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TABLE OF CONTENTS
Tranzyme, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONTENTS

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As filed with the Securities and Exchange Commission on November 19, 2010.

Registration No. 333-              

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



FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



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

Delaware
(State or other jurisdiction of
incorporation or organization)
  2834
(Primary Standard Industrial
Classification Code Number)
  63-1192270
(I.R.S. Employer
Identification Number)

4819 Emperor Boulevard, Suite 400
Durham, NC 27703
(919) 313-4760
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)

Vipin K. Garg, Ph.D.
President and Chief Executive Officer
Tranzyme, Inc.
4819 Emperor Boulevard, Suite 400
Durham, NC 27703
Telephone: (919) 313-4760
Facsimile: (919) 313-4700



Copies to:

Mitchell S. Bloom
Joseph C. Theis
Goodwin Procter LLP
Exchange Place
Boston, MA 02109
Telephone: (617) 570-1000
Facsimile: (617) 523-1231

 

Richard I. Eisenstadt
VP, Finance and Chief Financial Officer
Tranzyme, Inc.
4819 Emperor Boulevard, Suite 400
Durham, NC 27703
Telephone: (919) 313-4760
Facsimile: (919) 313-4700

 

Paul M. Kinsella
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199
Telephone: (617) 951-7000
Facsimile: (617) 951-7050

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

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

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of Securities
to Be Registered

  Proposed Maximum
Aggregate Offering
Price(1)

  Amount of
Registration Fee

 

Common Stock, par value $0.00001 per share

  $75,000,000   $5,347.50

 

(1)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.



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


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The information in this preliminary 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 preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED NOVEMBER 19, 2010

PRELIMINARY PROSPECTUS

GRAPHIC

            Shares

Tranzyme, Inc.

Common Stock
$      per share



        This is the initial public offering of our common stock. We are selling                  shares of our common stock. We currently expect the initial public offering price to be between $        and $        per share of common stock.

        We have granted the underwriters an option to purchase up to                  additional shares of common stock to cover over-allotments.

        We have applied to have the common stock listed on the Nasdaq Global Market under the symbol "TZYM."



        Investing in our common stock involves risks. See "Risk Factors" on page 8.

        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.



 
  Per Share   Total
Public Offering Price   $   $
Underwriting Discount   $   $
Proceeds to Tranzyme (before expenses)   $   $

        The underwriters expect to deliver the shares to purchasers on or about                        , 2011 through the book-entry facilities of The Depository Trust Company.



Citi



BMO Capital Markets   Canaccord Genuity   Stifel Nicolaus Weisel



                        , 2011.


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        You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.


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SUMMARY

        This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."


Tranzyme, Inc.

        We are a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing novel, first-in-class small molecule therapeutics for the treatment of acute (hospital-based) and chronic gastrointestinal, or GI, motility disorders. It is estimated that GI motility disorders, which disrupt the normal movement of food throughout the GI tract, affect two out of five people in the United States alone. Our two most advanced product candidates, ulimorelin, which is entering Phase 3, and TZP-102, which is entering Phase 2b, are being evaluated for the treatment of predominately upper GI motility disorders. While upper GI motility disorders are a highly prevalent group of persistent and recurring conditions, there is currently a void of treatment options for patients suffering from these conditions.

        Ulimorelin and TZP-102 target the ghrelin receptor, a novel mechanism of action, with a highly potent and direct role in the stimulation of GI motility. Prior drugs targeted GI function primarily through either the serotonin or dopamine receptors and had significant safety issues, resulting in product recalls. We believe our product candidates have the potential to offer a safe and effective treatment for GI motility disorders, an area of significant unmet medical need.

Ulimorelin (Intravenous Ghrelin Agonist)

        Ulimorelin is an intravenous ghrelin agonist entering Phase 3 clinical development for the management of postoperative ileus, or POI. POI refers to lack of GI motility after surgery before normal bowel function resumes, and is associated most commonly with major abdominal surgery, such as bowel resection. There are an estimated 360,000 bowel resection surgeries performed annually in the United States. Ulimorelin is designed to accelerate the return of normal GI function in patients suffering from acute GI motility disorders, such as POI and gastric stasis. Ulimorelin is administered intravenously, the ideal method of delivery in patients hospitalized with these conditions.

        To date, we have conducted six clinical trials of ulimorelin involving 577 subjects, 365 of whom received ulimorelin. The results of these trials support our belief that ulimorelin will be a safe and effective treatment for improving multiple symptoms associated with acute GI motility disorders. In our Phase 2 POI trial, GI recovery following partial bowel resection surgery was accelerated by approximately 24 hours in patients receiving ulimorelin, as compared to those receiving placebo. In addition, we observed a favorable safety profile for ulimorelin. We expect to commence two multinational Phase 3 trials for the management of POI in the first half of 2011. Each trial will enroll 300 patients and will be conducted at approximately 50 sites in North America and Europe. Based on discussions with the U.S. Food and Drug Administration, or FDA, at our End of Phase 2 meeting, and the advice we received from the European Medicines Agency, or EMA, the primary endpoint for our Phase 3 program will be acceleration of GI recovery in patients undergoing partial bowel resection. In addition, we plan to expand our ulimorelin development program to the treatment of gastric stasis in critical care patients.

TZP-102 (Oral Ghrelin Agonist)

        TZP-102 is an orally-administered ghrelin agonist that we are developing for diabetic gastroparesis, an upper GI motility disorder. Gastroparesis is a debilitating, chronic condition characterized by slow

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or delayed gastric emptying and gastric retention that can be caused by any disease that induces neuromuscular dysfunction of the GI tract, notably diabetes. Up to 4% of the population in the United States experiences symptomatic manifestations of gastroparesis. There are currently no safe and effective therapies on the market for treating this disorder. As a result, the FDA granted TZP-102 fast track status for the treatment of gastroparesis in diabetic patients.

        We evaluated the efficacy and safety of TZP-102 in a 28-day, proof of concept Phase 2 trial of 92 patients with diabetic gastroparesis. TZP-102 was observed to be effective in improving the most prevalent and clinically relevant symptoms associated with gastroparesis in this patient population, including reduction in nausea, early satiety, bloating and upper abdominal pain. In addition we observed a favorable safety profile for TZP-102. We expect to commence a 12-week, Phase 2b trial for the treatment of diabetic gastroparesis in the third quarter of 2011 and to evaluate TZP-102 for the treatment of other upper GI disorders such as functional dyspepsia and refractory gastroesophageal reflux disease, or refractory GERD.

Our Technology and Other Product Candidates

        All of our product candidates have been discovered by our scientists using our proprietary chemistry technology platform, which enables us to construct synthetic libraries of drug-like, macrocyclic compounds in a predictable and efficient manner. In addition to our two clinical stage candidates, we are also developing a motilin antagonist, TZP-201, for the treatment of various forms of moderate-to-severe diarrhea, and a ghrelin antagonist, TZP-301, for the treatment of obesity and other metabolic diseases. We are planning to ultimately move both compounds into clinical development.

Our Strategic Partnerships

        In June 2010, we entered into a license agreement with Norgine B.V., or Norgine, a leading, GI-focused European specialty pharmaceutical company, that provides Norgine with exclusive rights to develop and commercialize ulimorelin in Europe, Australia, New Zealand, Middle East, North Africa and South Africa. We retain rights to ulimorelin in all other territories, including North America, South America and all of Asia. The license permits Norgine to develop and commercialize ulimorelin only in injectable formulations. Norgine will share the cost of our planned Phase 3 clinical trials and the cost of procuring clinical manufacturing supply for the trials. In addition, we will receive milestone payments and royalties from the sale of ulimorelin in Norgine's territories.

        In December 2009, we entered into a strategic collaboration with Bristol-Myers Squibb Company, or BMS, to discover, develop and commercialize additional novel compounds discovered using our proprietary chemistry technology platform, other than our product candidates and internal programs, against a limited number of targets of interest to BMS. Under the terms of the agreement, BMS is funding our early lead discovery efforts on these targets and is also primarily responsible for optimizing the identified lead compounds. BMS will be solely responsible for preclinical and clinical development of all the products arising from this collaboration and for their commercialization globally. We will be entitled to development and regulatory milestone and royalty payments.

Business Strategy

        Our objective is to develop and bring to market products to treat acute and chronic GI motility disorders that are not satisfactorily or safely treated with current therapies and that represent significant market opportunities. Our business strategy is to:

    continue development and pursue regulatory approval for our product candidates;

    pursue additional indications for ulimorelin and TZP-102;

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    explore partnerships to accelerate and maximize the potential of our product candidates while preserving significant commercialization rights;

    explore building in-house capabilities that will allow us to effectively commercialize ulimorelin in the United States; and

    leverage our proprietary chemistry technology platform to discover, develop and commercialize a pipeline of first-in-class products in collaboration with discovery partners.

        We believe the quality as well as the breadth of our product candidate pipeline, technology platform, strategic collaborations and scientific team will enable us to become one of the leading companies focused on treating GI motility disorders.

Risk Associated with our Business

        Our ability to implement our business strategy is subject to numerous risks and uncertainties. As an early stage pharmaceutical company, we face many risks inherent in our business and our industry, as more fully described in the section entitled "Risk Factors" immediately following this prospectus summary, including the following:

    We currently have no commercial products and we have not received regulatory approval for, nor have we generated commercial revenue from, any of our product candidates.

    The regulatory approval process is expensive, time-consuming and uncertain, and our product candidates may not be approved for sale by regulatory authorities.

    Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties and may never achieve profitability.

    Any termination or suspension of, or delays in the commencement or completion of, clinical testing of our product candidates could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospect.

    It may be difficult and costly to protect our patents and other intellectual property rights, and we cannot ensure the protection of these rights from third parties.

    We have a history of losses and anticipate that we will continue to incur additional losses for the foreseeable future.

        You should carefully consider all of the information set forth in this prospectus and, in particular, the information under the heading "Risk Factors," prior to making an investment in our common stock.


Company Information

        In 1998, we formed Tranzyme, Inc., a Delaware corporation, the entity through which we conduct our operations in the United States. In December 2003, we entered into a business combination with Neokimia Inc., a Quebec, Canada based chemistry company, and changed its name to Tranzyme Pharma Inc., or Tranzyme Pharma. Following completion of this offering, Tranzyme Pharma will be our wholly-owned subsidiary. We are headquartered in Durham, North Carolina, with offices also in Canada. Our principal executive offices are located at 4819 Emperor Boulevard, Suite 400, Durham, North Carolina 27703, and our telephone number is (919) 313-4760.

        "Tranzyme," "Tranzyme Pharma" and MATCH™ are trademarks or servicemarks of Tranzyme, Inc. Other trademarks or servicemarks appearing in this prospectus are the property of their respective holders.

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The Offering

Common stock offered by us                   shares

Common stock to be outstanding after this offering

 

                shares, or                shares if the underwriters exercise their allotment option in full.

Over-allotment option

 

We have granted the underwriters an option for a period of up to 30 days to purchase up to                additional shares of common stock at the initial public offering price.

Use of Proceeds

 

We intend to use the net proceeds from this offering of approximately $                million, assuming an initial public offering price of $                per share, which is the mid-point of the range set forth on the cover of this prospectus, to fund the continued clinical development of ulimorelin, including our planned initiation of two Phase 3 clinical trials, to fund the continued clinical development of TZP-102, including our planned 12-week Phase 2b clinical trial and for other general corporate purposes.

Risk Factors

 

You should read the "Risk Factors" section of this prospectus beginning on page 8 for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Proposed NASDAQ Global Market symbol

 

TZYM

        The number of shares of common stock to be outstanding after this offering is based on                        shares outstanding as of September 30, 2010 and excludes:

    shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2010 with a weighted average exercise price of $            per share (of which, warrants to acquire                                    shares of common stock were vested as of September 30, 2010);

    shares of common stock issuable upon exercise of outstanding options as of September 30, 2010 at a weighted average exercise price of $            per share (of which options to acquire                        shares of common stock are vested as of September 30, 2010); and

    shares of our common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective in connection with this offering (including an aggregate of                        shares reserved for future grant or issuance under our 2001 Employee Stock Option Plan and our 2001 Non-Employee Stock Option Plan, or 2001 Stock Plans, our Amended and Restated 2003 Stock Option Plan, or 2003 Stock Plan, and the Amended and Restated 2004 Stock Option Plan of Tranzyme Pharma Inc., or the Tranzyme Pharma Plan, all of which shares will be added to the shares to be reserved under our 2011 Equity Incentive Plan upon the effectiveness of the 2011 Equity Incentive Plan).

        Except as otherwise indicated, all information in this prospectus:

    gives effect to the issuance of an aggregate of                                    shares of our common stock issuable upon the automatic exchange of all of the outstanding common and preferred exchangeable shares of our subsidiary Tranzyme Pharma Inc., a company organized under the

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      laws of Canada, or Tranzyme Pharma, in connection with this offering, as described in "Description of Capital Stock—Exchangeable Shares" elsewhere in this prospectus;

    gives effect to the automatic conversion of all outstanding shares of our preferred stock into an aggregate of                                     shares of our common stock in connection with this offering;

    our planned                        -for-                         reverse stock split of our common stock and preferred stock to be effected on                        2011 has not yet occurred;

    gives effect to our amended and restated certificate of incorporation, which we will file immediately prior to the completion of this offering; and

    assumes no exercise by the underwriters of their option to purchase                        shares of our common stock in this offering to cover over-allotments.

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SUMMARY FINANCIAL DATA

        The summary financial data presented below under the heading "Statement of Operations Data" for the years ended December 31, 2007, 2008 and 2009 have been derived from our audited annual consolidated financial statements included elsewhere in this prospectus. The summary statement of operations data for the nine months ended September 30, 2009 and 2010 and the summary balance sheet data as of September 30, 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that management considers necessary for the fair presentation of financial information set forth in those statements.

