S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on September 21, 2007

Registration No. 333-            

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


ELIXIR PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   2834   06-1549431
(State of Incorporation)   (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer Identification Number)

12 Emily Street

Cambridge, MA 02139

(617) 995-7000

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

 


William K. Heiden

President and Chief Executive Officer

Elixir Pharmaceuticals, Inc.

12 Emily Street

Cambridge, MA 02139

(617) 995-7000

(Name, Address, Including Zip Code, and Telephone Number,

Including Area Code, of Agent For Service)

 


Copies to:

 

Stuart M. Cable, Esq.

Robert E. Puopolo, Esq.

Goodwin Procter LLP

53 State Street

Boston, Massachusetts 02109

(617) 570-1000

 

Richard D. Truesdell, Jr., Esq.

Davis Polk & Wardwell

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 


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 to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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 effective 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 effective registration statement for the same offering.  ¨

 


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

  $86,250,000   $2,648
 
 
(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
(2)   Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price and includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

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 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.

 



Table of Contents

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 these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER           , 2007

             Shares

LOGO

Common Stock

 


Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $             and $             per share. We will apply to list our common stock on the NASDAQ Global Market under the symbol “ELXR.”

The underwriters have an option to purchase a maximum of                      additional shares of common stock to cover over-allotments of shares.

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 7.

 

      

Price to
Public

    

Underwriting
Discounts and
Commissions

    

Proceeds to
Issuer

Per Share

     $                      $                      $                

Total

     $                      $                      $                

Delivery of the shares of common stock will be made on or about                     , 2007.

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

Credit Suisse

 

Pacific Growth Equities, LLC   Leerink Swann

The date of this prospectus is                     , 2007.


Table of Contents

TABLE OF CONTENTS

 

     Page

PROSPECTUS SUMMARY

   1

RISK FACTORS

   7

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

   27

USE OF PROCEEDS

   28

DIVIDEND POLICY

   29

CAPITALIZATION

   30

DILUTION

   31

SELECTED CONSOLIDATED FINANCIAL DATA

   33

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   35

BUSINESS

   53

MANAGEMENT

   82

COMPENSATION

   87
     Page

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

   106

PRINCIPAL STOCKHOLDERS

   111

DESCRIPTION OF CAPITAL STOCK

   114

SHARES ELIGIBLE FOR FUTURE SALE

   119

MATERIAL U.S. FEDERAL TAX CONSEQUENCES FOR NON-U.S. HOLDERS

   121

UNDERWRITING

   123

NOTICE TO CANADIAN RESIDENTS

   126

LEGAL MATTERS

   128

EXPERTS

   128

MARKET AND INDUSTRY DATA

   128

WHERE YOU CAN FIND MORE INFORMATION

   128

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

 


You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

 

Dealer Prospectus Delivery Obligation

Until                     , 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” beginning on page 7, and the financial statements and notes to those financial statements, before making an investment decision. Unless the context indicates otherwise, the references in this prospectus to “Elixir,” “we,” “us” and “our” refer to Elixir Pharmaceuticals, Inc. and our wholly owned subsidiary.

Elixir Pharmaceuticals, Inc.

We are a pharmaceutical company focused on the discovery, development and commercialization of novel pharmaceuticals for the treatment of metabolic diseases such as diabetes and obesity. We mine the pathways involved in the regulation of aging discovered by our founders to identify novel mechanisms leading to the development of compounds to treat a range of metabolic diseases and disorders. Our product pipeline includes a number of programs which we believe will have significant advantages over existing products and will address unmet medical needs of the large metabolic disease markets. These include our phase III programs, Glinsuna (mitiglinide) and Metgluna (mitiglinide plus metformin) for the treatment of type 2 diabetes, and our novel ghrelin antagonist which represents a potential next-generation treatment for a range of metabolic diseases. In addition, we have leveraged our knowledge of ghrelin biology to advance a ghrelin agonist program and we continue to mine the pathways of aging leading to potential treatments for metabolic disease with our sirtuin modulator program. Recently, we entered into a strategic relationship with Novartis International Pharmaceuticals, or Novartis, in which it made a $10 million equity investment in Elixir through an investment fund managed by MPM Capital, our largest stockholder, and under which we granted Novartis the right to negotiate to obtain rights to develop and commercialize either our ghrelin agonist product candidate or one of our sirtuin programs.

Our Glinide Product Candidates

Glinsuna and Metgluna for the treatment of type 2 diabetes. Glinsuna is a short-acting insulin secretagogue that, if approved by the Food and Drug Administration, we intend to launch into the approximately $300 million U.S. meglitinide, or glinide, market. Based on what we believe is a competitive product profile, we in-licensed mitiglinide from Kissei Pharmaceutical Co. in Japan where it has been approved and prescribed to more than 500,000 patients since 2004.

Metgluna is our twice-daily fixed combination product candidate that couples our glinide, Glinsuna, with metformin, the first-line and most widely prescribed type 2 diabetes treatment. Metgluna is designed to address the dual defects of type 2 diabetes: the metformin component targets control of fasting plasma glucose, or FPG, and the Glinsuna component targets control of postprandial glucose, or PPG. Metgluna will offer a convenient fixed combination product option to physicians and those of their existing 5.4 million metformin patients who are sub-optimally controlled. Due to the progressive nature of type 2 diabetes, maintaining glycemic control typically requires that new therapies be added to metformin over time. We believe Metgluna is an ideal next step beyond metformin.

We believe the large, global clinical database has demonstrated that mitiglinide, either alone or in combination with metformin, is a safe and effective treatment for type 2 diabetes. To date, mitiglinide has been evaluated in over 4,000 patients across 60 clinical trials, including six core, randomized trials by Kissei Pharmaceutical Co. and its other current and former licensees, each of which achieved its primary endpoint. We are conducting a pivotal phase III clinical trial in the U.S. for our new drug applications, or NDAs, for both Glinsuna and Metgluna, which we expect to file in 2009.

 

 

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Our Ghrelin Product Candidates

Ghrelin antagonist for the treatment of type 2 diabetes and obesity. We believe that ghrelin may be a master regulator of metabolic function and that our ghrelin antagonists may represent a potential break-through approach for the treatment of type 2 diabetes, obesity and lipid disorders—all multi-billion dollar market opportunities. Ghrelin is a potent hormone which has powerful effects on appetite and plays a significant role in the regulation of glucose homeostasis, lipid profiles and body composition. For example, genetically eliminating, or “knocking-out,” ghrelin or the ghrelin receptor results in increased insulin sensitivity, improved triglyceride and cholesterol levels, and overall resistance to obesity, in animals fed a high-fat diet.

Using structure-assisted drug design, we have internally discovered and developed a series of potent, small molecule antagonist compounds that block the ghrelin receptor. Oral administration of our compounds in animal models of diet-induced obesity and early diabetes resulted in similarly favorable metabolic effects to the knock-out models with respect to blood glucose levels, insulin resistance, HbA1c, triglycerides, total cholesterol, liver fat, body weight and white fat when compared to placebo.

We believe we have the most advanced ghrelin antagonist program in the industry. We expect to commence human clinical trials in the fourth quarter of 2008 with a ghrelin antagonist initially targeting type 2 diabetes, subject to identification of a clinical product candidate and successful completion of investigational new drug, or IND, enabling studies demonstrating an acceptable safety and efficacy profile. We currently own 100% of the worldwide rights to our ghrelin antagonists.

Ghrelin agonist for opioid-induced bowel dysfunction and cancer cachexia. In addition to stimulating food intake, agonists to the ghrelin receptor have been shown to increase gastric motility in animal studies. We believe our ghrelin agonist product candidate will have clinical utility across a broad range of indications with market potential exceeding $2 billion worldwide, including opioid-induced bowel dysfunction, or OBD, and cancer cachexia. We in-licensed our ghrelin agonist from Bristol-Myers Squibb, or BMS. This BMS compound has been the subject of extensive preclinical development and we have been able to capitalize on this progress with rapid initiation of IND-enabling studies. Subject to successful completion of those studies, we expect to begin human clinical testing of our ghrelin agonist product candidate in 2008.

Our Sirtuin Development Program

Sirtuins. Leveraging our knowledge of the regulation of aging and metabolism, we have built a leadership position in the field of sirtuins, or SIRT. We believe that sirtuin modulators may have potential clinical utility in numerous, large pharmaceutical markets with unmet medical needs such as metabolic disease, cancer and neurodegenerative diseases. We have an extensive intellectual property position with regards to screening, chemical composition of matter and utility claims for sirtuin modulators.

Our Business Strategy

Our goal is to become a leading pharmaceutical company focused on developing and commercializing novel therapies for the treatment of metabolic diseases and disorders. The key elements of our strategy to achieve this objective include:

 

   

Launch our product candidates, Glinsuna and Metgluna, utilizing a small focused sales force targeting high-prescribers of metformin and glinides;

 

   

Continue the rapid development of our internally discovered ghrelin antagonists as a potential next-generation therapy for the treatment of a range of metabolic diseases, including type 2 diabetes and obesity;

 

   

Advance the development of our novel ghrelin agonist and sirtuin modulator programs; and

 

   

Establish collaborative partnerships with other pharmaceutical companies.

 

 

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Risks Associated with Our Business

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary, including the following:

 

   

We have not generated any material amounts of revenue and may never be profitable.

 

   

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

 

   

We will need substantial additional capital in the future.

 

   

Many of our product candidates are still in the early stages of development, and all of our product candidates remain subject to clinical testing and regulatory approval.

 

   

Our product candidates may cause side effects or have other properties that could delay or prevent their regulatory approval or limit the commercial profile of any approved label.

 

   

We cannot be certain that either Glinsuna and Metgluna will successfully complete the pivotal phase III clinical trial initiated in August 2007 or be commercialized successfully, even if the trial is successful and we receive regulatory approval.

 

   

We depend upon others for many intellectual property rights upon which our business is substantially dependent.

Corporate Information

We were founded on June 16, 1999 as a Delaware corporation. Our principal executive offices are located at 12 Emily Street, Cambridge, MA 02139, and our telephone number is (617) 995-7000. Our website is www.elixirpharm.com. The information on our website is not part of this prospectus.

Elixir Pharmaceuticals is a trademark of Elixir Pharmaceuticals, Inc. in the U.S. and other countries. We have applied for trademark protection of Glinsuna and Metgluna in the U.S. and other countries. This prospectus includes additional trademarks of Elixir Pharmaceuticals, Inc. and others.

 

 

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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 plan to use the net proceeds of this offering to fund the continued development of our product candidates, to prepare for commercialization and for general corporate purposes, such as general and administrative expenses, working capital, prosecution and maintenance of our intellectual property and the potential acquisition of, or investment in, technologies, products or companies that complement our business. For a more complete description of our intended use of the proceeds from this offering, see “Use of Proceeds.”

Proposed NASDAQ Global Market symbol

   ELXR

General Information About This Prospectus

The number of shares of our common stock to be outstanding following this offering is based on 143,462,234 shares of our common stock outstanding as of September 15, 2007 and excludes:

 

   

16,305,468 shares of common stock subject to options outstanding as of September 15, 2007 and having a weighted average exercise price of $0.12 per share and 7,142,252 additional shares of common stock reserved as of September 15, 2007 for future issuance under our stock-based compensation plans; and

 

   

17,591,113 shares of common stock subject to warrants outstanding as of September 15, 2007 and having a weighted average exercise price of $0.11 per share, including warrants currently exercisable for 1,449,960 shares of our preferred stock that will convert into warrants to purchase 1,461,520 shares of our common stock immediately prior to the closing of this offering.

 


Unless otherwise indicated, the share information in this prospectus is as of September 15, 2007 and has been adjusted to reflect or assume the following:

 

   

a     -for-   reverse stock split of our common stock effected on                     , 2007;

 

   

the automatic conversion of all of our outstanding shares of our redeemable convertible preferred stock, including shares of our redeemable convertible preferred stock issued after June 30, 2007 into 134,765,043 shares of common stock upon the closing of this offering;

 

   

the conversion of outstanding warrants to purchase 1,449,960 shares of our preferred stock into warrants to purchase 1,461,520 shares of our common stock, immediately prior to the closing of this offering;

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws immediately prior to the closing of this offering; and

 

   

no exercise of the underwriters’ over-allotment option.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables present our summary consolidated historical statements of operations data for the years ended December 31, 2004, 2005 and 2006, for the six months ended June 30, 2006 and 2007 and for the period from June 16, 1999 (Inception) through June 30, 2007, and our summary consolidated historical, pro forma and pro forma as adjusted balance sheet data as of June 30, 2007. The summary statements of operations data for the years ended December 31, 2004, 2005 and 2006 are derived from our audited consolidated financial statements as of and for the years ended December 31, 2004, 2005 and 2006 included elsewhere in this prospectus. The summary consolidated statements of operations data for the six months ended June 30, 2006 and 2007 and for the period from June 16, 1999 (Inception) through June 30, 2007 and the selected balance sheet data as of June 30, 2007 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and notes thereto, which include, in the opinion of our management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the information for the unaudited interim period. Our historical results for prior interim periods are not necessarily indicative of results to be expected for a full fiscal year or for any future period. You should read this data together with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Year Ended December 31,     Six Months Ended
June 30,
   

Period From
June 16, 1999
(Inception) to
June 30,

2007

 
    2004     2005     2006     2006     2007    
                      (unaudited)     (unaudited)     (unaudited)  
    (in thousands, except per share data)  

Statement of Operations Data:

           

Revenue:

           

Collaborative revenue

  $ —       $ —       $ —       $ —       $ 22     $ 22  

Operating expenses:

           

Research and development

    8,358       11,123       16,268       9,067       5,772       54,554  

In-process research and development

    —         —         —         —         —         6,184  

General and administrative

    3,235       4,231       3,575       1,710       2,750       19,477  

Restructuring charge (credit)

    (417 )     124       (250 )     —         —         1,975  

Impairment loss

    19       180       —         —         —         199  
                                               

Loss from operations

    (11,196 )     (15,658 )     (19,593 )     (10,777 )     (8,500 )     (82,367 )

Other income

    121       219       228       106       116       683  

Interest income

    209       185       467       121       401       1,642  

Interest expense

    (259 )     (205 )     (476 )     (303 )     (991 )     (2,231 )
                                               

Net loss

  $ (11,125 )   $ (15,459 )   $ (19,374 )   $ (10,853 )   $ (8,974 )   $ (82,273 )
                                               

Net loss per share applicable to common stockholders-basic and diluted

  $ (1.81 )   $ (2.13 )   $ (2.64 )   $ (1.47 )   $ (1.19 )  

Weighted average number of common shares used in net loss per share calculation-basic and diluted

    6,177       7,284       7,544       7,398       8,062    

Pro forma basic and diluted net loss attributable to common stockholders per share(1)

      $ (0.20 )     $ (0.08 )  

Pro forma weighted average shares outstanding—basic and diluted(1)

        97,092         114,797    

 

(1)

 

  The pro forma basic and diluted net loss per share gives effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock as of June 30, 2007 into 106,735,012 shares of our common stock.

 

 

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The following table presents our summary consolidated balance sheet data as of June 30, 2007:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the automatic conversion of all of our outstanding redeemable convertible preferred stock outstanding on June 30, 2007 into 106,735,012 shares of our common stock; and

 

   

on a pro forma, as adjusted basis to further reflect the receipt by us of net proceeds of $             million from the sale of the              shares of common stock offered by us in this offering at an assumed public offering price of $             per share, the midpoint of the range set forth on the cover of this prospectus, less underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of June 30, 2007
     Actual     Pro Forma    

Pro Forma,

As Adjusted(1)

     (unaudited)     (unaudited)
(in thousands)
    (unaudited)

Balance Sheet Data:

      

Cash and cash equivalents

   $ 13,878     $ 13,878     $             

Working capital

     8,615       8,615    

Total assets

     15,931       15,931    

Redeemable convertible preferred stock

     79,673       —      

Deficit accumulated during the development stage

     (82,273 )     (82,273 )  

Total stockholders’ (deficit) equity

     (77,347 )     3,025    

 

(1)

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and stockholders’ (deficit) equity by $            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should consider carefully the specific risk factors described below in addition to the other information contained in this prospectus, including our consolidated financial statements and related notes included elsewhere in the prospectus, before making a decision to invest in our common stock. If any of these risks actually occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. This could cause the trading price of our common stock to decline and a loss of all or part of your investment.

Risks Related to Our Financial Position and Capital Requirements

We have not generated any material amounts of revenue and may never be profitable.

To date, we have not generated, and may never generate, any material amounts of revenue. While we may generate milestone fees under collaborative agreements or proceeds from the sale or license of our assets, we do not expect to generate significant revenue unless and until we obtain regulatory approval of, and commercialize, our product candidates. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:

 

   

design and obtain favorable results from the pivotal phase III clinical trial of Glinsuna/Metgluna, which was initiated in August 2007;

 

   

progress the continued development of our ghrelin antagonist program, including identifying a lead product candidate with a satisfactory safety and efficacy profile;

 

   

progress the continued development of our ghrelin agonist product candidate and extract value from this program via our existing collaborative arrangement with Bristol-Myers Squibb, or BMS, or via a September 2007 collaborative arrangement with Novartis International Pharmaceuticals, or Novartis;

 

   

obtain regulatory approval for Glinsuna, Metgluna and our ghrelin antagonist, agonist and sirtuin modulators;

 

   

contract for the manufacture of our product candidates at acceptable cost levels for clinical trials and, ultimately, commercialization; and

 

   

establish sales and marketing capabilities or identify and enter into one or more strategic collaborations to effectively market and sell our product candidates.

Even if one or more of our product candidates is approved for commercial sale, which we do not expect to occur until at least 2010, any approved product candidate may not gain market acceptance or achieve commercial success. In addition, we will incur significant costs developing the sales force to commercialize any approved product. We may not achieve profitability after generating product sales, if ever. If we are unable to generate product revenues, we will not become profitable and may be unable to continue operations without obtaining additional funding.

Our limited operating history makes it difficult to evaluate our business and prospects.

We were founded in 1999. Our operations to date have been limited to organizing and staffing our company and conducting product development activities for our product candidates. We have not yet demonstrated an ability to successfully complete large-scale clinical trials, obtain regulatory approval for or commercialize a product candidate, or oversee the manufacturing of commercial quantities of any products. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products.

 

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

We are a development stage company and, to date, have focused on developing our product candidates. We have not derived any revenues from product sales or royalty revenue. We have financed our operations through debt and the private placements of our equity securities and have incurred losses in each year since our inception. Net losses were $15.5 million in 2005, $19.4 million in 2006, and $10.9 and $9.0 million for the six months ended June 30, 2006 and 2007, respectively. As of June 30, 2007, we had an accumulated deficit of $82.3 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations. We expect our development expenses and operating losses to significantly increase in connection with our planned clinical trials and other research and development activities. In addition, if we obtain regulatory approval for any of our product candidates, we expect to incur significant sales, marketing, in-licensing and outsourced manufacturing expenses, as well as continued development expenses. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

We will need to raise additional capital to fund our operations and to develop our product candidates. Our future capital requirements will be substantial and will depend on many factors, including:

 

   

the scope, size, rate of progress, results and costs of our preclinical studies, clinical trials and other development activities, including outsourced manufacturing expenses, for our product candidates;

 

   

our ability to establish and maintain collaborative arrangements;

 

   

the cost, timing and outcomes of regulatory proceedings;

 

   

revenues received from approved products, if any, in the future;

 

   

payments received, or required to be made under, any strategic partnerships;

 

   

the cost of filing, prosecuting and enforcing patent claims; and

 

   

the costs associated with commercializing our product candidates if they receive regulatory approval, including the cost and timing of developing sales and marketing capabilities or entering into strategic collaborations to market and sell any approved products.

We anticipate the net proceeds of this offering, together with existing liquid assets, will enable us to maintain our currently planned operations for the next 18 to 24 months after which we will be required to raise additional capital. Changing circumstances may cause us to consume capital significantly faster than we currently anticipate. Additional financing may not be available when we need it or may not be available on terms that are favorable to us. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If adequate funds are not available to us on a timely basis, or at all, we may be required to:

 

   

terminate or delay preclinical studies, clinical trials or other development activities for one or more of our product candidates;

 

   

delay our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates, including decrease the size of our sales force and reduce our promotional efforts, if approved for sale; or

 

   

share our rights to commercialize our product candidates with third parties on terms that may not be attractive to us.

 

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Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights.

Until such time as we can generate substantial product revenues, if ever, we expect to finance our cash needs through public or private equity offerings and debt financings, strategic collaborations and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, that are not favorable to us or to you. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.

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

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and The NASDAQ Stock Market, have imposed various new requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal controls for financial reporting and disclosure. In particular, beginning in the first full fiscal year after the consummation of this offering, we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by The NASDAQ Stock Market, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.

Risks Associated with Development and Commercialization of Our Product Candidates

Many of our product candidates are still in the early stages of development, and all of our product candidates remain subject to clinical testing and regulatory approval. If we are unable to successfully develop and test our product candidates, our prospects will be materially adversely affected.

To date, we have not marketed, distributed or sold any products. The future of our business depends primarily upon our ability to develop and commercialize our product candidates successfully. Our product candidates are prone to the risks of failure inherent in drug development. Before obtaining regulatory approvals

 

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for the commercial sale of Glinsuna, Metgluna, our ghrelin antagonist, ghrelin agonist, sirtuin modulator or any other product candidate we develop in the future, we must demonstrate the product candidate is safe and effective for use for that target indication with substantial evidence gathered in well-controlled clinical trials. Additionally, with respect to approval in the U.S., these studies must be to the satisfaction of the Food and Drug Administration, or FDA, and, with respect to approval in other countries, similar regulatory authorities in those countries. Despite our efforts, our product candidates may not:

 

   

offer therapeutic or other improvement over existing, comparable drugs;

 

   

demonstrate acceptable benefit/risk for approval;

 

   

be proven safe and tolerable in animal studies;

 

   

be proven safe and effective in clinical trials;

 

   

meet applicable regulatory standards;

 

   

be able to be formulated in a drug product acceptable in the market place;

 

   

be capable of being produced in commercial quantities at acceptable costs; or

 

   

be successfully commercialized.

Our ghrelin antagonist, ghrelin agonist, sirtuin modulator and other early-stage research and development programs are based upon novel science. Subsequent discoveries by us and third-parties may lead us to reconsider our scientific hypotheses, including how novel mechanisms regulate various biological functions. Like any scientific undertaking, we may draw the wrong inference from, or fail to appreciate the significance of, scientific data which could result in compounds emerging from our development programs having a lower than anticipated or unacceptable safety or efficacy profile. Moreover, positive results in preclinical studies of a product candidate may not be predictive of similar results in humans during clinical trials, and promising results from early clinical trials of a product candidate may not be replicated in later clinical trials. Interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, the results from the completed preclinical studies of our product candidates may not be predictive of the results we may obtain in later-stage trials. Our preclinical studies or clinical trials may produce negative or inclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials. We do not expect any of our product candidates to be commercially available until at least 2010.

Delays in the commencement or successful completion of clinical testing could result in increased costs to us and delay or limit our ability to generate revenues.

Delays in the commencement or successful completion of clinical testing could affect our product development costs significantly. We do not know whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:

 

   

obtaining regulatory approval to commence a clinical trial or complying with conditions imposed by a regulatory authority regarding the scope or term of a clinical trial;

 

   

unexpected clinical or nonclinical results that necessitate a change in the clinical testing plan;

 

   

recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including size of patient population, nature of trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;

 

   

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

 

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manufacturing sufficient quantities of a product candidate for use in clinical trials;

 

   

obtaining institutional review board, or IRB, or ethics committee approval to conduct a clinical trial at a prospective site;

 

   

severe or unexpected drug-related side effects experienced by patients in a clinical trial;

 

   

retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the trials, lack of efficacy or personal issues or who are lost to further follow-up; and

 

   

lack of internal resources and expertise to manage the clinical trial.

Clinical trials also may be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBs or ethics committees at the sites where they are overseeing a trial, or a data safety monitoring board overseeing the clinical trial, or other regulatory authorities due to a number of factors, including:

 

   

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

 

   

inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

 

   

unforeseen safety issues; and

 

   

lack of adequate funding to continue the clinical trial.

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs or ethics committees for reexamination, which may impact the cost, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.

We have no experience selling or marketing our products, and if we are unable to develop effectively adequate sales and marketing capabilities, we may be unsuccessful in commercializing our product candidates.

We currently have no sales and marketing capabilities. In order to commercialize our product candidates, if any are approved, we intend to develop internal sales and marketing capabilities. We may not be able to establish these capabilities internally or hire sales and marketing personnel with appropriate expertise to market and sell our products. In addition, even if we are able to identify one or more acceptable collaborators to perform these services for us, we may not be able to enter into any collaborative arrangement on favorable terms, or at all. If we enter into any collaborative arrangements for the marketing or sale of our products, our profit margins likely will be lower than if we marketed and sold our products alone.

Our product candidates may cause side effects or have other properties that could delay or prevent their regulatory approval or limit the commercial profile of any approved label.

Undesirable side effects caused by our product candidates could cause us, regulatory authorities or IRBs to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities. For example, the potential for cardiovascular risks are of particular concern in therapies for chronic conditions, including type 2 diabetes and obesity. Even if any of our product candidates receives marketing approval, we or others may later identify undesirable side effects caused by the product, and in that event a number of potentially significant negative consequences could result, including:

 

   

regulatory authorities may withdraw their approval of the product;

 

   

regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;

 

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

 

   

we could be sued and held liable for harm caused to patients; and

 

   

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could increase the costs of commercializing our product candidates substantially.

Negative results from other products in the class or products perceived to be related to our product candidates may delay approval or negatively impact sales of our products. In addition, the FDA may require class labeling to address risks identified with other class members.

We initially will be dependent on the success of Glinsuna and Metgluna, for which we began a pivotal phase III clinical trial in August 2007. We cannot be certain that either of these product candidates will receive regulatory approval.

We have no drug products for sale currently and we may never be able to develop marketable drug products. We currently are targeting 2010 for the commercial launches of Glinsuna and Metgluna, if they are approved. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the U.S. and other countries, whose regulations differ from country to country. We are not permitted to market our product candidates in the U.S. until we receive approval of a new drug application, or NDA, from the FDA, or in any foreign countries until we receive the requisite approval from such countries. We have not submitted an NDA or received marketing approval for either Glinsuna or Metgluna. Obtaining approval of an NDA is an extensive, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of a product candidate for many reasons, including:

 

   

the FDA may not deem a product candidate safe and effective;

 

   

we may not be able to include, or the FDA may not accept, data from clinical trials outside the U.S. in our regulatory submission;

 

   

the FDA may not find the data from preclinical studies and clinical trials sufficient to support approval;

 

   

the FDA may not approve of our third-party manufacturers’ processes and facilities; or

 

   

the FDA may change its practices or approval policies or may adopt new regulations.

For example, over 60 clinical trials have been conducted on mitiglinide, and if we are unable to include data from those trials in an acceptable format for FDA’s review, we may not be able to obtain an approval or, if approved, the labeling may be limited.

We face potential product liability exposure, and, if successful claims are brought against us, we may incur substantial liability.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers or others selling or otherwise coming into contact with our products. If we cannot defend ourselves successfully against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

   

decreased demand for any approved product candidates;

 

   

impairment of our business reputation;

 

   

withdrawal of clinical trial participants;

 

   

costs of related litigation;

 

   

distraction of management’s attention from our primary business;

 

   

substantial monetary awards to patients or other claimants;

 

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loss of revenues; and

 

   

the inability to successfully commercialize any approved product candidates.

We have product liability insurance coverage for our clinical trials. However, our insurance coverage 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 liability. If and when we obtain marketing approval for any of our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain this product liability insurance on commercially reasonable terms. On occasion, 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 could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

If any of our product candidates for which we receive regulatory approval does not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

The commercial success any of our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community, including physicians, patients and healthcare payors. The degree of market acceptance of any of our approved products will depend on a number of factors, including:

 

   

demonstration of clinical safety and efficacy compared to other products;

 

   

the relative convenience and ease of administration;

 

   

the prevalence and severity of any adverse side effects;

 

   

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

 

   

availability of alternative treatments for the indications we target, in particular type 2 diabetes where our product candidates will compete with a number of other products, many of which have been approved for years and many of which are, or will be, available as generics;

 

   

pricing and cost effectiveness compared to competing products, particularly generic products;

 

   

the effectiveness of our or any future collaborators’ sales and marketing strategies;

 

   

the effectiveness of our manufacturing and distribution plans;

 

   

our ability to obtain sufficient third-party coverage or reimbursement; and

 

   

the willingness of patients to pay out-of-pocket in the absence of third-party coverage.

If any of our product candidates are approved but do not achieve an adequate level of acceptance by physicians, healthcare payors and patients, we may not generate sufficient revenue from these products, and we may not become or remain profitable. In addition, our 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.

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

Even if U.S. regulatory approval is obtained, the FDA still may impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Our product candidates also will be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, record keeping and submission of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and

 

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periodic inspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practice regulations, or cGMP, and other regulations. If we or a regulatory agency discovers previously unknown problems with a product or the product class, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturer or us, including requiring withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

   

issue warning letters or untitled letters;

 

   

impose civil or criminal penalties or monetary fines;

 

   

suspend or withdraw regulatory approval;

 

   

suspend any ongoing clinical trials;

 

   

refuse to approve pending applications or supplements to applications filed by us;

 

   

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

 

   

seize or detain products or require us to initiate a product recall.

Even if our product candidates receive regulatory approval in the U.S., we may never receive approval or commercialize our products outside of the U.S.

In order to market any products outside of the U.S., we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. We in-licensed the rights to launch mitiglinide throughout North and South America from Kissei Pharmaceutical Co., or Kissei, but have not begun pursuing approvals outside the U.S. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the U.S. as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval would impair our ability to develop foreign markets for our product candidates. Further, sales of any of our products, once approved, outside of the U.S. likely will present risks and complexities not typically associated with domestic sales, including greater reliance on third-party distributors, longer payment cycles from customers and more difficulties collecting accounts receivables, less favorable reimbursement terms from payors or government imposed price controls, any of which could have an adverse impact on our financial condition and results of operations.

Recent federal legislation will increase the pressure to reduce prices of pharmaceutical paid for by Medicare, which could adversely affect our revenues, if any.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies by which they can limit the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

 

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Healthcare reform measures, if implemented, could hinder or prevent our commercial success.

There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

 

   

our ability to set a price that we believe is fair for our products;

 

   

our ability to generate revenues and achieve or maintain profitability; and

 

   

the availability of capital.

Recent federal legislation and actions by state and local governments may permit re-importation of drugs from foreign countries into the U.S., including foreign countries where the drugs are sold at lower prices than in the U.S., which could have a material adverse affect on our operating results and our overall financial condition.

We may face competition for any of our product candidates, once approved, from lower priced products from foreign countries that have placed price controls on pharmaceutical products. The MMA contains provisions that may change U.S. importation laws and expand pharmacists’ and wholesalers’ ability to import lower priced versions of our product candidates and competing products from Canada, where there are government price controls. These changes to U.S. importation laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changes will pose no additional risk to the public’s health and safety and will result in a significant reduction in the cost of products to consumers. The Secretary of Health and Human Services has not yet announced any plans to make this required certification. As directed by Congress, a task force on drug importation conducted a comprehensive study regarding the circumstances under which drug importation could be conducted safely and the consequences of importation on the health, medical costs and development of new medicines for U.S. consumers. The task force report issued its report in December 2004, finding that there are significant safety and economic issues that must be addressed before importation of prescription drugs is permitted. However, a number of federal legislative proposals have been made to implement the changes to the U.S. importation laws without any certification, and to broaden permissible imports in other ways. Even if the changes do not take effect, and other changes are not enacted, imports from Canada and elsewhere may continue to increase due to market and political forces, and the limited enforcement resources of the FDA, the U.S. Customs Service and other government agencies. For example, Pub. L. No. 109-295, which was signed into law in October 2006 and provides appropriations for the Department of Homeland Security for the 2007 fiscal year, expressly prohibits the U.S. Customs Service from using funds to prevent individuals from importing from Canada less than a 90-day supply of a prescription drug for personal use, when the drug otherwise complies with the Federal Food, Drug, and Cosmetic Act, or FDCA. Further, several states and local governments have implemented importation schemes for their citizens, and, in the absence of federal action to curtail such activities, we expect other states and local governments to launch importation efforts. The importation of foreign products that compete with any of our approved product candidates could negatively impact our profitability.

