject to prior notice and the opportunity to cure. Sanofi may terminate the agreement upon 90 days prior written notice, however doing so will not relieve Sanofi of its obligations to pay royalties with respect to further sales of any licensed product candidate.

Our Discovery Programs

Our discovery programs are focused on engineering new compounds and classes of compounds to treat the most highly resistant pathogens. In 2011, we initiated preclinical programs RX-05, focused on the development of a novel scaffold for the treatment of serious multi-drug resistant bacterial infections, and RX-06, focused on the development of a novel scaffold for the treatment of serious fungal infections. The current goals for the RX-05 and RX-06 programs are to show proof-of-concept by designing, preparing and validating at least one novel chemical scaffold that meets the following criteria:

 

   

binds in the intended region as measured crystallographically;

 

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has functional activity at the target; and

 

   

shows activity in cell culture.

We expect that achievement of this proof-of-concept will provide the necessary chemical foundation for lead identification/lead optimization programs in 2012. In addition, our RX-02 novel macrolide program is designed to overcome known ribosomal resistance modifications in a wide range of pathogens, including those generally associated with hospital-acquired Gram-positive infections, community respiratory tract infections and skin infections seen both in hospital and community settings.

Our Proprietary Drug Discovery Platform

Our integrated approach to novel antibiotic design targets the large (50S) ribosomal subunit of bacteria, for which our co-founder, Yale Professor Thomas A. Steitz, Ph.D., shared the Nobel Prize in Chemistry in 2009. We believe our key competitive advantage is our focus on the three-dimensional properties of antibiotics, which is enabled by our proprietary drug discovery platform. Unlike traditional approaches to antibiotic discovery, which generally rely on random screening of chemical libraries to identify potential compounds, our discovery team combines sophisticated and exclusive computational tools with patent-protected, atomic-level insights into the structure of the ribosome to systematically engineer novel antibiotics to avoid resistance and optimize potency, spectrum, efficacy and safety. As a result, we have created a highly efficient and productive drug development engine based on our unique design strategy that effectively leverages structure-based drug design, preparative medicinal chemistry, ribosome biochemistry, molecular biology and pharmacology.

Because its protein building function is essential for the life of the bacterium, the bacterial ribosome is the target of most marketed antibiotics, which work by binding to the ribosome and inhibiting its function. Unlike typical targets for structure-based drug design, the ribosome presents numerous distinct targets for drug discovery. We believe that we are the only company with the combined intellectual property portfolio, cross-functional experience and knowledge base to exploit the high-resolution X-ray crystal structures of the bacterial ribosome for drug development. By applying our analytic capability to current antibiotic classes, we are able to reveal gaps in coverage and rationally design next-generation, expanded-spectrum compounds and novel classes of antibiotics to combat known resistance mechanisms.

Our ribosome crystallography tools offer four key competitive advantages, based on atomic-level detail of the structure of the ribosome, for the design of new anti-infectives with differentiated coverage, safety and convenience:

 

   

unrivaled three-dimensional knowledge of how anti-infectives interact with the ribosome;

 

   

ability to augment and refine this knowledge by characterizing new antibiotic structures on a regular basis;

 

   

insight into the location of resistance-causing ribosomal mutations; and

 

   

ability to utilize ribosomal spaces to fine tune molecular attributes important for broad-spectrum efficacy and safety.

Our computational design tools, which were built and optimized on sophisticated software from Professor William Jorgensen, Ph.D., at Yale University, allow us to:

 

   

rapidly identify the high value binding sites for building new anti-infectives;

 

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assess the impact of and design molecules to counter target-based resistance; and

 

   

query and capitalize on the molecular properties that drive permeability, efflux avoidance and pharmaceutical viability.

We believe that a fundamental strength of our product platform is our ability to proceed from a new hypothesis to generating a set of chemically and biologically validated compounds in less than two weeks. This permits rapid pattern recognition, hypothesis refinement and iterative design. We can begin in any one of the validated ribosome target spaces, designing virtual molecules that extend from a simple scaffold that binds well to the ribosome to nearby spaces that address a particular therapeutic objective, as the biology dictates. Representative subsets of these virtual molecules are then chemically synthesized with key building blocks that can be assembled rapidly and on a scale that will facilitate fast and broad profiling, including measurements of affinity, microbiological activity, in vitro safety and in vivo efficacy in mouse models of infection. This strategy has led, and we believe will continue to lead, to a pipeline of novel, small-molecule antibiotic classes, which not only will offer new therapies for emerging medical needs but have the potential to keep one step ahead of resistance.