        Our historical results are not necessarily indicative of future operating results, and the results for the first nine months of 2010 are not necessarily indicative of results to be expected for the full year or for any other period. You should read this summary consolidated financial data in conjunction with the sections entitled "Risk Factors," "Capitalization," "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

 
  Year Ended December 31,   Nine Months Ended
September 30,
 
 
  2007   2008   2009   2009   2010  
 
   
   
   
  (unaudited)
 
 
  (in thousands of dollars, except share and per share data)
 

Statement of Operations Data:

                               

Licensing and royalty revenue

  $ 337   $ 357   $ 617   $ 161   $ 4,157  

Research revenue

            111         1,451  
                       

Total revenue

    337     357     728     161     5,608  

Operating expenses:

                               

Research and development

    14,986     19,057     7,336     5,900     7,704  

General and administrative

    2,708     3,323     3,377     2,500     2,863  
                       
 

Total operating expenses

    17,694     22,380     10,713     8,400     10,567  
                       

Operating loss

    (17,357 )   (22,023 )   (9,985 )   (8,239 )   (4,959 )

Interest expense, net

   
(11

)
 
(279

)
 
(1,503

)
 
(1,109

)
 
(1,095

)

Other income (expense), net

    129     486     314     163     (104 )
                       

Net loss

  $ (17,239 ) $ (21,816 ) $ (11,174 ) $ (9,185 ) $ (6,158 )
                       

Net loss per share—basic and diluted

 
$

(17.59

)

$

(22.23

)

$

(11.39

)

$

(9.36

)

$

(6.27

)
                       

Shares used to compute net loss per share—basic and diluted

    980,099     981,436     981,436     981,436     981,436  
                       

Pro forma net loss(1)

              $ (10,453 )       $ (5,504 )
                             

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

              $ (0.16 )       $ (0.08 )
                             

Shares used to compute pro forma net loss per share—basic and diluted(1)

                66,447,949           70,460,789  
                             

(1)
Pro forma net loss and pro forma net loss per share-basic and diluted have been calculated assuming i) the conversion of our 2008 convertible promissory notes into shares of our Series A Convertible Preferred stock and shares of Tranzyme Pharma's Class A Preferred Exchangeable stock, ii) the issuance of shares of our common stock upon the automatic exchange of each outstanding common and preferred exchangeable share of Tranzyme Pharma for one share of our common stock in connection with this offering, as described in "Description of Capital Stock-Exchangeable Shares", and (iii) the automatic conversion of each outstanding share of our preferred stock into shares of our common stock in connection with this offering, as of the beginning of each period presented (or at the original date of issuance, if later). See "Unaudited Pro Forma Net Loss per Share" of Note 2 to our consolidated financial statements, which are included elsewhere in this prospectus.

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  As of September 30, 2010  
 
  Actual   Pro forma(1)   Pro forma
As Adjusted(2)
 
 
  (unaudited)
 
 
  (in thousands of dollars)
 

Balance Sheet Data:

                   

Cash and cash equivalents

  $ 11,657              

Working capital (deficit)

    1,476              

Total assets

    14,478              

Notes payable, including current portion

    3,503              

Convertible shareholder notes payable

                 

Accumulated deficit

    (83,280 )            

Total stockholders' (deficit) equity

    (4,851 )            
(1)
The pro forma data in the tables above reflects (i) the issuance of an aggregate of                  shares of our common stock issuable upon the automatic exchange of all of the outstanding common and preferred exchangeable shares of Tranzyme Pharma in connection with this offering, as described in "Description of Capital Stock—Exchangeable Shares" elsewhere in this prospectus and (ii) the automatic conversion of all outstanding shares of our preferred stock into an aggregate shares of our common stock in connection with this offering, as described in "Description of Capital Stock—Exchangeable Shares" elsewhere in this prospectus.

(2)
The as adjusted column in the balance sheet data table reflects the effect of our receipt of estimated net proceeds from the sale of                  shares of our common stock in this offering, at an assumed initial public offering price of $            per share, the mid-point of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and offering expenses payable by us.

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RISK FACTORS

        Before you invest in our common stock, you should understand the high degree of risk involved. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before you decide to purchase shares of our common stock. The following risks may adversely impact our business, financial condition and operating results. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Related to the Development, Regulatory Approval and Commercialization of our Product Candidates

Our near-term success is largely dependent on the success of our clinical stage product candidates, ulimorelin, for which we expect to initiate Phase 3 clinical trials beginning in the first half of 2011, and TZP-102, which is entering Phase 2b clinical development. Our other product candidates are in the preclinical research stage. We cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize, any of our product candidates.

        We have invested, and expect to continue to invest, a significant portion of our time and financial resources in the development of our clinical stage product candidates, ulimorelin for the management of postoperative ileus, or POI, and TZP-102 for the treatment of diabetic gastroparesis. We have also invested a significant amount of time and financial resources in the development of our other drug candidates, TZP-201 and TZP-301. We anticipate that our success will depend largely on the receipt of regulatory approval and successful commercialization of these product candidates, particularly our clinical stage product candidates ulimorelin and TZP-102. The future success of these product candidates is subject to a number of risks, including the following:

    our ability to provide acceptable evidence of their safety and efficacy;

    the results of our planned clinical trials may not confirm the positive results of earlier clinical trials;

    the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA, EMA or other regulatory agencies for marketing approval;

    the dosing of our product candidate in a particular clinical trial may not be at an optimal level;

    our ability to demonstrate clinically meaningful results for ulimorelin in our Phase 3 trials may be more difficult now than when we conducted our Phase 2 trials in 2007 and 2008 due to better placebo performance, which may be attributable to improvements in the overall care of patients in acute care settings;

    patients in our clinical trials may die or suffer other adverse effects for reasons that may or may not be related to the product candidate being tested;

    competing products approved for marketing by the FDA and EMA and any other similar foreign regulatory authorities;

    our ability to obtain, maintain and enforce our patents and other intellectual property rights; and

    obtaining and maintaining commercial manufacturing arrangements with third-party manufacturers or establishing commercial-scale manufacturing capabilities.

        Of the large number of drugs in development, only a small percentage result in the submission of a new drug application, or NDA, to the FDA and even fewer are approved for commercialization. Furthermore, even if we do receive regulatory approval to market a commercial product, any such approval may be subject to limitations on the indicated uses for which we may market the product.

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Favorable results in our Phase 2 clinical trial of ulimorelin for the management of POI may not be predictive of the safety and efficacy results in our planned Phase 3 clinical trials of ulimorelin for the management of POI following partial bowel resection surgery.

        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 earlier-stage development. Our Phase 2 clinical trial of ulimorelin for the management of POI showed statistically significant results against clinically meaningful endpoints; however, we will not have the same primary endpoints in our planned Phase 3 clinical trials. In our Phase 2 trial, the primary endpoint was time to recovery of GI function based on first bowel movement, or BM, but the primary endpoint for our Phase 3 trials will be GI2, which is the later of time to BM and tolerance of solid food. Although we observed statistically significant improvement in GI2 in our Phase 2 trial, we cannot assure you that our Phase 3 trials will achieve positive results. A number of factors could contribute to a lack of favorable safety and efficacy results in our planned Phase 3 trials. For example:

    a multinational, multicenter trial could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period and surgical technique;

    a multinational, multicenter trial could result in increased variability due to varying patient characteristics including demographic factors and health status; and

    mix of surgery types may be different from the prior clinical trial.

Favorable results in our Phase 2 clinical trial of TZP-102 for the treatment of diabetic gastroparesis may not be predictive of the safety and efficacy results in our planned Phase 2b clinical trial of TZP-102 for the treatment of diabetic gastroparesis.

        Although our proof of concept Phase 2 clinical trial of TZP-102 for the treatment of diabetic gastroparesis showed statistically significant results against clinically meaningful endpoints, we will not have the same primary endpoints or reporting instrument in our planned Phase 2b clinical trial. The primary endpoint for our Phase 2 trial was the change from baseline in gastric emptying time; however, the primary endpoint for our Phase 2b trial will be, based upon our meeting with the FDA in November 2010, a composite of clinically relevant, patient-reported symptoms measured by a reporting instrument with a shorter recall period. While we observed statistically significant improvements in these clinically relevant symptoms, there can be no assurance that our Phase 2b trial will achieve positive results. A number of factors could contribute to a lack of favorable safety and efficacy results in our planned Phase 2b clinical trial. For example:

    a multinational, multicenter trial could result in increased variability due to varying patient characteristics including demographic factors, health status, underlying reason for disease state and concomitant medications; and

    an extended length of treatment period could results in changes in safety and efficacy results.

If we are not able to obtain required regulatory approvals for ulimorelin, TZP-102 or our other product candidates, we will not be able to commercialize them and our ability to generate revenue will be limited.

        We have not submitted an NDA or received regulatory approval to market any of our product candidates in any jurisdiction. We have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on consultants and third party contract research organizations to assist us in this process. Securing FDA approval requires the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish each product candidate's safety and efficacy. Our product candidates, and any future product candidates,

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may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

        Our product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. We are not permitted to market ulimorelin, TZP-102, TZP-201 or TZP-301 in the United States until we receive approval of an NDA for the product candidate in a particular indication from the FDA. Failure to obtain regulatory marketing approval for a product candidate will prevent us from commercializing the product candidate, and our ability to generate revenue will be materially impaired.

        The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the product candidates involved. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for a submitted product application, may cause delays in the approval or rejection of an application. Regulatory approval obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions in which we may seek approval.

        We have completed three Phase 2 trials for ulimorelin: two in patients with diabetic gastroparesis and one in patients undergoing partial bowel resection. We currently plan to commence two Phase 3 trials in patients undergoing partial bowel resection in the first half of 2011. We recently completed a Phase 2, double-blind, placebo-controlled trial in 92 subjects which evaluated TZP-102 in diabetic patients with gastroparesis over a 28-day period. We are currently planning to initiate a Phase 2b trial in diabetic gastroparesis patients in 2011. There is no guarantee that our future trials will be successful or that regulators will agree with our assessment of the preclinical studies and clinical trials we have conducted to date. The FDA, EMA and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional clinical trials, or preclinical or other studies. In addition, varying interpretation of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable.

Even if we receive regulatory approval for one of our product candidates, we still may not be able to successfully commercialize it and the revenue that we generate from its sales, if any, will be limited.

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

    demonstration of clinical safety and efficacy compared to other products;

    relative convenience and ease of administration;

    the prevalence and severity of any adverse effects;

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

    availability of alternative treatments, including, metoclopramide, erythromycin, domperidone and alvimopan and any new products that may in the future become available to treat indications for which ulimorelin or TZP-102 may be approved;

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    new procedures or methods of treatment that may reduce the incidences of any of the indications in which our product candidates may show utility;

    pricing and cost-effectiveness;

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

    our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors; and

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

        If our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue from these products, and we may not be able to achieve or sustain profitability. 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. In addition, our ability to successfully commercialize our product candidates will depend on our ability to manufacture our products, differentiate our products from competing products and defend the intellectual property of our products.

It will be difficult for us to profitably sell any of our product candidates if reimbursement is limited.

        Market acceptance and sales of our product candidates will depend on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors have been challenging the prices charged for products. They may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted marketing approval. This trend may impact the reimbursement for treatments for GI disorders especially, as physicians typically focus on symptoms rather than underlying conditions when treating patients with these disorders and drugs are often prescribed for uses outside of their approved indications. In instances where alternative products are available, it may be required that those alternative treatment options are tried before reimbursement is available for our products. We cannot be sure that reimbursement will be available for our product candidates and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. In addition, in certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize our product candidates.

We have no sales, marketing or distribution experience and we will have to invest significant resources to develop those capabilities.

        We have no sales, marketing or distribution experience. To develop internal sales, distribution and marketing capabilities, we will have to invest significant amounts of financial and management resources, some of which will be committed prior to any confirmation that ulimorelin, TZP-102 or any other of our product candidates will be approved. For product candidates where we decide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including:

    we may not be able to attract and build an effective marketing or sales force;

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    the cost of establishing a marketing or sales force may exceed the revenues generated by any products; and

    our direct sales and marketing efforts may not be successful.

        We have entered into an agreement with Norgine B.V., or Norgine, to assist in the development and commercialization of ulimorelin outside the United States, if approved, and may elect to seek other strategic partners for our products. We may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future revenues may depend heavily on the success of the efforts of these third parties.

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

        We may face competition in the United States for our product candidates, if approved, from lower priced products from foreign countries that have placed price controls on pharmaceutical products. This risk may be particularly applicable to drugs such as TZP-102 that are formulated for oral delivery and expected to command a premium price. The U.S. Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, contains provisions that may change U.S. importation laws and expand pharmacists' and wholesalers' ability to import lower priced versions of an approved drug 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.

        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, U.S. Customs and Border Protection and other government agencies. For example, Pub. L. No. 111-83, which was signed into law in October 2009 and provides appropriations for the Department of Homeland Security for the 2010 fiscal year, expressly prohibits U.S. Customs and Border Protection 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 product candidates for which we obtain marketing approval could negatively impact our revenue and profitability, possibly materially.

We rely and will continue to rely on outsourcing arrangements for certain of our activities, including clinical research of our product candidates and manufacturing of the compounds and product candidates.

        We rely on outsourcing arrangements for some of our activities, including manufacturing, preclinical and clinical research, data collection and analysis. We may have limited control over these third parties and we cannot guarantee that they will perform their obligations in an effective and timely manner.

        The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We do not own

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or operate manufacturing facilities for the production of any of our product candidates, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently depend on third-party contract manufacturers for all of our required raw materials, drug substance and drug product for our preclinical research and clinical trials. For ulimorelin and TZP-102, we are currently using, and relying on, single suppliers and single manufacturers for starting materials and the final drug substance. Although potential alternative suppliers and manufacturers for each product candidate have been identified, we have not qualified these vendors to date. If we were required to change vendors, it could result in a failure to meet regulatory requirements or projected timelines and necessary quality standards for successful manufacturing of the various required lots of material for our development and commercialization efforts.

        We do not have any current contractual relationships for the manufacture of commercial supplies of any of our product candidates and the current manufacturer of ulimorelin, our most advanced product candidate, may not have the capacity to serve commercial demand. If any of our product candidates are approved for sale by any regulatory agency, we intend to enter into agreements with third-party contract manufacturers for the commercial production of those products. The number of third-party manufacturers with the expertise, required regulatory approvals and facilities to manufacture bulk drug substance on a commercial scale is limited. The manufacturer of ulimorelin, in particular, requires a high level of expertise due to the need for sterile fill and finish. We have identified one manufacturer each for potentially providing commercial supplies of ulimorelin and TZP-102. No alternative providers have been identified to date. If we were to lose these manufacturers, we would have to find replacements, which could delay the commercialization of our product candidates.

        In addition, our reliance on third party contract research organizations, or CROs, and contract manufacturing organizations, or CMOs, entails further risks including, but not limited to:

    non-compliance by third parties with regulatory and quality control standards;

    breach by third parties of our agreements with them;

    termination or non-renewal of an agreement with third parties; and

    sanctions imposed by regulatory authorities if compounds supplied or manufactured by a third party supplier or manufacturer fail to comply with applicable regulatory standards.

If any of our current strategic partners fails to perform its obligations or terminates its agreement with us, the development and commercialization of the product candidates under such agreement could be delayed or terminated and our business could be substantially harmed.

        We currently have strategic partnerships in place relating to certain of our product candidates and technologies. We entered into a license agreement with Norgine regarding the development and commercialization of ulimorelin for the potential management of POI and other diseases and disorders in Europe, Australia, New Zealand, Middle East, North Africa and South Africa. We entered into a strategic collaboration with Bristol-Myers Squibb Company, or BMS, primarily focused on the identification and optimization of novel drug compounds for certain targets of interest to BMS. These strategic partnerships may not be scientifically or commercially successful due to a number of important factors, including the following:

    BMS and Norgine have significant discretion in determining the efforts and resources that each will apply to their strategic relationship with us. The timing and amount of any cash payments, milestones and royalties that we may receive under such agreements will depend on, among other things, the efforts, allocation of resources and successful development and commercialization of our product candidates by BMS and Norgine under their respective agreements.