Our market is subject to intense competition. If we are unable to compete effectively, our product candidates may be rendered noncompetitive or obsolete.

Our industry is highly competitive and subject to rapid and significant technological change. The market for diabetes therapeutics and other metabolic disease treatments is especially large and competitive. We will face intense and increasing competition as new drugs enter the market and advanced technologies become available. Given the dynamic nature of our competitive marketplace, we may fail to recognize adequately or, once recognized, respond appropriately to, our competitors’ advantages.

 

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Key competitive factors affecting the commercial success of our product candidates are likely to be the safety profile, efficacy, reliability, convenience of dosing, price and reimbursement. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render our product candidates obsolete or non-competitive before we can recover the expenses of developing and commercializing any of our product candidates. Our own development of new treatment methods for the diseases we are targeting could render our product candidates non-competitive or obsolete.

Generic versions of many treatments for type 2 diabetes are already available and others will be in the future, including metformin which is the most widely-prescribed type 2 diabetes therapeutic. Our products, when and if we have any, will have to compete with these and other current and future generic drugs as treatment options. Because of substantially reduced development costs, manufacturers of generic drugs are often able to charge relatively low prices for their products. We expect that many of these generic options will be less expensive than our products. This could decrease demand for our products, if and when they are approved.

Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. All of these competitors currently engage in, have engaged in or may engage in the future in the development, manufacturing, marketing and commercialization of new pharmaceuticals, some of which may compete with our present or future product candidates. Many of our potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval for drugs and achieving widespread market acceptance.

Other products are currently in development or exist in the market that may compete directly with the products that we are developing or marketing. Various other products to treat type 2 diabetes are available or are in development, including:

 

   

Biguanides;

 

   

Sulfonylureas;

 

   

Thiazolidinediones, or TZDs;

 

   

Alpha-glucosidase inhibitors, or AGIs;

 

   

Dipeptidyl peptidase IV, or DPP IV, inhibitors;

 

   

Glucagon-like peptide-1, or GLP-1, analogues; and

 

   

Insulins, including injectable and inhaled versions.

In addition, several companies are developing various new approaches to improve treatments for type 2 diabetes. We cannot predict whether any products we successfully develop will have sufficient advantages to cause healthcare professionals to adopt them over our competitors’ products or that our products will offer an economically feasible alternative to our competitors’ products. Our potential products could become obsolete before we recover expenses incurred in developing them. Market projections of increasing size of type 2 diabetes population may prove inaccurate, for example because of improvements in diet and exercise patterns of the population.

We could incur environmental liabilities related to hazardous materials used in, or generated by, our operations or as a result of our failure to comply with environmental laws or permits.

Our research and development operations use small quantities of hazardous materials, including chemicals, biologics and radioactive compounds, and generate hazardous and other types of waste. We are required to comply with various environmental laws, obtain and comply with environmental permits and ensure proper

 

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disposal of any wastes generated. In the event we fail to comply with laws or permits or store, handle, release or dispose of any hazardous materials or wastes improperly or in a manner that results in contamination, we could be subject to loss of our permits, government fines or penalties, or other governmental or private actions and we could be required to incur clean-up or related costs. These costs could exceed our resources. Although we maintain general liability insurance, we do not specifically insure against environmental liabilities.

Risks Related to Our Intellectual Property

If our patent position does not protect adequately our product candidates or any future products, others could compete against us more effectively, which would harm our business.

Our commercial success will depend in part on our ability to obtain patents, protect our existing patent position and otherwise maintain adequate intellectual property protection for our technologies, product candidates, and any of our future products in the U.S. and other countries. If we do not protect adequately our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and our ability to achieve profitability. In addition, we have applied for patent protection in some, but not all, foreign countries. In countries where we have not and do not seek patent protection, third parties may be able to manufacture and sell our products without our permission, and we may not be able to prevent or stop them from doing so. Furthermore, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S., and we may encounter significant problems in protecting our proprietary rights in these countries.

The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, and, therefore, the scope, validity and enforceability of our current patents and any patents we may obtain in the future cannot be predicted with certainty. During the prosecution of patent applications, claims may be disallowed or substantially narrowed. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing or commercializing competing products. Even after issuance, patents may be challenged, deemed unenforceable, invalidated, or circumvented.

Recent and future developments in patent law may negatively affect our ability to enforce our existing patents or in the future obtain patent claims broad enough to adequately protect our technology. For example, recent U.S. court rulings have, in some respects, tightened the standards for non-obviousness of U.S. patents and changes to U.S. Patent and Trademark Office procedures may limit the scope and number of patent claims we can obtain in the future.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure:

 

   

we will be able to commercialize our products successfully before some or all of our relevant patents expire;

 

   

we or our licensors were the first to invent the inventions covered by each of our pending patent applications;

 

   

we or our licensors were the first to file patent applications for these inventions;

 

   

others will not develop independently similar or alternative technologies or duplicate any of our technologies;

 

   

any patent applications licensed to us or filed by us will result in issued patents;

 

   

a court will hold that any patents licensed to us or filed by us are valid and enforceable;

 

   

any patents issued to us or our licensors and collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

   

we will develop additional proprietary technologies or product candidates that are patentable; or

 

   

the patents of others will not have an adverse effect on our business.

 

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We typically file for patent protection on the composition of our product candidates, pharmaceutical compositions and formulations containing these candidates, methods for their production, and methods of their use. As we learn more about the mechanisms of action and new methods of manufacture and use of our product candidates, we generally file additional patent applications for these new inventions. Although our patents may prevent others from making, using, or selling similar products, they do not ensure we will not infringe the patent rights of third parties. For example, because we sometimes identify the mechanism of action or molecular target of a given product candidate after we know its structure and therapeutic use, we may not be aware until the mechanism or target is further elucidated that a third-party has an issued or pending patent application claiming biological activities or targets that may cover our product candidate or its use. If such a patent exists or is granted in the future, we cannot provide assurances that a license will be available on commercially reasonable terms, or at all.

If we do not obtain or we are unable to maintain adequate patent or trade secret protection for our products in the United States, competitors could duplicate them without repeating the extensive testing that we will be required to undertake to obtain approval of the products by the FDA. Regardless of any patent protection, under the current statutory framework, the FDA is prohibited by law from approving any generic version of any of our products for five years after it has approved our product if our product contains an active ingredient that has not previously been approved, and for three years if the product approval is based on certain new clinical investigations. Upon the expiration of that period, or if that time period is altered, the FDA could approve a generic version of our product unless we have patent protection sufficient for us to block that generic version. Without sufficient patent protection, the applicant for a generic version of our product would be required only to conduct a relatively inexpensive study to show that its product is bioequivalent to our product and would not have to repeat the studies that we conducted to demonstrate the product is safe and effective. In the absence of adequate patent protection in other countries, competitors may similarly be able to obtain regulatory approval in those countries of products that duplicate our products.

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

Several third parties are actively researching and seeking patents in the sirtuin and ghrelin fields. These third parties have published patent applications that purport to cover the uses and formulations of ghrelin antagonists, ghrelin agonists, sirtuin modulators and aspects of our product candidates and business. One or more of these third parties may allege that their patent rights encompass the use of some of our product candidates. Although we do not believe these applications support patentable claims that would cover our product candidates, we cannot assure you that such claims will be denied by the patent office, or that one or more of these third parties will not attempt to block our activities in this field using whatever patents that may be issued. In the case of such a dispute, we may need to engage in costly litigation or obtain a license under such patents or other intellectual property rights. There can be no assurance that such licenses will be available on commercially reasonable terms, or at all. If a third-party does not offer us a necessary license or offers a license only on terms that are unattractive or unacceptable to us, we might be unable to develop and commercialize one or more of our product candidates.

Moreover, if we fail to meet our obligations under our license agreements, or our agreements are terminated for any other reasons, we may lose our rights to in-licensed technologies.

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

We rely on trade secrets and confidential information 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

 

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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. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection for our trade secrets and confidential information could adversely affect our competitive business position.

Litigation regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are involved in such litigation, it could cause delays in bringing product candidates to market and harm our ability to operate. Unfavorable outcomes in such litigation could limit or negate our intellectual property rights and our business.

Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain patents in the future and allege that the use of our technologies infringes these patent claims or that we are otherwise employing their proprietary technology without authorization.

Likewise, third parties may challenge or infringe upon our existing or future patents. In such cases, we may decide to resort to litigation or other adverse proceedings to enforce our intellectual property rights. Under certain circumstances, such third parties may also be able to initiate litigation or other adversarial proceedings to challenge our patents.

Proceedings involving our patents, patent applications or other intellectual property rights or those of others could result in adverse decisions regarding:

 

   

the patentability of our inventions relating to our product candidates; or

 

   

the enforceability, validity or scope of protection offered by our patents and other intellectual property rights relating to our product candidates.

Pursuant to our license agreements with Kissei and BMS, we have the right but not the obligation to bring infringement claims against and, in the case of the Kissei license agreement, defend infringement claims by third parties. If we do not exercise these rights, Kissei or BMS may. As a result, these adverse results could even arise as a result of disputes in which we are not a participant.

There can be no guarantee that we will be successful in any intellectual property infringement action. Furthermore, even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention as a result of these proceedings, which could have a material adverse effect on us. During the course of any proceeding, there may be public announcements of the results of hearings, motions, and other interim proceedings or developments in the proceeding. If securities analysts or investors regard these announcements as negative, the market price of our common stock may decline. In addition, proclamations or statements by key public figures may also have a negative impact on the perceived value of our intellectual property.

If we are unable to avoid infringing, misappropriating or violating the intellectual property rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of such intellectual property rights in court. Intellectual property 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; or

 

   

be precluded from manufacturing, using or selling our product candidates.

 

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If the Patent Reform Act of 2007 is enacted into law, it could make challenges to our patents easier, may increase the likelihood that we will be sued or our patents challenged at the United States Patent and Trademark Office, subject us to extraordinary legal expenses and risk a ruling that one or more of our patents are invalid.

There is currently pending in the United States Congress legislation referred to as the Patent Reform Act of 2007. While it is uncertain whether it will ultimately become law and whether or how it will be amended, in its current version, it may make it easier to challenge patents, may increase the likelihood our patents will be challenged in court or administratively at the United States Patent and Trademark Office, could result in our incurring extraordinary legal fees defending our patents and could result in one or more of the patents we own or license from a third party being ruled invalid, any of which could result in a material adverse effect upon our future operating results and financial condition. It may also reduce the amount of monetary damages we could collect for infringement of our patent rights.

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 applied to register a number of our trademarks. However, no assurance can be given that our trademark applications actually will become registered or that our registered trademarks can be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are generally given an opportunity to respond to those rejections, there can be no assurance that the rejections can be successfully overcome. In addition, in the U.S. Patent and Trademark Office and in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to cancel registered trademarks. No assurance can be given that opposition or cancellation proceedings will not be filed against our trademarks, nor can there be any assurance that our trademarks would survive such proceedings.

Risks Related to Our Dependence on Third Parties

We depend upon others for many intellectual property rights upon which our business is substantially dependent.

We have in-licensed some of our product candidates, or components of their development programs, and intend to continue pursuing in-licensing as a means to develop our pipeline of product candidates. We are dependent upon agreements with Kissei, BMS, Evotec-OAI, Sai Life, ASG and our founders’ universities for access to patents, trade secrets, data and other intellectual property assets developed, and sometime still controlled, by these and other third parties. Our rights to in-licensed technology may be terminated under the terms of our license agreements, including upon our failure to achieve certain development milestones or the occurrence of an uncured material breach by us. If a default does occur under any of these agreements, we could lose our rights to the in-licensed technologies or other products that are the subject of that agreement. The termination of these licenses or the loss of our rights to these technologies or products could harm our business.

Under some of these license agreements, we do not control the patent prosecution, maintenance or enforcement of some of the licensed technology. Accordingly, we may be unable to exercise the same degree of control over this intellectual property as we would over our internally developed and controlled technologies.

We have no experience manufacturing products and no internal capability to do so and therefore must rely upon third-party manufacturers to produce our product candidates.

We currently have no manufacturing capabilities and will rely on third-party manufacturers for the manufacture of all of our products. We plan to establish relationships with additional third-party manufacturers for products that we successfully develop. Accordingly, we will need to identify commercial-scale manufacturers, or our manufacturers of clinical supplies will need to increase their scale of production to meet our projected needs for commercial manufacturing. We also need to identify commercial supply chain vendors

 

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for tasks currently performed by clinical chain vendors, such as labeling and packaging. We can not assure you that we will be able to identify, or reach agreement with, commercial scale manufacturers on commercially reasonably terms, or at all. Moreover, our dependence upon third parties for the manufacture of our products may adversely affect our profit margins and our ability to develop and commercialize products on a timely and competitive basis.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including reliance on the third-party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third-party because of factors beyond our control and the possibility of termination or nonrenewal of the agreement by the third-party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require our product candidates be manufactured according to cGMP. Any failure by our third-party manufacturers to comply with cGMP and/or failure to scale up our manufacturing processes could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates. In addition, such failure could be the basis for action by the FDA or other regulatory authorities to withdraw approvals for product candidates previously granted to us and for other regulatory action. Furthermore, although we generally plan to not begin a clinical trial unless we have a sufficient supply of a product candidate for the trial, any significant delay in the supply of a product candidate for an ongoing trial due to the need to replace a third-party manufacturer could delay completion of the trial.

We depend on Kissei as the one supplier for mitiglinide and may not be able to obtain an alternate supply on a timely or acceptable basis.

We rely on Kissei as our sole-source supplier for mitiglinide. We intend to enter into a supply agreement with Kissei regarding its provision of commercial quantities of mitiglinide. We currently receive mitiglinide drug substance from Kissei which is manufactured in Japan by a third-party contractor. This third-party contractor and potential alternative mitiglinide suppliers have not been inspected by FDA for compliance to cGMP. Any failure by mitiglinide suppliers to comply with cGMP could lead to a delay in, or failure to obtain, regulatory approval of Glinsuna and Metsuna. We believe, if necessary, we could obtain alternate supplies of mitiglinide through Kissei from additional vendors in Japan. However, we may not be able to find such alternate suppliers in a timely manner and, even if we can, we may not be able to obtain mitiglinide in acceptable quantities or at acceptable prices. Any interruption in the supply of mitiglinide could have a material adverse effect on our business.

If our contract research organizations do not successfully carry out their duties or if our relationship with any of these contract research organizations is terminated, our drug development efforts could be delayed.

We are dependent on contract research organizations, third-party vendors and investigators for pre-clinical testing and clinical trials related to our drug discovery and development efforts and we likely will continue to depend on them to assist in our future discovery and development efforts. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our programs. If they fail to devote sufficient time and resources to our drug development programs or if their performance is substandard, it will delay the approval of our products. The parties with which we contract for execution of our clinical trials play a significant role in the conduct of the trials and the subsequent collection and analysis of data. Their failure to meet their obligations could adversely affect clinical development of our products. Moreover, these parties may also have relationships with other commercial entities, some of which may compete with us. If they assist our competitors it could harm our competitive position.

If our relationship with any one or more of these parties is terminated, we could experience a significant delay in both identifying another comparable provider and then contracting for its services. We may be unable to retain an alternative provider on reasonable terms, if at all. Even if we locate an alternative provider, it is likely that this provider may need additional time to respond to our needs and may not provide the same type or level of service as the original provider. In addition, any provider that we retain will be subject to current Good

 

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Laboratory Practices, or cGLP, for nonclinical testing and Good Clinical Practice for clinical testing 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 these practices and standards, the development and commercialization of our product candidates could be delayed.

If we do not establish successful collaborations, we may have to alter our development plans.

Our drug development programs and potential commercialization of our product candidates will require substantial additional cash to fund expenses. In September 2007, we entered into an arrangement with Novartis under which Novartis has the right to negotiate to obtain rights to develop and commercialize either our ghrelin agonist product candidate or one of our sirtuin programs. See “Business—Collaborative Agreements—Novartis International Pharmaceuticals (Ghrelin Agonist & Sirtuin Modulators).” We also may enter into collaborative arrangements for our other product candidates, especially for target indications in which the potential collaborator has particular therapeutic expertise or that involve a large, primary care market that must be served by large sales and marketing organizations or for markets outside of North America. We have entered, and may again enter, into these collaborations in order to:

 

   

fund our research and development activities;

 

   

access manufacturing capabilities of third parties;

 

   

help us conduct clinical trials; and

 

   

successfully commercialize any approved product candidates.

We face significant competition in seeking appropriate collaborators and these collaborations are complex and time-consuming to negotiate and document. We may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail the development of a particular product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of our sales or marketing activities or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.

If a collaborative partner terminates or fails to perform its obligations under an agreement with us, the development and commercialization of our product candidates could be delayed or terminated.

If any of our collaborative partners does not devote sufficient time and resources to a collaboration arrangement with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. In addition, if a collaboration partner were to breach or terminate its arrangements with us, the development and commercialization of the affected product candidate could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue development and commercialization of the product candidate on our own. In particular, data generated by Kissei and its other current and former licensees will be included in the NDAs we anticipate filing for Glinsuna and Metsuna. There can be no assurance, however, that we will have sufficient access to all of this data in the detail required by the FDA in a timely fashion. If we are unable to obtain this data in a timely manner, we may not have sufficient resources to generate the FDA required data ourselves. We do not have control over development activities by Kissei’s other current and former licensees for mitiglinide, the results of which we may be required to report to FDA and other regulatory authorities in our territory and which could negatively affect our approval or marketing.

 

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We expect much of the potential revenue from a collaborative arrangement to develop and commercialize any of our product candidates will consist largely of contingent payments, such as payments for achieving development milestones and royalties payable on sales of drugs developed. Thus, the milestone and royalty revenues that we may receive will depend upon our collaborator’s ability to successfully develop, introduce, market and sell new products. A collaboration partner may fail to develop or effectively commercialize products using our product candidates or technologies because they:

 

   

decide not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite scientific expertise, limited cash resources or specialized equipment limitations, or the belief that other drug development programs may have a higher likelihood of obtaining regulatory approval or may potentially generate a greater return on investment;

 

   

decide to pursue other technologies or develop other product candidates, either on their own or in collaboration with others (including our competitors), to treat the same diseases targeted by our own collaborative programs;

 

   

do not have sufficient resources necessary to carry the product candidate through clinical development, regulatory approval and commercialization; or

 

   

cannot obtain the necessary regulatory approvals.

Competition may negatively impact a collaboration partner’s focus on and commitment to our product candidate and, as a result, could delay or otherwise negatively affect the commercialization of our product candidate. If a collaboration partner fails to develop or effectively commercialize any of our product candidates for any of these reasons, we may not be able to replace it with another partner to develop and commercialize the product candidate. We also be unable to obtain, on terms acceptable to us, a license from such collaboration partner to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize the product candidate.

Risks Related to Personnel Matters and Managing Growth

Our future success depends on our ability to retain our senior executives and senior scientists and to attract, retain, and motivate qualified personnel.

We are highly dependent on our senior executives and senior scientists. Any of these individuals may terminate his or her employment with us at any time. Although we do not have any reason to believe that we may lose the services of any of these persons in the foreseeable future, the loss of the services of any of these persons might impede the achievement of our research, development, and commercialization objectives. Recruiting and retaining qualified scientific personnel and, as our product candidates are approved, sales and marketing personnel also will be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific personnel from universities and research institutions. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified scientific personnel. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

We no longer have an active relationship with some of our founders.

We continue to exploit the pathways involved in the regulation of aging discovered by our founders to further our ghrelin antagonist and sirtuin programs. While certain of our founders have continued to assist us in various roles, including as scientific consultants, we no longer have an active relationship with several of our other founders. Although bound by confidentiality obligations relating to their work at Elixir, we do not have rights to any of their future discoveries and none of our founders is prohibited from competing against us.

 

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We expect to expand our development and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We currently have a limited number of employees, and we expect to experience significant growth in the number of our employees and the scope of our operations. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational, and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

Risks Related to the Securities Markets and Investment in Our Common Stock

Market volatility may affect our stock price and the value of your investment.

Following this offering, the market price for our common stock is likely to be volatile, in part because our shares previously have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

   

plans for, progress in and results from clinical trials of our product candidates;

 

   

announcements of new products, services or technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

   

failure of any of our product candidates to achieve commercial success after it is approved;

 

   

fluctuations in stock market prices and trading volumes of similar companies;

 

   

general market conditions and overall fluctuations in U.S. equity markets;

 

   

variations in our quarterly operating results;

 

   

changes in our financial guidance or securities analysts’ estimates of our financial performance;

 

   

changes in accounting principles;

 

   

sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

   

additions or departures of key personnel;

 

   

success or failure of products within the diabetic or metabolic disease therapeutic area;

 

   

discussion of us or our stock price by the financial press and in online investor communities; and

 

   

other risks and uncertainties described in these Risk Factors.

An active public market for our common stock may not develop or be sustained after this offering. We will negotiate and determine the initial public offering price with representatives of the underwriters and this price may not be indicative of prices that will prevail in the trading market. As a result, you may not be able to sell your shares of common stock at or above the offering price.

If securities or industry analysts do not publish research reports about our business, or if they change their recommendations regarding our common stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced, in part, by the research reports and opinions that securities or industry analysts publish about our business. We currently do not have and may never obtain research coverage by these analysts. Investors have numerous investment opportunities and may limit their investments to publicly traded companies that receive thorough research coverage. If no analysts commence coverage of us or if one or more analysts cease to cover us or fail to publish reports in a regular manner, we could lose visibility in the financial markets, which could cause a significant and prolonged decline in our stock price due to lack of investor awareness.

 

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In the event that we do obtain analyst coverage and if one or more of these analysts downgrade our stock or comment negatively about our prospects or the prospects of other companies operating in our industry, our stock price could decline significantly. There is no guarantee that equity research organizations will elect to initiate or sustain research coverage of us, nor whether such research, if initiated, will be positive towards our stock price or our business prospects.

We have broad discretion to allocate the net proceeds from this offering.

We currently intend to use the proceeds from this offering to fund the clinical development of Glinsuna and Metgluna, research and development of our other product candidates, and for general corporate purposes, such as general and administrative expenses, working capital, prosecution and maintenance of our intellectual property and the potential acquisition of, or investment in, technologies, products, or companies that complement our business. Because of the number and variability of factors that will determine our use of the proceeds from this offering, their ultimate use may vary substantially from their currently anticipated use. As such, our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock. For a further description of our intended use of the proceeds of the offering, see “Use of Proceeds.”

Our directors, officers and certain significant stockholders will exercise significant control over Elixir.

After this offering, our directors, officers and significant stockholders, including investment funds affiliated with the MPM Group and MPM Capital, or the MPM Funds, ARCH Venture Partners, or the ARCH Funds, Oxford Bioscience Partners, or the Oxford Funds, and MunMun International Ltd., will collectively control approximately             % of our outstanding common stock, or             % if the underwriters exercise their option to purchase an additional              shares in full. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of Elixir and might affect the market price of our common stock.

Provisions in our certificate of incorporation or by-laws and Delaware law may deter third parties from acquiring us and could lead to the entrenchment of our board of directors.

Our certificate of incorporation and by-laws contain provisions that may make the acquisition of Elixir more difficult without the approval of our board of directors, including the following:

 

   

our board of directors is divided into three classes serving staggered three-year terms;

 

   

only our board of directors may call special meetings of our stockholders;

 

   

our stockholders may take action only at a meeting of our stockholders and not by written consent;

 

   

we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

   

stockholder approval of amendments of our certificate of incorporation or by-laws require a vote of 75% of our outstanding shares;

 

   

vacancies on the board of directors may be filled only by the directors;

 

   

our directors may be removed only for cause by the affirmative vote of the holders of 75% of the votes that all stockholders would be entitled to cast in the election of directors; and

 

   

we require advance notice for stockholder proposals.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which

 

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together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

These foregoing provisions could discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions that you desire. The anti-takeover defenses in our certificate of incorporation and by-laws could discourage, delay or prevent a transaction involving a change in control of Elixir, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate we will retain future earnings for the development, operation and expansion of our business. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

Future sales of our common stock may cause our stock price to decline.

Upon completion of this offering, there will be              shares of our common stock outstanding. Of these, shares are being sold in this offering (or              shares, if the underwriters exercise their over-allotment option in full),              shares may be sold upon expiration of lock-up agreements 180 days after the date of this offering and the remaining shares may be sold from time to time thereafter upon expiration of their respective one-year holding periods under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, as of September 15, 2007, we had outstanding options and warrants to purchase 33,896,581 shares of common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements. Sales by these stockholders, optionholders or warrantholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. Moreover, after this offering, the holders of shares of common stock will have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all common stock that we may issue under our 2007 Stock Option and Incentive Plan. Effective upon the completion of this offering, an aggregate of              shares of our common stock will be reserved for future issuance under this plan. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be sold freely in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. Purchasers of common stock in this offering will experience immediate dilution of approximately $             per share in net tangible book value of the common stock. In addition, investors purchasing common stock in this offering will contribute approximately             % of the total amount invested by stockholders since inception but will only own approximately             % of the shares of common stock outstanding. In the past, we issued restricted stock, warrants and options to acquire common stock at prices significantly below the initial public offering price. To the extent these outstanding warrants or options are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. See “Dilution” for a more detailed description of the dilution to new investors in the offering.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. We have included important factors in the cautionary statements included in this prospectus, particularly in the section entitled “Risk Factors” that we believe could cause actual 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. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds of the sale of the common stock that we are offering will be approximately $             million, or $             million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses that we must pay.

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 approximately $             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 commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for the following:

 

   

approximately $10 to $12 million of these net proceeds to fund the continued clinical development and pre-commercialization activities of Glinsuna and Metgluna, including completion of the pivotal phase III clinical trial initiated in August 2007;

 

   

approximately $7 to $9 million of these net proceeds to fund the continued development of our ghrelin antagonist, including the initiation of a phase I trial in the fourth quarter of 2008, which we believe will fund this trial through its completion;

 

   

approximately $6 to $8 million of these net proceeds to fund the continued development of our ghrelin agonist product candidate and our sirtuin initiatives, including the initiation of a phase I ghrelin agonist trial in 2008, which we believe will fund this trial through its completion; and

 

   

the remaining net proceeds for the further advancement of our development programs and general corporate purposes, such as general and administrative expenses, working capital, prosecution and maintenance of our intellectual property and the potential acquisition of, or investment in, technologies, products, or companies that complement our business.

We have no current understandings, commitments, or agreements with respect to any acquisition of or investment in any technologies, products or companies.

As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the proceeds from this offering, or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our development and commercialization efforts, the progress of our clinical trials, whether or not we enter into strategic collaborations or partnerships, and our operating costs and expenditures. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering.

The costs and timing of drug development and regulatory approval, particularly conducting clinical trials, are highly uncertain, are subject to substantial risks and can often change. Accordingly, we may change the allocation of use of these proceeds as a result of contingencies such as the progress and results of our clinical trials and other development activities, the establishment of collaborations, our manufacturing requirements and regulatory or competitive developments. In addition, assuming our current clinical programs proceed further to the next stage of clinical development, we do not expect our existing capital resources and the net proceeds from this offering to be sufficient to enable us to fund the completion of all such clinical development programs through commercial introduction. Accordingly, we expect we will need to raise additional funds.

Pending use of the proceeds from this offering as described above or otherwise, we intend to invest the net proceeds in short-term interest-bearing, investment grade securities.

 

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DIVIDEND POLICY

We have never declared or paid dividends on our common stock. Our board of directors will continue to have discretion in determining whether to declare or pay dividends, which will depend upon our financial condition, results of operations, capital requirements, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. We currently anticipate we will retain future earnings for the development, operation and expansion of our business and the repayment of indebtedness. In addition, under our existing loan agreement, we are prohibited from declaring or paying any cash dividends. Accordingly, we do not anticipate declaring or paying any cash dividends for the foreseeable future.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, debt and our capitalization as of June 30, 2007:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the automatic conversion of all of our shares of redeemable convertible preferred stock outstanding on June 30, 2007 into an aggregate of 106,735,012 shares of our common stock upon the consummation of this offering; and

 

   

on a pro forma, as adjusted basis to further reflect the receipt by us of net proceeds of $             million from the sale of the                  shares of common stock offered by us in this offering at an assumed public offering price of $             per share, which is the midpoint of the range set forth on the cover of this prospectus, less underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table in conjunction with our consolidated financial statements and related notes and the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

     As of June 30, 2007
     Actual     Pro Forma    

Pro Forma,

As Adjusted(1)

     (unaudited)     (unaudited)     (unaudited)
           (in thousands
except share data)
     

Cash and cash equivalents

   $ 13,878     $ 13,878     $             
                      

Notes payable

   $ 9,801     $ 9,801     $  

Warrant for the purchase of shares subject to redemption

     699       —      

Redeemable convertible preferred stock

     79,673       —      

Stockholders’ (deficit) equity:

      

Common stock, $0.001 par value; 185,671,638 shares authorized, 8,535,721 shares issued and outstanding (actual); 185,671,638 shares authorized, 115,270,733 shares issued and outstanding (pro forma);              shares authorized and              shares issued and outstanding (pro forma, as adjusted).

     8       115    

Additional paid in capital

     4,918       85,183    

Deficit accumulated during the development stage

     (82,273 )     (82,273 )  
                      

Total stockholders’ (deficit) equity

     (77,347 )     3,025    
                      

Total capitalization

   $ 12,826     $ 12,826     $  
                      

 

(1)

 

A $1.00 increase (decrease) in the assumed public offering price of $             per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

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DILUTION

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the assumed initial offering price of $             per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. As of June 30, 2007, we had a historical net tangible book value of $2.3 million, or approximately $0.27 per share of common stock. Historical net tangible book value per share represents the amounts of our total tangible assets less our total liabilities, divided by the number of our common shares outstanding. Our pro forma net tangible book value as of June 30, 2007 was $2.3 million, or approximately, $0.02 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 common stock outstanding, as of June 30, 2007 after giving effect to the conversion of all of our shares of preferred stock outstanding on June 30, 2007 into 106,735,012 shares of our common stock, which will occur upon completion of this offering.

After giving effect to the sale by us of                  shares of common stock in this offering at an assumed public offering price of $             per share, which is the midpoint of the range listed on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2007 would have been approximately $             million, or approximately $             per share. This amount represents an immediate increase in pro forma net tangible book value of $             per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $             per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $             

Historical net tangible book value per share as of June 30, 2007

   $     

Decrease per share due to assumed conversion of redeemable convertible preferred stock

     
         

Pro forma net tangible book value as of June 30, 2007

   $     

Increase per share attributable to new investors

     
         

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

     
         

Dilution of net tangible book value per share to new investors

        $
         

A $1.00 increase (decrease) in the assumed public offering price of $             per share would increase (decrease) our pro forma as adjusted net tangible book value as of June 30, 2007 by approximately $             million, the pro forma as adjusted net tangible book value per share after this offering by $             and the dilution to new investors in this offering by $             per share, 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 commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share after this offering would be $             per share, the increase per share attributable to new investors would be $             per share and the dilution to new investors would be $             per share.

 

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The following table summarizes, as of June 30, 2007, 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. The table gives effect to the conversion of all of our shares of preferred stock outstanding on June 30, 2007 into 106,735,012 shares of common stock, which will occur upon completion of this offering. The calculation below is based on an assumed public offering price of $             per share, which is the midpoint of the range listed on the cover of this prospectus, and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
     Number    Percent     Amount    Percent    

Existing stockholders

         %   $                    %   $             

New investors

             $  
                          

Total

      100.0 %   $      100.0 %  
                          

A $1.00 increase (decrease) in the assumed public offering price of $             per share would increase (decrease) total consideration paid to us by investors participating in this offering by approximately $             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 commissions and estimated offering expenses payable by us.