Commercialization Strategy

Our commercialization strategy is to develop our product candidates into leading therapies that will be available worldwide for the treatment of serious, multi-drug resistant infections. We have retained worldwide commercial rights to all of our product candidates, except in the RX-04 program where we have retained an option for U.S. co-commercialization rights on a compound of our choosing. We intend to retain significant control over the commercial execution of each our product candidates, while participating in a meaningful way in the economics of all drugs that we bring to market.

We intend to commercialize our product candidates in the United States alone or in collaboration with one or more pharmaceutical companies that have established commercial capabilities, as appropriate, to maximize the value of each our product candidates. We currently have limited marketing, no sales nor distribution capabilities. We intend to build a commercial organization in the United States to focus on educating hospital and institution-based physicians, nurses, pharmacy directors, and payors about our products. We intend to recruit experienced marketing, sales and medical education professionals and to develop a commercial strategy to target institutions with the greatest use of drugs for resistant, serious infections.

We will also seek to market our product candidates in the European Union, which has similarly seen an increase in serious, resistant infections such as MRSA. We have performed an analysis of the European Union market for serious, resistant infection treatment, and our current plan is to commercialize our product candidates in the European Union with the assistance of partners.

We also believe that there is a rapidly growing need for antibiotics to treat serious, resistant infections in other markets throughout the world, including Asian markets such as Japan, Korea, and Taiwan and emerging markets such as China, Russia, South America and India. We envision expansion of our product candidates to these markets through partnerships following the introductions in the United States.

Our commercialization strategy with respect to specific product candidates is as follows:

Delafloxacin. We are currently developing our most advanced product candidate, delafloxacin, for the treatment of ABSSSI. Assuming the successful completion of clinical trials

 

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and receipt of regulatory approvals, we intend to expand the usage of delafloxacin into other indications, such as CABP and cIAI. We plan to file for European Union approval of delafloxacin in the same time period as we seek approval in the United States. Upon any such approval, we intend to focus our delafloxacin commercialization efforts on use primarily in hospitals. We believe that delafloxacin has the potential to become the first-line treatment of choice in these settings because of its safety profile and coverage of both Gram-negative infections and Gram-positive infections, including MRSA.

Radezolid. We are currently pursuing development of radezolid for the treatment of ABSSSI, and plan to conduct a Phase 2 trial prior to designing and initiating Phase 3 development in this indication. We intend to perform additional clinical trials of radezolid for treatment of serious infections, such as ABSSSI and severe CABP, and for long-term treatment of underserved serious infections, such as osteomyelitis and prosthetic and joint infections, including as a result of orthopedic surgery. We believe that radezolid has the potential to become the antibiotic of choice for these indications because of its potency and improved long-term safety profile.

RX–04 Program. Under our collaboration and license agreement with Sanofi, we have the right to co-commercialize in the United States a product of our choice developed through our RX-04 program. We are not required to exercise this option until six months prior to the commencement by Sanofi of Phase 3 trials of the product candidate. This timing allows us to review Phase 2 data on the efficacy and safety profiles of the product candidates prior to our selection, thus potentially lowering the commercial risk of exercising that option. We believe that a single Rib-X sales force will be able to promote sales of delafloxacin, radezolid and an RX-04 product candidate, thus lowering our overall commercialization costs.

Manufacturing

We do not own or operate manufacturing facilities for the production of any of our product candidates, nor do we have plans to develop our own manufacturing operations in the foreseeable future. All of our product candidates are organic compounds of low molecular weight, commonly referred to as small molecules. They are manufactured in simple synthetic processes from readily available starting materials. We currently rely on a small number of third-party contract manufacturers for all of our required raw materials, drug substance and finished product for our preclinical research and clinical trials. We do not have long-term agreements with any of these third parties. We also do not have any current contractual relationships for the manufacture of commercial supplies of any of our product candidates after they are approved. If any of our products are approved by any regulatory agency, we intend to enter into agreements with third-party contract manufacturers for the commercial production of those products. We currently employ internal resources to manage our manufacturing contractors.

Intellectual Property

The proprietary nature of, and protection for, our proprietary drug discovery platform, our product candidates and our discovery programs, processes and know-how are important to our business. We seek patent protection in the United States and internationally for our proprietary drug discovery platform, delafloxacin, radezolid, the RX-04 program and our discovery programs, and any other technology to which we have rights, where available and when appropriate. Our policy is to pursue, maintain and defend patent rights, whether developed internally or licensed from third parties, and to protect the technology, inventions and improvements that are commercially important to the development of our business. We also rely on trade secrets that may be important to the development of our business.

 

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Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our proprietary drug discovery platform, our current and future product candidates and the methods used to develop and 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 technology depends on the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our technology. For this and more comprehensive risks related to our intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.”