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    Our agreement with BMS provides it with wide discretion in deciding which novel compounds to advance through the clinical development process. It is possible for BMS to reject certain compounds at any point in the research, development and clinical trial process without triggering a termination of their agreement with us. In the event of any such decision, our business and prospects may be adversely affected due to our inability to progress such compounds ourselves.

    BMS or Norgine may develop and commercialize, either alone or with others, or be acquired by a company that has, products that are similar to or competitive with the product candidates that they license from us.

    BMS or Norgine may change the focus of their development and commercialization efforts or pursue higher-priority programs.

    BMS or Norgine may, under specified circumstances, terminate their strategic partnership with us on short notice and for circumstances outside of our control, which could make it difficult for us to attract new strategic partners or adversely affect how we are perceived in the scientific and financial communities.

    BMS and Norgine have, under certain circumstances, the first right to maintain or defend our intellectual property rights licensed to them, and, although we may have the right to assume the maintenance and defense of our intellectual property rights if our strategic partners do not, our ability to do so may be compromised by our strategic partners' acts or omissions.

    BMS or Norgine may utilize our intellectual property rights in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or expose us to potential liability.

    BMS or Norgine may not comply with all applicable regulatory requirements, or fail to report safety data in accordance with all applicable regulatory requirements.

        If either BMS or Norgine fails to develop or effectively commercialize novel compounds or ulimorelin, respectively, for any of the foregoing reasons, we may not be able to replace the strategic partner with another partner. We may also be unable to obtain, on terms acceptable to us, a license from such strategic partner to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize a product candidate. Any of these events could have a material adverse effect on our business, results of operations and our ability to achieve future profitability, and could cause our stock price to decline.

We may encounter difficulties in managing our growth and expanding our operations successfully.

        As we seek to advance our product candidates through clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners, suppliers and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate additional management, administrative and sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.

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A variety of risks associated with our planned international business relationships could materially adversely affect our business.

        We have entered into an agreement with Norgine for the development of ulimorelin, and we may enter into agreements with other third parties for the development and commercialization of ulimorelin or our other product candidates, in international markets. International business relationships subject us to additional risks, including:

    differing regulatory requirements for drug approvals in foreign countries;

    potentially reduced protection for intellectual property rights;

    potential third party patent rights in foreign countries;

    the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market, with low or lower prices, rather than buying them locally;

    unexpected changes in tariffs, trade barriers and regulatory requirements;

    economic weakness, including inflation, or political instability, particularly in foreign economies and markets;

    compliance with tax, employment, immigration and labor laws for employees traveling abroad;

    foreign taxes;

    foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

    workforce uncertainty in countries where labor unrest is more common than in the United States;

    production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

    business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

        These and other risks of international business relationships may materially adversely affect our ability to attain or sustain profitable operations.

We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.

        Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of product candidates. Our objective is to design, develop and commercialize new products with superior efficacy, convenience, tolerability or safety. We expect any product candidate that we commercialize with our strategic partners or on our own will compete with existing, market-leading products. For example, we anticipate that ulimorelin, if approved for the management of POI, and TZP-102, if approved for the treatment of diabetic gastroparesis, would compete directly with metoclopramide, erythromycin, domperidone and alvimopan, each of which is available under various trade names sold by several major pharmaceutical companies.

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        Many of our potential competitors have substantially greater financial, technical and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. We will not be able to compete successfully unless we successfully:

    design and develop products that are superior to other products in the market;

    attract qualified scientific, medical, sales and marketing and commercial personnel;

    obtain patent and/or other proprietary protection for our processes and product candidates;

    obtain required regulatory approvals; and

    collaborate with others in the design, development and commercialization of new products.

        Established competitors may invest heavily to quickly discover and develop novel compounds that could make our product candidates obsolete. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition and operations will suffer.

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

        Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management, as well as other senior scientists and members of our management team. The loss of services of any of these individuals or one or more of our other members of senior management could delay or prevent the successful development of our product pipeline, completion of our planned clinical trials or the commercialization of our product candidates. We carry "key person" insurance only on our President and Chief Executive Officer.

        We need to hire and retain qualified personnel for the development, manufacture and commercialization of drugs. We could experience problems in the future attracting and retaining qualified employees. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We will need to hire additional personnel as we expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms who have the expertise we need to sustain and grow our business.

If we engage in an acquisition, reorganization or business combination, we will incur a variety of risks that could adversely affect our business operations or our stockholders.

        From time to time we have considered, and we will continue to consider in the future, strategic business initiatives intended to further the development of our business. These initiatives may include acquiring businesses, technologies or products or entering into a business combination with another company. If we do pursue such a strategy, we could, among other things:

    issue equity securities that would dilute our current stockholders' percentage ownership;

    incur substantial debt that may place strains on our operations;

    spend substantial operational, financial and management resources in integrating new businesses, technologies and products;

    assume substantial actual or contingent liabilities;

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    reprioritize our development programs and even cease development and commercialization of our product candidates; or

    merge with, or otherwise enter into a business combination with, another company in which our stockholders would receive cash or shares of the other company or a combination of both on terms that certain of our stockholders may not deem desirable.

Risks Related to Marketing Approval and Other Government Regulations

The FDA may impose requirements on our clinical trials that are difficult to comply with, which could harm our business.

        The requirements that the FDA may impose on clinical trials for our product candidates are uncertain. As a result, we cannot assure you that we will be able to comply with such requirements. For example, the FDA may require endpoints in our late-stage clinical trials that are different from or in addition to the endpoints in our early-stage clinical trials or the endpoints which we may propose. The endpoints or other trial elements, including sample size, dose selection and level at which clinical meaningfulness is achieved, that the FDA requires may make it less likely that our Phase 3 clinical trials are successful or may delay completion of the trials. If we are unable to comply with the FDA's requirements, we will not be able to get approval for our product candidates and our business will suffer.

Any termination or suspension of, or delays in the commencement or completion of, clinical testing of our product candidates could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.

        Delays in the commencement or completion of clinical testing could significantly affect our product development costs. 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:

    the FDA failing to grant permission to proceed and placing the clinical trial on hold;

    the FDA's willingness to review our TZP-102 application under the fast track development program;

    subjects failing to enroll or remain in our trials at the rate we expect;

    a facility manufacturing our product candidates being ordered by the FDA or other government or regulatory authorities to temporarily or permanently shut down due to violations of current Good Manufacturing Practices, or cGMP, or other applicable requirements, or infections or cross-contaminations of product candidates in the manufacturing process;

    any changes to our manufacturing process that may be necessary or desired;

    subjects choosing an alternative treatment for the indications for which we are developing our product candidates, or participating in competing clinical trials;

    subjects experiencing severe or unexpected drug-related adverse effects;

    reports from preclinical or clinical testing on similar technologies and products raising safety and/or efficacy concerns;

    third-party clinical investigators losing their license or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, Good Clinical Practice and regulatory requirements, or other third parties not performing data collection and analysis in a timely or accurate manner;

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    inspections of clinical trial sites by the FDA or institutional review boards, or IRBs, finding regulatory violations that require us to undertake corrective action, result in suspension or termination of one or more sites or the imposition of a clinical hold on the entire trial, or that prohibit us from using some or all of the data in support of our marketing applications;

    third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or any of the data produced by such contractors in support of our marketing applications; or

    one or more IRBs refusing to approve, suspending or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing its approval of the trial.

        Product development costs will increase if we have delays in testing or approval of our product candidates or if we need to perform more or larger clinical trials than planned. Additionally, changes in regulatory requirements and policies 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 for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of or if we, the FDA or other regulatory authorities, the IRB, or other reviewing entities, or any of our clinical trial sites suspend or terminate any of our clinical trials, the commercial prospects for our product candidate may be harmed and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Also if one or more clinical trials are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced.

Final marketing approval of our product candidates by the FDA or other regulatory authorities for commercial use may be delayed, limited, or denied, any of which would adversely affect our ability to generate operating revenues.

        After the completion of our clinical trials, we cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates and we cannot, therefore, predict the timing of any future revenue from these product candidates. Ulimorelin and TZP-102 are ghrelin receptor agonists. There are no FDA-approved ghrelin receptor agonists and the adverse effects from long-term exposure to this drug class are unknown.

        We cannot commercialize any of our product candidates until the appropriate regulatory authorities have reviewed and approved the applications for the product candidates. We cannot assure you that the regulatory agencies will complete their review processes in a timely manner or that we will obtain regulatory approval for any product candidate we develop. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

        If marketing approval for our product candidates is delayed, limited or denied, our ability to market products, and our ability to generate product sales, would be adversely affected.

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Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.

        Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product's indicated uses or marketing or impose ongoing requirements for potentially costly and time consuming post-approval studies, post-market surveillance or clinical trials. Our product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requesting recall or 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;

    seek an injunction or 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 or applications filed by us;

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

    seize or detain products, refuse to permit the import or export of product, or request us to initiate a product recall.

        The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue.

        The FDA has the authority to require a risk evaluation and mitigation strategy plan as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry.

        In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product's approved labeling. If we receive marketing approval for our product candidates, physicians may nevertheless prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging

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in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

        In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any of our product candidates for which we obtain marketing approval.

        Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA's approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

        In the United States, the 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 where 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.

        More recently, in March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revised the definition of "average manufacturer price" for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, beginning in 2011, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with healthcare practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

Our future growth depends, in part, on our ability to penetrate foreign markets, where we are subject to additional regulatory burdens and other risks and uncertainties. However, we have limited experience marketing and servicing our products outside North America.

        Our future profitability will depend, in part, on our ability to grow and ultimately maintain our sales in foreign markets. We rely on third parties, such as Norgine, to support our foreign operations.

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Our foreign operations and any foreign operations we establish in the future subject us to additional risks and uncertainties, including:

    our customers' ability to obtain reimbursement for procedures using our products in foreign markets;

    our inability to directly control commercial activities because we are relying on third parties who may not put the same priority on our products as we would;

    the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;

    different medical practices and customs in foreign countries affecting acceptance in the marketplace;

    import or export licensing requirements;

    longer accounts receivable collection times;

    longer lead times for shipping;

    language barriers for technical training;

    reduced protection of intellectual property rights in some foreign countries;

    foreign currency exchange rate fluctuations; and

    the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.

        Foreign sales of our products could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions, changes in tariffs and difficulties in staffing and managing foreign operations.

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

        In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include false claims statutes and anti-kickback statutes. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws.

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

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        Over the past few years, several pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered, off-label uses; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates. Most states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer's products from reimbursement under government programs, criminal fines and imprisonment.

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

        We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

    decreased demand for our product candidates or products that we may develop;

    injury to our reputation;

    withdrawal of clinical trial participants;

    costs to defend the related litigation;

    a diversion of management's time and our resources;

    substantial monetary awards to trial participants or patients;

    product recalls, withdrawals or labeling, marketing or promotional restrictions;

    loss of revenue;

    the inability to commercialize our product candidates; and

    a decline in our stock price.

        Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry product liability insurance covering our clinical trials in the amount of $5 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

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Risks Relating to Our Intellectual Property

It is difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights.

        We place considerable importance on obtaining patent protection for new technologies, products and processes because our commercial success will depend, in part, on obtaining patent protection for new technologies, products and processes, successfully defending these patents against third-party challenges and successfully enforcing our patents against third party competitors. To that end, we file applications for patents covering compositions of matter or uses of our product candidates or our proprietary processes as well as other intellectual property important to our business. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. Accordingly, our patent applications may never be approved by U.S. or foreign patent offices and the patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technologies.

        Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to ours, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference, opposition or invalidity proceedings before U.S. or foreign patent offices.

        We also rely on trade secrets to protect technology in cases when we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information. Our research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborators and advisors, our ability to receive patent protection or protect our proprietary information may be imperiled.

Claims by third parties that we infringe their proprietary rights may result in liability for damages or prevent or delay our developmental and commercialization efforts.

        The biotechnology industry has been characterized by frequent litigation regarding patent and other intellectual property rights. Because patent applications are maintained in secrecy until the application is published, we may be unaware of third party patents that may be infringed by commercialization of our product candidates. In addition, identification of third party patent rights that may be relevant to our technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. Any claims of patent infringement asserted by third parties would be time consuming and could likely:

    result in costly litigation;

    divert the time and attention of our technical personnel and management;

    cause product candidate development delays;

    prevent us from commercializing a product until the asserted patent expires or is held finally invalid or not infringed in a court of law;

    require us to develop non-infringing technology; or

    require us to enter into royalty or licensing agreements.

        Although no third party has asserted a claim of infringement against us, others may hold proprietary rights that could prevent our product candidates from being marketed. Any patent-related

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legal action against our collaborators or us claiming damages and seeking to enjoin commercial activities relating to our product candidates and processes could subject us to potential liability for damages and require our collaborators or us to obtain a license to continue to manufacture or market the affected products and processes. We cannot predict whether our collaborators or we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign our product candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing at least some of our product candidates, which could harm our business, financial condition and operating results.

Our product candidates may infringe the intellectual property rights of others, which could increase our costs and delay or prevent our development and commercialization efforts.

        Our success also depends on avoiding infringement of the proprietary technologies of others. In particular, there may be certain issued patents and patent applications claiming subject matter that our collaborators or we may be required to license in order to research, develop or commercialize at least some of our product candidates, including ulimorelin and TZP-102 and we do not know if such patents and patent applications would be available to license on commercially reasonable terms, or at all.

        We are aware of third party United States patents, and corresponding foreign counterparts, that contain broad claims related to a method of using a certain general type of compound, which may be construed to include ulimorelin and TZP-102, for the stimulation of gastrointestinal motility. If we were to challenge the validity of this or any issued United States patent in court, we would need to overcome a statutory presumption of validity that attaches to every United States patent. This means that in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent's claims. If we were to challenge the enforceability of this or any issued United States patent in court, we would need to meet the burden of showing that the patent is unenforceable. There is no assurance that a jury and/or court would find in our favor on questions of infringement, validity or enforceability.

        In addition, third parties may assert infringement or other intellectual property claims against us based on patents or other intellectual property rights. An adverse outcome in these proceedings could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease or modify our use of the technology. If we are required to license such technology, we cannot assure you that a license under such patents and patent applications will be available on acceptable terms or at all. Further, we may incur substantial costs defending ourselves in lawsuits against charges of patent infringement or other unlawful use of another's proprietary technology.

We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.

        As is commonplace in our industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject in the future to claims that our employees or prospective employees are subject to a continuing obligation to their former employers (such as non-competition or non-solicitation obligations) or claims that our employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

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

        Depending upon the timing, duration and specifics of FDA marketing approval of ulimorelin, TZP-102 and our other products, one or more of our U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.