Assuming the underwriters’ over-allotment option is exercised in full, sales by us in this offering will reduce the percentage of shares held by existing stockholders to             % and will increase the number of shares held by new investors to                     , or             %.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2004, 2005 and 2006 and balance sheet data as of December 31, 2005 and 2006 have been derived from our audited consolidated financial statements and related notes, which are included elsewhere in this prospectus, and have been audited by Ernst & Young LLP, independent registered public accounting firm. The selected consolidated statement of operations data for the years ended December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002, 2003 and 2004 have been derived from our audited financial statements that do not appear in this prospectus. The selected financial data set forth below should be read in conjunction with our financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected for any future period.

The selected consolidated statement of operations data for the six months ended June 30, 2006 and 2007 and for the period from June 16, 1999 (Inception) through June 30, 2007 and the selected condensed consolidated balance sheet data as of June 30, 2007 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and notes thereto, which include, in the opinion of our management, all adjustments (consisting of normal recurring adjustments), necessary for a fair statement of the information for the unaudited interim period. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period.

 

    Years ended December 31,     Six Months Ended
June 30,
   

Period
From June 16,
1999
(Inception) To
June 30,

2007

 
    2002     2003     2004     2005     2006     2006     2007    
                                  (unaudited)     (unaudited)     (unaudited)  
    (in thousands, except per share data)  

Revenue

  $ —       $ —       $ —       $ —       $ —       $ —       $ 22     $ 22  

Operating expenses:

               

Research and development

    4,596       7,802       8,358       11,123       16,268       9,067       5,772       54,554  

In-process research and development

    —         6,184       —         —         —         —         —         6,184  

General and administrative

    2,169       2,695       3,235       4,231       3,575       1,710       2,750       19,477  

Restructuring charge (credit)

    —         2,517       (417 )     124       (250 )     —         —         1,975  

Impairment loss

    —         —         19       180       —         —         —         199  
                                                               

Loss from operations

    (6,765 )     (19,198 )     (11,196 )     (15,658 )     (19,593 )     (10,777 )     (8,500 )     (82,367 )

Other income

    —         —         121       219       228       106       116       683  

Interest income

    61       221       209       185       467       121       401       1,642  

Interest expense

    (37 )     (262 )     (259 )     (205 )     (476 )     (303 )     (991 )     (2,231 )
                                                               

Net loss

  $ (6,741 )   $ (19,239 )   $ (11,125 )   $ (15,459 )   $ (19,374 )   $ (10,853 )   $ (8,974 )   $ (82,273 )
                                                               

Net loss per share applicable to common stockholders-basic and diluted

  $ (4.18 )   $ (4.08 )   $ (1.81 )   $ (2.13 )   $ (2.64 )   $ (1.47 )   $ (1.19 )  
                                                         

Weighted average number of common shares used in net loss per share calculation-basic and diluted

    1,620       4,731       6,177       7,284       7,544       7,398       8,062    

Pro forma basic and diluted net loss attributable to common stockholders per share(1)

          $ (0.20 )     $ (0.08 )  

Pro forma weighted average shares outstanding—basic and diluted(1)

            97,092         114,797    

 

(1)   The pro forma basic and diluted net loss per share gives effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock as of June 30, 2007 into 106,735,012 shares of our common stock.

 

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The summary consolidated balance sheet data as of June 30, 2007 is presented:

 

     As of December 31,    

As of June 30,

2007

 
     2002     2003     2004     2005     2006    
                                   (unaudited)  
     (in thousands)  

Balance Sheet Data:

            

Cash and cash equivalents

   $ 405     $ 26,105     $ 14,388     $ 8,452     $ 21,240     $ 13,878  

(Deficit) working capital

     (2,289 )     22,623       10,903       (2,294 )     17,702       8,615  

Total assets

     3,971       29,737       18,278       11,053       23,787       15,931  

Notes payable

     2,437       3,179       1,910       8,888       9,776       9,801  

Redeemable convertible preferred stock

     8,368       50,368       51,429       52,251       79,054       79,673  

Deficit accumulated during the development stage

     (8,102 )     (27,341 )     (38,466 )     (53,925 )     (73,300 )     (82,273 )

Total stockholders’ (deficit) equity

     (7,758 )     (26,882 )     (37,891 )     (52,387 )     (68,085 )     (77,347 )

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read together with our financial statements that appear elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations and involves risk and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. For example, statements regarding our expectations as to future financial performance, expense levels and liquidity sources are forward-looking statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a pharmaceutical company focused on the discovery, development and commercialization of novel pharmaceuticals for the treatment of metabolic diseases such as diabetes and obesity. Our product pipeline includes a number of programs to address unmet medical needs within the large metabolic disease markets which we believe will have significant advantages over existing products. These include our phase III programs, Glinsuna (mitiglinide) and Metgluna (mitiglinide plus metformin) for the treatment of type 2 diabetes, and our novel ghrelin antagonist which represents a potential next-generation treatment for a range of metabolic diseases. In addition, we have leveraged our knowledge of ghrelin biology to advance a ghrelin agonist program and we continue to mine the pathways of aging with our sirtuin modulator program to identify potential treatments for metabolic diseases.

To date, we have devoted substantially all of our resources to our drug discovery efforts comprising research and development, protecting our intellectual property and the general and administrative support of these operations. Since our inception in June 1999, we have generated no material amounts of revenue and have funded our operations principally through the private placement of equity and debt securities.

We have never been profitable and, as of June 30, 2007, we had an accumulated deficit of $82.3 million. We expect to incur significant and increasing operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical studies and clinical trials to seek regulatory approval and eventual commercialization. We expect that research and development expenses will increase along with general and administrative costs, as we grow and operate as a public company. We will need to generate significant revenues to achieve profitability and we may never do so.

Collaborative Arrangements

One element of our strategy is to establish collaborative arrangements with other pharmaceutical companies. We have entered into exclusive in-license agreements for mitiglinide from Kissei Pharmaceutical Company, or Kissei, and our ghrelin agonist from BMS. We may establish collaborative partnerships with large pharmaceutical companies in the future as we seek to in-license best-in-class product candidates for metabolic diseases where we believe we can create significant shareholder value.

We may seek to out-license our technology, programs or compounds to other pharmaceutical companies if the target indications are outside of our strategic focus. For example, recently, we have entered into a strategic relationship with Novartis in which it made a $10 million equity investment in our Series D financing through an investment fund managed by MPM Capital, our largest stockholder, and under which Novartis has the right to negotiate to obtain rights to develop and commercialize either our ghrelin agonist product candidate or one of our sirtuin programs. In February 2007, we entered into a collaboration with Siena Biotech S.p.A., or Siena, for Siena to explore the use of our SIRT1 inhibitor as a potential treatment for Huntington’s disease. We may consider

 

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co-promotional collaborations with other pharmaceutical partners. For example, we may seek a co-promotion partner for Metgluna to call on a physician audience beyond the reach of Elixir’s sales force or we may pursue additional revenue opportunities by entering into co-promotional arrangements where our sales force will co-promote another company’s product(s).

In-License Agreements. We have entered into two significant in-license collaborations.

In March 2006, we entered into an exclusive license agreement with Kissei, pursuant to which we obtained the exclusive right to develop and commercialize Glinsuna and related combination products in the Americas and a right of first refusal in Europe. We are developing a fixed-combination product, Metgluna, and have initiated a phase III clinical trial in the U.S., anticipated for completion in 2008. It is our plan to commercialize Glinsuna and Metgluna with a targeted Elixir commercial sales team. We will consider co-promotional collaborations with other pharmaceutical partners for Metgluna. In addition, with a targeted commercial team in place, we will consider additional revenue opportunities by entering into co-promotional arrangements where our sales force will co-promote another company’s product that is complementary to our own. Under the terms of the Kissei agreement, we paid a license fee of $5.0 million upon execution and will be required to pay additional milestone payments at the filing of the NDA and upon FDA approval. The $5.0 million payment was charged to research and development expense during 2006. Once commercial, we will pay Kissei a royalty and two sales-based milestones contingent upon achieving certain product sales levels.

In April 2005, we entered into an exclusive license agreement with BMS for worldwide development and commercialization rights to our ghrelin agonist and several backup compounds. We intend to develop this product candidate through proof of concept in humans and have entered into an agreement with Novartis under which they have the right to negotiate an agreement to further this product candidate’s development and potential commercialization. BMS retains a limited right of first negotiation. Under the terms of the BMS agreement, we paid an up front license fee of $3.5 million, comprised of $1.75 million in cash and 1,750,000 shares of series B redeemable convertible preferred stock and we will pay development-based milestone payments in cash and equity and product royalties upon commercialization. We charged the $3.5 million to research and development expense during 2005.

Out-License Agreements. We have entered into two collaborative arrangements to develop and commercialize our product candidates. In September 2007, we entered into a strategic relationship with Novartis under which Novartis has the right to negotiate to obtain the rights to develop and commercialize either our ghrelin agonist product candidate or one of our sirtuin programs. Under the terms of this agreement, we received an up-front payment of $0.25 million. In February 2007, we entered into a collaborative agreement with Siena pursuant to which we licensed Siena the right to explore the use of and potentially to commercialize our proprietary SIRT1 inhibitors as therapeutic agents to treat Huntington’s disease. We may consider additional collaborative arrangements for the development and commercialization of all our product candidates.

Financial Operations Overview

Revenue. We have not generated any product revenue since our inception and do not expect to generate any revenue from the sale of products until at least 2010. We will seek to generate revenue from collaborative partners through a combination of research funding, up-front license fees, milestone payments and royalties. Through June 30, 2007, we have entered into one revenue-generating collaboration.

Research and development. Research and development expense consists of expenses incurred in connection with the discovery and development of our product candidates. In 2005 and 2006, we incurred license fees of $3.5 million and $5.0 million, respectively, related to in-licensed products and technology and are obligated to make additional payments upon achievement of various milestones. Other research and development expenses consist primarily of salaries, allocated facility costs and third-party contract and scientific consulting costs relating to research, formulation, manufacturing and preclinical studies. Historically, we have not incurred expenses for clinical trials. As we move into our next stage of development, we expect to incur related clinical

 

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trial expenses, including for our pivotal phase III clinical trial of mitiglinide initiated in August 2007. We expense all research and development costs as incurred.

Historically we have not recorded our internal research and development costs or our personnel and personnel-related costs on a project-by-project basis. Prior to the in-licensing activities beginning in 2005, our programs shared all of our research resources. In April 2005, we in-licensed the ghrelin agonist and began to track development expenses on our in-licensed programs but did not allocate indirect expenses. In 2007, we are tracking external development expenses by program and allocating personnel and other common expenses, such as facilities, scientific consultants, lab supplies, depreciation and research and development management to each program based on the allocation of research and development personnel resources. The following table summarizes our product development initiatives for the period from June 16, 1999 (inception) through December 31, 2003, for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007. Included in “Other Product Candidates” are the costs directly related to research and development initiatives for all of our internally developed programs, including our ghrelin antagonist and sirtuin programs.

 

     Mitiglinide   

Ghrelin

Agonist

  

Other Product

Candidates

   Total
     (unaudited)
     (amounts in thousands)

Six Months ended June 30, 2007

   $ 1,417    $ 258    $ 4,097    $ 5,772

Year ended December 31, 2006

     7,993      1,360      6,915      16,268

Year ended December 31, 2005

     —        3,862      7,261      11,123

Year ended December 31, 2004

     —        —        8,358      8,358

June 16, 1999 (Inception) through December 31, 2003

     —        —        13,033      13,033
                           

Total

   $ 9,410    $ 5,480    $ 39,664    $ 54,554
                           

General and administrative. General and administrative expense consists primarily of salaries and related expenses for personnel in administration, finance and business development. Other significant costs include legal costs to pursue patent protection of our intellectual property, allocated facility costs and professional fees for legal services. We expect general and administrative expense to increase as the business grows and begins operating as a public company. These increases likely will include salaries and related expenses, legal and consultant fees, accounting fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relations services and enhanced business systems.

Interest expense. Interest expense consists primarily of interest, amortization of beneficial conversion features and debt discount, and amortization of deferred financing costs associated with our notes payable, some of which was convertible into shares of our preferred stock, issued in 2005 and 2006. Our interest expense increased $0.3 million in 2006 as compared to 2005 as the remaining debt discount and beneficial conversion features related to our notes payable issued in 2005 were charged to interest expense upon the closing of our Series C redeemable convertible preferred stock financing. Our interest expense increased $0.7 million during the six-month period ended June 30, 2007 as compared to the corresponding 2006 period as a result of the amortization of deferred financing costs related to our note payable issued in November 2006

Restructuring charge (credit). The restructuring charge (credit) relates to the remaining lease obligations, net of an estimate of sublease income, on a facility assumed in an acquisition. We initially vacated, and in 2005 reoccupied a portion of, this facility. In 2006, we re-located all of our operations to this facility.

 

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Results of Operations

Comparison of the Six Months Ended June 30, 2006 and the Six Months Ended June 30, 2007

 

     Six Months Ended
June 30,
 
     2006     2007  
     (unaudited)  
     (amounts in thousands)  

Collaborative partner revenue

   $ —       $ 22  

Operating expenses:

    

Research and development

     9,067       5,772  

General and administrative

     1,710       2,750  
                

Loss from operations

     (10,777 )     (8,500 )

Other income

     106       116  

Interest income

     121       401  

Interest expense

     (303 )     (991 )
                

Net loss

   $ (10,853 )   $ (8,974 )
                

Revenue. For the six months ended June 30, 2007, revenue totaled $22,000 compared with no revenue recorded in the six months ended June 30, 2006. We received a cash payment totaling $79,000 upon the execution of the agreement with Siena Biotech which we will recognize over the term of the research and development program which totals 18 months.

Research and development. Research and development expense for the six months ended June 30, 2007 was $5.8 million compared to $9.1 million for the six months ended June 30, 2006, a decrease of $3.3 million or 36.4%. The decrease was primarily the result of a $5.0 million license fee paid in the 2006 period to Kissei with no corresponding payment in the 2007 period. Excluding the $5.0 million license fee paid in 2006, research and development expense for the six months ended June 30, 2007 increased $1.7 million over the same period in 2006. The increase was attributable principally to increases in external contract costs and scientific consulting costs of $1.3 million and $0.2 million, respectively, associated with the development of mitiglinide, such as regulatory, drug formulation and manufacture of product for stability testing and the development expenses in the ghrelin antagonist program. Also contributing to the increase in research and development expense was an increase in laboratory animal and supply expenses of $0.3 million, an increase in personnel costs of $0.2 million related to higher research and development headcount, and an increase in external chemistry costs of $0.1 million. These increases were partially offset by a decrease in facility expenses of $0.4 million. The decrease in facility expenses resulted from the relocation to a lower cost facility in October 2006.

Included in research and development expense were stock-based compensation charges of $0.2 million and $32,000 for the six months ended June 30, 2007 and June 30, 2006, respectively

General and administrative. General and administrative expense for the six months ended June 30, 2007 totaled $2.8 million compared to $1.7 million for the six months ended June 30, 2006, an increase of $1.1 million, or 61.4%. The increase was due primarily to an increase in personnel and recruiting costs of $0.6 million associated with new hires in business development, marketing and administrative functions, higher legal fees of $0.2 million related to protecting our intellectual property, an increase in consulting fees of $0.1 million and higher travel expenses totaling $85,000. These increases were partially offset by a decrease of $81,000 in facility expenses resulting from relocation to a lower cost facility in October 2006.

Included in general and administrative expense were stock-based compensation charges of $0.1 million and $2,000 for the six months ended June 30, 2007 and June 30, 2006, respectively.

 

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Other income. Other income for the six months ended June 30, 2007 totaled $0.1 million compared to $0.1 million for the six months ended June 30, 2006. Other income comprised income from a sub-lease of small portion of our facilities scheduled to terminate on December 31, 2007 and related services under an agreement which terminated on May 30, 2007.

Interest income. Interest income for the six months ended June 30, 2007 was $0.4 million compared to $0.1 million for the six months ended June 30, 2006, an increase totaling $0.3 million or 233%. The increase in interest income was attributable to higher cash balances available for investment.

Interest expense. Interest expense for the six months ended June 30, 2007 was $1.0 million compared to $0.3 million for the six months ended June 30, 2006, an increase totaling $0.7 million or 227%. The increase in interest expense was attributable to higher debt levels and higher interest rates on our debt. In the 2007 period, we recorded interest expense associated with the indebtedness incurred in November 2006 and the warrants issued in connection with that debt. In the 2006 period, we recorded interest expense associated with short-term debt incurred during 2005 that subsequently converted into equity in June 2006.

Comparison of the Year Ended December 31, 2005 and the Year Ended December 31, 2006

 

     Years Ended December 31,  
     2005     2006  
     (amounts in thousands)  

Revenue

   $ —       $ —    

Operating expenses:

    

Research and development

         11,123           16,268  

General and administrative

     4,231       3,575  

Restructuring charge (credit)

     124       (250 )

Impairment loss

     180       —    
                

Loss from operations

     (15,658 )     (19,593 )

Other income

     219       228  

Interest income

     185       467  

Interest expense

     (205 )     (476 )
                

Net loss

   $ (15,459 )   $ (19,374 )
                

Revenue. We did not record any revenue for the years ended December 31, 2006 and 2005.

Research and development. Research and development expense for the year ended December 31, 2006 was $16.3 million compared to $11.1 million for the year ended December 31, 2005, an increase of $5.2 million, or 46.3%. In 2007, we recorded a $5.0 million license fee in connection with a Kissei agreement and in 2006 we recorded a $3.5 million license fee in connection with a BMS agreement. Excluding these license fees, research and development expense for the year ended December 31, 2006 totaled $11.3 million compared to $7.6 million for the year ended December 31, 2005, an increase of $3.7 million, or 47.8%. The increase primarily resulted from an increase in external contract costs of $2.7 million, an increase in scientific consulting fees of $0.8 million, an increase in laboratory animal and supply expense of $0.4 million and an increase of $0.2 million for personnel and recruiting costs related to new hires in the development function, offset partially by a decrease in outsourced chemistry services of $0.5 million as a result the full year impact of switching to a lower cost provider and a decrease in facility expenses of $0.2 million which resulted from the relocation to a lower cost facility in October 2006.

Included in research and development expense was stock-based compensation charges of $0.1 million and $20,000 for the year ended December 31, 2006 and 2005, respectively.

 

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General and administrative. General and administrative expense for year ended December 31, 2006 was $3.6 million compared to $4.2 million for the year ended December 31, 2005 a decrease of $0.6 million, or 15.5%. The decrease was primarily attributable to a decrease in legal and consulting expense totaling $0.5 million and $0.1 million, respectively, associated with business development activities coupled with decreased personnel and recruiting costs of $0.1 million.

Included in general and administrative expense were stock-based compensation charges of $0.1 million and $10,000 for the years ended December 31, 2006 and 2005, respectively.

Restructuring charge (credit). Restructuring charge (credit) for the year ended December 31, 2006 was $(0.2 million) compared to $0.1 million for the year ended December 31, 2005, a decrease of $0.3 million. The credit recorded in 2006 resulted from a restructuring reserve adjustment recorded when we re-located all of our operations to a facility acquired as part of an acquisition during 2003. In 2004, we re-located a portion of our operations to this acquired facility.

Impairment loss. Impairment loss for the year ended December 31, 2006 was $0 compared to $0.2 million for the year ended December 31, 2005, a decrease of $0.2 million. The impairment loss recorded in the year ended December 31, 2005 reflected a write off of the value of certain equipment acquired in a 2003 acquisition that we subsequently determined had no value.

Other income. Other income for the year ended December 31, 2006 was $0.2 million compared to $0.2 million for the year ended December 31, 2005.

Interest income. Interest income for the year ended December 31, 2006 was $0.5 million compared to $0.2 million for the year ended December 31, 2005, an increase of $0.3 million. The increase in interest income resulted from an increase in the average fund balances available for investment.

Interest expense. Interest expense for the year ended December 31, 2006 was $0.5 million compared to $0.2 million for the year ended December 31, 2005, a increase of $0.3 million. The increase in interest expense was attributable to the increase in short-term borrowing initiated at the end of 2005 and converted into equity in June 2006.

Comparison of the Year Ended December 31, 2004 and the Year Ended December 31, 2005

 

     Years Ended
December 31,
 
     2004     2005  

Revenue

   $ —       $ —    

Operating expenses:

    

Research and development

   $ 8,358     $ 11,123  

General and administrative

     3,235       4,231  

Restructuring charge (credit)

     (417 )     124  

Impairment loss

     19       180  
                

Loss from operations

     (11,195 )     (15,658 )

Other income

     120       219  

Interest income

     209       185  

Interest expense

     (259 )     (205 )
                

Net loss

   $ (11,125 )   $ (15,459 )
                

Revenue. We did not record any revenue for the years ended December 31, 2005 and 2004.

 

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Research and development. Research and development expense for the year ended December 31, 2005 was $11.1 million compared to $8.4 million for the year ended December 31, 2004, an increase of $2.7 million, or 33.1%. The increase principally resulted from a license fee payment of $3.5 million recorded in 2005 in connection with a BMS license. If the license fee were excluded, research and development expense for the year ended December 31, 2005 was $7.6 million compared with $8.4 million for the year ended December 31, 2004, a decrease of $0.8 million. The decrease was primarily related to our decision to discontinue work initiated by a company we acquired in 2003 totaling approximately $0.5 million and a decrease in external chemistry costs of $0.4 million as a result of a switching to a lower cost provider offset partially by an increase of $0.1 million from higher laboratory animal costs.

Included in research and development expense were stock-based compensation charges of $20,000 and $0.1 million for the year ended December 31, 2005 and 2004, respectively.

General and administrative. General and administrative expense for year ended December 31, 2005 was $4.2 million compared to $3.2 million for the year ended December 31, 2004, an increase of $1.0 million, or 30.8%. This increase was attributable primarily to higher legal expenses of $0.6 million associated with business development activities during 2005 and higher consulting and personnel expenses of $0.2 million, and $0.1 million, respectively.

Restructuring charge (credit). The restructuring charge (credit) for year ended December 31, 2005 was $0.1 million compared to a credit of $(0.4 million) for the year ended December 31, 2004, an increase of $0.5 million. The 2004 credit comprises amounts recorded when we reoccupied a portion of a facility acquired as part of an acquisition during 2003 after a sub-lease was terminated early.

Impairment loss. Impairment loss for year ended December 31, 2005 was $0.2 million compared with $19,000 for the year ended December 31, 2004, an increase of $0.2 million. The impairment loss recorded in the year ended December 31, 2005 reflected a write off of the value of certain equipment acquired in a 2003 acquisition that we subsequently determined had no value.

Other income. Other income for year ended December 31, 2005 was $0.2 million compared to $0.1 million for the year ended December 31, 2004, an increase of $0.1 million, or 81.9%. The increase was attributable primarily to increased income from our animal services agreement and increased rent resulting from our facility sub-lease.

Interest income. Interest income for the year ended December 31, 2005 was $0.2 million compared to $0.2 million for the year ended December 31, 2004.

Interest expense. Interest expense for the year ended December 31, 2005 was $0.2 million compared to $0.3 million for the year ended December 31, 2004.

 

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Liquidity and Capital Resources

Since our inception in June 1999 through June 30, 2006, we have funded our operations principally through the private placement of equity securities, which provided aggregate gross proceeds of approximately $86.8 million, including $31.3 million from the sale of 31,295,240 series C redeemable convertible preferred stock units, at $1.00 per unit on June 30, 2006, August 16, 2006, September 8, 2006 and November 17, 2006. We also have generated funds from debt financing, $10.0 million as of June 30, 2007, interest income, collaborative revenue and other income. As of June 30, 2007, we had cash, cash equivalents and short-term investments of approximately $13.9 million. Currently, our funds are invested in investment grade and United States government securities.

 

    Years Ended December 31,     Six Months Ended June 30,  
    2004     2005     2006         2006             2007      
          (unaudited)  
    (in thousands)  

Operating Expenses:

 

Net cash used in operating activities

  $ (11,217 )   $ (12,765 )   $ (17,561 )   $ (9,936 )   $ (8,570 )

Net cash (used in) provided by investing activities

    (231 )     (143 )     (520 )     (5 )     596  

Net cash provided by (used) in financing activities

    (269 )     6,972       30,869       9,224       613  
                                       

Net increase (decrease) in cash and cash equivalents

  $ (11,717 )   $ (5,936 )   $ 12,788     $ (717 )   $ (7,361 )
                                       

During 2004, 2005 and 2006 and the six months ended June 30, 2006 and June 30, 2007, our operating activities used cash of $11.2 million, $12.8 million, $17.6 million, $9.9 million and $8.5 million, respectively. The use of cash in all periods primarily resulted from our net losses and changes in our working capital accounts. The increase in cash used in operations in all periods was due primarily to an increase in research and development activities as noted above.

During 2004, 2005 and 2006 and the six months ended June 30, 2006 and June 30, 2007, our investing activities used (provided) cash of $0.2 million, $0.1 million, $0.5 million, $5,000 and $(0.6 million), respectively. The use of cash in 2004 primarily resulted from purchases of property and equipment. The use of cash in 2005 was attributable to the increase in restricted cash to secure a letter of credit for the security deposit on a lease and the purchase of property and equipment. The use of cash in 2006 was primarily the net result of the purchase of property and equipment partially offset by the sale of property and equipment, both in connection with the Company’s relocation in 2006 and recording deferred financing costs in connection with the indebtedness incurred in 2006. The use of cash in the six months ended June 30, 2006 was primarily the net result of the purchase of property and equipment partially offset by recording the pre-paid financing costs associated with the Series C financing, against the Series C proceeds closed in June 2006. The cash provided by investing activities in the six month period ended June 30, 2007 was primarily the release of restricted cash resulting from the termination of a lease, partially offset by the purchase of property and equipment and amortization of the deferred financing costs associated with the indebtedness.

During 2004, 2005 and 2006 and the six months ended June 30, 2006 and June 30, 2007, our financing activities provided (used) $(0.3 million), $7.0 million, $30.9 million, $9.2 million and $0.6 million, respectively. The cash used in 2004 was primarily a result of the payment of notes payable of $1.3 million partially offset by the proceeds from the sale and issuance of 1 million shares of Series B redeemable convertible preferred stock in March 2004, for net proceeds of $1.0 million. The cash provided by financing activities in 2005 was primarily a result of the issuance of notes payable in the amount of $8.0 million partially offset in part by the repayment of notes payable in the amount of $1.0 million. The cash provided by financing activities in 2006 was a result of the issuance of venture debt in the amount of $10.0 million and the sale and issuance of 31,295,240 Series C units at $1.00 per unit, with each unit consisting of 1 share of Series C redeemable convertible preferred stock and a warrant for the purchase of 0.282538 shares of common stock including the conversion of $8.0 million of short-term notes for net proceeds of $21.9 million, offset partially by the repayment of notes payable in the amount of

 

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$0.9 million and deferred financing fees of $0.2 million. The cash provided by financing activities during the six months ended June 30, 2006 is a result of the issuance of 18,000,000 Series C units at $1.00 per unit, with each unit consisting of 1 share of Series C redeemable convertible preferred stock and a warrant for the purchase of 0.282538 shares of common stock including the conversion of $8.0 million of short-term notes for net proceeds of $9.4 million, partially offset by the repayment of notes payable of $0.1 million. The cash provided by financing operations in the six months ended June 30, 2007 is the receipt of $0.4 million in advance of a subsequent financing, $0.1 million deferred financing costs and $65,000 proceeds from the issuance of common stock upon exercise of stock options.

On September 4, 2007, we raised $28 million in our series D financing. We sold 28,030,031 Series D units for $1.00 per unit. Each unit consisted of one share of series D redeemable convertible preferred stock and warrants to purchase 0.25 shares of common stock with an exercise price of $0.01 per share.

In November 2006, we entered into a Loan and Security Agreement, or Loan Agreement, with Hercules Technology Growth Capital Inc. and its affiliated funds, collectively Hercules, to borrow up to $15.0 million, $10.0 million of which was available immediately and an additional $5.0 million of which was available from March 31, 2007 through June 30, 2007 if we achieved specified clinical milestones. In connection with the Loan Agreement, we granted Hercules a first priority security interest in all of our assets, except our intellectual property. In September 2007, we amended the terms of the Loan Agreement to extend the period during which we could achieve the clinical milestones from June 30, 2007 to September 19, 2007. In connection with this amendment, we requested that Hercules advance the additional $5.0 million. Borrowings under the Loan Agreement bear interest at a rate of prime plus 2.45%, which totaled 10.7% as of June 30, 2007. Until September 2007, we were obligated only to pay interest on the amounts outstanding under the Loan Agreement. Thereafter, we will pay principal and interest in 39 equal monthly installments, the last of which will be due on December 22, 2010.

Operating Capital Requirements. We anticipate commercializing our first product in 2010, however, we anticipate we will continue to incur net losses for the next several years as we incur expenses to complete our phase III clinical trial, build commercial capabilities, develop our therapeutic candidates and expand our corporate infrastructure.

We believe our cash and cash equivalents, the $28.0 million of net proceeds from our series D financing in September 2007, the $5.0 million of proceeds from indebtedness incurred in September 2007, the interest from our investments and the proceeds from this offering, will be sufficient to meet our currently anticipated cash requirements for the next 18 to 24 months, including any anticipated milestone payments in connection with our in-licensed product candidates. This period may be extended if we receive milestones or other lump-sum amounts in connection with an existing or new collaborative arrangements.

If our available cash and cash equivalents are insufficient to satisfy our liquidity requirements, or if we develop additional opportunities, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity and debt securities may result in additional dilution to our shareholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we were unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

 

   

Successful NDA filing, approval and commercialization of Glinsuna and Metgluna;

 

   

the expenses we incur in manufacturing, developing, marketing and selling our products;

 

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the costs and timing of additional regulatory approvals;

 

   

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

   

the rate of progress and cost of our product development activities;

 

   

the success of research and development efforts;

 

   

the emergence of competing or complementary therapeutic developments;

 

   

the terms and timing of any collaborative, licensing and other arrangements that we may establish; and

 

   

the acquisition of business, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are required to be disclosed under Item 303(a)(4)(ii) of SEC Regulation S-K.

Tax Loss Carryforwards

We had net operating loss carryforwards available to offset future federal and state taxable income of $79.5 million and $70.9 million, respectively, as of June 30, 2007, as well as federal and state research and development tax credit carryforwards of approximately $1.4 million and $0.8 million, respectively, available to offset future federal and state taxes. The net operating loss and credit carryforwards expire at various dates through 2027. Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may result in a limitation on the amount of net operating loss carryforwards and research and development carryforwards which could be utilized annually to offset future taxable income and taxes payable. At June 30, 2007, we recorded a 100% valuation allowance against our net operating loss carryforwards of approximately $34.3 million, as our management believes it is uncertain that they will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss carryforwards, an adjustment to our net operating loss carryforwards would increase net income in the period in which we make such a determination.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at June 30, 2007.

 

     Total    Less than
1 Year
  

1-3

Years

  

4-5

Years

   After 5
Years

Short and long-term debt (including interest)

   $ 11,886,958    $ 3,442,923    $ 8,444,035    $ —      $ —  

Operating lease obligations

     2,715,604      555,605      1,631,087      528,912      —  

Purchase obligations(1)(2)

     12,500,000      9,300,000      3,200,000      —        —  
                                  

Total contractual cash obligations

   $ 27,102,562    $ 13,298,528    $ 13,275,122    $ 528,912    $ —  
                                  

 

(1)

 

Excludes milestones and other potential lump-sum amounts that we may owe to our collaborative partners upon our achievement of specified clinical milestones. See “Business—Collaborative Agreements.”