Risks Related to Our Financial Position and Need for Capital

Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.

        Our recurring losses from operations raise substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2009 with respect to this uncertainty. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on our financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. We have incurred significant losses since our inception and have never been profitable, and it is possible we will never achieve profitability. We have devoted our resources to developing our product candidates, but these product candidates cannot be marketed until regulatory approvals have been obtained. Though we have received revenue from our strategic partnerships, and may receive additional revenues from these partnerships in the future, these sources of revenue are insufficient to sustain our present activities, and sufficient revenues will likely not be available until, and unless, our product candidates are approved by the FDA or comparable regulatory agencies in other countries and successfully marketed, either by us or a partner, an outcome which may not occur. If we successfully complete this offering, based upon our currently expected level of operating expenditures, we expect to be able to fund our operations for at least the next 30 months. This period could be shortened if there are any significant increases in planned spending on development programs or more rapid progress of development programs than anticipated. There is no assurance that other financing will be available when needed to allow us to continue as a going concern. The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.

We have incurred significant operating losses since inception, and we expect to incur losses for the foreseeable future. We may never become profitable or, if achieved, be able to sustain profitability.

        We have incurred significant operating losses since we were founded in 1998 and expect to incur significant losses for the next several years as we begin our Phase 3 trials for ulimorelin and Phase 2b trial for TZP-102. Net loss for the year ended December 31, 2009 was $11.2 million. As of September 30, 2010, we had an accumulated deficit of $83.3 million. Losses have resulted principally from costs incurred in our clinical trials, research and development programs and from our general and administrative expenses. In the future, we intend to continue to conduct research and development, clinical testing, regulatory compliance activities and, if any of our product candidates is approved, sales

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and marketing activities that, together with anticipated general and administrative expenses, will likely result in our incurring further significant losses for the next several years.

        We currently generate no revenue from sales, and we may never be able to develop marketable drugs. As a result, there can be no assurance that we will ever generate revenues or achieve profitability, which could impair our ability to sustain operations or obtain any required additional funding. If we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully develop and commercialize our most advanced product candidates.

        We will require substantial future capital in order to complete clinical development and commercialize our most advanced product candidate, ulimorelin, and to conduct the research and development and clinical and regulatory activities necessary to bring other product candidates to market, including TZP-102. The amount and timing of any expenditure needed to implement our development and commercialization programs will depend on numerous factors, including:

    the initiation, progress, costs, results of and timing of our two planned Phase 3 clinical trials of ulimorelin for the management of POI following partial bowel resection surgery;

    the need for, and the progress, costs and results of, any additional Phase 3 clinical trials of ulimorelin we may initiate based on the results of our planned clinical trials or our discussions with regulatory agencies, including any additional trials the FDA, EMA or other regulatory agencies may require evaluating the safety of ulimorelin;

    the initiation, progress, costs, results of and timing of our planned Phase 2b clinical trial of TZP-102 for treatment of diabetic gastroparesis and future clinical trials of TZP-102;

    the costs and timing of obtaining regulatory approval in the United States and abroad for our product candidates;

    the FDA's willingness to review our TZP-102 application under the fast track development program;

    the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights globally;

    the costs and timing of obtaining or maintaining manufacturing for our product candidates, including commercial manufacturing if any of our product candidates is approved;

    the costs and timing of establishing sales and marketing capabilities in selected markets; and

    the terms and timing of establishing collaborations, license agreements and other partnerships on terms favorable to us.

        Some of these factors are outside of our control. We do not expect our existing capital resources together with the net proceeds from this offering to be sufficient to enable us to fund the completion of any of our development programs through commercial introduction. We expect that we will need to raise additional funds in the future.

        We may seek additional funding through collaboration agreements and public or private financings. Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. In addition, the issuance of additional shares by us, or the possibility of such issuance, may cause the market price of our shares to decline.

        If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek funds

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through arrangements with collaborative partners or otherwise that may require us to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us.

Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of the transactions contemplated by this offering.

        Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long term tax exempt rate and the value of the company's stock immediately before the ownership change. We may be unable to offset future taxable income, if any, with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax liability.

        In addition, it is possible that the transactions described in this offering, either on a standalone basis or when combined with future transactions, will cause us to undergo one or more additional ownership changes. In that event, we generally would not be able to use our pre-change loss or credit carryovers or certain built-in losses prior to such ownership change to offset future taxable income in excess of the annual limitations imposed by Sections 382 and 383 and those attributes already subject to limitations as a result of our prior ownership changes may be subject to more stringent limitations. As of December 31, 2009, we have estimated approximately $2.8 million of U.S. federal net operating loss carryforwards are at risk of loss due to prior ownership changes, as well as approximately $15.4 million of U.S. federal and state net operating loss carryforwards at risk of limitation in the event of a future ownership change.

Risks Related to this Offering

An active trading market for our common stock may not develop.

        Prior to this offering, there has been no public market for our common stock. Although we anticipate that our common stock will be approved for listing on the Nasdaq Global Market, an active trading market for our shares may never develop or be sustained following this offering. If the market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could materially adversely affect our business.

The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock could incur substantial losses.

        Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

    our ability to enroll patients in our clinical trials;

    results of clinical trials of our product candidates, those of our competitors or those of other companies in our market sector;

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    regulatory developments in the United States and foreign countries;

    variations in our financial results or those of companies that are perceived to be similar to us;

    changes in the structure of healthcare payment systems, especially in light of current reforms to the U.S. healthcare system;

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

    market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts' reports or recommendations;

    sales of our stock by insiders and 5% stockholders;

    general economic, industry and market conditions;

    additions or departures of key personnel;

    intellectual property, product liability or other litigation against us;

    expiration or termination of our relationships with our collaborators; and

    the other factors described in this "Risk Factors" section.

        In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies' stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management's attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

Our quarterly operating results may fluctuate significantly.

        We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:

    variations in the level of expenses related to our development programs;

    addition or termination of clinical trials;

    any intellectual property infringement lawsuit in which we may become involved;

    regulatory developments affecting our product candidates;

    our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements; and

    the achievement and timing of milestone payments under our existing strategic partnership agreements.

        If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.

We may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

        We currently intend to use the proceeds from this offering to fund our planned clinical trials of ulimorelin and TZP-102, to fund working capital, capital expenditures and other general corporate purposes. 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 intended 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."

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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 the completion of 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 the past, we issued options and warrants to acquire common stock at prices significantly below the initial public offering price. To the extent these outstanding options and warrants are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. See the section entitled "Dilution" on page         for a more detailed description of the dilution to new investors in this offering.

Because a small number of our existing stockholders own a majority of our voting stock, your ability to influence corporate matters will be limited.

        Following the completion of this offering, our executive officers, directors and greater than 5% stockholders, in the aggregate, will own approximately        % of our outstanding common stock, without giving effect to the purchase of shares by any person in this offering. As a result, such persons, acting together, will have the ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. These persons will also have the ability to control our management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

        Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:

    a classified and staggered board of directors whose members can only be dismissed for cause;

    the prohibition on actions by written consent of our stockholders;

    the limitation on who may call a special meeting of stockholders;

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

    the ability of our board of directors to issue preferred stock without stockholder approval, which would increase the number of outstanding shares and could thwart a takeover attempt; and

    the requirement of at least 75% of the outstanding common stock to amend any of the foregoing provisions.

        In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirors to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current

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management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

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 that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. 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.

        Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.

        Upon the closing of this offering, there will be                shares of our common stock outstanding. Of these,                 shares are being sold in this offering and will be freely tradable immediately after this offering, except for shares purchased by affiliates, and the remaining shares may be sold upon expiration of lock-up agreements 180 days after the date of this offering, subject in some cases to volume limitations. In addition, as of                        , 2011, we had outstanding options and warrants to purchase                shares of common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements, subject in some cases to volume limitations. A large portion of these shares and options are held by a small number of persons and investment funds. Moreover, after this offering and the expiration of the 180 day lock-up period, 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 2011 Stock Option and Incentive Plan. Effective upon the closing of this offering, an aggregate of                 shares of our common stock will be reserved for future issuance under these plans. Once we register these shares, which we plan to do shortly after the closing of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above and volume limitation in some cases. 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.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price.

        Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish a report by our management on our internal control over financial reporting beginning with the fiscal year ended December 31, 2012. We have not been subject to these requirements in the past. The internal control report must contain (a) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (b) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (c) management's assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (d) a statement that our

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independent registered public accounting firm has issued an attestation report on internal control over financial reporting.

        To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to dedicate internal resources, engage outside consultants and adopt a detailed work plan to (a) assess and document the adequacy of internal control over financial reporting, (b) take steps to improve control processes where appropriate, (c) validate through testing that controls are functioning as documented, and (d) implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, we can provide no assurance as to our, or our independent registered public accounting firm's, conclusions with respect to the effectiveness of our internal control over financial reporting under Section 404. There is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

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

        The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus, including the sections entitled "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains forward-looking statements that are based on our management's belief and assumptions and on information currently available to our management. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

    our expectations related to the use of proceeds from this offering;

    the progress, timing and amount of expenses associated with our research, development and commercialization activities;

    the timing, design, implementation and success of our clinical trials for our product candidates;

    our ability to obtain U.S. and foreign regulatory approval for our product candidates and the ability of our product candidates to meet existing or future regulatory standards;

    our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

    our expectations regarding federal, state and foreign regulatory requirements;

    the therapeutic benefits, effectiveness and safety of our product candidates;

    the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our product candidates;

    our ability to manufacture sufficient amounts of our product candidates for clinical trials and products for commercialization activities;

    our intention to seek to establish strategic collaborations or partnerships for the development or sale of our product candidates;

    our expectations as to future financial performance, expense levels and liquidity sources;

    the timing of commercializing our product candidates;

    our ability to compete with other companies that are or may be developing or selling products that are competitive with our product candidates;

    anticipated trends and challenges in our potential markets;

    our ability to attract and retain key personnel; and

    other factors discussed elsewhere in this prospectus.

        In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, future results, levels of activity, performance and achievements may differ materially. We do not intend to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results. The Private Securities Litigation Reform Act of 1995 does not provide any protection for statements made in this prospectus.

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USE OF PROCEEDS

        We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $            , or $            if the underwriters fully exercise their over-allotment option, based upon an assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover of this preliminary prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $            increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the net proceeds to us from this offering by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

        We anticipate that we will use the net proceeds as follows:

    approximately $             million of these net proceeds to fund the continued clinical development of ulimorelin, including our planned initiation of two Phase 3 clinical trials for the management of postoperative ileus following partial bowel resection surgery;

    approximately $             million of these net proceeds to fund the continued clinical development of TZP-102, including our planned 12-week Phase 2b clinical trial for the treatment of gastroparesis in diabetic patients; and

    the remainder for general corporate purposes, such as payment of principal and interest under our debt facilities, general and administrative expenses, capital expenditures, working capital, prosecution and maintenance of our intellectual property and the potential investment in technologies or products that complement our business.

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

        Although we currently anticipate that we will use the net proceeds as described above, there may be circumstances where a reallocation of funds may be necessary. 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 these net proceeds.

        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.

        Pending use of the proceeds 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 capital stock. We do not anticipate paying any dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Additionally, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries and us to pay dividends or make distributions, including restrictions under the terms of the agreements governing our indebtedness. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." The declaration of dividends will be at the discretion of our board of directors, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend on various factors, including our results of operations, financial condition, future prospects and any other factors deemed relevant by our board of directors.

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CAPITALIZATION

        The following table sets forth our capitalization as of September 30, 2010.

    on an actual basis;

    on a pro forma basis to reflect (1) the issuance of an aggregate of                shares of our common stock upon the automatic exchange of each outstanding common and preferred exchangeable share of Tranzyme Pharma for one share of our common stock in connection with this offering, as described in "Description of Capital Stock—Exchangeable Shares", and (2) the automatic conversion of each outstanding share of our preferred stock into an aggregate of                shares of our common stock in connection with this offering; and

    on a pro forma as adjusted basis to further reflect our receipt of the estimated net proceeds from our sale of                 shares of common stock offered hereby at an assumed initial public offering price of $        per share, the mid-point of the price range set forth on the cover of this preliminary prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

        You should read this table in conjunction with the sections of this prospectus entitled "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus.

 
  As of September 30, 2010  
 
  Actual   Pro Forma   Pro Forma
as Adjusted
 
 
  (unaudited)
 
 
  (in thousands of dollars, except share
and per share data)

 

Series A convertible preferred stock, $.00001 par value, voting; authorized 69,300,000 shares, issued 51,038,570 shares, liquidation preference of $51,039, actual; no shares issued, proforma and proforma as adjusted

               

Series A-1 convertible preferred stock, $.00001 par value, voting; authorized 17,500,000 shares, issued 17,423,094 shares, actual; no shares issued, proforma and proforma as adjusted

               

Series B convertible preferred stock, $.00001 par value, voting; authorized 1,570,680 shares, issued 1,047,120 shares, liquidation preference of $2,000, actual; no shares issued, proforma and proforma as adjusted

               

Class A common stock, $.00001 par value; authorized 81,000,000 shares, issued 981,436 shares, actual; no shares authorized or issued proforma and proforma as adjusted

               

Class C common stock, $.00001 par value; authorized 26,442,362 shares, issued 972,062 shares, actual; no shares authorized or issued proforma and proforma as adjusted

               

Additional paid-in capital

    79,076     78,361        

Accumulated other comprehensive loss

    (647 )   (647 )      

Accumulated deficit

    (83,280 )   (83,280 )      
                 

Total stockholders' deficit

    (4,851 )   (4,851 )      
                 

Total capitalization

  $ (4,851 ) $ (4,851 )      
                 

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        The number of shares of common stock to be outstanding after this offering is based on shares outstanding as of September 30, 2010 and the proposed       -for-    reverse stock split we intend to effect prior to the completion of this offering. This number excludes:

    shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2010 with a weighted average exercise price of $        per share (of which, warrants to acquire                shares of common stock were vested as of September 30, 2010);

    shares of common stock issuable upon exercise of outstanding options as of September 30, 2010 at a weighted average exercise price of $        per share (of which options to acquire                shares of common stock are vested as of September 30, 2010); and

    shares of our common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective in connection with this offering (including an aggregate of                shares reserved for future grant or issuance under our 2001 Stock Plans, our 2003 Stock Plan and the Tranzyme Pharma Plan, all of which shares will be added to the shares to be reserved under our 2011 Equity Incentive Plan upon the effectiveness of the 2011 Equity Incentive Plan).

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DILUTION

        If you invest in our common stock, your investment will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering.

        This discussion and the tables below are based on                    shares of our common stock issued and outstanding as of September 30, 2010 and also reflect:

    the issuance of an aggregate of                        shares of our common stock issuable upon the automatic exchange of all of the outstanding common and preferred exchangeable shares of Tranzyme Pharma in connection with this offering, as described in "Description of Capital Stock—Exchangeable Shares" elsewhere in this prospectus; and

    the automatic conversion of all outstanding shares of our preferred stock into an aggregate of                        shares of our common stock in connection with this offering.

        This discussion and the tables do not reflect:

    shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2010 with a weighted average exercise price of $            per share (of which, warrants to acquire                        shares of common stock were vested as of September 30, 2010);

    shares of common stock issuable upon the exercise of options outstanding as of September 30, 2010 with a weighted average exercise price of $            per share (of which, options to acquire                        shares of common stock were vested as of September 30, 2010); and

    shares of our common stock reserved for future issuance under our 2011 Incentive Plan, which will become effective in connection with this offering (which includes an aggregate of                        shares reserved for future grant or issuance under our 2001 Stock Plans, our 2003 Stock Plan and the Tranzyme Pharma Plan, all of which will be added to the shares to be reserved under our 2011 Incentive Plan upon the effectiveness of the 2011 Incentive Plan).

        Our historical net tangible book value as of September 30, 2010 was approximately $            , or $            per share, based on                        shares of common stock outstanding as of that date. Historical net tangible book value per share is determined by dividing our total tangible assets (total assets less intangible assets) less total liabilities by the actual number of outstanding shares of our common stock. Our pro forma net tangible book value as of September 30, 2010 was approximately $            , or approximately $            per share, based on                        shares of common stock outstanding after giving effect to (1) the issuance of an aggregate of                        shares of our common stock issuable upon the automatic exchange of all of the outstanding common and preferred exchangeable shares of Tranzyme Pharma in connection with this offering, as described in "Description of Capital Stock—Exchangeable Shares" elsewhere in this prospectus; and (2) the automatic conversion of all outstanding shares of our preferred stock into an aggregate of                        shares of our common stock in connection with this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by the pro forma number of shares of common stock outstanding before giving effect to this offering.

        After giving effect to our receipt of the proceeds from the sale of                        shares of our common stock in this offering based on an assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover of this prospectus, less underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value after this offering would have been $            per share. This represents an immediate increase in pro

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forma net tangible book value per share of $            to existing stockholders and immediate dilution in pro forma net tangible book value of $            per share to new investors purchasing our common stock in this offering at the initial public offering price. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the assumed initial public offering price per share paid by a new investor. The following table illustrates the per share dilution to new investors.

Assumed initial public offering price per share(1)

        $    

Historical net tangible book value per share as of                             , 2010

  $          

Increase per share due to the conversion of all shares of preferred stock

             
             

Pro forma net tangible book value per share as of                             , 2010

             

Increase per share attributable to new investors

             
             

Pro forma net tangible book value per share after the offering

             
             

Dilution per share to new investors

        $    
             

(1)
The midpoint of the price range set forth on the cover of this preliminary prospectus.

        A $            increase (decrease) in the assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover of this prospectus, would increase (decrease) the pro forma net tangible book value per share after giving effect to this offering by $            per share and would increase (decrease) the dilution in pro forma net tangible book value per share to investors in this offering by $            per share. This calculation assumes that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and is after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

        The following table summarizes as of                        , the number of shares of our common stock purchased from us, the total cash consideration paid to us and the average price per share paid to us by existing stockholders and by new investors in this offering at an assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover of this preliminary prospectus.

 
  Shares Purchased   Total Consideration    
 
 
  Average
Price Per
Share
 
 
  Number   Percent   Amount   Percent  
 
  (in thousands of dollars, except share and per share data)
 

Existing stockholders

            % $         % $    

New investors

                               
                         
 

Total

            % $         %      
                         

        To the extent that outstanding options or warrants are exercised, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.

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SELECTED FINANCIAL DATA

        You should read the selected financial data presented below in conjunction with our consolidated financial statements and the related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included elsewhere in this prospectus. The selected consolidated financial data presented below under the heading "Statement of Operations Data" for the years ended December 31, 2007, 2008 and 2009 and the selected consolidated financial data presented below under the heading "Balance Sheet Data" as of December 31, 2008 and 2009, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data presented below under the headings "Statement of Operations Data" for the years ended December 31, 2005 and 2006 and under "Balance Sheet Data" as of December 31, 2005, 2006 and 2007, have been derived from our audited consolidated financial statements not included in this prospectus. The statement of operations data for the nine months ended September 30, 2009 and 2010 and balance sheet data as of September 30, 2010 were derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those statements.

        Our historical results are not necessarily indicative of the results of operations to be expected for future periods, and the results for the nine months ended September 30, 2010 are not necessarily indicative of results to be expected for the full year or for any other period.

 
  Year Ended December 31,   Nine Months Ended September 30,  
 
  2005   2006   2007   2008   2009   2009   2010  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands of dollars, except share and per share data)
 

Statement of Operations Data:

                                           

Licensing and royalty revenue

  $ 468   $ 365   $ 337   $ 357   $ 617   $ 161   $ 4,157  

Research revenue

                    111         1,451  

Grant revenue

    47                          
                               

Total revenue

    515     365     337     357     728     161     5,608  

Operating expenses:

                                           

Research and development

    5,244     7,584     14,986     19,057     7,336     5,900     7,704  

General and administrative

    1,598     2,365     2,708     3,323     3,377     2,500     2,863  
                               
 

Total operating expenses

    6,842     9,949     17,694     22,380     10,713     8,400     10,567  
                               

Operating loss

    (6,327 )   (9,584 )   (17,357 )   (22,023 )   (9,985 )   (8,239 )   (4,959 )

Interest expense, net

   
(99

)
 
(1

)
 
(11

)
 
(279

)
 
(1,503

)
 
(1,109

)
 
(1,095

)

Other income (expense), net

    (23 )       129     486     314     163     (104 )
                               

Net loss

  $ (6,449 ) $ (9,585 ) $ (17,239 ) $ (21,816 ) $ (11,174 ) $ (9,185 ) $ (6,158 )
                               

Net loss per share—basic and diluted

  $ (6.69 ) $ (9.91 ) $ (17.59 ) $ (22.23 ) $ (11.39 ) $ (9.36 ) $ (6.27 )
                               

Shares used to compute net loss per share—basic and diluted

    965,382     969,001     980,099     981,436     981,436     981,436     981,436  
                               

Pro forma net loss(1)

                          $ (10,453 )       $ (5,504 )
                                         

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

                          $ (0.16 )       $ (0.08 )
                                         

Shares used to compute pro forma net loss per share—basic and diluted(1)

                            66,447,949           70,460,789  
                                         

(1)
Pro forma net loss and pro forma net loss per share—basic and diluted have been calculated assuming i) the conversion of our 2008 convertible promissory notes into shares of our Series A Convertible Preferred stock and shares of Tranzyme Pharma's Class A Preferred Exchangeable stock, ii) the issuance of shares of our common stock upon the automatic

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    exchange of each outstanding common and preferred exchangeable share of Tranzyme Pharma for one share of our common stock in connection with this offering, as described in "Description of Capital Stock—Exchangeable Shares", and (iii) the automatic conversion of each outstanding share of our preferred stock into shares of our common stock in connection with this offering, as of the beginning of each period presented (or at the original date of issuance, if later). See "Unaudited Pro Forma Net Loss per Share of Note 2" to our consolidated financial statements, which are included elsewhere in this prospectus.


 
  As of December 31,   As of September 30,  
 
  2005   2006   2007   2008   2009   2010  
 
   
   
   
   
   
  (unaudited)
 
 
   
   
   
   
  (in thousands of dollars)
 

Balance Sheet Data:

                                     

Cash and cash equivalents

  $ 2,420   $ 6,527   $ 9,249   $ 7,590   $ 14,373   $ 11,657  

Working capital (deficit)

    1,649     4,402     6,729     (1,103 )   (9,361 )   1,476  

Total assets

    3,813     8,138     12,556     9,459     16,050     14,478  

Notes payable, including current portion

    434     3,786     2,922     6,261     5,242     3,503  

Convertible shareholder notes payable

    247     244     272     5,086     15,807      

Accumulated deficit

    (17,307 )   (26,892 )   (44,132 )   (65,948 )   (77,122 )   (83,280 )

Total stockholders' (deficit) equity

    1,498     2,095     5,876     (6,124 )   (17,441 )   (4,851 )

        The table above reflects a  -for-    reverse stock split of our common stock that will occur immediately prior to the completion of this offering and the conversion of all of our preferred stock into shares of our common stock upon completion of this offering. The calculation of the basic pro forma weighted average shares outstanding (unaudited) consists of the basic weighted average shares outstanding plus the weighted average preferred stock outstanding, which will convert to common stock in connection with this offering.

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

        You should read the following discussion and analysis of our financial condition and results of our operations together with our financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, this discussion contains forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, particularly those set forth under "Special Note Regarding Forward-Looking Statements" and "Risk Factors," our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements.

Overview

        We are a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing novel, first-in-class small molecule therapeutics for the treatment of acute (hospital-based) and chronic GI motility disorders. Our two most advanced product candidates, ulimorelin, which is entering Phase 3, and TZP-102, which is entering Phase 2b, are being evaluated for the treatment of predominantly upper GI motility disorders. All of our product candidates have been discovered by our scientists using our proprietary chemistry technology platform, MATCH (Macrocyclic Template Chemistry), which enables us to construct synthetic libraries of drug-like, macrocyclic compounds in a predictable and efficient manner. We not only have first-in-class product candidates and a strong drug discovery platform, but also have pursued a licensing strategy with collaborators whose capabilities complement our own. One such regional partnership for ulimorelin enables us to retain significant control over development and commercialization of the product candidate, share the development costs and retain a substantial portion of the future long-term value of our product candidate in the United States and certain other major pharmaceutical markets.

        We were incorporated in Delaware on January 12, 1998. On December 17, 2003, we entered into a business combination with Neokimia Inc., a Quebec, Canada based chemistry company which now operates under the name Tranzyme Pharma Inc., or Tranzyme Pharma. Following the completion of this offering, Tranzyme Pharma will be our wholly-owned subsidiary and will continue to own substantially all of our intellectual property and conduct our preclinical research.

        We have devoted substantially all of our resources to our drug discovery efforts which consist of research and development activities, clinical trials for our product candidates, the general and administrative support of these operations and intellectual property protection and maintenance. Since inception, our research and development expenses have represented approximately 76% of our total operating expenses. To date, we have funded our operations principally through private placements of our common stock, preferred stock and convertible debt; bank and other lender financings; and, more recently, through payments received under collaborative licensing arrangements with Norgine B.V., or Norgine, and Bristol-Myers Squibb Company, or BMS, raising an aggregate of approximately $115.5 million.

        We have incurred significant losses since our inception. As of September 30, 2010, our accumulated deficit was approximately $83.3 million. We expect to incur significant operating losses over the next several years as we complete the development of, and seek regulatory approval for, our product candidates and develop other product candidates. We will need substantial additional financing to continue to develop our product candidates, obtain regulatory approvals and fund operating expenses. As a result, we will continue to seek private or public equity and debt financing, research funding and revenue or expense sharing from collaborative agreements to meet our capital requirements. There can be no assurance that such funds will be available on terms favorable to us, if at all, or that we will be able to successfully enter into collaborations or commercialize our product

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candidates. In addition, we may not be profitable even if we succeed in commercializing any of our product candidates.

Strategic Partnerships

        Norgine, B.V.    In June 2010, we entered into a license agreement with Norgine, a leading, GI-focused European specialty pharmaceutical company, to co-develop and commercialize ulimorelin in licensed territories that include Europe, Australia, New Zealand, Middle East, North Africa and South Africa. Under the terms of the agreement, we received a nonrefundable, upfront license fee of $8.0 million. In addition, Norgine purchased 1,047,120 shares of our Series B convertible preferred stock for $1.91 per share, resulting in total net proceeds of approximately $2.0 million.

        The agreement contains potential development, regulatory and commercial milestone payments that, if achieved, could provide us with additional cash payments of up to $32.0 million, including the purchase of $1.0 million of additional shares of our capital stock. If we complete this offering prior to the issuance of these additional shares, upon the achievement of certain milestones, we will issue shares of our common stock at a price per share equal to $1.0 million divided by 110% of the average of the closing bid price of our common stock over the 30-day period ending three days prior to the issuance of these additional shares. In addition, we may receive sales milestone payments of up to approximately $120.0 million and tiered double-digit percentage royalties on sales of any successfully commercialized products within the licensed territory. The $8.0 million nonrefundable up-front payment is being deferred and recognized on a straight-line basis over 31 months, the estimated period of time of the core development phase of the collaboration. As of September 30, 2010, we have not received any milestone or royalty payments.

        Under the agreement, Norgine will share the cost of our planned Phase 3 clinical trials and the cost of procuring clinical manufacturing supply for the trials. Each party is solely responsible for managing and covering the cost of regulatory filings in its own territories. In addition, each party is solely responsible for the cost of any special studies required for regulatory approval specific to its own territory. Costs for development services provided under the agreement are expensed as incurred. Reimbursement of expenses under this agreement will be offset against costs as incurred. We did not recognize any development expense related to this agreement for the nine months ended September 30, 2010.

        Bristol-Myers Squibb Company.    In December 2009, we entered into a collaboration agreement with BMS to discover, develop and commercialize additional novel compounds discovered using our MATCH technology platform, other than our product candidates and internal programs, against a limited number of targets of interest to BMS. Under the terms of the agreement, BMS is funding our early lead discovery efforts on these targets and is also primarily responsible for optimizing the identified lead compounds. BMS will be solely responsible for preclinical and clinical development of all product candidates arising from the collaboration and, if successful products are developed, for their commercialization globally. As part of the agreement, we received a $10.0 million nonrefundable upfront license fee, and we may receive up to approximately $80.0 million in additional milestone payments, excluding sales milestones and royalties, for each target program if development and regulatory milestones are achieved. In addition, we would receive single-digit percentage royalties and sales milestone payments on sales of successful products. The $10.0 million nonrefundable upfront license fee is being deferred and recognized on a straight-line basis over thirty months, the estimated initial research and collaboration period of the agreement. As of September 30, 2010, we have not received any milestone or royalty payments, and we are not certain when we will be eligible for such payments in the future.

        The agreement with BMS provides for reimbursement of costs of up to $1.5 million in year one and $2.5 million in year two, payable in quarterly installments, to support collaboration related

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personnel expenses, laboratory supplies and equipment, with additional funding available for certain other research program expenses. The collaboration agreement may be extended by BMS for a one-year period with ninety day notice to us and may be further extended by mutual agreement. As of September 30, 2010, we have recognized $1.6 million of revenue for reimbursement of research costs under this agreement.