(2)

 

These purchase obligations are clinical trial expenses and represent our estimated financial obligation assuming we complete the pivotal phase III on mitiglinide as planned, which is our intention. However, if circumstances dictated, we could terminate the trial at any point and significantly reduce the financial obligation to the amounts actually incurred at the time the trial is terminated.

 

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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values 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 described in more detail in Note 2 of the Notes to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Accrued expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services which have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our consolidated financial statements. Examples of estimated expenses for which we accrue include contract service fees paid to contract manufacturers in conjunction with the production of clinical drug supplies and to contract research organizations in connection with our preclinical studies and clinical trials. We accrue the costs incurred under these contracts based on factors such as estimates of work performed, milestones achieved, patient enrollment and costs historically incurred for similar contracts. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs, which have begun to be incurred, or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often determined based on subjective judgments. We make these judgments based upon the facts and circumstances known to us in accordance with GAAP. Through December 31, 2006, differences between actual and estimated clinical trial costs were not material to our results of operations or financial position. We anticipate that as our clinical trial activity increases, such differences could become more significant and potentially material to our results of operations and financial position.

Stock-based compensation

Prior to January 1, 2006, we accounted for employee stock-based compensation arrangements in accordance with the intrinsic value method presented in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as permitted by Statement of Financial Accounting Standards, SFAS No. 123 “Accounting for Stock-Based Compensation,” or SFAS No. 123. Under the intrinsic value recognition provisions of APB No. 25, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period.

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” or SFAS No. 123(R), using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in the year ended December 31, 2006 included the

 

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pro rata compensation cost for all stock-based compensation granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and the pro rata compensation cost for all stock-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). In accordance with the modified prospective transition method of SFAS No. 123(R), results for prior periods have not been restated. The impact of adopting SFAS No. 123(R) was not material to the net loss or cash flows. For all grants, the amount of stock-based compensation expense has been adjusted for estimated forfeitures of awards for which the requisite service was not expected to be provided. Estimated forfeiture rates are developed based on our analysis of historical forfeiture data. Prior to the adoption of the fair value recognition provisions of SFAS No. 123(R), stock-based payment expense was adjusted for actual forfeitures as they occurred. The cumulative effect of the change in accounting for forfeitures was immaterial.

We account for stock-based compensation issued to non-employees in accordance with SFAS No. 123(R) and EITF No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services.” We record the expense of such services based on the estimated fair value of the equity instrument using the Black-Scholes option pricing model. The value of the equity instrument is charged to earnings over the term of the service agreement.

For stock-based awards granted to both employees and non-employees, we use the fair value method of calculating stock-based compensation in accordance with SFAS No. 123 for awards prior to January 1, 2006 and SFAS No. 123(R) for awards after December 31, 2005. Calculating the fair value of stock-based awards requires the input of highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Stock-based compensation expense is significant to our financial statements and is calculated using our best estimates which involve inherent uncertainties and the application of management’s judgment. Significant estimates include the expected life of the stock option, stock price volatility, risk-free interest rate and forfeiture rates.

The following table presents the grant dates and related exercise prices of stock options granted to employees in the year ended December 31, 2006 and the six-month period ended June 30, 2007:

 

     Number of
Options Granted
   Exercise Price   

Fair Value

of Common

Stock

February 2, 2006

   97,500    $ 0.10    0.10

May 10, 2006

   30,000    $ 0.10    0.10

October 4, 2006

   433,500    $ 0.15    0.37

November 9, 2006

   2,855,000    $ 0.15    0.37

December 14, 2006

   171,650    $ 0.15    0.37

January 30, 2007

   1,125,000    $ 0.15    0.41

May 1, 2007

   830,000    $ 0.29    0.61

July 24, 2007

   16,500    $ 0.65    0.65
          

Total

   5,559,150      
          

The expected life of stock options to be outstanding was determined using an average of publicly traded guideline companies. As we have been operating as a private company since inception with no active market for our stock or traded options, it is not possible to use actual price volatility data. Therefore, we estimated the volatility of our common stock based on the volatility of the average of publicly traded guideline companies. Using an expected volatility based on the average historical volatility of other entities may result in variability when compared to actual historical volatility once we have a public market for our common stock. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with terms equal to the expected lives of the stock options. We have never and do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. In

 

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order to properly attribute compensation expense, we are required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If the actual forfeiture rate is materially different from the estimate, stock-based compensation expense could be significantly different from what has been recorded. For stock options granted to employees, we allocate expense on a straight-line basis over the requisite service period. For stock options granted to non-employees, we allocate expense using an accelerated recognition method as prescribed in FIN 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans—an Interpretation of APB Opinion No. 15 and 25.”

There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods, or if we decide to use a different valuation model, the stock-based compensation expense that we record in the future under SFAS No. 123(R) may differ significantly from what we have recorded and could materially affect our operating results.

In the absence of a public trading market for our common stock, our Board of Directors determined the fair market value of our common stock in good faith based upon consideration of a number of relevant factors including:

 

   

our stock option grants involved illiquid securities in a private company;

 

   

prices of our redeemable convertible preferred stock issued primarily to outside investors in arms-length transactions, and the rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;

 

   

our results of operations, financial status and the status of our research and product development efforts;

 

   

our stage of development and business strategy;

 

   

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

 

   

the likelihood of achieving a liquidity event for the shares of our common stock underlying stock options, such as an initial public offering of our common stock or our sale to a third-party, given prevailing market conditions.

Contemporaneous valuations were prepared as of September 30, 2006 and April 30, 2007 for the purpose of granting stock options during 2006 and 2007. In July 2007, in connection with this offering, we subsequently deemed it appropriate to reassess the fair value of our common stock with respect to options granted in the fourth quarter of 2006 and the first and second quarter of 2007 and performed three retrospective valuations as of September 30, 2006, December 31, 2006 and April 30, 2007. We also believe the preparation of the retrospective valuations was necessary to reassess the fair value of our common stock for financial reporting purposes due to an accelerated timeline to initial public offering or other liquidity event as a result of an improvement in market conditions and our completion of milestone events. After completing the retrospective valuations for these dates, a contemporaneous analysis performed as of July 22, 2007 determined the fair value of our common stock used in stock option grants in July 2007. As part of our retrospective and contemporaneous analysis, multiple factors were considered, including business milestone events and financial conditions during 2006 through 2007, research and development activities, the lack of liquidity in our common stock, and the increasing likelihood in the pursuit of an initial public offering.

Our valuation model used the Market Approach concepts outlined in AICPA Technical Practice Aid titled Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the Practice Aid, in order to estimate the future expected enterprise value of our company. We believe the valuation methodologies used in the retrospective and contemporaneous valuations are consistent with the Practice Aid.

 

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In order to allocate the enterprise values we determined to our common stock, we used the probability weighted expected return method described in the Practice Aid. Under this method, the value of our common stock is estimated based upon an analysis of future values for our company assuming various future outcomes, the timing of which is based on the plans of our board and management. Share value is based on the probability-weighted present value of expected future values, considering each of the possible outcomes available to us as well as the rights of each share class. The fair value of our common stock was estimated using a probability-weighted analysis of the present value of the returns afforded to our shareholders under each of three possible future scenarios.

There were three scenarios considered under this methodology: (a) become a public company through the completion of an initial public offering in February 2008; (b) sale or merger at a premium to our liquidation preference of preferred stock, or a premium sale, as of April 2008; and (c) sale or merger below the full liquidation preference of preferred stock as of April 2009.

The fair value of the Company’s common stock under the initial public offering scenario was determined by taking the total enterprise value and reducing it by the repayment of the outstanding debt. The preferred stock was assumed to convert into common stock at the conversion ratios as set forth in our certificate of incorporation. The present value of these future initial public offering proceeds were determined using a risk adjusted discount rate. In the sale scenarios, the enterprise value was reduced by the outstanding debt and the liquidation preference of the preferred stock and then the remaining proceeds were allocated ratably to common and preferred shares on an as-converted basis. The present value of these future sale scenario proceeds were determined using a risk adjusted discount rate.

For each of our retrospective and contemporaneous valuations, the selected probability weighted and future expected enterprise values for the initial public offering and sale scenarios were based on a market approach. In the application of this approach, we considered the guideline public company method as described in the Practice Aid. We began by analyzing valuations of initial public offerings of development stage pharmaceutical companies approximately within a twenty-four month period prior to the valuation date. More specifically, we selected guideline companies that completed their initial public offerings in 2005, 2006 and 2007 and had drug candidates in phase I, phase II or phase III clinical trials. We concluded that these companies were most comparable to its stage of development based upon the status of our clinical programs. We did not include any guideline companies that had not begun clinical trials or companies that had a marketed product. We selected an expected enterprise value based upon the mean of the IPO pre-money valuations of this group of guideline companies in 2005, 2006 and 2007 together.

The estimation of present values of our common stock was calculated using assumptions including: the expected enterprise value based on the market approach described above; the expected dates of the future initial public offering sale; and then discounted at an appropriate risk-adjusted discount rate to result in present values. The risk-adjusted discount rate was based on the inherent risk of a hypothetical investment in our common stock. An appropriate rate of return required by a hypothetical investor was determined based on: (1) well established venture capital rates of return published in the Practice Aid for firms engaged in bridge financing in anticipation of a later initial public offering; and (2) our calculated cost of capital. Our calculated cost of capital was developed based upon a quantitative and qualitative analysis of factors that would impact the discount rate. If different discount rates had been used, the valuations would have been different.

In applying the market approach in the sale scenario, we analyzed recent guideline transactions of development stage pharmaceutical companies. Our selected transaction enterprise value was supported by published transaction values of companies in similar stages of development during the preceding twenty four months of the valuation date. Finally, in applying the market approach in the sale below the full liquidation preference scenario, we applied a transaction enterprise value assuming a sale of our existing research and intellectual property at a value that would not allow the preferred stockholders to realize their full liquidation value. Under a sale below full liquidation preference scenario no proceeds would be available to distribute to common shareholders.

 

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We used a 35% probability weight for the initial public offerings scenario in our September 2006 valuation and we increased this percentage in each valuation going forward to reflect the increased probability of a public offering as significant business milestones were achieved, including the issuance of series C redeemable convertible preferred stock in June, August, September and November 2006 with net proceeds of $30 million, entering into a collaborative agreement with Siena in February 2007, announcement of clinical data at American Diabetes Association conference highlighting the ability of Glinsuna, progress on our ghrelin antagonist program and increased discussions with investment bankers regarding a public offering in late 2007. In general, the closer a company gets to an initial public offering, the higher the probability assessment weighting is for the “public company” scenario. Thus the probability weight assigned to an initial public offering scenario increased from 35% at September 2006, to 40% at December 2006, and to 45% for April and July of 2007.

We also considered the possibility of a premium sale within a similar timeline adjusted for the timeline to complete a sale process, and at the same enterprise value as an initial public offering. As a result, the combined initial public offering and premium sale probabilities as of the September 2006, December 2006, April 2007 and July 2007 valuation dates were 70%, 75%, 80%, and 80%, respectively. We did not include a discount for lack of marketability in any of our valuations.

The fair values of our common stock increased throughout 2006 reducing the difference between the fair value of our common stock and the estimated initial public offering price range. The increase in fair value was attributed to business and operating milestones and our proximity to a potential initial public offering, and the engaging of investment bankers. The retrospective fair value of our common stock on September 2006 was determined to be $0.37 per share. The fair value of common stock on that date contemplated the following:

 

   

As of the September 30, 2006 valuation date, we selected a probability of an initial public offering of 35%, sale at a premium scenario of 35%, and sale below our liquidation preference of 30%. The 35% probability of an initial public offering was based on:

 

   

our need to raise substantial amounts of capital in order to sustain operations;

 

   

completion of several tranches of Series C preferred stock financing;

 

   

our entering into a license agreement with Kissei, in which we obtained the exclusive right to develop and commercialize mitiglinide and combination products;

 

   

uncertainty regarding the regulatory requirements for NDA submissions for Glinsuna and Metgluna;

 

   

related risks identified in the need for additional collaborative agreements;

 

   

the then status of our other development programs; and

 

   

the addition of new capabilities with new hires.

 

   

The expected future enterprise value for both the initial public offering and sale at a premium scenario.

 

   

The timeline to complete an initial public offering of 17 months and a premium sale of 2.25 years.

 

   

The future enterprise value of proceeds were discounted at rate of return of 35% for sale and initial public offering scenarios.

The retrospective fair value of our common stock on December 2006 was determined to be $0.41 per share. The fair value of common stock on that date contemplated the following:

 

   

As of the December 31, 2006 valuation date, we selected a probability of an initial public offering of 40%, sale at a premium scenario of 35%, and sale below our liquidation preference of 25%. The increased probability from 35% to 40% of an initial public offering was due to:

 

   

the shorter timeline to an initial public offering;

 

   

the completion of the final tranche of the Series C financing;

 

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discussions at a pre-IND meeting with the FDA regarding the potential approval of Glinsuna and Metgluna;

 

   

the continued advancement of our development programs; and

 

   

the addition of new capabilities with new hires.

 

   

The expected future enterprise value for both the initial public offering and sale at a premium scenario.

 

   

The timeline to complete an initial public offering of 14 months and a premium sale of 17 months.

 

   

The future proceeds were discounted at rate of return of 35% for sale and initial public offering scenarios.

The retrospective fair value of our common stock on April 30, 2007 was determined to be $0.61 per share. The fair value of common stock on that date contemplated the following:

 

   

As of the April 2007 valuation date, we selected a probability of an initial public offering of 45%, sale at a premium scenario of 35%, and sale below our liquidation preference of 20%. The increased probability from 40% to 45% of an initial public offering was based on:

 

   

our entering into a collaborative agreement with Siena;

 

   

the continued advancement of our development programs; and

 

   

the addition of new capabilities with new hires.

 

   

The expected future enterprise value for both the initial public offering and sale at a premium scenario.

 

   

The timeline to complete an initial public offering of ten months and a premium sale of 12 months.

 

   

The future proceeds were discounted at rate of return of 30% for sale and initial public offering scenarios.

The contemporaneous fair value of our common on July 22, 2007 was determined to be $0.65 per share. The fair value of common stock on that date contemplated the following:

 

   

A probability of an initial public offering of 45% was selected as the initiation of a pivotal phase III mitiglinide clinical trial increased significantly the likelihood of a short term liquidity event and we estimated an 80% probability of experiencing either a public offering or a sale at a premium in 2007 and utilized similar enterprise value for initial public offering and sale at a premium scenario, based on:

 

   

the likelihood of completing our series D financing;

 

   

our announcement of clinical data which indicated the ability of Glinsuna to maintain glycemic control in patients with type 2 diabetes;

 

   

completion of additional pre-clinical work on Glinsuna and receipt of confirmation from the FDA regarding its adequacy;

 

   

our presentation of data regarding the safety and efficacy of our ghrelin antagonists at two major international conferences; and

 

   

the addition of new capabilities with new hires.

 

   

The expected future enterprise value for both the initial public offering and sale at a premium scenario.

 

   

The timeline to complete an initial public offering of six months and a premium sale of ten months.

 

   

The future proceeds were discounted at rate of return of 30% for sale and initial public offering scenarios.

 

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The primary factors contributing to the difference between the fair value of our common stock as of each grant date and the estimated initial public offering price range of              per share include the factors discussed, most notably:

 

   

Engaging of investment bankers to initiate the process of an initial public offering and drafting of a registration statement.

 

   

Raising $29 million in our series D financing on September 4, 2007.

 

   

Initiation of a strategic relationship with Novartis in September 2007.

 

   

Initiation of pivotal phase III clinical study prior to NDA. The addition of new capabilities with new hires.

 

   

Improvement in market conditions during throughout 2006 and 2007.

 

   

Upon successful completion of an initial public offering, enterprises typically experience a further reduction in their cost of capital. A reduction in the cost of capital increases the enterprise value.

 

   

The completion of an initial public offering would reduce limitations on the ability of holders to transfer the equity securities.

 

   

There is no assurance we will complete a public offering or other liquidity event at the pricing range provided by our investment bankers or that we will be able to complete the initial public offering of our company’s common stock.

Based on the factors described above, the probability weighting of being able to proceed with an initial public offering increased significantly, thus reducing the difference between the fair value of common stock and the estimated initial public offering price range. While we had formally initiated the public offering process as of this date, there is no assurance that we will actually proceed with the initial public offering.

We have incorporated the fair values calculated in the contemporaneous and retrospective valuations into the Black-Scholes option pricing model when calculating the stock-based compensation expense to be recognized for the stock options granted in 2006 and 2007. The retrospective valuations generated per share fair values of common stock of $0.37, $0.41 and $0.61 at September 30, 2006, December 31, 2006 and April 30, 2007, respectively. This resulted in intrinsic values of $0.22, $0.26 and $0.32 per share, respectively, at each grant date.

Valuation models require the input of highly subjective assumptions. Because our common stock has characteristics significantly different from that of publicly traded common stock and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable, single measure of the fair value of our common stock. The foregoing valuation methodologies are not the only valuation methodologies available and will not be used to value our common stock once this offering is complete. We cannot make assurances of any particular valuation of our stock. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future stock prices.

Recent Accounting Pronouncements

In July 2006, the FASB issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (FIN 48) to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement and classification of amounts relating to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim periods, disclosures and transition relating to the adoption of the new accounting standard. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 as of January 1, 2007, as required and determined that adoption of

 

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FIN 48 did not have a material impact on our financial position and results of operations. We did not recognize interest or penalties related to income tax during the period ended December 31, 2006 and did not accrue for interest of penalties as of December 31, 2006. We do not have an accrual for uncertain tax positions as of December 31, 2006 or June 30, 2007. Tax returns for all years beginning 1999 and thereafter are subject to future examination by tax authorities.

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

Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. As of December 31, 2006 and June 30, 2007, we had cash and cash equivalents and short-term investments of $21.2 million and $13.9 million, respectively, consisting of cash and highly liquid short-term investments. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term marketable securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

Foreign Currency Exchange Rate Risk

We are exposed to a number of risks relating to fluctuations in foreign currencies. Our collaborative arrangement with Siena provides that they will make payments to us based on Euro-denominated amounts. We currently purchase the active pharmaceutical ingredient for our mitiglinde product candidates from Kissei based on prices determined in Japanese Yen. We also make payments in the ordinary course of business in non-U.S. dollar denominated amounts, including for outsourced chemical analysis where the contract price is set in Indian rupee. Fluctuations in the exchange ratio of the U.S. dollar and these foreign currencies will have the effect of increasing or decreasing our revenues or expenses even if there is a constant amount of revenue or expense in such foreign currencies. For example, if the U.S. dollar strengthens against a foreign currency, then our revenues will decrease given a constant payment amount in such foreign currency.

The impact on our revenues and expenses from foreign currency exchange rate risk is based on a number of factors, including the exchange rate (and the change in the exchange rate from the prior period) between a foreign currency and the U.S. dollar, and the amounts received or expenses paid that are denominated in foreign currencies. We do not currently hedge our foreign currency exchange rate risk.

 

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BUSINESS

We are a pharmaceutical company focused on the discovery, development, and commercialization of novel pharmaceuticals for the treatment of metabolic diseases such as diabetes and obesity. We mine the pathways involved in the regulation of aging discovered by our founders to identify novel mechanisms leading to the development of compounds to treat metabolic disease, compounds that may ultimately be used to treat a host of age-related diseases. Metabolic diseases, including our primary targets of type 2 diabetes and obesity, constitute important global pharmaceutical markets in terms of size, growth and unmet medical need. Obesity rates are on the rise not only in the U.S. but also around the world, and are contributing to a worldwide epidemic of type 2 diabetes. Despite the high prevalence, expected growth, and injurious health consequences of these diseases, there are relatively few satisfactory therapeutic options available.

We have several programs in various phases of development to address unmet medical needs within these large commercial markets. For example, our phase III Glinsuna (mitiglinide) and Metgluna (mitiglinide plus metformin) programs represent near-term commercial opportunities in the U.S. for the treatment of type 2 diabetes. Our ghrelin antagonists represent a potential novel approach to treating metabolic diseases, and we have confirmed the favorable effects of treatment with our compounds across a range of metabolic parameters in animal models. We believe ghrelin may be a master regulator of metabolic function and that our ghrelin antagonists may have clinical utility in the treatment of type 2 diabetes, obesity and lipid disorders. In addition, we have leveraged our knowledge of ghrelin biology to advance a ghrelin agonist program, and we continue to mine the pathways of aging, with our sirtuin modulator program to identify potential treatments for metabolic diseases.

We believe that the strength of our scientific platform has been recognized, in part, by our recently initiated strategic relationship with Novartis International Pharmaceuticals, or Novartis. In September 2007, Novartis made a $10 million equity investment in Elixir through an investment fund managed by MPM Capital, our largest stockholder. Simultaneously, we entered into an agreement under which Novartis company paid us an initial lump-sum fee and will have the right to negotiate to obtain rights to develop and commercialize either our ghrelin agonist product candidate or one of our sirtuin programs.

Glinsuna/Metgluna

We expect that, if approved, our first product to enter the market will be Glinsuna (mitiglinide) for the treatment of type 2 diabetes. Glinsuna is a short-acting insulin secretagogue that, if approved by the FDA, we intend to launch into the approximately $300 million U.S. meglitinide, or glinide, market. Based on what we believe is a competitive product profile, we in-licensed mitiglinide from Kissei in Japan where it has been approved and marketed since 2004.

Metgluna is our twice-daily fixed combination product candidate which we believe represents an even larger commercial opportunity. Metgluna couples our glinide, Glinsuna, with metformin, the first-line and most widely prescribed type 2 diabetes treatment. Due to the progressive nature of type 2 diabetes, maintaining glycemic control typically requires that new therapies be added to metformin over time. We believe Metgluna is an ideal next step beyond metformin as it targets the dual defects of type 2 diabetes. Metgluna’s metformin component targets control of fasting plasma glucose, or FPG, and the Glinsuna component targets control of postprandial glucose, or PPG. Metgluna will offer a convenient fixed combination product option to physicians and those of their existing 5.4 million metformin patients who are sub-optimally controlled. While fixed combination products currently represent a relatively small percentage of the market, we believe they present a significant opportunity since each 1% share of the current metformin patients transitioned to Metgluna would translate into an estimated $58 million in Metgluna sales based on our current pricing assumptions.

We believe the large, global clinical database has demonstrated that mitiglinide, either alone or in combination with metformin, is a safe and effective treatment for type 2 diabetes. To date, mitiglinide has been evaluated in over 4,000 patients across 60 clinical trials, including six core, randomized trials by Kissei and its other current and former licensees, each of which achieved its primary endpoint. We are conducting a pivotal

 

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phase III clinical trial in the U.S. to supplement our NDA filings for both Glinsuna and Metgluna, which we expect to file in 2009. Subject to successful completion of this trial, we expect to receive regulatory approval and launch Glinsuna and Metgluna in 2010 utilizing a small, highly-targeted Elixir sales force.

Ghrelin Antagonist

We believe ghrelin antagonism is a potential breakthrough approach for the treatment of a range of metabolic diseases, including type 2 diabetes, obesity and lipid disorders, each of which represents a multi-billion dollar market opportunity. Ghrelin is a potent hormone which acts through the ghrelin receptor as a master regulator of metabolic function. Ghrelin’s importance was initially highlighted when human studies demonstrated its powerful effects on appetite. Subsequent research, including new discoveries at Elixir, revealed ghrelin’s broader role in the regulation of glucose homeostasis, lipid profiles and body composition. For example, genetically eliminating, or “knocking-out,” ghrelin or the ghrelin receptor results in increased insulin sensitivity, improved triglyceride and cholesterol levels, and overall resistance to obesity, in animals fed a high-fat diet. These knock-out animals otherwise appear normal and healthy.

Using structure-assisted drug design, we have internally discovered and developed a series of potent, small molecule antagonist compounds that block the ghrelin receptor. Oral administration of our compounds in animal models of diet-induced obesity, or DIO, and early diabetes resulted in similarly favorable metabolic effects to the knock-out models with respect to blood glucose levels, insulin resistance, HbA1c, triglycerides, total cholesterol, liver fat, body weight and white fat when compared to placebo.

We believe we have the most advanced ghrelin antagonist program in the industry. We expect to commence human clinical trials in the fourth quarter of 2008 with a ghrelin antagonist initially targeting type 2 diabetes, subject to identification of a clinical product candidate and successful completion of investigational new drug, or IND, enabling studies demonstrating an acceptable safety and efficacy profile. We currently own 100% of the worldwide rights to our ghrelin antagonist compounds.

Ghrelin Agonist

Leveraging our knowledge of the ghrelin receptor and associated physiology, we are also pursuing the development of a small molecule ghrelin agonist compound. In addition to stimulating food intake, agonists to the ghrelin receptor have been shown to increase gastric motility in animal studies. We believe our ghrelin agonist product candidate will have clinical utility across a broad range of indications with market potential exceeding $2 billion worldwide, including opioid-induced bowel dysfunction, or OBD, and cancer cachexia. Rather than initiate a de novo chemistry effort, we elected to jump start our program by in-licensing a ghrelin agonist compound, together with several back-up compounds, from BMS. This BMS compound has been the subject of extensive preclinical development and we have been able to capitalize on this progress with rapid initiation of IND-enabling studies. Subject to successful completion of those studies, we expect to begin human clinical testing of our ghrelin agonist product candidate in 2008.

Sirtuins

Leveraging our knowledge of the regulation of aging and metabolism, we have built a leadership position in the field of sirtuins, or SIRT. One of Elixir’s founders first identified that overexpression of a sirtuin gene called silent information regulator 2, or Sir2, increased the lifespan of yeast. Sirtuins are well conserved across species and humans have seven related sirtuin genes labeled SIRT1 through SIRT7. Sirtuins recently have received a significant amount of attention in the scientific and popular press with publication of data indicating that ingestion of a red wine extract up-regulates the SIRT1 enzyme and leads to a variety of beneficial health effects including improvement in metabolic function. We believe that sirtuin modulators may also have potential clinical utility in numerous large pharmaceutical markets with unmet medical needs such as cancer and neurodegenerative diseases. We have an extensive intellectual property position with regards to screening, chemical composition of matter and utility claims for sirtuin modulators.

 

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Our Strategy

Our objective is to be a leader in the discovery, development and commercialization of new treatments for metabolic diseases. The core elements of our strategy include:

 

   

Launch our product candidates to treat metabolic diseases, such as type 2 diabetes, utilizing a small focused sales force targeting high prescribers.

 

   

We intend to generate sales of Metgluna by quickly building awareness with key prescribers of the inherent advantages of Metgluna’s convenient fixed combination presentation targeting the dual defects of type 2 diabetes: FPG and PPG. We believe that there is a significant commercial opportunity to transition existing metformin patients who are sub-optimally controlled to Metgluna. We expect to differentiate Metgluna from other fixed combinations through its favorable safety profile and competitive pricing. We believe Glinsuna will be perceived as a best-in-class glinide based upon its competitive safety and efficacy profile and we expect to capture share from the two existing competitors.

 

   

We intend to build a highly targeted U.S. sales force to sell our phase III product candidates Glinsuna and Metgluna, once approved by the FDA, to high prescribers of metformin and other glinide products. We believe we can maximize the return on our investment in sales and marketing by focusing on the top three percent of all physicians who account for twenty percent of metformin prescriptions. We believe we can cover these top prescribers with an initial force of approximately fifty sales representatives. Once established, our sales force will serve as a platform in the metabolic disease market from which will have the ability to market our future products, such as our ghrelin antagonist, as well as future in-licensed products.

 

   

Continue the rapid development of our internally discovered ghrelin antagonists as a potential next-generation therapy for the treatment of a range of metabolic diseases, including type 2 diabetes and obesity.

 

   

Our ghrelin antagonists have demonstrated the ability to significantly lower blood glucose levels, insulin resistance, HbA1c, triglycerides, total cholesterol, liver fat, body weight and white fat in animal models when compared to placebo. We intend to exploit these findings by developing ghrelin antagonists as potential treatments for diabetes, obesity, and a variety of other metabolic diseases, including lipid disorders and diseases of fatty liver.

 

   

We believe we have the most advanced ghrelin antagonist program in the industry. We may enter into collaborative arrangements with large pharmaceutical companies to ensure that our program continues on the most rapid global development and commercialization track, while retaining certain development and commercialization rights for ourselves.

 

   

Advance the development of our other therapeutic candidates with novel mechanisms and significant clinical and commercial potential.

 

   

Ghrelin Agonist—We intend to progress our ghrelin agonist product candidate from our current IND-enabling studies to human clinical testing for the treatment of OBD, cancer cachexia and other indications. Leveraging our knowledge of ghrelin biology and pharmacology, we intend to advance our product candidate to proof of concept in humans when we believe we can maximize value from the program by partnering with a large pharmaceutical company.

 

   

Sirtuins—We intend to continue to identify and advance the development of compounds modulating SIRT to exploit what we believe is the broad potential clinical utility of sirtuins. We will internally develop our compounds with potential utility in metabolic disease and we may enter collaborations for compounds targeting diseases that are outside of our core focus of metabolic disease such as cancer or neurodegenerative diseases.

 

   

Other Research and Development Programs—We intend to leverage our research and development expertise to pursue additional novel programs that address the large unmet medical needs in

 

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metabolic disease. Our drug discovery strengths lie in our knowledge of the biology of the complex pathways of aging and metabolism and our ability to develop novel chemistries to modulate targets in these pathways. We believe animal models of metabolic disease are highly predictive of human clinical response and we have developed significant expertise within these models.

 

   

Establish collaborative partnerships with other pharmaceutical companies.

 

   

To create value for our stockholders, we may enter into strategic relationships with large and small pharmaceutical companies to: realize value from our development programs more quickly; access new or larger markets; or pursue target indications outside our focus on metabolic disease.

Elixir Pipeline

The following table summarizes our product candidates and development programs:

 

         

Program

   Product
Candidate
 

Initial

Indications

  

Status

  

Commercialization

Rights

Glinide    GlinsunaTM
(mitiglinide)
  Type 2 diabetes   

Phase III trial ongoing;

NDA expected 2009

   North & South America
     MetglunaTM
(mitiglinide
plus
metformin)
  Type 2 diabetes   

Phase III trial ongoing;

NDA expected 2009

   North & South America
Ghrelin    Antagonist   Type 2 diabetes;

obesity

  

Selection of a development candidate expected 2008

 

IND filing and initiation of phase I trial expected 4Q08

   Worldwide
     Agonist   Opioid-induced
bowel dysfunction;

cancer cachexia

  

IND-enabling studies initiated

 

IND-filing and initiation of phase I trial expected 2008

   Worldwide, if Elixir elects to partner is subject to BMS Rights of First Negotiation(1)
Sirtuin Modulators    SIRT1
Inhibitor
  Huntington’s
Disease; certain
cancers
  

Proof of principle expected 2008

 

IND filing and initiation of phase I trial expected 4Q08

   Worldwide, subject to Siena’s rights to negotiate a license for treatments for neurodegenerative diseases(1)
   SIRT2
Inhibitor
  Type 2 diabetes;

obesity

   Preclinical studies    Worldwide(1)
     SIRT1
Activator
  Type 2 diabetes;

obesity

  

Preclinical studies

 

IND filing and initiation of phase I trial expected 2009

   Worldwide(1)

(1)

 

Potentially subject to the rights Novartis has under the terms of the strategic relationship we entered into during September 2007. See “—Collaborative Agreements.”