        Open Biosystems, Inc.    In October 2005, we entered into a license and marketing agreement whereby Open Biosystems, Inc. acquired a worldwide royalty-bearing license to certain of our intellectual property unrelated to our product candidates and MATCH drug discovery technology. The agreement provides for royalty revenue on annual net sales at rates that vary by licensed product category or, through 2010, minimum annual royalties if greater than earned, until the expiration date of the last-to-expire licensed patent or 12 years, whichever occurs last. We have recognized $1.2 million of royalty revenue from this agreement through September 30, 2010. With the expiration of the requirement for the payment of minimum annual royalties in 2010, we estimate that future revenues recognized under this agreement will not be material.

Financial Operations Overview

    Revenues

        Our revenue consists primarily of licensing and royalty revenue as well as research revenue, which consists of fees for research services from license or collaboration agreements. The upfront licensing fees received pursuant to our license agreements are deferred and are being recognized in licensing and royalty revenue on a straight-line basis over a period which represents the estimated period of time over which our involvement in the collaboration represents a substantive performance obligation. These fees under our collaboration agreement with BMS and license agreement with Norgine are being recognized over 30 and 31 month periods, respectively. Revenue for research services provided under our collaboration agreement with BMS is recognized in research revenue as such services are performed. Royalty revenue from our agreement with Open Biosystems, Inc. is recognized in licensing and royalty revenue as applicable products are sold.

        We expect our future revenues to increase from historical levels as a result of the deferral and subsequent amortization of the upfront payments received under the collaboration agreement with BMS and the Norgine license agreement and research service revenue being recognized for the collaboration agreement with BMS. In addition, our revenue will increase if we achieve development, regulatory and commercial milestones as specified in these agreements.

        In the future, we may generate revenue from product sales, upfront licensing fees and milestone payments from collaborations, and royalties from the sale of products commercialized under licenses of our intellectual property. We do not expect to generate any significant revenue unless or until we commercialize our product candidates or reach milestones contained in our collaboration agreements. We expect that our revenue will fluctuate from quarter to quarter as a result of the timing and amount of licensing and milestone payments received, research and development reimbursements for collaborative agreements, and other payments received from partnerships. If we or our strategic partners fail to complete the development of our drug candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue from product sales and milestones payments or royalties from product sales may adversely affect our results of operations and financial position.

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    Research and Development

        We expense research and development costs as they are incurred. Research and development expenses consist of expenses incurred in the discovery and development of our product candidates, and primarily include:

    expenses, including salaries, benefits and non-cash share-based compensation expenses for research and development personnel;

    expenses incurred under third party agreements with contract research organizations, or CROs, investigative sites and consultants in conducting clinical trials;

    costs of acquiring and manufacturing clinical trial supplies;

    costs associated with our discovery efforts and preclinical activities;

    costs associated with non-clinical activities and regulatory approvals; and

    costs associated with the maintenance and protection of our intellectual property.

        Direct development expenses and certain indirect overhead expenses associated with our research and development activities are allocated to our product candidates. The allocation of indirect overhead is based on management's estimate of the use of such resources on a program-by-program basis. Indirect costs related to our research and development activities that are not allocated to a product candidate and costs associated with the development of TZP-201 and TZP-301 are included in "Other research and development" in the table below.

        Since inception, our research and development expenses have represented approximately 76% of our total operating expenses. The following table summarizes our research and development expenses for the periods indicated:

 
  Year Ended December 31,    
 
 
  Nine Months Ended
September 30,
2010
 
 
  2007   2008   2009  
 
   
   
   
  (unaudited)
 
 
  (in thousands of dollars)
 

ulimorelin

  $ 7,435   $ 10,950   $ 1,606   $ 544  

TZP-102

    2,971     4,091     2,782     3,159  

Other research and development

    4,580     4,016     2,948     4,001  
                   

Total research and development expenses

  $ 14,986   $ 19,057   $ 7,336   $ 7,704  
                   

        We expect our research and development expenses to increase as we advance into later-stage development of our product candidates. We expect to fund our research and development expenses from our current cash and cash equivalents, a portion of the net proceeds from this offering, milestones and cost-sharing reimbursement payments received from collaboration agreements, if any, and potentially, additional financing transactions or collaboration arrangements.

        At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing our product candidates, including:

    the currently limited clinical data concerning their benefits;

    the uncertain cost and outcome of ongoing and planned clinical trials;

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    the possibility that regulators may require us to conduct clinical or non-clinical testing in addition to trials and studies that we have planned;

    rapid and significant technological changes;

    new product and service introductions and enhancements and evolving industry standards in the life sciences industry; and

    our future need for additional capital.

        Our expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements provide a fixed fee or unit price for services performed. Payments under the contracts depend on factors such as the successful enrollment of patients or the achievement of clinical trial milestones. Expenses related to clinical trials generally are accrued based on services performed at contractual amounts and the achievement of milestones such as number of patients enrolled. If timelines or contracts are modified based upon changes to the clinical trial design or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

        A change in the outcome of any of these variables with respect to the development of a product candidate could result in a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

    General and Administrative

        General and administrative expenses consist primarily of compensation for employees in executive and administrative functions including non-cash, share-based compensation expense, costs associated with our corporate infrastructure, and professional fees for business development, market research, accounting and legal services.

        We anticipate that our general and administrative expenses will continue to increase primarily for the following reasons:

    increased expenses for sales and marketing activities in preparing for commercial launch of our product candidates prior to regulatory approval;

    increased administrative personnel related expenses required to support our growth as we continue to develop our product candidates; and

    increased costs of operating as a public company including costs associated with regulatory compliance, corporate governance, insurance and consulting fees for our legal, accounting and investor relations activities.

    Interest Expense, Net

        Interest income consists of interest earned on our cash and cash equivalents. We expect our interest income to increase following this offering as we invest the net proceeds from the offering pending their use in our operations.

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        Interest expense to date has consisted primarily of interest expense on convertible shareholder notes payable and long-term debt and the amortization of debt discounts and debt issuance costs. We amortize debt issuance costs over the life of the notes which are reported as interest expense in our statements of operations.

    Other Income (Expense), Net

        Other income and expense, to date has primarily consisted of costs incurred from extinguishment of debt and gains and losses on foreign currency transactions primarily from purchases made by Tranzyme Pharma.

Results of Operations

        The following table summarizes our results of operations for the periods indicated:

 
   
   
   
  Nine Months Ended
September 30,
 
 
  2007   2008   2009   2009   2010  
 
   
   
   
  (unaudited)
 
 
   
  (in thousands of dollars)
 

Licensing and royalty revenue

  $ 337   $ 357   $ 617   $ 161   $ 4,157  

Research revenue

            111         1,451  
                       

Total Revenue

    337     357     728     161     5,608  

Operating expenses:

                               
 

Research and development

    14,975     19,057     7,336     5,900     7,704  
 

General and administrative

    2,719     3,323     3,377     2,500     2,863  
                       

    17,694     22,380     10,713     8,400     10,567  
                       

Operating loss

    (17,357 )   (22,023 )   (9,985 )   (8,239 )   (4,959 )

Interest expense, net

    (11 )   (279 )   (1,503 )   (1,109 )   (1,095 )

Other income (expense), net

    129     486     314     163     (104 )
                       

Net loss

  $ (17,239 ) $ (21,816 ) $ (11,174 ) $ (9,185 ) $ (6,158 )
                       

Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009

    Revenues

        Licensing and royalty revenue and research revenue were collectively $5.6 million for the nine months ended September 30, 2010 as compared to $161,000 for the nine months ended September 30, 2009. The $5.4 million increase in revenues during the nine month period ended September 30, 2010, is primarily due to an increase in licensing and royalty revenue from the amortization of upfront licensing fees pursuant to our collaboration agreement with BMS in the amount of $3.0 million and from our license agreement with Norgine in the amount of $1.0 million. In addition, we recognized $1.5 million of research revenue for reimbursable expenses pursuant to the BMS agreement to support the collaborative discovery efforts for the nine months ended September 30, 2010. We had no research revenue during the nine months ended September 30, 2009.

    Research and Development

        Research and development operating expenses were $7.7 million for the nine months ended September 30, 2010, an increase of $1.8 million, as compared to $5.9 million for the nine months ended September 30, 2009. The 31% increase was primarily due to an increase in Phase 2 clinical trial expenses of $1.3 million for TZP-102, an increase of $422,000 for personnel related expenses incurred

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in connection with increasing our research staff to support our collaboration with BMS, an increase of $176,000 for legal expenses related to our maintenance and prosecution of our intellectual property portfolio and an increase of $347,000 for research supplies purchased to support our research and development activities, partially offset by a $445,000 decrease in clinical trial expenses as we concluded the Phase 2 clinical trials for ulimorelin.

    General and Administrative

        General and administrative expenses were $2.9 million for the nine months ended September 30, 2010, an increase of $363,000, as compared to $2.5 million for the nine months ended September 30, 2009. The 15% increase in general and administrative expenses was primarily due to an increase in legal and other professional fees related to our financing and collaboration and license agreement activities.

    Interest Expense, Net

        Interest expense, net was $1.1 million for each of the nine months ended September 30, 2009 and 2010.

    Other Income (Expense), Net

        For the nine months ended September 30, 2010, we incurred $104,000 of losses on foreign currency transactions as compared to $163,000 of other income for the same period of 2009.

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

    Revenues

        Revenues were $728,000 for the year ended December 31, 2009 as compared to $357,000 for the year ended December 31, 2008. The $371,000 increase in revenue for the year ended December 31, 2009, was primarily due to recognition of licensing and royalty revenue of $290,000 related to the amortization of an upfront payment pursuant to the BMS agreement and research revenues of $110,000 for reimbursable expenses to support collaborative discovery efforts associated with the BMS collaboration. For the years ended December 31, 2008 and 2009, we recognized $357,000 and $326,000, respectively, of licensing and royalty revenues from various license and marketing agreements.

    Research and Development Expenses

        Research and development expenses were $7.3 million for the year ended December 31, 2009, a decrease of $11.8 million, as compared to $19.1 million for the year ended December 31, 2008. The 62% decrease was primarily due to an $8.0 million decrease in clinical trial expenses as we completed our Phase 2 clinical trial for ulimorelin. In addition, costs for our preclinical and early discovery development activities as our product candidates advanced into clinical development decreased by $3.8 million including a $594,000 decrease in personnel related expenses resulting from a reduction in the number of employees in our research operations.

    General and Administrative Expenses

        General and administrative expenses were $3.4 million for the year ended December 31, 2009 as compared to $3.3 million for the year ended December 31, 2008. The 3% increase was primarily due to a $447,000 increase in consulting and other professional fees for our business development activities offset by a $259,000 decrease in personnel related expenses and a $134,000 decrease in other costs related to our corporate infrastructure.

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    Interest Expense, Net

        Interest expense, net was $1.5 million for the year ended December 31, 2009 as compared to $279,000 for the year ended December 31, 2008. The $1.2 million increase in interest expense, net for the period ended December 31, 2009 as compared to 2008, was primarily due to an increase of $634,000 for the non-cash accretion of interest related to our convertible shareholder notes and a $501,000 increase for interest paid on our term loan offset by a decrease in income from our investments of $89,000.

    Other Income, (Expense) Net

        Other income, net was $314,000 for the year ended December 31, 2009 as compared to $486,000 for the year ended December 31, 2008. The $172,000 decrease in other income for the period ended December 31, 2009 as compared to 2008, was primarily due to a $144,000 gain on early extinguishment of debt recognized in 2008, and a $28,000 decrease in losses associated with our foreign currency transactions.

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

    Revenues

        Revenues for the year ended December 31, 2008 were $357,000, as compared to $337,000 for the year ended December 31, 2007. The $20,000 increase was primarily due to an increase in licensing and royalty revenues from our license and marketing agreements.

    Research and Development Expenses

        Research and development expenses for the year ended December 31, 2008 were $19.1 million, an increase of $4.1 million, as compared to $15.0 million for the year ended December 31, 2007. The 27% increase in research and development expenses was primarily due to a $1.6 million increase in Phase 1 clinical trial activities for TZP-102, an increase of $2.3 million for Phase 2 clinical trial activities for ulimorelin, and an increase of approximately $386,000 for personnel related expenses including non-cash share-based compensation, partially offset by a decrease of $155,000 for preclinical and early discovery development activities.

    General and Administrative Expenses

        General and administrative expenses for the year ended December 31, 2008 were $3.3 million, an increase of $604,000, as compared to $2.7 million for the year ended December 31, 2007. The 22% increase in general and administrative expenses was primarily due to a $165,000 increase in personnel related expenses including non-cash share-based compensation and a $439,000 increase in other professional fees and services including legal fees related to our business development activities.

    Interest Expense, Net

        Interest expense, net includes interest income on our cash investments and interest expense for our convertible notes and term loans. Interest expense, net was $279,000 for the year ended December 31, 2008 as compared to $11,000 for the year ended December 31, 2007. The $268,000 increase in interest expense, net for the period ended December 31, 2008 as compared to 2007, was primarily due to a decrease in interest income on our cash investments. Interest income decreased as a result of a decline in interest rates for the period ended December 31, 2008 as compared to the same period of 2007.

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    Other Income (Expense), Net

        Other income (expense), net includes gains and losses on early extinguishment of debt and gains and losses on foreign currency transactions. Other income (expense), net was $486,000 for the year ended December 31, 2008 as compared to $129,000 for the year ended December 31, 2007. The $357,000 increase in other income for the period ended December 31, 2008 was primarily due to a $144,000 gain on early extinguishment of debt and a $213,000 gain on foreign currency transactions as compared to the period ended December 31, 2007.

Liquidity and Capital Resources

    Sources of Liquidity

        We have financed our operations primarily through private placements of common stock and convertible preferred stock, issuance of convertible promissory notes to our shareholders, upfront payments from strategic partnerships, bank and other lender financing and development grants from governmental authorities. Our financing sources have included:

    proceeds of approximately $51.0 million from the sale of our and our subsidiary's common stock and convertible preferred stock;

    proceeds of approximately $22.2 million from the issuance of convertible promissory notes by us and Tranzyme Pharma Inc.;

    proceeds of approximately $18.8 million in upfront payments and royalty fees from collaboration and license agreements; and

    proceeds of approximately $23.5 million from the issuance of promissory notes primarily to bank and other lenders.

        As of September 30, 2010, we had $11.7 million in cash and cash equivalents. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash equivalents are invested primarily in money market funds which are currently providing only a minimal return.

    Cash Flows

        The following table sets forth the primary sources and uses of cash for each of the periods presented:

 
  Year Ended December 31,   Nine Months Ended
September 30,
 
 
  2007   2008   2009   2009   2010  
 
   
   
   
  (unaudited)
 
 
  (in thousands of dollars)
 

Net cash used in operating activities

  $ (16,980 ) $ (19,132 ) $ (1,333 ) $ (9,907 ) $ (1,928 )

Net cash used in investing activities

    (231 )   (62 )   (285 )   (8 )   (818 )

Net cash provided by (used in) financing activities

    20,007     18,253     8,883     9,451     (408 )

Effect of exchange rate changes on cash

    (73 )   (718 )   (482 )   (86 )   438  
                       

Net increase (decrease) in cash and cash equivalents

  $ 2,723   $ (1,659 ) $ 6,783   $ (550 ) $ (2,716 )
                       

    Cash Used in Operating Activities

        Net cash used in operating activities during these periods primarily reflected our net losses and changes in working capital, partially offset by non-cash charges including depreciation expense, share-based compensation expense and non-cash interest expense on convertible promissory notes. The net

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cash used in operating activities decreased $17.8 million in 2009 as compared to 2008 primarily due to a decrease in development costs as we completed our Phase 2 clinical trials of ulimorelin and receipt of a $10.0 million upfront license fee for our collaboration agreement with BMS. Net cash used in operating activities decreased $8.0 million for the nine months ended September 30, 2010 as compared to 2009 principally due to our receipt of $8.0 million from our collaboration agreement with Norgine.

    Cash Used in Investing Activities

        Net cash used in investing activities for all periods was primarily due to the purchase of laboratory and other equipment to support our research and development activities. In the nine months ended September 30, 2010, the equipment purchases were made to support our collaboration with BMS.

    Cash Used in Financing Activities

        Net cash provided by financing activities for 2007 was primarily due to receipt of $20.9 million, net of issuance costs, from the sale of 15,852,283 shares of our Series A convertible preferred stock and the sale of 5,147,717 shares of Class A preferred exchangeable stock in Tranzyme Pharma, offset by $1.0 million in principal payments on our term loan. Net cash provided by financing activities for 2008 was primarily due to $10.0 million, net of issuance costs, from the sale of 7,602,283 shares of our Series A convertible preferred stock and the sale of 2,397,717 shares of Class A preferred exchangeable stock in Tranzyme Pharma. In addition, we issued $5.0 million of convertible promissory notes to shareholders and entered into a term loan agreement with two lenders for $6.3 million which was partially offset by aggregate payments of $3.1 million on our term loans. Net cash provided by financing activities for the nine months ended September 30, 2009 and for the year ended December 31, 2009 included the issuance of $10.0 million of convertible promissory notes to shareholders partially offset by principal payments on our term loan. Net cash used in financing activities for the nine month period ended September 30, 2010 was primarily due to $1.6 million, net of issuance costs, from the sale of 1,047,120 shares of our Series B convertible preferred stock to Norgine, partially offset by principal payments on our term loans.

    Credit Facilities

        On October 2, 2008, we entered into a convertible note agreement with certain preferred stockholders to borrow up to $15.0 million in three tranches of $5.0 million each. The average interest rate on the notes was approximately 5.8% annually and matured on September 30, 2010. On September 30, 2010, the notes plus accrued interest converted into 13,884,004 shares of our Series A convertible preferred stock and 2,577,660 shares of Class A exchangeable preferred stock of Tranzyme Pharma.

        On December 3, 2008, we entered into a loan and security agreement with Silicon Valley Bank and Oxford Finance Corporation. This loan and security agreement consisted of a $6.3 million term loan. The amounts owed under the 2008 loan agreement were to be repaid in monthly installments of principal and interest over a three-year period ending December 31, 2011. The 2008 term loan carried an annual interest rate of 12.09% and was secured by our assets, excluding our intellectual property.

        On September 30, 2010, we entered into a term loan and security agreement with Oxford Finance Corporation and Compass Horizon Funding Company for $13.0 million. The proceeds of the loan were received on October 1, 2010 and we used a portion of the proceeds from the 2010 term loan to repay the outstanding principal and interest on the 2008 term loan. The 2010 term loan bears interest at an annual interest rate of 10.75% and is secured by our assets, excluding our intellectual property. The 2010 term loan matures on January 1, 2014 and requires interest only payments for the first nine months and principal and interest payments for the following 30 months. Upon payment of the final monthly installment of the 2010 term loan, or the remaining balance in the case of a prepayment, we

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will also pay an end-of-term fee of approximately $520,000. In addition, in the event of prepayment we will pay a prepayment fee ranging from 6% to 1%, based on time to maturity, of the principal amount of the loan at the time of repayment.

        The 2010 loan and security agreement also contains certain financial and nonfinancial covenants, including limitations on our ability to transfer assets, engage in any change of control transaction, incur additional indebtedness, pay dividends, make investments and engage in transactions with affiliates. Upon an event of default, the lenders may declare the unpaid principal amount of all outstanding loans and interest accrued under the 2010 loan and security agreement to be immediately due and payable, and exercise their security interests and other rights under the credit agreement. As of September 30, 2010, we were in compliance with the covenants under our loan and security agreement.

    Capital Resources and Funding Requirements

        We expect to continue to incur substantial operating losses in the future and that our operating expenses will increase as we continue developing our product candidates and begin to operate as a public company. We will require substantial amounts of capital in the future for clinical trials and regulatory and commercialization activities for our products. Our recurring losses from operations raise substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2009.

        We believe that our existing cash and cash equivalents, together with the net proceeds of this offering, will be sufficient to fund our anticipated operating requirements for at least the next 30 months. We have based this estimate on assumptions that may prove to be wrong resulting in the use of our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, including our ability to enter into collaborations with third parties to participate in development and commercialization of our product candidates, we are unable to estimate the amount of increased capital required to become profitable. Our future funding requirements will depend on many factors, including:

    the scope, progress and results of our clinical trials for ulimorelin and TZP-102;

    the costs and timing involved in obtaining regulatory approvals for our product candidates;

    the market acceptance of our product candidates, if approved, and related success in commercializing and generating sales from our product candidates if approved by the regulatory authorities;

    the costs of developing manufacturing capabilities to support our commercialization activities;

    the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

    the number and characteristics of product candidates that we pursue;

    the timing and amount of payments received under new or existing strategic collaboration agreements, if any, including upfront payments, milestone payments and royalties;

    the amount of cost sharing under new or existing strategic collaboration agreements, if any;

    our ability to hire qualified employees at salary levels consistent with our estimates to support our growth and development, including additional general and administrative personnel as a result of becoming a public company; and

    the costs of developing our anticipated internal sales, marketing and distribution capabilities.

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        Until we obtain regulatory approval to market our product candidates, if ever, we cannot generate revenues from sales of our products. Even if we are able to sell our products, we may not generate a sufficient amount of product revenues to finance our cash requirements. Accordingly, we may need to obtain additional financing in the future which may include public or private debt and equity financings, entering into product and technology collaboration agreements or licenses and asset sales. There can be no assurance that additional capital will be available when needed on acceptable terms, or at all. The issuance of equity securities may result in dilution to stockholders. If we raise additional funds through the issuance of debt securities, these securities may have rights, preferences and privileges senior to those of our common stock and the terms of the debt securities could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we may have to scale back our operations or limit our research and development activities, which would have a material adverse impact on our business prospects and results of operations.

Critical Accounting Policies and Significant Judgments and Estimates

        Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the date of the financial statements, as well as reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates under different assumptions or conditions.

        While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included later in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

    Revenue Recognition

        Our revenues consist primarily of licensing and royalty revenue as well as research revenue, which consists of fees for research services from license or collaboration agreements. The terms of these collaboration agreements typically include payment to us of one or more of the following: non-refundable, upfront payments, payments and reimbursements of research and/or development efforts and activities, contingent milestone payments and royalties on product sales.

        When evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting. This evaluation requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship. If we determine they are separable, we must determine a revenue recognition policy for each separate unit. If we determine the arrangement constitutes a single unit of accounting, the revenue recognition policy must be determined for the entire arrangement.

        We typically receive upfront, nonrefundable payments when licensing our intellectual property in conjunction with a research and development agreement. We believe that these payments generally are not separable from the activity of providing research and development services because the license does

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not have stand-alone value separate from the research and development services that we provide under our agreements. Accordingly, we account for these elements as one unit of accounting and recognize upfront, nonrefundable payments as licensing and royalty revenue on a straight-line basis over the estimated period of time over which our involvement represents a substantive performance obligation, which is typically the term of our research and development obligations. If we cannot reasonably estimate when our performance obligation ends, then revenue is deferred until we can reasonably estimate when the performance obligation ends. As a result, we often are required to make estimates regarding drug development and commercialization timelines for compounds being developed pursuant to a strategic collaboration agreement. Because the drug development process is lengthy and our strategic collaboration agreements typically cover activities over several years, this approach has resulted in the deferral of significant amounts of revenue into future periods. In addition, because of the many risks and uncertainties associated with the development of drug candidates, our estimates regarding the period of performance may change in the future. Any change in our estimates could result in substantial changes to the period over which the revenues from upfront payments are recognized. To date, we have had no material changes to our estimated periods of continuing involvement under our existing strategic collaboration agreements. Also, royalty revenue resulting from applicable licensing agreements is recognized in licensing and royalty revenue as applicable licensed products are sold.

        Our strategic partnership agreements may also contain contingent milestone payments. At the inception of each agreement that includes contingent milestone payments, we evaluate whether the contingencies underlying each milestone are substantive and at risk to both parties, specifically reviewing factors such as the scientific and other risks that must be overcome to achieve the milestone, as well as the level of effort and investment required. Revenues from milestones, if they are nonrefundable, are recognized upon successful accomplishment of the milestones if all of the following conditions are met: (i) achievement of the milestone event was not reasonably assured at the inception of the arrangement; (ii) substantive effort is involved to achieve the milestone event; and (iii) the amount of the milestone payment appears reasonable in relation to the effort expended, the other milestone payments in the arrangement and the related risk associated with the achievement of the milestone event. If any of these conditions are not met, the milestone payment is deferred and is recognized on a straight-line basis over the remaining performance obligation milestone. Payments received or reasonably assured after performance obligations are fully met are recognized in licensing and royalty revenue as earned.

        Because the recognition of a substantive milestone under a collaboration agreement typically requires the completion of a number of activities conducted over a significant period of time, the expenses related to achieving the milestone often are incurred prior to the period in which the milestone payment is recognized. When we do achieve milestones that we consider substantive under any of our collaborations, we may experience significant fluctuations in our licensing and royalty revenues from quarter-to-quarter and year-to-year depending on the timing of achieving such substantive milestones.

        Our collaboration agreements may also include payment for research and development services provided by us on a contractual rate and direct expense basis. We record such payments as research revenue in accordance with the agreements when we act as principal in the transaction. In addition, certain of our collaboration agreements contain cost-sharing provisions for development activities. Reimbursable amounts received under these provisions are reflected as a reduction of research and development expense.

    Research and Development Expenses

        We expense all research and development expenses as incurred including expenses incurred under our cost-sharing collaboration. Research and development expenses include costs incurred in

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performing research and development activities; personnel related expenses including share-based compensation expense; laboratory and clinical supplies; facilities expenses; overhead expenses; and fees for contractual services, including preclinical studies, clinical trials and clinical manufacturing expenses. We estimate clinical trial expenses based on the services received pursuant to contracts with research institutions and contract research organizations, or CROs, that conduct and manage clinical trials on our behalf. We accrue service fees based on work performed, which relies on estimates of total costs incurred based on milestones achieved, patient enrollment and other events. The majority of our service providers invoice us in arrears, and to the extent that amounts invoiced differ from our estimates of expenses incurred, we accrue for additional costs. The financial terms of these agreements vary from contract to contract and may result in uneven expenses and cash flows. To date, we have not experienced any events requiring us to make material adjustments to our accruals for service fees. If we do not identify costs that we incurred or if we underestimate or overestimate the level of services performed, our actual expenses could differ from our estimates which could materially affect our results of operations. Adjustments to our accruals are recorded as changes in estimates become evident. In addition to accruing for expenses incurred, we may also record payments made to service providers as prepaid expenses that we will recognize as expense in future periods as services are rendered.

    Share-based Compensation Expense

        We record share-based awards to employees, including stock options, at their fair value as of the grant date and recognize expense on a straight-line basis over the employee's requisite service period, which is generally the vesting period of the award. Share-based payment transactions with nonemployees are measured using either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. In the case of equity instruments for which the number of shares or other specific terms are not measurable at the time of issuance, we determine whether a measurement date has occurred, and once a measurement date has been determined, we estimate the fair value of the equity instrument granted to the nonemployee using the Black-Scholes valuation model. The measurement of nonemployee share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the term of the related financing or the period over which services are received.

        We reported share-based compensation expense for stock options granted to employees in our statements of operations as follows:

 
  Years Ended December 31,   Nine-months ended September 30,  
 
  2007   2008   2009   2009   2010  
 
   
   
   
  (unaudited)
 
 
  (in thousands of dollars)
 

Research and development

  $ 22   $ 208   $ 133   $ 97   $ 89  

General and administrative

    100     248     234     178     151  
                       

  $ 122   $ 456   $ 367   $ 275   $ 240  
                       

        We recognized $1,000 in share-based compensation expense related to options issued to nonemployees for the periods ended December 31, 2007 and 2008. No share-based compensation expense for nonemployees was recognized for the year ended December 31, 2009 and for the nine-months ended September 30, 2009 or 2010.

        No options were granted or exercised during the year ended December 31, 2009 or for the nine months ended September 30, 2010.

        We calculate the fair value of share-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions,

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including stock price volatility and the expected life of stock options. As a private company, we do not have sufficient history to estimate the volatility of our common stock price or the expected life of our options. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies, or guideline peer group, for which the historical information is available. We will continue to use the guideline peer group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future option grants. The assumed dividend yield is based on our expectation that we will not pay dividends in the foreseeable future. We determine the average expected life of stock options according to the "simplified method" as described in Staff Accounting Bulletin 110, which is the mid-point between the vesting date and the end of the contractual term. We determine the risk-free interest rate by reference to implied yields available from five-year and seven-year U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2007, 2008 and 2009 and the nine months ended September 30, 2009 and 2010 are set forth in Note 9 of our financial statements appearing at the end of this prospectus.

        There is a high degree of subjectivity involved when using option-pricing models to estimate share-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option-pricing model, that value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we have historically reported.

        For the options granted in the years ended December 31, 2007 and 2008, our board of directors estimated the fair value for our common stock, with input from management. Given the absence of an active market for our common stock, our board of directors determined the fair value of our common stock on the date of grant based on several factors, including:

    our stage of development and business strategy;

    the price per share at which our redeemable convertible preferred stock was issued to investors and the rights, preferences and privileges of the preferred stock relative to the common stock;

    our financial condition and book value;

    economic and competitive elements affecting us, our industry and our target markets;

    our projected operating results;

    a comparative analysis of our financial condition and operating results with those of publicly-owned companies engaged in similar lines of business;

    the current and historical relationship between the reported stock prices and revenue and earning levels of selected publicly traded companies engaged in similar lines of business;

    important developments relating to the results of our clinical trials; and

    the likelihood of achieving a liquidity event for our outstanding shares of stock.