 


 

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The Market Opportunity for New Treatments in Metabolic Disease

Obesity

Obesity is a major health crisis in the U.S. and has become a worldwide epidemic. Obesity has been characterized as “the number one health threat” facing the nation, and is forecasted to become the leading cause of mortality in the U.S., overtaking smoking-related illnesses, all according to the Center for Disease Control and Prevention, or CDC. According to the World Health Organization, or WHO, there are as many as 1.6 billion people worldwide considered to be overweight, 400 million of whom are estimated to be obese. In the U.S., approximately 134 million adults are overweight, of which 63 million are considered obese and 9 million are considered severely obese. Approximately 300,000 deaths per year in the U.S. are associated with obesity according to the Department of Health and Human Services, or HHS. According to the National Health and Nutrition Examination Survey from 1980 to 2002, the prevalence of obesity in the U.S. doubled to approximately 30% of the adult population with an additional 34% being classified as overweight. The HHS and the North American Association for the Study of Obesity consider excessive body weight to be associated with a host of complications, including diabetes, hypertension, high cholesterol, coronary artery disease, cancer, liver and pulmonary disease which are often precipitated or exacerbated by the obese condition.

In 2000, HHS estimated the overall annual economic costs of obesity in the U.S. to be $117 billion. Americans spend an estimated $40 billion per year on diet-related products alone. Despite the size of this unmet medical need, the pharmaceutical market to treat obesity is relatively small because there are few therapies currently available and most are ineffective or poorly tolerated by patients. While some patients are candidates for gastric bypass or reduction surgery, the potential complications, including mortality, and the substantial costs and recovery time make it a realistic option only for those patients characterized as morbidly obese. A measure of the urgency of this unmet medical need in the U.S. is the growing success of Byetta, a drug recently approved for type 2 diabetes. In spite of the fact that patients must self-inject Byetta twice a day, the drug has been remarkably successful. We believe the modest weight loss benefits of Byetta have been one of the drivers of its commercial success. This success demonstrates the very significant commercial opportunity for safe, effective and novel pharmaceuticals that treat obesity.

Type 2 Diabetes

As with obesity, the incidence of type 2 diabetes is growing at an alarming rate and has reached epidemic proportions in developed countries around the world. An aging population, poor dietary habits and increasing obesity rates are all driving the increasing incidence of type 2 diabetes. While obesity does not directly cause the hyperglycemic condition associated with diabetes, the correlation is striking as statistics indicate that 90% of type 2 diabetics are overweight or obese.

At least 180 million people worldwide have diabetes and over the next two decades that number will more than double, according to the WHO. In the U.S., the total prevalence of diabetes in 2005 was estimated to be 20.8 million people, or 7.0% of the population. Type 2 diabetes accounts for 90% to 95% of all diagnosed cases of diabetes. Type 2 diabetes is frequently not diagnosed until complications appear, and approximately one-third of all people with diabetes are undiagnosed. Type 2 diabetes is a complicated metabolic disorder that involves multiple factors including loss of sensitivity to the effects of insulin, a decrease in the body’s ability to produce insulin and the overproduction of glucose by the liver. Uncontrolled diabetes results in abnormally high blood sugar levels, a condition known as hyperglycemia. The long-term adverse effects of hyperglycemia include blindness and loss of kidney function as well as nerve damage, loss of sensation and poor circulation in the extremities, each of which may eventually necessitate amputation. Diabetes is currently the sixth leading cause of death by disease and is the leading cause of kidney disease and non-traumatic lower limb amputations as well as blindness among young adults.

The primary goal in the treatment of diabetes is to maintain tight glycemic control as measured by HbA1c, a broad measure of glucose control over a three month period. FPG and PPG are both measures of current glucose levels. Elevated FPG has been associated with the development of microvascular disease complications,

 

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including damage to the retina. Elevated PPG has been associated with the development of macrovascular disease, including cardiovascular disease.

There are six classes of oral agents approved for the treatment of type 2 diabetes that are differentiated by their mechanisms of action and effect on either FPG, PPG or both. There are those that improve insulin sensitivity (metformin and thiazoliadinediones, or TZDs), those that increase insulin secretion (sulfonylureas and glinides) and those that block food absorption into the gut (alpha-glucosidase inhibitors, or AGIs). The newest oral agent on the market (dipeptyl peptidase IV, or a DPP-IV inhibitor) focuses on the action of a glucagon-like peptide-1, or GLP-1, a peptide that, like the glinides, enhances glucose-dependent insulin secretion and exhibits other antihyperglycemic actions.

Treatment of type 2 diabetes is typically characterized by a poly-pharmaceutical approach. Generally at diagnosis, patients are initiated on one oral medication, usually metformin, to control hyperglycemia. As a result of the progressive nature of type 2 diabetes, HbA1c typically rises over time and additional medications with complimentary mechanisms are added to the treatment regime as needed. Despite the variety of therapeutic approaches available today, a recent study in the Annals of Internal Medicine estimated that more than half of diagnosed patients have not achieved adequate control of their blood sugar levels and are therefore more at risk for complications associated with type 2 diabetes. We believe that this unmet medical need, in combination with a growing patient population, is driving a large commercial opportunity for new products for the treatment of type 2 diabetes.

Our Programs and Products

Glinsuna for Type 2 Diabetes

Glinsuna (mitiglinide) is a member of the glinide class of drugs which lower blood glucose by rapidly stimulating the release of insulin from the pancreas in a glucose-dependent fashion.

Based on our extensive clinical database, we believe Glinsuna is a safe and effective treatment for type 2 diabetes, either alone or in combination with metformin. To date, mitiglinide has been evaluated in over 4,000 patients across 60 clinical trials, including six core, randomized clinical trials conducted by Kissei and its other current and former licensees, each of which achieved its primary endpoint. Mitiglinide was launched in Japan under the brand name Glufast in May 2004 by Kissei and is co-marketed by Takeda Pharmaceuticals. We estimate that Glufast has been prescribed to an estimated more than 500,000 patients since 2004. In 2006, Glufast achieved sales of approximately $50 million in Japan, having captured approximately one third of the Japanese glinide market, or five percent of the $1 billion Japanese oral type 2 diabetes market, in just over two years.

We in-licensed North and South American rights from Kissei for mitiglinide and all combination products which will enter the $7 billion U.S. oral type 2 diabetes market. We believe Glinsuna will capture a portion of the approximately $300 million U.S. glinide market based on its competitive product profile. In spite of little to no active promotion of the class as well as the launch of other new classes of treatments for type 2 diabetes, revenues from the sale of glinides have continued to grow modestly over the past few years. We believe that sales for type 2 diabetes products are promotion sensitive, and combined with its competitive product profile, the launch of Glinsuna by a small specialized sales team will allow us to capture a portion of this market. The approval of Glinsuna is also expected to lead to the approval and launch of a larger product opportunity, our fixed combination Metgluna.

Glinsuna Market: The Glinides

In the treatment of diabetes, the primary goal is to maintain overall glycemic control as measured by HbA1c and reduce both FPG and PPG levels. Glinides specifically target the reduction of elevated PPG which has been associated with the development of macrovascular disease, a disease affecting the arteries that provide blood flow to major structures including the heart, kidneys and legs.

 

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Glinides have been shown to be an effective and safe therapy for lowering HbA1c by stimulating insulin secretion. Their short-acting mechanism leads to a lower risk of hypoglycemia or weight gain compared to the sulfonylureas, the other class of type 2 diabetes treatments that increases insulin secretion. Based on market research, we believe the primary reason glinides have not been more broadly prescribed is that they are dosed three times a day.

In the United States, there are two glinides approved to treat type 2 diabetes, Prandin® (repaglinide) and Starlix® (nateglinide). In a comparative study of patients not adequately controlled with metformin alone, Prandin decreased FPG more significantly than Starlix. However, patients on Prandin experienced a higher number of hypoglycemic events than Starlix. We believe that Glinsuna has a competitive profile since it blends the best attributes of both existing glinides, an efficacy profile similar to Prandin and a superior safety profile.

Market data indicates there is a core group of physicians who prescribe the bulk of the glinide class. In 2006, only 5% of physicians prescribing diabetes products wrote 80% of all glinide prescriptions in the U.S. This group of physicians continues to prescribe glinides despite the lack of active promotion of Prandin and Starlix. Glinides are dosed with meals, and are very effective in reducing PPG and reducing HbA1c. While the three times a day dosing schedule may have limited their broad use, this core group of prescribing physicians appear to be strong believers in the need to treat PPG and appear to like the safety and efficacy profile of this class of agents. For these physicians and their patients, we believe Glinsuna will be an attractive treatment option.

This relatively small group of active prescribing physicians will enable us to deploy a relatively small sales force targeted at capturing a share of the approximately $300 million glinide market. Importantly, these physicians prescribe not only glinides but also metformin and other classes of diabetes treatments. Most diabetes therapies work well in combination due to their different, complementary mechanisms of action, including newer agents such as the recently launched DPP-IV inhibitor. Thus, Glinsuna could potentially be used together with these other therapies, with the exception of the sulfonylureas which target the same receptor as the glinides. Finally, while Metgluna is the larger commercial opportunity and our sales force will be deployed based primarily on that opportunity, the addition of Glinsuna should efficiently leverage our sales force to generate additional sales.

Competition

Novo Nordisk launched Prandin in 1998 in the U.S. Novo Nordisk recently announced a strategic decision to focus on biologics and we believe this, in part, led them to de-emphasize promotion of Prandin to physicians. Recently, we believe there has been no active sales force promotion or marketing of the product, with the exception of limited direct mail sampling. Novartis launched Starlix in 2000 in the U.S. We believe Novartis has ceased all active promotion of Starlix due to its small revenue contribution relative to its other, larger products. Even with these very limited promotion efforts, the glinide class has grown despite other new agents coming to market. In 2006, Prandin and Starlix generated revenues of $306 million in the U.S.

Development Achievements and Plan

Mitiglinide has been evaluated in over 4,000 patients, both as monotherapy and in combination trials, across sixty clinical trials worldwide, including six core randomized trials, each of which successfully reached its primary endpoint. Through our license with Kissei, we have obtained rights to all of the data from these trials which were conducted by Kissei and its former licensees. Glufast was launched in Japan in May 2004 by Kissei and is co-marketed by Takeda Pharmaceuticals, and we estimate that Glufast has been prescribed to more than 500,000 patients since 2004.

 

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Mitiglinide for Type 2 Diabetes Mellitus: Randomized Efficacy Trials

Primary efficacy endpoint for all trials: Reduction of HbA1c

 

             

Investigator Countries

   Comparator    Total
Patients
   Patients treated
with Mitiglinide
   Dosing(1) (mg)    Duration    p-values(2)

Australia/New Zealand

   repaglinide    720    363    up to 40    12 months    <0.001

Germany/EU

   acarbose    369    184    up to 40    12 months    <0.001

France/EU

   combination
versus metformin
   324    109    up to 40    7 months    <0.001

Japan

   placebo    185    139    up to 20    12 weeks    <0.001

Japan

   placebo    204    102    10    12 weeks    <0.001

Czech Republic

   glibenclamide    195    99    up to 40    9 weeks    N/A

 

(1)

 

Each dose administered three times daily at the beginning of meals.

(2)

 

P-values are an indication of statistical significance reflecting the probability of an observation occurring due to chance alone. A p-value < 0.001 means that the probability of the event measured occurring by chance is less than 1 in 1,000.

N/A     Study not designed to demonstrate, nor has subsequent analysis been done to evaluate, the difference between treatment arms.

In addition to the results from our on-going U.S. clinical trial, data from the three completed clinical trials conducted primarily in Europe and Australia will be included as the primary database of Caucasian patients from randomized trials of six months or longer for our upcoming U.S. NDA filing and will help differentiate the commercial profiles of our products.

One phase III trial demonstrated that mitiglinide provided similar blood glucose control and better tolerability as compared to the largest selling glinide, Prandin (repaglinide). This trial was a twelve-month, double-blind comparator trial of 720 patients with type 2 diabetes. There was an additional twelve-month open label phase to this study. The primary objective of the trial was to demonstrate non-inferiority of mitiglinide compared to Prandin administered in optimal dosages for type 2 diabetic patients. The primary efficacy endpoint was the evaluation of HbA1c. Mitiglinide met the primary endpoint of non-inferiority to Prandin with a statistical significance (p<0.001), as measured by HbA1c levels. Mitiglinide demonstrated a better safety profile than Prandin, with minor hypoglycemia rates of 5.0% for mitiglinide compared to 9.5% for Prandin. There were no reports of major hypoglycemia for either product.

A second phase III trial demonstrated the safety (as measured by adverse events relating to renal function) and efficacy (as measured by reductions in HbA1c) of mitiglinide in the elderly, an important and growing segment of the type 2 diabetes population. This trial was a twelve-month, double-blind comparator trial of 369 patients over the age of 65 with type 2 diabetes. The primary objective of the trial was to demonstrate non-inferiority of mitiglinide compared to Precose (acarbose), a member of another oral class targeting PPG, administered in optimal dosages for elderly type 2 diabetic patients. The primary efficacy endpoint was the evaluation of HbA1c. Mitiglinide was shown to be non-inferior compared with Precose with a statistical significance (p<0.001) as measured by HbA1c levels. Patients treated with Precose reported gastrointestinal side effects with a 13% overall incidence rate as compared to 2% of patients treated with mitiglinide. No major hypoglycemic episodes were observed in either group. Type 2 diabetics are at risk for developing renal insufficiency and two-thirds of the participants in this trial had mild to moderate renal impairment.

A third European phase III trial demonstrated that the addition of mitiglinide provides an additional reduction in HbA1c for patients who are sub-optimally controlled by metformin alone. This trial was a seven-month, double-blind trial with 324 diabetic patients on metformin treatment, with an additional five month open label period. The

 

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primary objective of the trial was to assess the efficacy of mitiglinide given alone or in combination with metformin compared to metformin monotherapy in type 2 diabetic patients sub-optimally controlled on metformin. The primary efficacy endpoint was the evaluation of HbA1c. The trial showed with statistical significance (p<0.001) that mitiglinide in combination with metformin provided superior glycemic control over metformin or mitiglinide alone as measured by HbA1c levels. No major hypoglycemic episodes were observed.

Based on discussions with the FDA, we are currently conducting a 300 patient pivotal phase III randomized, placebo-controlled six month clinical trial. Our trial is evaluating metformin monotherapy compared to a combination of metformin plus mitiglinide (three times daily and twice daily). Our trial is designed to demonstrate superiority of the Glinsuna combinations versus metformin alone in the reduction of HbA1c. The study is expected to enroll patients from at least 60 clinical sites in the United States and will supplement our existing phase III data package with additional exposure in U.S. minorities. We are conducting this trial with Quintiles, a large contract research organization that has substantial experience in conducting type 2 diabetes trials. This trial introduces our glinide monotherapy and its combination use with metformin to U.S. physicians and will support the expected filing of our NDAs in 2009 for both Glinsuna and Metgluna for the treatment of type 2 diabetes.

Metgluna for Type 2 Diabetes

We believe Metgluna, our twice-daily mitiglinide plus metformin fixed combination product candidate, represents a significant commercial opportunity for Elixir. Metformin is the cornerstone of type 2 diabetes treatment as it lowers HbA1c, and its safety profile is well established. Due to the progressive nature of the disease, continued glycemic control typically requires new therapies be added to the treatment regime over time. We believe Metgluna is an ideal next step beyond metformin as it targets the dual defects of diabetes. Metgluna’s metformin component targets control of FPG and the Glinsuna component targets control of PPG. The complementary mechanisms of Metgluna mimic the way the body naturally addresses increased blood glucose. We believe clinicians are increasingly aware of the growing body of evidence of the benefits of treating both FPG and PPG. Our plan for Metgluna is to target the highest-prescribing metformin physicians. Metgluna will offer a convenient fixed combination product option to physicians and those of their existing 5.4 million metformin patients who are sub-optimally controlled.

The majority of metformin patients are on a twice-daily dosing regimen, typically taken at breakfast and dinner. Mitiglinide in combination with metformin has already been shown to significantly lower HbA1c levels in patients not adequately controlled on metformin alone. Our on-going clinical trial in the U.S. is expected to further demonstrate that when added to metformin, mitiglinide can be dosed twice-daily and result in a significant reduction in HbA1c versus metformin alone. Although fixed combination products currently represent a relatively small percentage of the market, we believe that the potential therapeutic benefits offered by Metgluna versus metformin alone present a significant opportunity since each 1% share of the current metformin patients transitioned to Metgluna would translate into an estimated $58 million in Metgluna sales based on our current pricing assumptions.

Metgluna Market

Metformin is the most widely prescribed treatment for type 2 diabetes in the U.S., both in total prescriptions and in new prescriptions. After diet and exercise, it is usually the first oral therapy to be prescribed to a type 2 diabetes patient. As the disease continues to progress over time and additional oral therapies are often added to the treatment regime.

As poly-therapy with metformin is common in the treatment of type 2 diabetes, combining agents with metformin into fixed combinations was a logical step to provide for enhanced patient convenience and compliance to therapy. In 2000, BMS launched the first of these fixed combination products with twice daily GlucovanceTM, combining metformin with the sulfonylurea glyburide. BMS was very successful in transitioning

 

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patients to this new fixed combination, and GlucovanceTM reached sales of over $400 million by the third full year of sales. The primary advantages of metformin and the sulfonylureas have been that they effectively lower HbA1c and are inexpensive. Physicians have been comfortable prescribing sulfonylureas with metformin given the large body of clinical experience accumulated over a long period of time. However, the addition of a sulfonylurea to metformin therapy is also associated with substantial side effects. Weight gain and high incidences of minor and major hypoglycemia are common adverse side effects of sulfonylureas. Sulfonylureas are no longer promoted, with the last branded product having gone generic in 2006, and, coupled with their side effects, their popularity is declining.

This was followed by another class of combination products, metformin plus TZDs, being approved and launched. TZDs are effective, but are expensive and associated with side effects such as fluid retention and weight gain. Cardiac safety concerns have recently been raised and have led to the addition of black box warnings to these products. So while the metformin plus TZD combinations have offered patients the benefits of increased convenience, they retain the limitations of the TZD class.

We believe that the safety profile of Metgluna compares favorably to these older fixed combinations. When Merck developed JanuviaTM they filed for approval of the twice daily combination of JanuviaTM plus metformin called JanumetTM (sitagliptin plus metformin) even prior to the approval of the single agent therapy. We believe that payors, as well as cost conscious physicians and patients, will support the use of Metgluna as we expect it will deliver similar efficacy more cost-effectively than some of these newer fixed combinations.

We intend to position Metgluna as a first-choice therapy when initial treatment with metformin does not result in adequate glycemic control. Metgluna will be dosed with morning and evening meals, similar to current twice-daily dosing regimen of metformin. We believe that this will address the burdensome three times per day dosing obstacle that has limited broad use of the glinide class to-date, and that the fixed combination with metformin provides optimal patient convenience. The Metgluna product message will be simple and compelling for busy physicians, and builds on the broad success of metformin and the established use of fixed dose combinations. We believe Metgluna will compete favorably against existing fixed combination products based on its efficacy, side effect profile and cost effectiveness.

Development Achievements and Plan

A European phase III trial demonstrated that the addition of mitiglinide provides a further reduction in HbA1c for patients who are sub-optimally controlled by metformin alone. That trial showed (p<0.001) that mitiglinide in combination with metformin provided superior glycemic control over metformin alone as measured by HbA1c levels.

Additionally, Metgluna’s NDA filing will be supported by our currently on-going pivotal phase III randomized, placebo-controlled six month study comparing metformin monotherapy to a combination of mitiglinide added to metformin (twice daily and three times daily). This is a three-arm study with 100 patients per arm comparing the benefit of both twice daily dosing and three times daily dosing of mitiglinide, up to 40 mg per dose, added to metformin, versus placebo added to metformin. This study is designed to demonstrate superiority of twice daily dosing and three times daily dosing of mitiglinide added to metformin as compared to metformin alone as measured by a change in HbA1c.

A pharmacokinetic study demonstrating bioequivalence between taking the individual tablets (metformin plus Glinsuna) and our fixed combination Metgluna tablet is expected to be the final element to an anticipated NDA that we currently expect to file in 2009. This approach has been used to obtain FDA approval for each of the other fixed combination products with metformin.

 

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Glinsuna and Metgluna Sales Force Strategy

To launch Metgluna and Glinsuna and achieve rapid penetration into the core target audience, we envision creating a small, focused diabetes specialty sales force composed of experienced sales representatives with diabetes-specific experience, contacts and knowledge. We believe that we have a significant sales opportunity with Metgluna, and anticipate that an approximately 50 person sales team is sufficient initially to capitalize on that opportunity. While metformin is widely prescribed by more than 285,000 physicians, we plan to target the 8,000 to 10,000 highest prescribing physicians who write 20% of all metformin prescriptions. We believe this strategy of focusing our resources on those physicians with the highest potential for Metgluna prescriptions will allow us maximize the return on our investment in sales and marketing.

This group of high prescribing metformin physicians generally also prescribe glinides. Market data indicates that more than one third of patients on Prandin or Starlix are also on metformin. Thus, while Metgluna represents the largest market opportunity and will be the primary promoted product by our sales force, the introduction of Glinsuna will achieve additional revenues in a cost-effective manner. We believe that sales of diabetes products generally are highly responsive to promotion. Given the lack of active promotion for the currently available glinides, we believe a modest promotional effort will allow Glinsuna to gain share of this existing market.

We plan for our sales team to promote and sample our products only in key metropolitan areas allowing for maximum call efficiency with shorter travel times between calls. By targeting a relatively small number of physicians and making frequent sales calls on those targets, we believe that we can educate physicians to achieve rapid conversion of current metformin patients to Metgluna. This sales team will also be building relationships with key opinion leaders. Their support will be important for Metgluna and Glinsuna, as well as for input on pipeline programs. Our targeted physicians that treat type 2 diabetes also treat a number of related metabolic diseases, including other future Elixir target markets of obesity and lipid disorders.

We may chose to augment our sales force’s efforts with a co-promotion partnership with a company having a larger sales force calling on a broader audience of physicians. A co-promotion partnership for Metgluna could dramatically increase our penetration across the broader group of physicians prescribing metformin. A large pharmaceutical partner would allow for expanded promotional coverage of nearly all physicians representing approximately 80% of total metformin prescriptions. This would result in a four-fold increase from the currently anticipated coverage of only high-potential prescribers, or 20% of the metformin market.

 

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Ghrelin Antagonist

Our focus on metabolic disease and the pathways that we believe impact aging and metabolism led us to an important human hormone called ghrelin. Ghrelin sits in the center of a central pathway which we believe is a master regulator of metabolic function and aging. Our research supports the notion that a ghrelin antagonist could have clinical utility across a range of metabolic diseases, but the longer-term potential is that this approach may positively affect an even broader range of diseases of aging.

Ghrelin is a hormone released from the stomach into the circulation that stimulates receptors in one region of the brain called the hypothalamus (Figure 1). This particular brain region controls a variety of endocrine functions including food intake, energy metabolism and growth hormone, or GH, release. In a variety of species, including man, administration of ghrelin not only increases GH release but also powerfully stimulates food intake and, in several species, ghrelin promotes fat storage and body weight gain.

LOGO

 

Figure 1.   Ghrelin is a hormone released from the stomach. It is released into the circulation where it acts primarily upon neurons in the hypothalamus of the brain affecting insulin sensitivity, plasma glucose levels, body composition, fat storage and utilization, lipid synthesis, GH release, and gastric motility.

Mice lacking the ghrelin hormone or the ghrelin receptor have been very informative in establishing ghrelin antagonism as an attractive potential approach to treat metabolic disease. Ghrelin or ghrelin receptor knockout mice have significantly lower blood glucose levels, insulin resistance, HbA1c, triglycerides, total cholesterol, liver fat, body weight and white fat when compared to normal mice fed the same diet. These animals also show increased insulin sensitivity, improved triglyceride and cholesterol levels, and overall resistance to obesity. These observations suggest that blocking ghrelin signaling may be an effective treatment for type 2 diabetes, in addition to treating obesity and lipid disorders. The goal of Elixir’s small molecule ghrelin antagonist program is to pharmacologically recapitulate the phenotype observed in the ghrelin receptor knockout animals under conditions of metabolic stress.

We have identified a series of novel, potent antagonists to the ghrelin receptor. In animal models of diet-induced obesity and early diabetes our ghrelin antagonists demonstrate significantly lower body weight, white fat, blood glucose, insulin resistance, HbA1c, triglycerides, total cholesterol and liver fat as compared to animals treated with placebo.

 

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Ghrelin Antagonist Market

We believe that ghrelin is a master regulator of metabolic function and that our ghrelin antagonists may have clinical utility in the treatment of a variety of metabolic diseases such as those defined under the clinical umbrella of metabolic syndrome. Metabolic syndrome is often used to describe a constellation of linked metabolic disorders including obesity, type 2 diabetes (insulin resistance), lipid disorders and high blood pressure. This metabolic disruption predisposes individuals to myriad medical complications including kidney failure, neurological disorders, blindness, peripheral vascular disease, coronary artery disease and stroke. It is currently estimated that approximately 50 million American are affected by these associated diseases. From a treatment perspective, while each of these disease pathologies can be addressed separately, targeting a central mechanism which appears to control many or all of these metabolic functions may be a more effective and efficient approach. We believe that ghrelin antagonism may be one approach with such broad therapeutic applications.

Rising obesity rates are causing a major health crisis and has become a worldwide epidemic. Obesity has been characterized by the CDC as “the number one health threat” facing the U.S., and is forecasted to become the leading cause of mortality in this country, overtaking smoking related illnesses. In 2000, HHS estimated that the overall annual economic burden of obesity in the U.S. is $117 billion. Americans are estimated to spend $50 billion per year on diet-related products alone. Despite the size of this unmet medical need, the pharmaceutical market to treat obesity is relatively small because there are relatively few therapies currently available and most are ineffective or poorly tolerated by patients. Several pharmaceutical products have been approved for obesity marketing in the U.S. Approved obesity drugs are generally prescribed for short-term use and only a select few have been approved for longer-term maintenance therapy. Several older drugs, indicated for short-term administration, have an undesirable amphetamine-like profile. For example, Meridia (sibutramine) has been shown to stimulate modest weight loss but is associated with increased cardiovascular risk. This can represent a significant medical risk for obese patients since many of them are already susceptible to heart disease. Another entrant, Xenical (orlistat) has also been show to effect modest weight loss, but complications of flatulence, fecal incontinence and urgency have limited its use. Orlistat was recently launched in over-the-counter form under the brand name Alli and, despite well-published discussions of its complications, Alli’s manufacturer forecasts that it will reach at least $1.5 billion in annual sales. In sum, there is a significant unmet medical need for safe and effective new pharmaceutical approaches to treat obesity, and ghrelin antagonism may represent one such novel approach.

Type 2 diabetes, characterized by elevated levels of HbA1c and insulin resistance, is also growing at an alarming rate and has reached epidemic proportions in developed countries. This increasing incidence is being driven by an aging population, poor dietary habits, sedentary lifestyle and increasing obesity rates. While obesity does not directly cause the hyperglycemic condition associated with diabetes, the correlation is striking as statistics indicate that 90% of type 2 diabetics are overweight or obese. Worldwide, at least 171 million people have diabetes and it is expected to double over the next two decades. Today, there are six classes of oral agents approved for the treatment of type 2 diabetes. They are differentiated on their mechanisms of action such as increasing insulin sensitivity, increasing insulin secretion, or blocking food absorption into the gut. Some treatments have side affects that are not desirable. For example, sulfonylureas increase weight and some agents that block food absorption can cause gastric distress. Because type 2 diabetes is a progressive disease, HbA1c typically rises over time and additional medications with a complimentary mechanism are added to the treatment regime as needed. We believe that mechanisms which increase insulin sensitivity, allowing patients to utilize their own insulin most efficiently, represent an excellent approach. Our internally discovered and developed series of potent, small molecule antagonist compounds that block the ghrelin receptor have generated favorable metabolic effects in animal experiments that include increased insulin sensitivity, lower triglycerides, lower total cholesterol and lower fat.

Competition

Several small and larger pharmaceutical companies have early-stage ghrelin antagonist programs. We believe that we have the most advanced small molecule ghrelin antagonist program in the industry and are aware

 

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of only one other product candidate that has entered clinical trials, an unsuccessful injectable therapeutic vaccine from a small Swiss-based company. We are aware that several large pharmaceutical companies have or had active medicinal chemistry efforts against this target. However, we do not believe any of these programs has reached a more advanced stage than ours.

Other Potential Indications for a Ghrelin Antagonist

Lipid disorders. Hyperlipidemia, or elevated levels of cholesterol in the blood, can lead to an accumulation of cholesterol and other substances in the inner walls of the arteries, causing reduced blood flow to critical organs, including the heart. Hyperlipidemia is one of the primary risk factors for coronary heart disease, or CHD, which is the leading cause of death in the U.S. Clinical studies have demonstrated the benefit of lipid-lowering medications in both the primary and secondary prevention of CHD events. These drugs are a major component of the global cardiovascular market, which is valued at an estimated $100 billion. Animal models have shown that administration of our ghrelin antagonists results in improved triglyceride and cholesterol levels. Our ghrelin antagonists may therefore not only be an efficacious treatment for hyperlipidemia but also may be able to lower the overall risk of CHD.

Fatty Liver Diseases. Fatty liver diseases represent a progressive spectrum of fat deposition causing liver dysfunction. Non-alcoholic fatty liver disease, or NAFLD, arises in individuals who drink minimal amounts of alcohol but acquire fatty deposits in the liver known as steatosis, mainly due to inappropriate amounts of fat in the diet. In its earliest forms this may have no effect on liver function. A more progressive form of fatty liver disease, known as non-alcoholic steatohepatitis, or NASH, is characterized by inflammatory infiltrates that lead to fibrosis and scarring of the liver. Eventually this progresses to cirrhosis and eventual liver failure, and can also result in liver cancer. Obese individuals and diabetics are most at risk to develop fatty liver disease; 70% of obese individuals and 75% of type 2 diabetics eventually develop NAFLD or NASH. Animal models have shown that administration of our ghrelin antagonists results in reduced liver fat and may therefore be an efficacious treatment for NAFLD or NASH.

Gastrointestinal hypermotility syndromes. In some individuals, food passes too rapidly through the intestinal tract to allow nutrients time to be digested and absorbed. This physiology results in the dumping syndrome, characterized by a severe osmotic diarrhea. This syndrome classically occurs in patients with a short intestinal track following surgical resection. Because ghrelin is a pro-motility hormone, a ghrelin antagonist could have efficacy in managing this condition.

About 20% of the U.S. population is thought to suffer from irritable bowel syndrome, and approximately 30% of these patients have a functional diarrhea as a primary symptom. Although the mechanism behind this disorder is not well understood, a putative anti-motility agent such as a ghrelin antagonist may be an efficacious treatment.

Development Achievements and Plan

We have identified five different chemistry series of potent small molecule antagonists to the human ghrelin receptor through a structure-assisted drug design program. We constructed a three-dimensional model of the ghrelin receptor and undertook to design molecules which antagonize this receptor. We have identified a number of compounds that antagonize the ghrelin receptor when administered orally to animals. These molecules have been shown in vitro to be highly potent and selective.

We have demonstrated that ghrelin antagonist compounds administered orally have an effect on diabetes and obesity in a DIO mouse model. In this model, we rendered the animals obese, insulin resistant and hyperglycemic by feeding them a diet consisting of 60% fat content. When dosed at 60 mg per kg twice per day for 28 or 56 days, a ghrelin antagonist compound significantly ameliorated metabolic deficits of DIO mice. Treated mice became more insulin sensitive and had lower HbA1c levels when compared to placebo-treated mice. Administration of this compound also resulted in a 10% lower body weight versus the placebo group. The weight differential was primarily white fat and we observed no significant reductions in skeletal muscle mass. Total cholesterol and plasma triglyceride levels were also lower. Liver fat and liver lipid deposits were significantly lower in the ghrelin antagonist-treated group.

 

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The results of our eight week DIO mouse study are summarized below.

 

Metabolic Parameter

   8 weeks of treatment
   Placebo    Elixir ghrelin
antagonist
   %
Difference
   P value

Glucose Homeostasis

   Insulin GTT (AUC)(1)    536   +/-   78    308   +/-   75    42.5    <0.0001
   % HbA1c    4.01   +/-   0.15    3.55   +/-   0.27    1.5    <0.0001

Body Composition

   Body weight (g) *    46.8   +/-   2.8    42.0   +/-   4.1    10.3    <0.05
   White fat-omental(2) (g)    0.78   +/-   0.14    0.46   +/-   0.17    41.7    <0.01
   Skeletal muscle (g)    0.34   +/-   0.02    0.32   +/-   0.02    5.5    n.s
Lipid Profile    Triglycerides (mg/dL)    82   +/-   12    71   +/-   4    3.6    <0.05
   Cholesterol (TC/HDL-C)    1.36   +/-   0.07    1.16   +/-   0.09    14.7    <0.001
   HDL-C    179   +/-   16    167   +/-   11    6.8    n.s
   Liver (g)    2.13   +/-   0.20    1.17   +/-   0.15    45.2    <0.0001
     Liver % fat    28   +/-   2.5    15.9   +/-   4.2    43.0    <0.0001

 

n.s.   not significant

(1)

 

GTT refers to a standard glucose tolerance test and AUC, or area under the curve, refers to the total cumulative plasma insulin during the 2 hours after glucose is administered to a mouse in the glucose tolerance test.

(2)

 

White fat-omental refers to one of the fat pads located in the peritoneal, or belly, region of the mouse. It is distinct from subcutaneous fat and is considered the “bad” fat in metabolic diseases.

Our work in this area with our oral ghrelin antagonists has allowed us to develop a deep understanding of ghrelin biology and pharmacology. We have identified several compounds that have demonstrated similar effects, but have not yet identified a development candidate which has satisfactorily demonstrated acceptable pharmaceutical properties, including parameters such as ion channel interactions, potency, crystallinity and oral bioavailability. We are currently in the final stages of lead optimization, working towards selection of a clinical development candidate.

Ghrelin Agonist

The clinical effect of ghrelin administration and small molecule ghrelin agonism in humans is well validated. For example, studies have shown that ghrelin stimulates the release of GH, and increases food intake by activating feeding centers in the hypothalamus. These effects have been observed in several species, including humans. Ghrelin also stimulates fat production, decreases fat breakdown and decreases metabolic rate, all features that have the net effect of fat storage. In animal studies, ghrelin also stimulates gastric motility.

Our lead ghrelin agonist product candidate is a potent, orally active full agonist to the ghrelin receptor. We believe that our ghrelin agonist will have clinical utility as a therapy for a number of indications, including gastric motility disorders such as OBD, cancer cachexia and other diseases. There are few effective and safe therapeutic options for patients today, and we believe that successful development of our ghrelin agonist would fulfill a significant unmet medical need.

We licensed the worldwide rights for development and commercialization of our lead ghrelin agonist and several backup compounds for all therapeutic indications from BMS in April 2005. We believe that this compound has a competitive profile compared to other ghrelin agonists in development and in particular has an excellent safety profile, particularly with regards to pre-clinical cardiovascular safety. BMS retains a royalty interest in commercial sales, as well as certain milestone payments. If we elect to pursue a development or commercialization partnership, BMS currently maintains a right of first negotiation.

Ghrelin Agonist Markets for Primary Indications

Opioid-induced Bowel Dysfunction. Patients on opioid analgesics for chronic pain syndromes frequently develop debilitating opioid-induced constipation. With an estimated 4 to 5 million patients on chronic pain

 

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medications, of which an estimated 50% will develop severe constipation, there is a large unmet medical need. Therapies are needed that restore the normal GI function but do not interfere with the opioid analgesic effect. There are no currently approved therapies for OBD. Because ghrelin has been shown in third parties’ studies to stimulate gastric motility, it may prove an efficacious treatment for OBD.

Cancer cachexia. An estimated 80% of patients diagnosed with cancer also suffer from cancer-associated cachexia, a condition of malnourishment and wasting of body tissues. Available treatments for this condition are utilized in only a relatively small percentage of patients because of limited efficacy and significant side effects. The cancer cachexia market is part of the overall supportive care oncology market which exceeds $12 billion in worldwide revenues and includes erythropoietin-based products such as Epogen and therapies to prevent nausea such as Zofran. Approximately 80,000 patients per year are treated for cachexia at a market value approaching $400 million, primarily with progesterone and testosterone-like steroidal derivates such as Megace, Oxandrin and Marinol, all of which have significant side effects. We believe that with the introduction of more efficacious and safe therapeutics, the size of this market could grow significantly. Third parties’ studies with ghrelin and ghrelin agonists have been shown to both stimulate appetite and reverse nitrogen loss, which we believe translates into a substantial market opportunity for successful development of ghrelin agonist.

Competition

The most advanced competitive oral ghrelin agonist program in cachexia is from Sapphire Therapeutics Inc. Sapphire in-licensed their small molecule ghrelin agonist from Novo Nordisk, and it has successfully completed phase Ib testing in cancer patients and is currently in early phase II testing for cancer cachexia. Gastrotech and Daiichi Sankyo have injectible ghrelin hormone analogues in phase II trials for unspecified subtypes of cachexia. Gastrotech has not reported any development since February of 2006 when they announced their compound was entering phase II. Daiichi Sankyo has not publicly reported any data.

For gastrointestinal motility, the most advanced ghrelin agonist programs are from Tranzyme Pharmaceuticals, Inc. and Sapphire Pharmaceuticals. Tranzyme has an intravenous ghrelin receptor agonist that has completed phase IIa clinical trial testing efficacy in diabetic patients with severe gastroparesis. They have announced that they will also be pursuing an indication for post-operative ileus. In addition, they have reportedly developed an oral formulation which is in phase I testing for mild to moderate gastroparesis. Sapphire is also developing its small molecule for post-operative ileus which is entering phase I/II clinical testing.

Other Potential Indications for a Ghrelin Agonist

Post-operative ileus. Post-operative ileus, or POI, is the impairment of gastrointestinal motility that routinely occurs following abdominal, gynecological, and pelvic surgeries. POI is considered as an inevitable, deleterious response to these surgeries and can increase hospital stay by 4 days or more, resulting in a significant additional expense. During this time, patients are neither able to tolerate oral feeding nor have bowel movements. This indication is particularly attractive because currently there is no marketed therapeutic solution. An estimated 5 million surgeries result in some degree of POI. Because ghrelin has been shown in third parties’ studies to stimulate gastric motility, it may prove an efficacious treatment for POI.

Cachexia/heart failure. The prevalence of people with chronic heart failure in the U.S. is about 1%. Approximately 20% of these patients, or 980,000 individuals, suffer from cardiac cachexia, a poorly understood syndrome resulting in weight loss, particularly lean body mass. A ghrelin agonist may be a particularly appealing therapy for this condition because ghrelin not only increases appetite and improves nitrogen balance, but also improves cardiac output.

Development Achievements and Plan

We have a ghrelin agonist product candidate which binds with high affinity and selectivity to the ghrelin receptor. When administered intraveneously, intraperitoneally, or orally to a variety of animal species, our

 

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product candidate stimulated the release of GH into the blood stream. Unlike several other small-molecule ghrelin agonists, we have not observed cardiovascular or ion channel abnormalities by single or repeat dosing of our ghrelin agonist product candidate in dogs or rodents. Extensive ion channel analysis of our ghrelin agonist product candidate has not shown any untoward effects on several key ion channels involved in cardiac function. No cardiovascular or general toxicities have been observed in animal models at high exposure levels.

We are currently performing IND-enabling studies for our ghrelin agonist product candidate. Our strategy for this program is to develop it through proof of concept in man, a potentially key value inflection point, and then partner as the likely indications for this product are outside of the current scope of our commercial focus. In September 2007, we initiated a strategic relationship with Novartis. Under the terms of our agreement, Novartis has the right to negotiate to obtain rights to develop and commercialize our ghrelin agonist product candidate. For more information about our collaboration with Novartis, see “—Collaborative Agreements.”

Sirtuin Modulators

Elixir’s founding technology is based on the identification of genes and pathways that regulate aging, and we have mined these pathways to develop products for the treatment of age-related diseases, including metabolic disease. One such target involves a gene known as Sir2 which expresses one member of a class of enzymes called sirtuins, or SIRTs. Initial enthusiasm around the sirtuins was generated based on discoveries made by an Elixir founder showing that this enzyme plays a potential role in increasing lifespan. When the amount of the Sir2 enzyme was increased in a simple organism, yeast, it led to an increase in lifespan. This finding in a very simple organism generated significant enthusiasm for drug discovery efforts aimed at the seven human sirtuins, called SIRT1-SIRT7, to identify drugs for the treatment of age-related diseases, most notably the major metabolic diseases.

Further research in vitro suggests that SIRT1 is intimately involved in the regulation of a variety of very important basic cellular functions, including cell cycle control, cell survival, mitochondrial function and intracellular metabolism. Additionally, SIRT1 has recently been implicated in the control of glucose homeostasis and fat mobilization in animal studies, suggesting that increasing the amount of the SIRT1 enzyme may improve metabolic function. Conversely, blocking the amount or activity of SIRT1 has recently been shown to reverse “epigenetic silencing,” a phenomenon that decreases the expression of important tumor suppressor genes. The implication of these findings is that SIRT1 blocking could be important in combating several types of cancer. Collectively, these observations highlight the large potential, and explain the recent interest, in the discovery and development of compounds which could either increase or decrease the enzymes of this important class of SIRT targets.

Leveraging our knowledge of the regulation of aging and metabolism, we have built a leadership position in the field of sirtuins, or SIRT. We believe that sirtuin modulators may also have potential clinical utility in large pharmaceutical markets with unmet medical needs such as cancer and neurodegenerative diseases. We have an extensive intellectual property position around screening, chemical composition of matter and novel uses of sirtuin modulators.

Sirtuin Inhibitors

We identified our SIRT1 inhibitor product candidate and a number of additional structural classes of active compounds using an ultra-high throughput screen of a library of chemical compounds against the human SIRT1 enzyme. Our SIRT1 inhibitor product candidate is approximately 1,000 times more potent than any published inhibitor of SIRT1 and is 200 to 800 times more selective for SIRT1 versus SIRT2, SIRT3 and SIRT5. A medicinal chemistry approach has identified a clear structure-activity relationship for our SIRT1 inhibitors and allowed for the identification of several molecules related to our SIRT1 inhibitor product candidate with similar potencies and selectivities. Importantly, our SIRT1 inhibitor product candidate is capable of entering cells to inhibit the activity of SIRT1. We have also confirmed that our oral SIRT1 inhibitor product candidate inhibits SIRT1 activity in animal studies of rats and mice and crosses the blood-brain-barrier.

 

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We and Siena have shown that our SIRT1 inhibitor product candidate is effective in a nerve survival assay model for Huntington’s Disease. We entered into an exclusive collaborative agreement with Siena in January 2007 to develop our SIRT1 inhibitor product candidate for Huntington’s Disease.

Our SIRT1 inhibitor product candidate may also have clinical utility for use in treating cancer, specifically to target epigenetic silencing mechanisms mediated by SIRT1. Broadly, we have also established a number of academic collaborations to explore SIRT mechanisms in these and other disease areas with our SIRT1 inhibitor product candidate.

Sirtuin Activators

We have identified several potent structural classes of molecules that increase SIRT1 activity in a relevant assay, called the Fluor-de-lys assay, using a high throughput compound screening approach. These compounds are currently being tested for their ability to alter metabolic functions, including AMP kinase activity, mitochondrial function, lipid synthesis and adipokine secretion in a variety of cell types, including adipocytes.

Identification of Further Modulators of Sirtuin Activity

One of the hurdles to significant advancement in the SIRT field has been the lack of functional assays of SIRT activity. “Activation” may represent the presence of more enzyme, or “enhanced enzymatic activity;” inhibition may be the presence of less enzyme protein or diminished enymatic activity. In order to identify “enhanced or diminished SIRT activity” our researchers have established collaborations to perform compound library screens in relevant human cultured cell assays. These activities can be linked to up- or down-regulation of sirtuin enzyme activity or protein expression, thus ascribing immediate function to the hit molecules. This approach will identify molecules that can be developed for the treatment of metabolic diseases and other age-related diseases.

Competition

We believe we are a leader in the field of SIRT and sirtuin biology and pharmacology, and that we hold a comprehensive IP position around screening, chemical composition of matter and utility claims for the sirtuin modulators. Sirtris, formed in 2004, is focused exclusively on sirtuins. Sirtris’s lead compound, a proprietary formulation of resveratrol, is in phase II clinical trials for the treatment of male type 2 diabetics in India.

Collaborative Agreements

Kissei Pharmaceutical Company (Mitiglinide)

In March 2006, we entered into a license agreement with Kissei, or the Kissei license agreement, pursuant to which we obtained the exclusive right to develop and commercialize mitiglinide and related combination products in the Americas. We also acquired a right of first refusal to develop and commercialize mitiglinide in Europe. In the event we elect to co-promote the first product for which we seek regulatory approval, Kissei will have a limited option to negotiate for the right to co-promote such product. Pursuant to the terms of the Kissei license agreement, Kissei will be the sole provider of mitiglinide. We will enter into a supply agreement with Kissei regarding its provision of this material for our commercial sales.

We paid an initial $5 million fee to Kissei in connection with the execution of the Kissei license agreement, and Kissei is entitled to receive development and sales-based milestone payments from us depending on the extent to which we advance a product candidate through development and the success of any commercialization efforts. We will pay Kissei escalating low double-digit royalties based on our net sales of Glinsuna and escalating single-digit royalties based on our net sales of Metgluna.

 

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The Kissei license agreement will terminate at the later of the expiration of all patents in a country or fifteen years from the first commercial sale in a country. The Kissei license agreement will thereafter automatically renew for successive two year terms unless we or Kissei provide six months advance notice of an intent to terminate on a country-by-country basis. We and Kissei each retain the right to terminate the Kissei license agreement earlier upon the bankruptcy of, or a material breach by, the other party, including in Kissei’s case our failure to pursue clinical approval of mitiglinide in accordance with the mutually agreed upon development plan. We also retain the right to terminate the Kissei license agreement if Glinsuna becomes subject to a safety recall in the Americas. We may not conduct any carcinogenicity studies of mitiglinide in non-human animals or in vitro without the prior written consent of Kissei. In the event that the FDA requires or strongly recommends that we perform such a study and Kissei withholds its consent for us to perform the study, we may terminate the Kissei license agreement.

Bristol-Myers Squibb Company (Ghrelin Agonist)

In April 2005, we entered into a license agreement with BMS, or the BMS license agreement, pursuant to which we obtained the exclusive worldwide right to develop and commercialize our lead ghrelin agonist product candidate and several backup compounds for all therapeutic indications. BMS retained a right of first negotiation if we seek to develop or commercialize this ghrelin agonist product candidate with a partner. We may seek to have BMS waive this right of first negotiation so that we may sublicense the development and commercialization of this ghrelin agonist product candidate to Novartis. See “—Novartis International Pharmaceuticals (Ghrelin Agonist & Sirtuin Modulators).” We may not develop or commercialize any BMS ghrelin agonist with a third-party prior to the earlier of our completion of a phase II clinical trial, or achieving proof of concept of human safety and efficacy.

We made a $1.75 million up-front cash payment and issued 1.75 million shares of our series B redeemable convertible preferred stock to BMS in connection with the execution of the BMS license agreement. We will make development, regulatory and sales based lump-sum payments to BMS upon the achievement of various milestones. Certain of these milestones are payable, at our discretion, in shares of common stock which we would thereafter register with the SEC for resale. We will also pay BMS a high single-digit to low double-digit royalty on escalating net sales of our ghrelin agonist product candidate for all indications. We will make these payments on a country-by-country basis for as long as our ghrelin agonist product candidate is covered by a valid patent, subject to other data exclusivity protection or ten years from the first commercial sale of our ghrelin agonist product candidate, whichever is longer.

If we sublicense our rights under the BMS license agreement to a third-party, including to Novartis, we will pay BMS a low double digit percentage of any upfront consideration received from our sublicensee. This amount will be reduced if we enter into the sublicense after our ghrelin agonist product candidate’s clinical proof of concept is established in a phase II trial, and further reduced after we file an NDA for our ghrelin agonist product candidate.

We and BMS each retain the right to terminate the BMS license agreement prior to the expiration of our royalty obligations upon the material breach by the other party, including in BMS’s case our failure to use commercially reasonable efforts to develop and commercialize our ghrelin agonist product candidate. BMS also retains the right to terminate the BMS license agreement if we, alone or in conjunction with a third-party, clinically develop or market a compound competitive to this ghrelin agonist product candidate, subject to limited exceptions.

Novartis International Pharmaceuticals (Ghrelin Agonist & Sirtuin Modulators)

In September 2007, we initiated a strategic relationship with Novartis International Pharmaceuticals, or Novartis. Novartis invested $10 million in our series D financing through a fund managed by MPM Capital, our largest stockholder. Simultaneously, we entered into an agreement, or the Novartis agreement, under which

 

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Novartis paid us an initial fee and has the right to negotiate to obtain rights to develop and commercialize one of our ghrelin agonist product candidates or a sirtuin product candidate (but not both). As noted above, we and BMS would need to amend the BMS license agreement in order to trigger Novartis’ rights with respect to our lead ghrelin agonist product candidate.

If we and BMS agree to specific amendments to the BMS license agreement and if BMS waives its existing right of first negotiation as described above (See “—Bristol-Myers Squibb Company (Ghrelin Agonist)”), Novartis would then have sixty days to elect to pay us an additional fee for which we must negotiate in good faith with Novartis an option to obtain a license to develop and commercialize our lead ghrelin agonist product candidate, which option would be exercisable upon the earlier of our successful completion of its phase IIa clinical trial or achieving proof of concept of human efficacy and safety. Pursuant to the terms of the Novartis agreement, Novartis would pay us an additional fee upon signing of the option agreement, in addition to any other negotiated milestones or royalties which would be payable under the definitive license agreement if Novartis exercises its option. Pursuant to the terms of the BMS license agreement, we will, if paid, owe to BMS a percentage of any negotiated milestone or other lump sum payments. See “—Bristol-Myers Squibb Company (Ghrelin Agonist).”

In the event that we and BMS have amended the BMS license agreement and BMS waives its right of first negotiation before Novartis’ rights to our sirtuin modulator programs are triggered, Novartis will have no further rights to sirtuin modulator product candidates under the Novartis agreement.

If we do not secure the required amendment to the BMS license agreement or BMS does not waive its right of first negotiation, Novartis will retain rights in our sirtuin modulators development program or to any ghrelin agonist we develop independent of the compounds licensed from BMS. Upon the earlier of successful completion of its phase IIa clinical trial or achieving proof of concept of human efficacy and safety with respect to either a sirtuin modulator product candidate or a non-BMS ghrelin agonist product candidate, Novartis will have sixty days to elect to pay us an additional fee for which we must negotiate in good faith with Novartis the terms of a license for such non-BMS ghrelin agonist or sirtuin modulator product candidate. The Novartis agreement is subject to limitations to account for Siena’s rights to sirtuin modulator candidates (See “—Siena Biotech (SIRT1 Inhibitor)”) and also permits Novartis to choose not to license an unencumbered sirtuin modulator product candidate on one occasion only. If Novartis passes on the second unencumbered sirtuin modulator product candidate that successfully completes preclinical development and reaches proof of concept, Novartis will have no further rights to our sirtuin modulators development program, BMS ghrelin agonist product candidate or non-BMS ghrelin agonist product candidate.

Siena Biotech (SIRT1 Inhibitor)

In an effort to advance our sirtuin modulator program and as part of our strategy to extract value from compounds with targets indications outside of our strategic focus on treatments for metabolic disease, we entered into a collaboration agreement with Siena in February 2007. Pursuant to this collaboration agreement, we licensed Siena the right to explore the use of our proprietary SIRT1 Inhibitors as therapeutic agents to treat Huntington’s disease and an option to enter into a definitive license agreement for any such compound. We received an initial lump-sum fee in connection with the execution of the collaboration agreement and will receive a low double digit percentage of any lump-sum payments they receive from sublicensing the compound and an additional fee if Siena successfully completes a phase IIa clinical trial of the compound. Unless replaced by a definitive license agreement or extended by the mutual agreement of us and Siena for an additional six months, the collaboration agreement will expire in February 2008. We and Siena each retain the right to sooner terminate the collaboration agreement upon the material breach by the other party.

Manufacturing

We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of Glinsuna, Metgluna or any of the compounds that we are testing in our preclinical research and development

 

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programs. We currently have no plans to build our own clinical or commercial-scale manufacturing capabilities, and we expect to rely on contract manufacturers for both clinical and commercial supplies of our products for the foreseeable future. Although we rely on contract manufacturers, we have consultants with manufacturing experience to oversee the relationships with our contract manufacturers.

Glinsuna/Metgluna

Pursuant to the terms of our license agreement with Kissei, Kissei will be the sole provider of mitiglinide for our commercial sales. We will enter into a supply agreement with Kissei regarding its provision of this material. Metformin is a generic compound that is generally commercially available in sufficient supplies. Once approved by the FDA, we intend to engage Patheon to formulate, package and label Glinsuna and Metgluna for sale by us.

Clinical and Preclinical Materials

Patheon is currently our sole contract manufacturer for the production of Glinsuna drug product for our clinical trial. Pantheon currently formulates and packages Glinsuna for our clinical trials upon its receipt from Kissei of mitiglinide drug substance which is manufactured in Japan by a third-party contractor. We currently intend to utilize Patheon to manufacture, formulate and package our commercial drug product supplies of Glinsuna and Metgluna. We believe that, if necessary, we could obtain alternate drug substance supplies of mitiglinide through Kissei from additional vendors in Japan in sufficient quantities to satisfy our clinical trial requirements without significant delay or material additional costs.

We obtain drug substance for our pre-clinical studies of ghrelin antagonists, ghrelin agonists and sirtuin modulators from contract manufacturers. As we approach commencement of human clinical studies with these programs, we have initiated, or will initiate, the appropriate pre-formulation and scale-up manufacturing work with these and other contract manufacturers.

Intellectual Property

We actively seek patent protection and regulatory exclusivity for the proprietary technology that we consider important to our business, including compounds, compositions and formulations, their methods of use and processes for their manufacture. In addition to seeking patent protection in the U.S., we generally file patent applications in Canada, Europe, Japan and other countries on a selective basis to protect the inventions that we consider important to the development of our business worldwide. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, technology and know-how, to operate without infringing the proprietary rights of others, and to prevent others from infringing our proprietary rights.

We own a total of 18 United States patent applications, as well as 44 foreign and Patent Cooperation Treaty applications which are counterparts to certain United States patents and patent applications. In addition, we license from third parties a total of 11 United States patents and 17 United States patent applications, 5 foreign patents and 47 foreign and Patent Cooperation Treaty applications which are counterparts to certain United States patents and patent applications. These patents and patent applications include claims covering various aspects of our product pipeline and research and development strategies, including: mitiglinide and its use both alone and in combination with other type 2 diabetes drugs, certain ghrelin agonists and their uses, certain ghrelin antagonists and their uses, uses of certain SIRT1 modulators, methods of evaluating sirtuins for their ability to modify particular substrates, methods for evaluating the proliferative capacity of cells, methods of modulating the GH axis to treat particular diseases, and use of modulators of AMP kinase in aging and age-related diseases.

We have the exclusive rights to certain patent rights covering mitiglinide and its method of use in the United States. In particular, we have the exclusive rights to U.S. Patent No. 5,202,335, which issued on April 13, 1993,

 

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from Kissei, the assignee. See “—Collaborative Agreements—Kissei Pharmaceutical Co. (Mitiglinide).” This patent is due to expire on March 30, 2012. Certain rights in this patent should be eligible for patent term extension for regulatory delays associated with the clinical testing of this product.

BMS has filed international and United States patent applications covering the chemical composition of our ghrelin agonist product candidate. U.S. Patent No. 7,166,596 issued from one such application on January 23, 2007 and has composition claims directed to our ghrelin agonist product candidate and related back-up compounds. The term of this patent expires on September 2, 2023 and may be eligible for extension. BMS has filed additional patent applications with claims relating to additional licensed classes of compounds, as well as applications with claims relating to methods of using our ghrelin agonist product candidate and related back-up compounds which claim priority to the same application. We have the exclusive right to exploit these patents and patent applications under the BMS license agreement. See “—Collaborative Agreements—Bristol-Myers Squibb Company (Ghrelin Agonist).”

We have filed United States and foreign patent applications with composition of matter and use claims relating to a number of proprietary ghrelin antagonist pharmacophores. Patents that may issue from these applications are entitled to patent terms that extend until at least November 2024.

We have filed United States and foreign patent applications on therapeutic uses for key chemical classes of molecules that we identified in screens for SIRT1 modulators. The claims in these applications cover therapeutic uses for our least sirtuin product candidate and like molecules and compositions enriched for a specific stereo-isomer. Patents that may be granted on these applications are entitled to patent terms that extend until at least September 2024. We have filed additional pending patent applications covering SIRT activators and their uses.

Individual patents extend for varying periods depending on the effective date of filing of the patent application or the date of patent issuance, and the legal term of the patents in the countries in which they are obtained. Generally, patents issued in the U.S. are effective for:

 

   

the longer of 17 years from the issue date or 20 years from the earliest effective filing date, if the patent application was filed prior to June 8, 1995; and

 

   

20 years from the earliest effective non-provisional filing date, if the patent application was filed on or after June 8, 1995 (though the term may be lengthened under 35 USC § 154 which relates adjusting the patent term for certain delays by the United States Patent and Trademarks Office in prosecution, lengthened under 35 USC § 156, which relates to patent term extension for certain delays in regulatory approval, or shortened by terminal disclaimer).

The term of foreign patents varies in accordance with provisions of applicable local law, but typically is 20 years from the international filing date. In addition, in some instances, certain patent rights may be eligible for patent term extension in the U.S. and other countries depending on the time invested in health authority regulatory review. In the U.S., these extensions, which may be as long as five years, are directed to the approved product and its approved indications. We intend to seek such extensions as appropriate.

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications that are licensed to us will result in the issuance of any patents or if issued will assist our business. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented. This could limit our ability to stop competitors from marketing related products and reduce the length of term of patent protection that we may have for our products. In addition, the rights granted under any of our issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Our competitors may develop similar technologies, duplicate any technology developed by us, or use their patent rights to block us from taking

 

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the full advantage of the market or entering the market at all. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that a related patent may remain in force for a short period following commercialization, thereby reducing the advantage of the patent to our business and products.

In addition to patents, we may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect the trade secrets in our proprietary technology and processes, in part, by entering into confidentiality agreements with commercial partners, collaborators, employees, consultants, scientific advisors and other contractors and into invention assignment agreements with our employees and some of our commercial partners and consultants. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of the technologies that are developed. These agreements may be breached; and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered or patented by competitors.

Many of our employees, consultants and contractors have worked for others in the biotechnology or pharmaceutical industries. We try to ensure that, in their work for us, they do not use the proprietary information or know-how of others. To the extent that our employees, consultants or contractors use proprietary information owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Such disputes may be costly, detrimental to our business and may result in an award of damages against us or injunctive relief which prevents us from making use of any such trade secrets.

Regulatory Matters

Government Regulation and Product Approval

Government authorities in the U.S., at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing and export and import of products such as those we are developing. Our drugs must be approved by FDA through the NDA process before they may be legally marketed in the U.S.

U.S. Drug Development Process

In the U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement, or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a drug may be marketed in the U.S. generally involves the following:

 

   

completion of preclinical laboratory tests, animal studies and formulation studies according to Good Laboratory Practices or other applicable regulations;

 

   

submission to the FDA of an IND application which must become effective before human clinical trials may begin;

 

   

performance of adequate and well-controlled human clinical trials according to Good Clinical Practices to establish the safety and efficacy of the proposed drug for its intended use;

 

   

submission to the FDA of an NDA;

 

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satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with current good manufacturing practice, or cGMP, to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and

 

   

FDA review and approval of the NDA.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

Once a pharmaceutical candidate is identified for development it enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. The sponsor will also include a protocol detailing, among other things, the objectives of the first phase of the clinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated, if the first phase lends itself to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during studies due to safety concerns or non-compliance.

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with good clinical practice regulations. These regulations include the requirement that all research subjects provide informed consent. Further, an institutional review board, or IRB, must review and approve the plan for any clinical trial before it commences at any institution. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the information regarding the trial and the consent form that must be provided to each trial subject or his or her legal representative and must monitor the study until completed.

Each new clinical protocol must be submitted to the IND for FDA review, and to the IRBs for approval. Protocols detail, among other things, the objectives of the study, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

   

Phase I: The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

 

   

Phase II: Involves studies in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

 

   

Phase III: Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide, if appropriate, an adequate basis for product labeling.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events. Phase I, phase II, and phase III testing may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the

 

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research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

U.S. Review and Approval Processes

The results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling, and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to the payment of user fees; a waiver of such fees may be obtained under certain limited circumstances.

In addition, under the Pediatric Research Equity Act of 2003, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.

The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept a NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The approval process is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. The FDA may issue an approvable letter, which may require additional clinical or other data or impose other conditions that must be met in order to secure final approval of the NDA. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant to assure and preserve the product’s identity, strength, quality and purity. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured.

NDAs receive either standard or priority review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. In addition, products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval and may be approved on the basis of adequate and well-controlled clinical trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug receiving

 

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accelerated approval perform adequate and well-controlled post-marketing clinical trials. Priority review and accelerated approval do not change the standards for approval, but may expedite the approval process. If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. In addition, the FDA may require us to conduct phase IV testing which involves clinical trials designed to further assess a drug’s safety and effectiveness after NDA approval, and may require testing and surveillance programs to monitor the safety of approved products which have been commercialized.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our product candidates, some of our U.S. patents may be eligible for limited patent term extension 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, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND, and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the extension must be applied for prior to expiration of the patent. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned or licensed patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the filing of the relevant NDA.

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the U.S. to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by FDA to be essential to the approval of the application, for example, for new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Pediatric exclusivity is another type of exclusivity in the U.S. Pediatric exclusivity, if granted, provides an additional six months to an existing exclusivity or statutory delay in approval resulting from a patent certification. This six-month exclusivity, which runs from the end of other exclusivity protection or patent delay, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study. The current pediatric exclusivity provision is scheduled to end on October 1, 2007, but it may be reauthorized.

 

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Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the U.S., or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for this type of disease or condition will be recovered from sales in the U.S. for that drug. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication, except in very limited circumstances, for seven years. Orphan drug exclusivity, however, also could block the approval of one of our products for seven years if a competitor obtains approval of the same drug as defined by the FDA or if our product candidate is determined to be contained within the competitor’s product for the same indication or disease.

Post-Approval Requirements

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and state inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct.

Any drug products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the drug, providing the FDA with updated safety and efficacy information, drug sampling and distribution requirements, complying with certain electronic records and signature requirements, and complying with FDA promotion and advertising requirements. FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label.

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may be.

Foreign Regulation

In addition to regulations in the U.S., we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries

 

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before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

Under European Union regulatory systems, we may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by certain biotechnological processes and optional for those which are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member states. For drugs without approval in any Member State, the decentralized procedure provides for approval by one or more other, or concerned, Member States of an assessment of an application performed by one Member State, known as the reference Member State. Under this procedure, an applicant submits an application, or dossier, and related materials (draft summary of product characteristics, draft labeling and package leaflet) to the reference Member State and concerned Member States. The reference Member State prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference Member State’s assessment report, each concerned Member State must decide whether to approve the assessment report and related materials. If a Member State cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points may eventually be referred to the European Commission, whose decision is binding on all Member States.

Reimbursement

Sales of pharmaceutical products depend in significant part on the availability of third-party reimbursement. Third-party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. We anticipate third-party payors will provide reimbursement for our products. However, these third-party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. Our product candidates may not be considered cost-effective. It is time consuming and expensive for us to seek reimbursement from third-party payors. Reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis.

The passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, imposes new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries, and includes a major expansion of the prescription drug benefit under a new Medicare Part D, which went into effect on January 1, 2006. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary in which it indicates which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee.

It is not clear what effect the MMA will have on the prices paid for currently approved drugs and the pricing options for new drugs approved after January 1, 2006. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

 

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We expect that there will continue to be a number of federal and state proposals to implement governmental pricing controls and limit the growth of healthcare costs, including the cost of prescription drugs. At the present time, Medicare is prohibited from negotiating directly with pharmaceutical companies for drugs. However, Congress is currently considering passing legislation that would lift the ban on federal negotiations. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability.

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products.

Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of our business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

Facilities

All of our operations, including our corporate headquarters and research and development laboratories, are housed in one leased facility in Cambridge, Massachusetts. Our lease for this 19,700 square foot facility expires in May 2012. We believe our existing facilities are adequate for our current needs and that additional space will be available in the future on commercially reasonable terms as needed.

Employees

As of September 15, 2007, we had 30 full-time and three part-time employees. We have 24 employees in research and development and nine in general and administrative, which includes marketing and business development. Ten of our employees have received their Ph.D. We enjoy good employee relations. None of our employees are members of any labor union, and we are not a party to any collective bargaining agreement.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding our directors and executive officers, including their ages as of September 15, 2007.

 

Name

   Age   

Position

William K. Heiden

   47    President, Chief Executive Officer and Director

Gregory D. Perry

   47    Chief Financial Officer and Executive Vice President

Peter S. DiStefano, Ph.D.  

   50    Chief Scientific Officer and Vice President Research and Development

Alan D. Watson, Ph.D.  

   54    Chief Business Officer and Executive Vice President

Vaughn M. Kailian

   62    Chairman

Vernon Cassin

   55    Director

Jonathan J. Fleming

   50    Director

Ansbert K. Gadicke, M.D.  

   49    Director

Cynthia J. Kenyon, Ph.D.  

   53    Director

Dion Madsen

   40    Director

Bennett M. Shapiro, M.D.  

   68    Director

David Stack

   56    Director

 

(1)

 

Member of the nominating and corporate governance committee.

(2)

 

Member of the audit committee.

(3)

 

Member of the compensation committee.

William K. Heiden. Mr. Heiden has served as a director and as our Chief Executive Officer and President since September 2004. Prior to joining Elixir, Mr. Heiden served as President and Chief Operating Officer from May 2002 responsible for corporate strategy and overseeing all operations of PRAECIS, a public biopharmaceutical company which was subsequently purchased by GlaxoSmithKline. Mr. Heiden was recruited to PRAECIS from the Schering Plough Corporation which he joined in 1987 in their executive development program, and held positions of increasing responsibility for a variety of businesses in the U.S. and abroad. Mr. Heiden is a member of the board of directors of LFB, S.A., a French biotechnology company, and is a member of the Duke University Healthcare Advisory Council. Mr. Heiden holds an M.B.A. from Cornell University’s Johnson Graduate School of Management, an M.A. from the University of Louvain and a B.S. from the University of Florida.

Gregory D. Perry. Mr. Perry has served as our Chief Financial Officer since January 2007. Prior to joining Elixir, Mr. Perry served as Chief Financial Officer of Domantis, Ltd., a biopharmaceutical company that was recently acquired by GlaxoSmithKline, which he joined in June 2006. From May 2003 to August 2005, Mr. Perry served as Senior Vice President and Chief Financial Officer at Transkaryotic Therapies. At Domantis and Transkaryotic Therapies, Mr. Perry was responsible for overseeing all aspects of accounting, finance, planning, taxation and investor relations. Prior to Transkaryotic Therapies, Mr. Perry served as Senior Vice President, Finance and Business Development, Life Sciences at PerkinElmer Inc. where he was responsible for their financial operations. Mr. Perry holds a B.A. from Amherst College.

Peter S. DiStefano, Ph.D. Dr. DiStefano has served as our Chief Scientific Officer and Vice President of Research and Development since October 2001. Prior to joining us, Dr. DiStefano was Senior Director of Neurobiology at Millennium Pharmaceuticals from 1997 to 2001, focusing on central nervous systems disorders, pain, and urology. From 1991 to 1997, he was senior Staff Scientist at Regeneron Pharmaceuticals where he was responsible for research and clinical development activities for peripheral nervous system disorders. Dr. DiStefano started his career in 1986 in the Neuroscience division at Abbott Laboratories. He is co-author of over 100 scientific publications in leading journals and holds more than 10 issued patents. Dr. DiStefano received his B.A. from Kenyon College, a Ph.D. in Pharmacology from Upstate Medical Center in Syracuse and post-doctoral training at Washington University School of Medicine.

 

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Alan D. Watson, Ph.D. Dr. Watson has served as our Chief Business Officer since July 2002. Prior to joining Elixir, Dr. Watson served as Senior Vice President, Corporate Development at Cubist Pharmaceuticals, Inc., where he was responsible for business and corporate development, licensing, mergers and acquisitions and intellectual property. Dr. Watson currently serves as a director of IMCOR Pharmaceutical Co. (OTC:ICRP.PK) and Targeted Diagnostics & Therapeutics, Inc. Dr. Watson holds a Ph.D. in Chemistry from the Australian National University, an M.B.A. from Northeastern University, and a B.Sc. (Hons.) from the University of New South Wales in Sydney, Australia.

Vaughn M. Kailian. Mr. Kailian has served as our Chairman since February 2004. Mr. Kailian is currently a General Partner of MPM Capital. From 2002 to 2004, he was the vice chairperson of the Board of Directors of Millennium Pharmaceuticals, Inc. Mr. Kailian served from 1990 to 2002 as Chief Executive Officer, President and director of COR Therapeutics, Inc. until its acquisition by Millennium. He currently serves as the Chairman of the Board of ViaCell, Inc. (NASDAQ:VIAC) and Cerimon Pharmaceuticals, Inc., and as a director of Cephalon, Inc. (NASDAQ:CEPH), Memory Pharmaceuticals (NASDAQ:MEMY), NicOx, S.A and Windhover Information, Inc. He is a member of the board of BioVentures for Global Health and the New England Healthcare Institute. Mr. Kailian holds a B.A. from Tufts University.

Vernon Cassin. Mr. Cassin has served as a director since December 2003. Mr. Cassin was trained as a lawyer, has practiced financial and corporate law in New York, Singapore and Saudi Arabia and served as a partner in a major U.S. and international law firm for approximately thirteen years. He continues to counsel privately a small number of clients on legal matters relating to Saudi Arabia. In addition, Mr. Cassin has been active in venture capital projects and has put together investors for a number of projects in biotechnology, internet, media and oil and gas. Mr. Cassin serves as a director or observer on a several boards of directors of privately held companies, including two biotechnology companies based in the Boston area. He has also served as an advisor to a San Francisco-based hedge fund and serves as a senior advisor to a Saudi Arabian based venture capital fund. Mr. Cassin currently also serves as Chairman of a Bermuda-based oil and gas exploration company. Mr. Cassin received his A.B. from Princeton University in Near Eastern Studies and his J.D. from Harvard Law School.

Jonathan J. Fleming. Mr. Fleming has served as a director since December 2000. Mr. Fleming has been a General Partner at Oxford Bioscience Partners, an international venture capital firm specializing in life science technology based investments, since 1996, and has served as its Managing Partner since 2001. Prior to joining Oxford Bioscience Partners, he was a Founding General Partner of MVP Ventures in Boston, MA. Mr. Fleming has also co-founded Medica Venture Partners, a venture capital investment firm specializing in early-stage healthcare and biotechnology companies in Israel. Mr. Fleming is a co-founder and Chairman of the Board of Memory Pharmaceuticals (NASDAQ:MEMY). He is also Chairman of the Board of BioProcessors Corporation and is a director of several other private companies including Leerink Swann, a Boston based investment bank specializing in healthcare companies. Mr. Fleming holds a M.P.A. from Princeton University and a B.A. from the University of California, Berkeley.

Ansbert K. Gadicke, M.D. Dr. Gadicke has served as a director since February 2003. Dr. Gadicke is the founder and a General Partner of the MPM Group. He led MPM’s effort to build its Advisory and Investment Banking business from 1992 to 1996 and started its Asset Management business in 1996. Prior to founding MPM, Dr. Gadicke was employed by The Boston Consulting Group. He has held research positions in biochemistry and molecular biology at the Whitehead Institute at MIT, Harvard University and the German Cancer Research Center. Dr. Gadicke is currently a director of Pharmasset, Inc. (NASDAQ:VRUS). He previously served as a director of BioMarin (NASDAQ:BMRN), Biovitrum (Stockholm:BVT), Idenix (NASDAQ:IDIX), MediGene (Frankfurt:MDG), Omrix Biopharmaceuticals (NASDAQ:OMRI), PharmAthene (AMEX:PIP) and Viacell (NASDAQ:VIAC). He is a member of the Advisory Council for Harvard Medical School. Dr. Gadicke holds an M.D. from J.W. Goethe University in Frankfurt.

 

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Cynthia J. Kenyon, Ph.D. Dr. Kenyon is a founder of Elixir, and has served as a director since April 2004. She currently serves as the American Cancer Society Research Professor of Biochemistry and Biophysics at the University of California, San Francisco. She has received honors including the King Faisal Prize for Medicine, the American Association of Medical Colleges Award for Distinguished Research, the Ilse & Helmut Wachter Award for Exceptional Scientific Achievement, and the La Fondation IPSEN Prize. She is a past president of the Genetic Society of America and a member of the US National Academy of Sciences. She is the director of the Hillblom Center for the Biology of Aging at UCSF. She directs a C. elegans laboratory with a research focus on development and aging. Dr. Kenyon holds a B.S. in chemistry and biochemistry from the University of Georgia and a Ph.D. in biology from the Massachusetts Institute of Technology.

Dion Madsen. Mr. Madsen has served as a director since September 2007. Mr. Madsen has served as a Managing Director of Physic Ventures since its inception in March 2007, and was previously the Managing Director and leader of the investment practice of Unilever Technology Ventures, a predecessor of Physic Ventures. Prior to joining Unilever Technology Ventures, Mr. Madsen was head of Investor Relations at Chiron Corporation. Mr. Madsen served from March 1998 to September 2003 as a Partner of RBC Capital Partners, the private equity arm of the Royal Bank of Canada. Mr. Madsen holds a bachelors degree in commerce specializing in finance from the University of Saskatchewan and is a CFA Charterholder.

Bennett M. Shapiro, M.D. Dr. Shapiro has served as director since April 2003. Prior to this, he was Executive Vice President, Worldwide Licensing and External Research at Merck & Co, Inc. where he was responsible for all the basic and preclinical research activities at Merck, then of Worldwide Licensing and External Research, where he directed all of Merck’s research relationships with the academic and industrial biomedical research community. Earlier, he was Professor and Chairman of the Department of Biochemistry at the University of Washington. He is the author of over 120 papers on the molecular regulation of cellular behavior and has served on many institutional advisory boards and review panels. He is currently a director of PureTech Ventures, Momenta Pharmaceuticals (NASDAQ: MNTA), Protein Forest, and Vascular Biogenics, and a trustee of Dickinson College. Dr. Shapiro has a B.S. in Chemistry from Dickinson College and an M.D. from Jefferson Medical College.

David Stack. Mr. Stack has served as director since September 2007. Mr. Stack has served as an Executive Partner of MPM Capital since June 2005. Mr. Stack has been the President and General Partner of Stack Pharmaceuticals, Inc. since November 2004. Prior to this, Mr. Stack was President, Chief Executive Officer and a director of The Medicines Company. He is a director of Bio-Imaging Technologies, Inc (NASDAQ: BITI), Molecular Insight Pharmaceuticals, Inc. (NASDAQ:MIPI) and PepTx, Inc.  Mr. Stack holds a B.S. from Siena College and a B.S. from Albany College of Pharmacy.

Scientific and Clinical Advisors

Our scientific and clinical advisors participate in advisory board meetings as well as provide ad hoc individual consulting to management. We regularly seek advice and input from these experienced scientific leaders on matters related to our research and development programs. The more than 15 members of our scientific and clinical advisory boards consist of experts across a range of key disciplines relevant to our programs and science, including: Alexander Fleming, M.D., who was a medical reviewer in the FDA’s metabolic disease division for over ten years; Jeffrey Flier, M.D., the Dean of the Harvard Medical School and a leading researcher in the field of diabetes and obesity; Manuel Navia, Ph.D., a renowned expert in structure-assisted drug design; Jeffrey Saunders, Ph.D., a highly respected industry expert in small molecule medicinal chemistry; Edward Scolnick, M.D., former President of research at one of the world’s largest pharmaceutical companies; and John Whisnant, M.D., an industry veteran with extensive experience in drug development, including diabetes. We intend to continue to leverage the broad expertise of our advisors by seeking their counsel on important topics of our drug discovery and development programs.

 

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Board of Directors

We currently have nine directors. Upon completion of this offering, the board of directors will be divided into three classes with members of each class of directors serving for three-year terms. Our board of directors will consist of three Class I directors (currently                     ,                      and                     ), three Class II directors (currently                     ,                      and                     ) and three Class III directors (currently                     ,                      and                     ), whose initial terms will expire at the annual meetings of stockholders held in 2008, 2009 and 2010, respectively.

Our by-laws provide that any vacancies in our board of directors and newly created directorships may be filled only by our board of directors and that the authorized number of directors may be changed only by our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes, so that, as nearly as possible, each class will consist of one-third of the total number of directors. Our classified board could have the effect of making it more difficult for a third-party to acquire control of us. These provisions of our by-laws and the classification of the board of directors may have the effect of delaying or preventing changes in the control or management of Elixir.

Each executive officer is elected by, and serves at the discretion of, the board of directors. Each of our executive officers and directors, other than non-employee directors, devotes his or her full time to our affairs. Each of our directors currently serves on the board of directors pursuant to a voting agreement. The voting agreement, including the provisions relating to the nomination and election of directors, will terminate upon the consummation of this offering. There are no family relationships among any of our directors or officers.

Our board of directors has considered the relationships of all directors and, where applicable, the transactions involving them described below under “Certain Relationships and Related Person Transactions,” and determined that each of                     ,                     ,                     ,                     ,                     ,                      and                      does not have any relationship which would interfere with the exercise of independent judgment in carrying out his or her responsibility as a director and qualifies as an independent director under the applicable rules of the NASDAQ Global Market.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which operates pursuant to a separate charter adopted by our board of directors. The composition and functioning of all of our committees will comply with all applicable requirements of the Sarbanes-Oxley Act of 2002, the NASDAQ Global Market and SEC rules and regulations.

Audit Committee

Mr.                     ,                      and                      currently serve on the audit committee. Mr.                     serves as the chairman of the audit committee and qualifies as an “audit committee financial expert” for purposes of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The audit committee’s responsibilities include:

 

   

appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;

 

   

pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

 

   

reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;

 

   

coordinating the oversight and reviewing the adequacy of our internal control over financial reporting;

 

   

reviewing and approving all related party transactions for potential conflict of interest situations;

 

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establishing policies and procedures for the receipt and retention of accounting related complaints and concerns; and

 

   

preparing the audit committee report required by SEC rules to be included in our annual proxy statements.

Compensation Committee

Mr.                      and                      currently serve on the compensation committee. Mr.                      serves as the chairman of the compensation committee. The compensation committee’s responsibilities include:

 

   

annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer;

 

   

evaluating the performance of our chief executive officer in light of such corporate goals and objectives and determining the compensation of our chief executive officer;

 

   

reviewing and approving the compensation of all our other officers;

 

   

overseeing and administering our employment agreements, severance arrangements, compensation, welfare, benefit and pension plans and similar plans;

 

   

reviewing and making recommendations to the board with respect to director compensation;

 

   

reviewing and recommending the Company’s Compensation Discussion and Analysis for inclusion in our annual proxy statements; and

 

   

preparing the compensation committee report required by SEC rules to be included in our annual proxy statements.

Nominating and Corporate Governance Committee

Mr.                      and                      currently serve on the nominating and corporate governance committee. Mr.                      serves as the chairman of the nominating and corporate governance committee. The nominating and corporate governance committee’s responsibilities include:

 

   

developing and recommending to the board criteria for selecting board and committee membership;

 

   

establishing procedures for identifying and evaluating director candidates including nominees recommended by stockholders;

 

   

identifying individuals qualified to become board members;

 

   

recommending to the board the persons to be nominated for election as directors and to each of the board’s committees;

 

   

developing and recommending to the board a code of business conduct and ethics and a set of corporate governance guidelines; and

 

   

overseeing the evaluation of the board, its committees and management.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or who will serve on our compensation committee. None of the members of our compensation committee has ever been one of our employees.

 

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COMPENSATION

Compensation Discussion and Analysis

Overview

We believe that the compensation of our named executive officers should focus executive behavior on the achievement of near-term corporate targets as well as long-term business objectives and strategies. We place significant emphasis on pay-for-performance compensation programs, which reward our executives when we achieve certain financial and business goals and create stockholder value. We use a combination of base salary, annual cash incentive compensation programs, a long-term equity incentive compensation program and a broad based benefits program to create a competitive compensation package for our executive management team. We describe below our compensation philosophy, policies and practices with respect to our president and chief executive officer, chief financial officer and our other named executive officers, who are collectively referred to as our named executive officers. We note that, prior to January 2007, we did not have a chief financial officer. In January 2007, we hired Gregory D. Perry to be our chief financial officer. Prior to Mr. Perry’s employment with us, our president and chief executive officer also acted as our principal financial officer.

Administration and objectives of our executive compensation program

Our compensation committee is responsible for establishing and administering our policies governing the compensation for our named executive officers, including salaries, cash incentives and equity incentive compensation. Until                      2007, our compensation committee consisted of three members from our Board of Directors, all with extensive experience in the industry. We restructured our compensation committee in                      2007 to be composed entirely of independent directors.

Our compensation committee has designed our overall executive compensation program to achieve the following objectives:

 

   

attract and retain talented and experienced executives;

 

   

motivate and reward executives whose knowledge, skills and performance are critical to our success;

 

   

provide a competitive compensation package that aligns the interests of our named executive officers and stockholders by including a significant variable component which is weighted heavily toward performance-based rewards;

 

   

ensure fairness among the executive management team by recognizing the contributions each executive makes to our success; and

 

   

foster a shared commitment among executives by aligning their individual goals with our corporate goals.

We use a mix of short-term compensation (base salaries and cash incentive bonuses) and long-term compensation (equity incentive compensation) to provide a total compensation structure that is designed to achieve these objectives. The compensation committee uses its judgment and experience and the recommendations of our chief executive officer (except for his own compensation) to determine the appropriate mix of compensation for each individual. In addition, beginning in 2007, our compensation committee retained an independent compensation consultant, to assist the committee in developing our overall executive compensation and director compensation program for our 2008 fiscal year. We have engaged this independent compensation consultant also to develop a competitive peer group analysis for benchmarking purposes for our 2008 fiscal year. For our fiscal year ended December 31, 2007 and prior periods, our compensation committee considered a leading life science compensation survey for benchmarking our executive compensation and determining annual increases. In determining whether to adjust the compensation of any one of our named executive officers, we annually take into account the following:

 

   

market compensation levels for each role;

 

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the contributions and performance of each named executive officer;

 

   

the increases or decreases in responsibilities and roles of each named executive officer;

 

   

the criticality of the role of each named executive officer; and

 

   

the readiness of each named executive officer to assume more responsibility within the organization.

In addition, with respect to new named executive officers, we take into account their prior base salary and annual incentive awards, their expected contribution and our business needs.

Executive compensation components

Our executive compensation program is composed of base salary, annual incentive cash compensation and equity compensation. Our compensation committee has not adopted a formal policy for allocating between various forms of compensation. However, we generally strive to provide our named executive officers with a balance of short-term and long-term incentives to encourage consistently strong performance. With respect to various equity-based awards, we grant stock options as a means of providing longer-term equity-based incentives to our executives. In addition, we provide our executives with benefits that are generally available to our salaried employees, including medical, dental, group life and accidental death and dismemberment insurance and our 401(k) plan. We have entered into employment letter agreements with Mr. Heiden, Mr. Perry, Dr. Watson and Dr. DiStefano which set forth their respective salaries, bonuses, severance and, in certain cases, stock option awards and change in control provisions. We anticipate entering into amended employment agreements with each of our named executive officers in advance of the consummation of this offering.

Within the context of the overall objectives of our compensation programs, we determined the specific amounts of compensation, including base salary, incentive cash compensation and equity compensation, to be paid to each of our executives for our fiscal year ended December 31, 2007 based on a number of factors, including:

 

   

our understanding of compensation generally paid by similarly situated companies to their executives with similar roles and responsibilities;

 

   

formal market data from a leading life science compensation survey;

 

   

the roles and responsibilities of our executives;

 

   

the individual experience and skills of, and expected contributions from, our executives; and

 

   

the provisions of applicable employment letter agreements.

In addition to the criteria above, the actual amount and allocation of total compensation (i.e., base salary, variable annual bonus compensation and equity awards) paid or issued to our named executive officers also reflects the timing and circumstances of when the executive joined us.

Although no formal policy for allocating between various forms of compensation had been adopted prior to this offering, our compensation committee has engaged an independent compensation consultant to assist us in developing a peer group of comparable companies for benchmarking purposes for each element of the compensation packages for our named executive officers for fiscal year 2008.

We discuss each of the primary elements of our executive compensation in detail below. While we have identified particular compensation objectives that each element of executive compensation serves, our compensation programs complement each other and collectively serve all of our executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe that, as a part of our overall executive compensation, each element to a greater or lesser extent serves each of our objectives.

 

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Base salary. Our compensation committee annually reviews salary ranges and individual salaries for our named executive officers. We have historically established base salaries for each of our executives based on the following three factors: competition in the marketplace to hire and retain executives, experiences of our directors and leadership team with respect to salaries and compensation of executives in similarly situated companies in the biopharmaceutical industry, and our desire to hire and retain our leadership team in an extremely competitive environment.

For our fiscal year ended December 31, 2006, the compensation committee established annual base salaries for our president and chief executive officer, our chief business officer and our chief scientific officer of $338,000, $278,500 and $270,400, respectively, based on the three factors listed above. In addition, with respect to our named executive officers, other than Mr. Heiden, our compensation committee considered the recommendations of Mr. Heiden in determining appropriate base salary levels. We believe that the base salaries paid to our named executive officers during our fiscal year ended December 31, 2006 achieve our executive compensation objectives and are competitive with those of similarly-situated companies. We also base this belief on our review of a leading life sciences compensation survey.

In April 2007, the compensation committee decided to increase the base salary of each of our president and chief executive officer, our chief business officer and our chief scientific officer for fiscal year 2007 by approximately 4.0% over their 2006 fiscal year base salaries effective January 1, 2007. The compensation committee decided that the increase was necessary in order to appropriately retain and motivate our leadership team in a highly competitive environment. Our compensation committee made this decision based on its understanding of what similar companies in our industry pay their executive officers, its review of a leading life sciences compensation survey and the recommendations of Mr. Heiden (other than with respect to Mr. Heiden’s base salary).

In January 2007, the compensation committee established an annual base salary for Gregory D. Perry of $300,000, in connection with his hiring into the newly created position of chief financial officer. We believe that this base salary fairly represents what is considered “market” for this position based on the compensation committee’s understanding of what similar companies in our industry pay their chief financial officers as well as its review of a leading life sciences compensation survey.

In September 2007, our compensation committee also engaged an independent compensation consultant to assist us in conducting formal peer review analysis and developing our overall executive compensation program and philosophy for fiscal year 2008. The compensation committee intends to use this analysis in determining base salaries, and other compensation program components, for our named executive officers after 2007.

Annual cash incentive program. We have designed our annual cash incentive program, to reward our named executive officers upon the achievement of certain annual corporate and personal goals, as approved in advance by our compensation committee and board of directors. Our cash incentive program emphasizes pay-for-performance and is intended to closely align executive compensation with achievement of certain operating results. The compensation committee communicates the bonus criteria to the named executive officers at the beginning of the fiscal year. The performance goals established by the compensation committee are based on the growth strategy of the company and the objective of building shareholder value. For our fiscal year ended December 31, 2006, our compensation committee (with board approval) set corporate and individual goals for our president and chief executive officer, our chief business officer and our chief scientific officer in the following areas: (a) business development; (b) financing; and (c) progress of our development programs. Our overall corporate goals accounts for 50% of each named executive officer’s bonus. Given the nature of these goals and the development stage of our company, our compensation committee makes a qualitative assessment as to the extent that corporate goals have been satisfied. The remaining 50% of each named executive officer’s bonus is based upon the extent to which he or she achieves their personal goals. Our president and chief executive officer makes recommendations to the compensation committee as to the degree to which the other

 

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named executive officers have satisfied their personal goals. The compensation committee makes this same determination with respect to our president and chief executive officer.

The compensation committee established targets under each of these goals for each of the named executive officers that it believed could be achieved only with significant effort and operational success on the part of such executives and the company. For our fiscal year ended December 31, 2006, the target cash incentives for each of our named executive officers, as a percentage of base salary, were 68.2%, 30.0%, and 25.0% for our president and chief executive officer, chief business officer and chief scientific officer, respectively. Our president and chief executive officer’s target bonus percentage was higher than normal for our company in the first three years of his employment because we were attempting to compensate him for opportunities that he relinquished in connection with joining us. We have reduced our president and chief executive officer’s target bonus percentage to lower levels for 2008 and anticipate that it will remain substantially below the 2006 level for the foreseeable future. These targets represents a significant percentage of our named executive officers’ base salaries and vary depending on position of the named executive officer, with our chief executive officer having the greatest percentage of his compensation tied to the company’s targets since he has the most influence over the success of the company. We believe that structuring our cash incentive program this way appropriately aligns our executives’ compensation to our performance and creation of stockholder value.

After the end of our 2006 fiscal year, the compensation committee evaluated the company’s performance and made determinations regarding whether each of the named executives had attained his respective performance targets under the goals specified above. Based on that evaluation and determination, the actual cash incentive payouts for our fiscal year ended December 31, 2006 represented 40.8%, 20.0% and 25.0% of the base salaries for our president and chief executive officer, chief business officer and chief scientific officer, respectively.

Our compensation committee and board of directors established the fiscal 2007 cash incentive program for each of our named executive officers upon the achievement of the following corporate goals: (a) business development; (b) financing; and (c) progress of our development programs. Each named executive’s individual targets under these goals are based on the historical targets for such executive, the ability of the executive to drive corporate performance, provisions of their respective employment agreements that were negotiated at the time of hire and the experiences of our compensation committee and board members as to what they believed was appropriate. The compensation committee established targets under each of these goals for each of the named executive officers that it believed could be achieved only with significant effort and operational success on the part of such executives and the company. For the fiscal year ended December 31, 2007, the target cash incentive payment for each of our named executive officers, as a percentage of base salary, is 67.2%, with a minimum payment of $15,000, 30.0%, 30.0% and 25.0% for our president and chief executive officer, chief financial officer, chief business officer and chief scientific officer, respectively. After the end of our 2007 fiscal year, the compensation committee will again evaluate our performance and make determinations regarding whether each of the named executives has attained his respective performance targets and will make payments in addition to the minimum amounts as appropriate.

Our compensation committee has engaged an independent compensation consultant to assist us in establishing the parameters of our annual cash incentive program for fiscal year 2008. Accordingly, target bonuses and bonus criteria for our fiscal years ended December 31, 2006 and 2007 may not be indicative of the targets established for future years as our mix of compensation elements may vary after we become a public company.

Equity compensation. We use stock options to attract, retain, motivate and reward our named executive officers. Through our equity-based grants, we seek to align the interests of our named executive officers with our stockholders, reward and motivate both near-term and long-term executive performance and provide an incentive for retention. Our decisions regarding the amount and type of equity incentive compensation, the allocation of equity and relative weighting of these awards within total executive compensation have been based on our understanding and individual experiences of market practices of similarly-situated companies and our negotiations with our executives in connection with their initial employment or promotion. Equity-based

 

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incentive awards are intended to be the longer-term components of our overall executive compensation program. While annual incentive cash compensation is designed to encourage shorter-term performance, generally performance over a one-year period, equity-based awards are designed to encourage our named executives’ performance over several years.

All of our employees, including our named executive officers, have received stock option grants under our 2001 Stock Incentive Plan, or 2001 Plan. We grant stock option awards to our employees generally upon the commencement of their employment, upon a promotion and from time to time based on level of equity ownership, performance and expected future contribution, as part of our overall compensation program. Stock option awards provide our named executive officers with the right to purchase shares of our common stock at a fixed exercise price typically for a period of up to 10 years, subject to continued employment with our company. Stock options are earned on the basis of continued service to us and generally vest over four years, beginning with 25% vesting one year after the date of grant, then pro-rata vesting monthly thereafter. In addition, certain of the stock options granted to our named executive officers vest upon the achievement of certain milestones. Our stock option awards also include an early exercise provision which allows for immediate exercise of the stock option. In the event of an early exercise, the underlying shares of common stock will be subject to repurchase by us at the exercise price paid by the executive upon any termination event, with respect to the exercised shares which have not yet vested. The vesting of the shares underlying these option grants to our named executive officers is the same as the vesting for stock option awards generally. Thus, while the executive is able to exercise the options immediately to take advantage of beneficial tax treatment in certain circumstances, the executive’s ability to retain the shares, and any appreciation of such shares are still dependent upon the executive’s continued service, the continued vesting of the shares so exercised. Thus, these grants continue to align the interests of the executive with those of the stockholders. Our compensation committee has authorized these equity awards to provide for an additional long-term incentive and to facilitate the long-term tax planning of the named executives.

To date, all grants of stock options to our named executive officers have been subject to approval first by the compensation committee and then by the board of directors at regularly scheduled meetings during the year. The date of grant and the fair market value of the award are based upon the date of the board meeting approving such grant. The following factors are considered in determining the amount of equity incentive awards, if any, to grant to our named executive officers:

 

   

the number of shares subject to, and exercise prices of, outstanding options, both vested and unvested, held by our executives;

 

   

the vesting schedule of the unvested stock options held by our executives; and

 

   

the amount and percentage of our total equity on a diluted basis held by our executives.

All historical stock option grants were made at what our board of directors determined to be the fair market value of our shares of common stock on the respective grant dates. In contemplation of this initial public offering, we have reexamined the valuations of our common stock during 2006. In connection with that reexamination, we prepared retrospective valuations of the fair value of our common stock for financial reporting purposes as of September 30, 2006, December 31, 2006 and April 30, 2007. We believe that the valuation methodologies used in the retrospective valuations are reasonable and that the preparation of the retrospective valuations was necessary due to the fact that the timeframe for a potential initial public offering had accelerated significantly since the contemporaneous valuations were prepared.

We recognize stock-based compensation expense under SFAS 123R using the fair-value based method for all awards granted on or after the date of our adoption and these values have since been reflected in our consolidated financial statements.

On November 9, 2006, our board of directors granted a stock option to each of Mr. Heiden, Dr. Watson and Dr. DiStefano for the purchase of 1,500,000, 425,000 and 500,000 shares of our common stock, respectively,

 

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based on the factors listed above. The board determined to base a portion of the vesting of such grants on the company’s achievement of certain performance goals. This decision was based on the board’s desire to provide an additional motivation to these named executive officers to achieve these milestones, thus further aligning the interest of such named executive officers with the interests of our stockholders. Of the stock options granted on November 9, 2006, 25% vest on completion of this initial public offering, 25% vest upon acceptance of our first NDA by the FDA and the remaining 50% vest over four years, with 25% vesting on October 4, 2007, then pro-rata vesting monthly thereafter.

On January 30, 2007 our board of directors granted Mr. Perry a stock option to purchase 1,000,000 shares of our common stock in connection with his hiring, with 50% vesting upon the completion of this initial public offering and 50% vesting over four years with 25% vesting one year from date of grant then pro-rata vesting monthly thereafter. Our board made this stock option grant to Mr. Perry for two reasons. First, it wanted to provide him with an appropriate long-term incentive by including both time-based vesting, to encourage retention, and milestone achievement based-vesting, to motivate him to achieve the company’s goals. Second, it made this grant as part of Mr. Perry’s initial compensation package in order to provide him with an equity award that is comparable to what he could receive from companies with which we compete for talent, based on the board’s understanding of the equity awards made to similar executives by such companies and its review of a leading life sciences compensation survey. We granted all of these stock options at an exercise price of $0.15 per share, the fair market value on the date of grant, as determined by our board of directors.

In September 2007, our compensation committee engaged an independent compensation consultant to assist us in developing an equity award grant policy that formalizes how we grant equity awards to our officers and employees in the future.

Other benefits

We believe that establishing competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. Named executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, group life and accidental death and dismemberment insurance and our 401(k) plan, in each case on the same basis as other employees. We do not currently provide a matching contribution under our 401(k) plan. Moreover, with the exception of our 401 (k) plan, we do not offer retirement benefits. Consistent with our compensation philosophy, we intend to continue to maintain our current benefits for our named executive officers. The compensation committee in its discretion may revise, amend or add to the officer’s executive benefits and perquisites if it deems it advisable. Historically, our company has made one loan to our president and chief executive officer in connection with his employment arrangements, although we no longer engage in such practice. In September 2004, pursuant to a promissory note, we loaned Mr. Heiden $400,000. The note was forgivable over a three year period with the final installment of principal and interest forgiven on September 17, 2007.

Section 162(m) of the Internal Revenue Code places a limit of $1 million on the amount of compensation that public companies may deduct in any one year with respect to certain of its named executive officers. Certain performance-based compensation approved by stockholders is not subject to this deduction limit. Our compensation committee’s strategy in this regard is to be cost and tax efficient. Therefore, the compensation committee intends to preserve corporate tax deductions, while maintaining the flexibility in the future to approve arrangements that it deems to be in our best interests and the best interests of our stockholders, even if such arrangements do not always qualify for full tax deductibility.

Severance and change in control benefits

In September 2007, our compensation committee engaged an independent compensation consultant to provide advice, as well as a peer group analysis, to assist our compensation committee in determining appropriate severance and change in control benefits for our named executive officers. Our compensation committee expects this peer group to include companies with whom we compete for executive talent and companies that face similar challenges as us. The compensation committee expects to review the terms of severance programs and

 

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arrangements maintained by our peer companies, such as coverage (who is covered), benefit triggers (i.e., terminating events, like termination without cause, or resignation for “good reason” both prior to and after a change in control), coverage period (how long after a change in control would the benefits trigger or severance benefits be applicable), cash severance and continuation of health care benefits post termination.

After completing this analysis, our compensation committee expects to enter into agreements with each of our named executive officers. See “—Potential Payments Upon Termination or Change-in-Control” for a discussion of the terms of the severance and change in control benefits currently in place. Our goal in adopting new severance and change in control benefits is to offer sufficient cash continuity protection such that an officer’s full time and attention will focus on the requirements of the business rather than the potential implications for his/her position. Our compensation committee also wants to negotiate the terms of any severance package with our named executive officers before becoming a public company as a planning mechanism. The compensation committee prefers to have certainty regarding the potential severance amounts payable to the named executive officers under certain circumstances, rather than negotiating severance at the time that a named executive officer’s employment terminates.

In addition, our stock option agreements provide that in the event of a change in control, all awards granted will fully vest and all outstanding options will be immediately exercisable unless the parties to the transaction, in their discretion, provide for appropriate substitutions or assumptions of outstanding awards. In the event that outstanding awards are substituted or assumed, then one-half of the substituted or assumed unvested shares shall immediately become exercisable. The remaining one-half of unvested shares shall continue to vest in accordance with the original vesting schedule set forth in the award agreement. If employment is terminated within twelve months following a change in control event, for any reason other than for cause or by the executive without good reason, the remaining substituted or assumed unvested shares will immediately vest. Our board of directors has determined that such accelerated vesting provisions are appropriate for two reasons. First, our board believes that guaranteeing a percentage of accelerated vesting in the event of a change in control transaction will encourage our option holders, including our named executive officers, to stay focused in such circumstances. Second, our board believes that having a portion of the option continue to vest after the transaction provides an incentive for our option holders, including our named executive officers, to provide continuity to a successor.

 

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Summary Compensation Table

The following summarizes the compensation earned during the fiscal year ended December 31, 2006, for our chief executive officer (who also served as our principal financial officer in 2006) and each of our other most highly compensated executive officers who were serving as executive officers on December 31, 2006 and whose compensation exceeded $100,000. We refer to these individuals as our “named executive officers.”

 

Name and Principal Position

   Year    Salary($)    Option
Awards($)(1)
    Non-Equity
Incentive Plan
Compensation($)(2)
   All Other
Compensation($)
    Total($)

William K. Heiden

   2006    337,750    12,893 (3)   138,138    144,198 (4)   632,979

President, Chief Executive Officer, Principal Financial Officer and Director

               

Peter S. DiStefano, Ph.D

   2006    270,200    4,298 (5)   67,600    —       342,098

Chief Scientific Officer and Vice President Research and Development

               

Alan D. Watson, Ph.D.  

   2006    278,306    3,653 (6)   55,702    —       337,661

Chief Business Officer and Executive Vice President

               

 

(1)

 

Stock-based compensation expense for these awards was calculated in accordance with SFAS 123(R) and is being amortized over the vesting period of the related award. The amounts reflected in this table exclude the estimate of forfeitures applied by us under SFAS 123(R) when recognizing stock-based compensation expense for financial statement reporting purposes for fiscal 2006. For a discussion of the valuation assumptions used in calculating this amount, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation.”

(2)

 

Represents amounts paid in 2007 for performance in 2006.

(3)

 

$8,883 of this amount is allocable to options subject to time-based vesting; $4,010 of this amount is allocable to options that will vest upon the filing of an NDA.

(4)

 

Promissory note receivable was issued on September 5, 2004 to Mr. Heiden in the amount of $400,000 and bears interest at 4%. The principal and interest are forgiven over a three year period as long as Mr. Heiden remains an employee with the company. A total of $144,198 was expensed in 2006 as recognition of the principal and interest charge.

(5)

 

$2,961of this amount is allocable to options subject to time-based vesting; $1,337 of this amount is allocable to options that will vest upon the filing of an NDA.

(6)

 

$2,517 of this amount is allocable to options subject to time-based vesting; $1,136 of this amount is allocable to options that will vest upon the filing of an NDA.

 

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Grants of Plan-Based Awards—2006

The following table sets forth certain information with respect to awards under our non-equity incentive plan and equity incentive plan made by us to our named executive officers during the fiscal year ended December 31, 2006.

 

Name

   Grant
Date
  

Estimated
Possible Payouts
Under
Non-Equity
Incentive Plan
Awards

Target($)

   Estimated
Future Payouts
Under Equity
Incentive Plan
Awards (#)(1)
    All Other Option
Awards: Number
of Securities
Underlying Options
(#)(1)
    Exercise or
Base Price
of Option
Awards
($/Sh)
   Grant Date Fair
Value of Stock
and Option
Awards($)

William K. Heiden

   11/9/2006    230,230    750,000 (2)   750,000 (3)   0.15    221,250

Peter S. DiStefano

   11/9/2006    67,600    250,000 (2)   250,000 (3)   0.15    73,750

Alan D. Watson

   11/9/2006    83,554    212,500 (2)   212,500 (3)   0.15    62,688

 

(1)

 

All option awards were granted under the 2001 Plan as amended and are subject to the related award agreements.

(2)

 

Option shares subject to performance based-vesting criteria. Fifty percent of these options will vest immediately at the consummation of this offering and fifty percent of the option shares vest immediately upon the acceptance of a filed NDA by the FDA.

(3)

 

Option shares subject to time based-vesting criteria. Twenty-five percent of the option shares vest on the first anniversary of the vesting commencement date of October 4, 2006, and one forty-eighth (1/48) of the original number of shares vest at the end of each successive month following the first anniversary until the fourth anniversary date of the vesting commencement date.

 

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Outstanding Equity Awards at Fiscal Year-End—2006

 

     Option Awards

Name

   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
     Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options #
   

Option
Exercise
Price

($)

    Option
Expiration
Date

William K. Heiden

   2,086,155     1,561,600 (1)      0.1000     9/7/2014
        1,449,102
(2)
  0.1000     9/7/2014
        750,000 (3)   0.1500     11/8/2016
     750,000 (4)      0.1500     11/8/2016

Peter S. DiStefano, Ph.D

   122,009 (5)        0.1311 (6)   12/13/11
   182,289     67,711 (7)      0.1000     1/29/2014
   701,810     30,523 (8)      0.1000     1/29/2014
   151,085 (9)        0.1000     1/29/2014
        151,086 (10)   0.1000     1/29/2014
   31,145 (7)   33,855 (7)      0.1000     1/19/2015
        250,000 (3)   0.1500     11/8/2016
     250,000 (4)      0.1500     11/8/2016

Alan D. Watson, Ph.D.  

   244,019 (11)        0.1311 (6)   6/30/2012
   45,753 (12)        0.1311 (6)   6/30/2012
   76,256 (9)        0.1311 (6)   6/30/2012
   90,080 (9)        0.1000     1/29/2014
        90,080 (10)   0.1000     1/29/2014
   441,137     19,186 (8)      0.1000     1/29/2014
   72,915     27,085 (7)      0.1000     1/29/2014
        50,000
(13)
  0.1000     1/19/2015
        212,500 (3)   0.1500     11/8/2016
     212,500 (4)      0.1500     11/8/2016

 

(1)

 

One forty-eighth (1/48) of the option shares vest at the end of each month after September 8, 2004, the vesting grant date. Mr. Heiden exercised options to purchase 100,000 shares of common stock on November 30, 2006 from this grant.

(2)

 

Fifty percent of the option shares vest upon consummation of a significant corporate partnering transaction and fifty percent vest on the effective date of this offering.

(3)

 

Fifty percent of these options will vest immediately at the closing of an this offering and fifty percent of the option shares vest immediately upon the acceptance of a filed NDA by the FDA.

(4)

 

Twenty-five percent of the option shares vest on the first anniversary of the vesting commencement date of October 4, 2006, and one forty-eighth (1/48) of the original number of shares vest at the end of each successive month following the first anniversary until the fourth anniversary date of the vesting commencement date.

(5)

 

Twenty-five percent of the option shares vested on the first anniversary of the vesting commencement date of October 29, 2001 and one forty-eighth (1/48) of the original number of shares vested at the end of each successive month following the first anniversary until the fourth anniversary date of the vesting commencement date.

(6)

 

These option grants were originally granted at an exercise price of $0.10 per share and were subject to a reverse split (0.76256 to 1) on February 4, 2003.

(7)

 

Twenty-five percent of the option shares vested on the first anniversary of grant date and one forty-eighth (1/48) of the original number of shares vest at the end of each successive month following the first anniversary until the fourth anniversary of the grant date.

 

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(8)

 

Twenty-five percent of the option shares vest on the first anniversary of the vesting commencement date of February 4, 2003 and one forty-eighth (1/48) of the original number of shares vested at the end of each successive month following the first anniversary until the fourth anniversary date of the vesting commencement date.

(9)

 

The original milestone vesting terms of this grant were modified on January 20, 2005 to include the successful negotiation of terms of a corporate collaboration agreement.

(10)

 

One hundred percent of the option shares vested upon the first human testing of a compound by Elixir.

(11)

 

Twenty-five percent of the option shares vested on the first anniversary of the grant date of July 1, 2002 and one forty-eighth (1/48) of the original number of shares vest at the end of each successive month following the first anniversary until the fourth anniversary of the grant date.

(12)

 

These option shares vested upon completion of agreement with third-party service providers.

(13)

 

One hundred percent of the option shares vest upon the successful completion of a collaboration agreement.

Option Exercises and Stock Vested—2006

The following table provides certain information regarding the number of stock options exercised under the 2001 Plan as amended and the corresponding amounts realized by the named executive officers.

 

     Option Awards

Name

   Number of Shares
Acquired on
Exercise (#)(1)
   Value Realized on
Exercise ($)(2)

William K. Heiden

   100,000   

 

(1)

 

All option awards were granted under the 2001 Plan as amended and are subject to the related Stock Option Agreements.

(2)

 

There was no public market for our common stock in 2006. We have estimated the market value of the unvested option shares based on an assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover of this prospectus.

Stock and Benefit Plans

2001 Stock Incentive Plan

Our 2001 Plan was adopted by our board of directors and approved by our stockholders on December 13, 2001. We initially reserved 3,180,000 shares of our common stock for issuance as restricted stock and upon the exercise of incentive and non-qualified options granted under the 2001 Plan. We subsequently amended the 2001 Plan on multiple occasions, the last of which was March 1, 2007. We have reserved a total of 24,558,695 shares of our common stock for issuance under our 2001 Plan. As of September 15, 2007, 16,046,809 of these shares were subject to outstanding awards and 7,142,252 of these shares were available for issuance.

The 2001 Plan is administered by our board of directors. The administrator of the 2001 Plan has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to

 

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participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2001 Plan.

The 2001 Plan permits us to make grants of restricted stock and incentive and non-qualified stock options to employees, directors and consultants who perform services for us. Stock options granted under the 2001 Plan have a maximum term of ten years from the date of grant and stock options have an exercise price of no less than the fair market value of the common stock on the date of grant.

In the event of a merger, sale or dissolution of the Company, or a similar “sale event,” all awards granted under the 2001 Plan will fully vest and all outstanding options will be immediately exercisable prior to and subject to the closing of the “sale event,” unless the parties to the transaction, in their discretion, provide for appropriate substitutions or assumptions of outstanding awards. Fifty percent of any assumed awards will vest and fifty percent of assumed options will become immediately exercisable upon the closing of the “sale event.” The remaining assumed and unvested awards will vest over the period specified in the original award agreement, unless the grantee is terminated without “cause” or resigns for “good reason,” in which case all remaining unvested awards will fully vest and all outstanding options will be immediately exercisable.

In connection with the adoption of our 2007 Stock Option and Incentive Plan, or 2007 Option Plan, which is discussed below, our board of directors determined not to grant any further awards under the 2001 Plan after this offering.

Centagenetix Plan

In connection with our 2003 merger with Centagenetix, Inc., we assumed the Centagenetix, Inc. 2001 Employee, Director and Consultant Stock Plan, or Centagenetix Plan. We assumed options under the Centagenetix Plan on substantially the same terms and conditions under which they were issued originally. We have not granted any new options under the Centagenetix Plan since the merger. A total of 258,659 shares of our common stock are reserved for issuance under the Centagenetix Plan. As of September 15, 2007, all of these shares were subject to outstanding awards and none were available for issuance.

In the event of a merger, sale or dissolution of the Company, or a similar “sale event,” all awards granted under the Centagenetix Plan will fully vest and all outstanding options will be immediately exercisable prior to and subject to the closing of the “sale event,” unless the parties to the transaction, in their discretion, provide for appropriate substitutions or assumptions of outstanding awards. We will not grant any further awards under the Centagenetix Plan after this offering.

2007 Stock Option and Incentive Plan

Our 2007 Option Plan was adopted by our board of directors and approved by our stockholders in                      2007. The 2007 Option Plan permits us to make grants of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, performance shares, cash-based awards, unrestricted stock awards and dividend equivalent rights. We have initially reserved                      shares of our common stock for the issuance of awards under the 2007 Option Plan. The 2007 Option Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning in 2009, by             % of the outstanding number of shares of common stock on the immediately preceding December 31; provided that the maximum aggregate number of shares reserved after any annual increase may not exceed             % of the total number of outstanding shares of stock. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Generally, shares that are forfeited or canceled from awards under the 2007 Option Plan also will be available for future awards. Awards will not be granted under the 2007 Option Plan prior to the effectiveness of the registration statement of which this prospectus is a part.

The 2007 Option Plan may be administered by either a committee of at least two non-employee directors or by our full board of directors, or the administrator. The administrator has full power and authority to select the

 

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participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2007 Option Plan.

All full-time and part-time officers, employees, non-employee directors and other key persons (including consultants and prospective employees) are eligible to participate in the 2007 Option Plan, subject to the discretion of the administrator. There are certain limits on the number of awards that may be granted under the 2007 Option Plan. For example, no more than              shares of common stock may be granted in the form of stock options or stock appreciation rights to any one individual during any one-calendar-year period and no more than              shares may be granted in the form of incentive stock options.

The exercise price of stock options awarded under the 2007 Option Plan may not be less than the fair market value of our common stock on the date of the option grant and the term of each option may not exceed ten years from the date of grant. The administrator will determine at what time or times each option may be exercised and, subject to the provisions of the 2007 Option Plan, the period of time, if any, after retirement, death, disability or other termination of employment during which options may be exercised.

To qualify as incentive options, stock options must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options which first become exercisable in any one calendar year, and a shorter term and higher minimum exercise price in the case of certain large stockholders.

Stock appreciation rights may be granted under our 2007 Option Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. The administrator determines the terms of stock appreciation rights, including when such rights become exercisable and whether to pay the increased appreciation in cash or with shares of our common stock, or a combination thereof.

Restricted stock may be granted under our 2007 Option Plan. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted to any employee. The administrator may impose whatever conditions to vesting it determines to be appropriate. For example, the administrator may set restrictions based on the achievement of specific performance goals. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.

Deferred and unrestricted stock awards may be granted under our 2007 Option Plan. Deferred stock awards are units entitling the recipient to receive shares of stock paid out on a deferred basis, and are subject to such restrictions and conditions as the administrator shall determine. Our 2007 Option Plan also gives the administrator discretion to grant stock awards free of any restrictions.

Performance shares may be granted under our 2007 Option Plan. Performance shares are awards entitling the grantee to receive shares of our common stock upon the attainment of pre-established performance goals. The administrator determines the performance goals with respect to awards of performance shares. If the performance goals are not attained, no shares will be granted to the recipient.

Dividend equivalent rights may be granted under our 2007 Option Plan. Dividend equivalent rights are awards entitling the grantee to current or deferred payments equal to dividends on a specified number of shares of stock. Dividend equivalent rights may be settled in cash or shares and are subject to other conditions as the administrator shall determine.

Cash-based awards may be granted under our 2007 Option Plan. Each cash-based award shall specify a cash-denominated payment amount, formula or payment ranges as determined by the administrator. Payment, if any, with respect to a cash-based award may be made in cash or in shares of stock, as the administrator determines.

 

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Unless the administrator provides otherwise, our 2007 Option Plan does not allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime.

In the event of a merger, sale or dissolution, or a similar “sale event,” unless assumed or substituted, all stock options and stock appreciation rights granted under the 2007 Option Plan will automatically become fully exercisable, all other awards granted under the 2007 Option Plan will become fully vested and non-forfeitable and awards with conditions and restrictions relating to the attainment of performance goals may become vested and non-forfeitable in connection with a sale event in the administrator’s discretion. Upon the effective time of any such sale event, the 2007 Option Plan and all awards will terminate unless the parties to the transaction, in their discretion, provide for appropriate substitutions or assumptions of outstanding awards. Fifty percent of any award so assumed or continued or substituted shall be deemed vested and exercisable in full upon the closing of the sale event. The remaining unvested portion of any award so assumed or continued or substituted shall be deemed vested and exercisable in full upon the date on which the grantee’s employment or service relationship with us terminates if such termination occurs (i) within twelve months after such sale event and (ii) such termination is by us or a successor entity without cause or by the grantee for good reason.

No awards may be granted under the 2007 Option Plan after                      2017. In addition, our board of directors may amend or discontinue the 2007 Option Plan at any time and the administrator may amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose. No such amendment may adversely affect the rights under any outstanding award without the holder’s consent. Other than in the event of a necessary adjustment in connection with a change in our stock or a merger or similar transaction, the administrator may not “reprice” or otherwise reduce the exercise price of outstanding stock options or stock appreciation rights. Further, amendments to the 2007 Option Plan will be subject to approval by our stockholders if the amendment (i) increases the number of shares available for issuance under the 2007 Option Plan, (ii) expands the types of awards available under, the eligibility to participate in, or the duration of, the plan, (iii) materially changes the method of determining fair market value for purposes of the 2007 Option Plan, (iv) is required by the Nasdaq Global Market rules, or (v) is required by the Internal Revenue Code of 1986, as amended, or the Code, to ensure that incentive options are tax-qualified.

401(k) Savings Plan

Our employee savings plan is intended to qualify under Section 401 of the Internal Revenue Code. Our 401(k) plan permits employees to make contributions up to the statutory limit. We may make annual discretionary contributions to our 401(k) plan in amounts determined annually. We did not make discretionary contributions in 2006 or in previous years.

Pension Benefits

None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us.

Non-Qualified Deferred Compensation

None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us.

Employment Agreements and Severance Agreements

William K. Heiden. Under the terms of the offer letter to our President and Chief Executive Officer, William K. Heiden, dated September 2, 2004, the term of his employment is indefinite until terminated by either party. Mr. Heiden is entitled to an annual base salary of not less than $325,000 and an annual bonus as determined by our board of directors. In connection with his employment, we granted Mr. Heiden an incentive

 

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stock option, subject to time based vesting, to purchase 3,747,755 shares of our common stock, and two non-qualified stock options, subject to time based vesting, to purchase an aggregate of 1,499,102 shares of our common stock. Mr. Heiden’s offer letter provides for customary health benefits.

Gregory D. Perry. Under the terms of the offer letter to our Executive Vice President and Chief Financial Officer, Gregory D. Perry, dated January 22, 2007, the term of his employment is indefinite until terminated by either party. Mr. Perry is entitled to an annual base salary of not less than $300,000 and an annual bonus as determined by us. In connection with his employment, we granted Mr. Perry an incentive stock option, subject to time based vesting, to purchase 500,000 shares of our common stock, and an incentive stock option, subject to vesting upon the closing of a qualified public offering or upon a change in control, to purchase 500,000 shares of our common stock. Mr. Perry’s offer letter provides for customary health benefits.

Peter S. DiStefano, Ph.D. Under the terms of the offer letter to our Vice President Research and Development and Chief Scientific Officer, Peter S. DiStefano, Ph.D., dated October 1, 2001, the term of his employment is indefinite until terminated by either party. Dr. DiStefano is entitled to an annual base salary of not less than $205,000 and an annual bonus as determined by us. In connection with his employment, we granted Dr. DiStefano an incentive stock option, subject to time based vesting, to purchase 160,000 shares of our common stock. Dr. DiStefano’s offer letter provides for customary health benefits.

Alan D. Watson, Ph.D. Under the terms of the offer letter to our Executive Vice President and Chief Business Officer, Alan D. Watson, Ph.D., dated June 17, 2002, the term of his employment is indefinite until terminated by either party. Dr. Watson is entitled to an annual base salary of not less than $250,000 and an annual bonus as determined by us. In connection with his employment, we granted Dr. Watson an incentive option, subject to time based vesting, to purchase 320,000 shares of our common stock, and two incentive options, subject to performance based vesting, to purchase an aggregate of 160,000 shares of our common stock. Dr. Watson’s offer letter provides for customary health benefits.

Potential Payments Upon Termination or Change-in-Control

We have entered into certain agreements and maintain certain plans that may require us to make certain payments an/or provide certain benefits to the named executive officers in the event of a termination of employment or a chance of control. The following tables and narrative disclosure summarize the potential payments to each named executive officer assuming that one of the events listed in the tables below occurs. The tables assume that the event occurred on December 31, 2006, the last day of our fiscal year. For purposes of estimating the value of amounts of equity compensation to be received in the event of a termination of employment or change of control, we have assumed a price per share of our common stock of $            , which represents the mid-point of the range set forth on the cover of this prospectus.

As discussed above under the heading “Stock and Benefit Plans,” the stock options held by our named executive officers are subject to accelerated vesting under certain circumstances in connection with a change in control of our company. For purposes of the disclosure below, we have assumed that a change in control transaction occurred in which the successor entity did not assume any of our outstanding equity awards. Accordingly, we have assumed that 100% of the unvested stock options held by our named executive officers would become fully exercisable in connection with a change in control.

William K. Heiden. In the event that his employment is terminated by us without cause or he resigns for good reason, Mr. Heiden will receive a lump-sum severance payment totaling his base salary for one year plus his continued medical and dental benefits for one year, and acceleration of a portion of his unvested stock options. In the event Mr. Heiden’s employment terminates for any other reason, he will not be entitled to any benefits after the date of termination. Mr. Heiden is subject to customary confidentiality restrictions and post-termination non-compete and non-solicit provisions, whereby he agrees not to provide services to any company in the industry in which we compete for 12 months and not to solicit or interfere with our relationships with any

 

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of our clients, consultants, suppliers or employees for 12 months after terminating his employment. Our obligation to make the termination payments described above is conditioned upon Mr. Heiden’s continued compliance with the confidentiality, non-compete and non-solicit provisions. The following table quantifies certain payments which may become due to Mr. Heiden:

 

Payments and Benefits

  

Involuntary Termination
Without Cause or
Resignation for
Good Reason

($)

  

Change of
Control

($)

Cash Severance

   337,750    —  

Stock Option Acceleration

   —     

Health and Dental Benefits

   10,307            —  
         

Total

   348,057   
       

Gregory D. Perry. In the event that his employment is terminated by us without cause or he resigns for good reason, Mr. Perry will receive monthly severance payments totaling his base salary for one year and continued medical and dental benefits for one year. In the event Mr. Perry’s employment terminates for any other reason, he will not be entitled to any benefits after the date of termination. Mr. Perry is subject to customary confidentiality restrictions and post-termination non-compete and non-solicit provisions, whereby he agrees not to provide services to any company in the industry in which we compete for 18 months and not to solicit or interfere with our relationships with any of our clients, consultants, suppliers or employees for 18 months after terminating his employment. Our obligation to make the termination payments described above is conditioned upon Mr. Perry’s continued compliance with the confidentiality, non-compete and non-solicit provisions. The following table quantifies certain payments which may become due to Mr. Perry:

 

Payments and Benefits

  

Involuntary Termination
Without Cause or
Resignation for
Good Reason

($)

  

Change of
Control

($)

Cash Severance

   300,000    —  

Stock Option Acceleration

   —     

Health and Dental Benefits

   15,949            —  
         

Total

   315,949   
       

Peter S. DiStefano, Ph.D. In the event that his employment is terminated by us without cause, Dr. DiStefano will receive monthly severance payments totaling his base salary for six months. In the event Dr. DiStefano’s employment terminates for any other reason, he will not be entitled to any benefits after the date of termination. Dr. DiStefano is subject to customary confidentiality restrictions and post-termination non-compete and non-solicit provisions, whereby he agrees not to provide services to any company in the industry in which we compete for 18 months and not to solicit or interfere with our relationships with any of our clients, consultants, suppliers or employees for 18 months after terminating his employment. Our obligation to make the termination payments described above is conditioned upon Dr. DiStefano’s continued compliance with the confidentiality, non-compete and non-solicit provisions. The following table quantifies certain payments which may become due to Dr. DiStefano:

 

Payments and Benefits

  

Involuntary Termination
Without Cause

($)

  

Change of
Control

($)

Cash Severance

   135,100    —  

Stock Option Acceleration

   —     
         

Total

   135,100   
       

 

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Alan D. Watson, Ph.D. In the event that his employment is terminated by us without cause, Dr. Watson will receive monthly severance payments totaling his base salary for one year and continued medical and dental benefits for one year. In the event Dr. Watson’s employment terminates for any other reason, he will not be entitled to any benefits after the date of termination. Dr. Watson is subject to customary confidentiality restrictions and post-termination non-compete and non-solicit provisions, whereby he agrees not to provide services to any company in the industry in which we compete for 18 months and not to solicit or interfere with our relationships with any of our clients, consultants, suppliers or employees for 18 months after terminating his employment. Our obligation to make the termination payments described above is conditioned upon Dr. Watson’s continued compliance with the confidentiality, non-compete and non-solicit provisions. The following table quantifies certain payments which may become due to Dr. Watson:

 

Payments and Benefits

  

Involuntary Termination
Without Cause

($)

  

Change of
Control

($)

Cash Severance

   278,306    —  

Stock Option Acceleration

   —     

Health and Dental Benefits

   10,307            —  
         

Total

   289,613   
       

Proprietary Information and Inventions Agreements

Each of our named executive officers has also entered into a standard form agreement with respect to proprietary information and inventions. Among other things, this agreement obligates each named executive officer to refrain from disclosing any of our proprietary information received during the course of employment and, with some exceptions, to assign to us any inventions conceived or developed during the course of employment.

Director Compensation

Non-employee Director Compensation Policy

We reimburse each member of our board of directors who is not an employee for reasonable travel and other expenses in connection with attending meetings of the board of directors or committees thereof. The total amounts reimbursed to each director during 2006 is set forth in the table below. We intend to adopt a new compensation policy for non-employee directors to be effective upon consummation of this offering.

Director Compensation—2006

 

Name

  

Fee Earned or
Paid

in Cash

($)

   

Option
Awards(1)

($)

   

All Other
Compensation

($)

   

Total

($)

Vaughn M. Kailian

   100,002 (2)   50,016 (3)   —       158,018

Vernon Cassin

   —       —       33,399 (4)   33,999

Jonathan J. Fleming

   —       —       —       —  

Ansbert K. Gadicke, M.D.  

   —       —       —       —  

Cynthia J. Kenyon, Ph.D.  

   70,000 (5)   —       —       70,000

Edward Mascioli, M.D.(6)

   —       —       —       —  

Robert Nelson(7)

   —       —       —       —  

Bennett M. Shapiro, M.D.  

   23,000 (8)   5,359 (9)   —       28,359

 

(1)

 

Stock-based compensation expense for these awards was calculated in accordance with SFAS 123(R) and is being amortized over the vesting period of the related award. The amounts reflected in this table exclude the estimate of forfeitures applied by us under SFAS 123(R) when recognizing stock-based compensation expense for financial statement reporting purposes for fiscal 2006.

 

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(2)

 

Represents payments made to Vaughn M. Kailian pursuant to a consulting agreement for services rendered to us by Mr. Kailian in his capacity as chairman of the board of directors. This agreement will terminate upon the consummation of this offering.

(3)

 

During 2006, we granted Mr. Kailian a stock option to purchase 180,000 shares of our common stock for services rendered in his capacity as chairman of our board of directors, which had an aggregate grant date fair value computed in accordance with SFAS 123(R) of $59,400. As of December 31, 2006, Mr. Kailian held options to purchase a total of 500,000 shares of our common stock.

(4)

 

Represents common stock and warrants to purchase common stock issued to Compton Overseas Investments Ltd., of which Vernon Cassin is the sole director, in connection with our series C financing. See “Certain Relationships and Related Person Transactions—Agency Agreements.” During 2006, we issued Compton Oversees Investments Ltd. a warrant to purchase 69,083 shares of our common stock, which had an aggregate fair value at the time of issuance of $30,638. As of December 31, 2006, Compton Oversees Investments Ltd. held warrants to purchase a total of 188,083 shares of our common stock

(5)

 

Represents payments made to Cynthia J. Kenyon pursuant to a consulting agreement for scientific and other research related consulting services rendered to us by Dr. Kenyon. This agreement will terminate upon the consummation of this offering.

(6)

 

Edward Mascioli resigned from our board of directors in September 2007 and was replaced by David Stack.

(7)

 

Robert Nelson resigned from our board of directors in September 2007.

(8)

 

Represents payments made to Bennett M. Shapiro pursuant to a consulting agreement and a consulting and clinical advisory board agreement for scientific and other technical consulting services rendered to us by Dr. Shapiro. These agreements will terminate upon the consummation of this offering.

(9)

 

During 2006, we granted Dr. Shapiro a stock option to purchase 110,000 shares of our common stock, which had an aggregate grant date fair value computed in accordance with SFAS 123(R) of $34,300. As of December 31, 2006, Dr. Shapiro held options to purchase a total of 180,000 shares of our common stock.

Limitation of Liability and Indemnification Agreements

As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and by-laws to be in effect at the closing of this offering that limit or eliminate the personal liability of our directors. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:

 

   

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

 

   

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;