Qualitative and Quantitative Disclosures About Market Risk

    Foreign Currency Risk

        We incur a substantial amount of our research and development expenses through our Canadian subsidiary. In addition, we contract with third-party providers to manufacture product and to conduct

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clinical trials and perform other research and development activities in Europe. Accordingly, we are exposed to fluctuations in foreign currency exchange rates in connection with the liabilities incurred by us in these relationships. Pursuant to the terms of a strategic collaboration agreement we entered into in June 2010 with Norgine, the calculation of certain milestone payments and royalty payments, when earned, may be impacted by fluctuations in foreign exchange rates thereby impacting the amount of revenue we ultimately recognize from these payments. In addition, product revenues, if any, are expected to be generated from worldwide sales in various currencies. We do not currently hedge our exposures to foreign currency fluctuations.

    Market Risk

        We are also exposed to market risk related to changes in interest rates as it impacts our interest income. As of September 30, 2010, we had cash and cash equivalents of $11.7 million. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates as our cash equivalents are invested in interest-bearing money market funds. The goals of our investment policy are liquidity and capital preservation to fund our operations. Due to the short-term duration and low risk profile of our cash equivalents portfolio, a 10% change in interest rates would not have a material effect on interest income we recognize or the fair market value of our investments. 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.

    Interest Risk

        The interest rates on our notes payable are fixed. Therefore, we are not exposed to market risk from changes in interest rates as it relates to these interest-bearing obligations.

Contractual Commitments and Obligations

        The following table reflects a summary of our estimates of future material contractual obligations as of December 31, 2009. Future events could cause actual payments to differ from these estimates.

 
  Payments Due By Period  
 
  Total   Less than
1 year
  1-3 years   More than
5 years
 
 
  (in thousands of dollars)
 

Convertible notes payable

  $ 16,182   $ 16,182   $   $  

Term loan

    6,120     2,958     3,162      

Operating lease obligations

    124     124          
                   

Total

  $ 22,426   $ 19,264   $ 3,162   $  

        On September 30, 2010, the convertible notes plus accrued interest converted into 13,884,004 shares of our Series A convertible preferred stock and 2,577,660 shares of Class A exchangeable preferred stock of Tranzyme Pharma. As a result, the convertible notes are no longer outstanding.

        The commitment under our term loan consists of the amounts outstanding under our 2008 notes and does not reflect commitment under our 2010 notes.

        The commitments under our operating leases shown above consist primarily of lease payments for our Durham, North Carolina, corporate headquarters and our Sherbrooke, Quebec, Canada subsidiary location. The amounts shown do not reflect the renewal of our Sherbrooke lease in 2010.

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Off-Balance Sheet Arrangements

        We do not currently have nor have we had in the past any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements

        In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 requires companies to allocate revenue in multiple-element arrangements based on an element's estimated selling price if vendor-specific or other third-party evidence of value is not available. This change increases the likelihood that deliverables within an arrangement will be treated as separate units of accounting, ultimately leading to less revenue deferral for many arrangements. The new accounting guidance is effective beginning January 1, 2011, and earlier application is permitted. We do not believe ASU 2009-13 will have a material impact on our financial statements.

        In April 2010, the FASB issued Accounting Standards Update No. 2010-17, Milestone Method of Revenue Recognition, or ASU 2010-17. ASU 2010-17 defines a milestone event and permits an entity to make an accounting policy election to recognize a payment that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. ASU 2010-17 is effective for fiscal years beginning on or after June 15, 2010, and interim periods within those years, and may be applied prospectively to milestones achieved after the adoption date or retrospectively for all periods presented. Early adoption is permitted. We are in the process of evaluating the potential impact of adopting ASU 2010-17 on our financial results.

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BUSINESS

Overview

        We are a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing novel, first-in-class small molecule therapeutics for the treatment of gastrointestinal (GI) motility disorders in both the acute (hospital-based) and chronic settings. It is estimated that GI motility disorders, which are sometimes referred to as functional GI disorders, affect two in five people in the United States alone. While GI motility disorders are a highly prevalent group of persistent and recurring conditions, they are not well understood. These conditions can affect any part of the GI tract, from the esophagus to the stomach, to the small and large intestines and to the rectum. They are characterized by long-term unpredictable symptom episodes and sometimes disabling effects. They cause tremendous societal burden in terms of both monetary and personal costs. There are currently few safe and effective therapeutic options to treat motility disorders. We believe that the successful development of our product candidates would fulfill a significant unmet medical need.

        Our two clinical stage product candidates, ulimorelin, which is entering Phase 3, and TZP-102, which is entering Phase 2b, target the ghrelin receptor, a novel mechanism of action with a highly potent and direct role in the stimulation of GI motility. This mechanism of action is separate and distinct from the mechanisms utilized by prior GI motility drugs. Prior drugs targeted GI function primarily through either the serotonin or dopamine receptors and had significant safety issues, resulting in product recalls. We believe our product candidates have the potential to offer a safe and effective treatment for GI motility disorders, an area of significant unmet medical need.

    Ulimorelin (Intravenous Ghrelin Agonist)

        Ulimorelin is an intravenous ghrelin agonist entering Phase 3 clinical development for the management of postoperative ileus, or POI. Ulimorelin is designed to accelerate the return of normal GI function in patients suffering from acute GI disorders. We believe ulimorelin has the potential to improve clinical outcomes in patients experiencing loss of motility function in conditions such as POI and gastric stasis. Ulimorelin is administered intravenously, the ideal method of delivery in patients hospitalized with these conditions.

        To date, our ulimorelin clinical program has consisted of six trials involving 577 subjects, 365 of whom received ulimorelin. The results of these trials support our belief that ulimorelin will be a safe and effective treatment for improving multiple symptoms associated with acute GI motility disorders. In our Phase 2 POI trial, GI recovery following partial bowel resection surgery was accelerated by approximately 24 hours in patients receiving ulimorelin, as compared to those receiving placebo. In addition, we observed a favorable safety profile for ulimorelin. We expect to commence two multinational Phase 3 trials for the management of POI in the first half of 2011. Each trial will enroll 300 patients and will be conducted at approximately 50 sites in North America and Europe. Based on discussions with the U.S. Food and Drug Administration, or FDA, at our End of Phase 2 meeting, and the advice we received from the European Medicines Agency, or EMA, the primary endpoint for our Phase 3 program will be acceleration of GI recovery in patients undergoing partial bowel resection.

    TZP-102 (Oral Ghrelin Agonist)

        TZP-102 is an orally-administered ghrelin agonist that we are developing for diabetic gastroparesis, an upper GI motility disorder. Gastroparesis is a debilitating, chronic condition characterized by slow or delayed gastric emptying and gastric retention that can be caused by any disease that induces neuromuscular dysfunction of the GI tract, notably diabetes. Up to 4% of the population in the United States experiences symptomatic manifestations of gastroparesis. There are currently no safe and effective therapies on the market for treating this disorder. As a result, the FDA granted TZP-102 fast track status for the treatment of diabetic gastroparesis.

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        We evaluated the efficacy and safety of TZP-102 in a 28-day, proof of concept Phase 2 trial of 92 patients with diabetic gastroparesis. TZP-102 was observed to be effective in improving the most prevalent and clinically relevant symptoms associated with gastroparesis in this patient population, while exhibiting a favorable safety profile. We expect to commence a 12-week, Phase 2b trial for the treatment of diabetic gastroparesis in the third quarter of 2011 and evaluate TZP-102 for the treatment of other upper GI disorders such as functional dyspepsia and refractory gastroesophageal reflux disease, or refractory GERD.

    Our Technology and Other Product Candidates

        All of our product candidates have been discovered using our proprietary Macrocyclic Template Chemistry (MATCH) technology platform, which enables us to construct synthetic libraries of drug-like, macrocyclic compounds in a predictable and efficient manner. In addition to our two most advanced product candidates, we are also developing a motilin antagonist, TZP-201, for the treatment of various forms of moderate-to-severe diarrhea, and a ghrelin antagonist, TZP-301, for the treatment of obesity and other metabolic diseases. We are planning to ultimately move both compounds into clinical development.

    Our Strategic Partnerships

        In June 2010, we entered into a license agreement with Norgine B.V., or Norgine, a leading, GI-focused European specialty pharmaceutical company, that provides Norgine with exclusive rights to develop and commercialize ulimorelin in Europe, Australia, New Zealand, Middle East, North Africa and South Africa. We retain rights to ulimorelin in all other territories, including North America, South America and all of Asia. The license permits Norgine to develop and commercialize ulimorelin only in injectable formulations. Norgine will share the cost of our planned Phase 3 clinical trials and the cost of procuring clinical manufacturing supply for the trials. In addition, we will receive milestone payments and royalties from the sale of ulimorelin in Norgine's territories.

        In December 2009, we entered into a strategic collaboration with Bristol-Myers Squibb Company, or BMS, to discover, develop and commercialize additional novel compounds discovered using our MATCH technology platform, other than our product candidates and internal programs, against a limited number of targets of interest to BMS. Under the terms of the agreement, BMS is funding our early lead discovery efforts on these targets and is also primarily responsible for optimizing the identified lead compounds. BMS will be solely responsible for preclinical and clinical development of all the products arising from this collaboration and for their commercialization globally. We will be entitled to development and regulatory milestone and royalty payments.

        We believe the quality as well as the breadth of our product candidate pipeline, technology platform, strategic collaborations and scientific team will enable us to become one of the leading companies focused on treating GI motility disorders.

Business Strategy

        Our objective is to develop and bring to market products to treat acute and chronic GI motility disorders that are not satisfactorily or safely treated with current therapies and that represent significant market opportunities. Our business strategy is to:

    Continue development and pursue regulatory approval for our product candidates.  We are preparing our Phase 3 program for ulimorelin and expect to begin enrolling in two Phase 3 clinical trials for the management of POI in the first half of 2011. We are currently preparing to initiate a Phase 2b trial of TZP-102 in patients suffering from diabetic gastroparesis in the third quarter of 2011. We plan to conduct additional preclinical studies to bring additional product candidates in our pipeline into clinical development.

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    Pursue additional indications for ulimorelin and TZP-102.  GI motility is compromised by a number of disorders, for which there are few safe and effective treatment options. Therefore we believe our product candidates, which are designed to stimulate GI motility, may be applicable to treat several disorders in addition to those we are currently pursuing. As a result, we plan to evaluate our development and commercialization plans for both ulimorelin and TZP-102 to support additional indications, such as gastric stasis in critical care settings, functional dyspepsia and refractory GERD.

    Explore partnerships to accelerate and maximize the potential of our product candidates while preserving significant commercialization rights.  As we continue to generate data on ulimorelin, TZP-102 and our other product candidates, we plan to investigate development and commercialization licensing strategies with strategic partners.

    Explore building in-house capabilities and strategic partnerships that will allow us to effectively commercialize ulimorelin in the United States.  As ulimorelin progresses through its Phase 3 program, in addition to partnering, we intend to explore the development of our own hospital-based sales force and marketing capabilities to allow us to directly market ulimorelin in the United States, if approved by the FDA.

    Leverage our MATCH platform to discover, develop and commercialize a pipeline of first-in-class products with discovery partners.  All of our product candidates to date have been discovered using our proprietary MATCH drug discovery platform. We intend to continue to explore additional funded collaborations leveraging our MATCH drug discovery platform.

The Gastrointestinal Market

        The health of the GI system has a major effect on an individual's daily activities and quality of life. A retrospective review published by the National Institute of Diabetes and Digestive and Kidney Diseases estimated that in 2004 there were more than 97 million ambulatory care visits with a diagnosis of a GI disorder in the United States alone. The annual cost of these GI disorders in 2004, not including digestive cancers and viral diseases, was estimated to be greater than $114.0 billion in direct and indirect expenditures, including hospital, physician and nursing services as well as over-the-counter and prescription drugs.

        We estimate worldwide sales of GI drugs to be worth $49.9 billion in 2008. Sales in the United States of $18.8 billion represented 38% of this market, the largest percentage by value. Four major GI market segments can be distinguished:

    upper GI disorders resulting from impaired motility along the upper GI tract, including GERD, gastroparesis and functional dyspepsia;

    lower GI disorders resulting from impaired motility affecting the small and large intestines, such as constipation and irritable bowel syndrome, or IBS;

    inflammatory GI disorders such as Crohn's disease and ulcerative colitis; and

    disorders of organs involved in the digestive process, such as gallbladder, liver and pancreas.

        Historically GI product development efforts have focused on indications with the largest patient populations such as GERD, constipation, peptic ulcers and IBS. As a result, limited innovation has occurred in other segments of the GI market, such as upper GI motility disorders, even though these disorders affect several million patients worldwide. Consequently, due to the limited safe and effective treatments available for upper GI motility disorders, we believe there is a substantial market opportunity for us to address significant unmet medical needs.

        We have focused our attention on developing products to treat patients suffering predominantly from upper GI motility disorders, identifying conditions and diseases such as POI, gastric stasis and

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gastroparesis as areas of high unmet medical needs with few, if any, effective and safe treatment options.

    GI Motility Disorders

        Motility disorders are one of the most common GI disorders. Motility disorders affect the orderly contractions or relaxation of the GI tract which move contents forward and prevent backwards egress. This is important in the normal movement of food throughout the GI tract.

        Motility disorders are sometimes referred to as functional GI disorders to highlight that many abnormalities in gut function can occur even when structure is normal. Functional GI disorders affect the upper and lower GI tract and include gastroparesis, GERD, functional dyspepsia, constipation and IBS. It has been estimated by the International Foundation for Functional Gastrointestinal Disorders that two in five people in the United States suffer from functional GI disorders, having symptoms such as abdominal pain, nausea, vomiting, constipation, diarrhea, bloating, decreased appetite, early satiety, swallowing difficulties, heartburn or incontinence.

    Postoperative Ileus

        Postoperative ileus, or POI, refers to lack of GI motility after surgery before normal bowel function resumes, and can affect the stomach, small intestine or colon. POI is associated most commonly with major abdominal surgery, such as bowel resection, but it is also a well-recognized complication after gynecological surgeries, and may occur with other non-GI-related procedures including extraperitoneal surgery, joint replacement and cardiovascular surgery.

        POI is considered to be an inevitable response to major abdominal surgery and often complicates postoperative care. Delayed gastric emptying and disrupted intestinal motility are the main factors leading to POI. Patients with POI often endure symptoms of nausea and vomiting, abdominal pain and cramping, bloating, abdominal distention and the inability to pass stool. During this time, patients are not able to tolerate solid food or have bowel movements, the resumption of which are required before the patient may be released from the hospital. POI may also be responsible for numerous postoperative complications, including infection, difficulty breathing, pneumonia and poor wound healing.

        The mechanism of POI is multi-faceted, and includes neural and inflammatory responses to surgical trauma. Opioid drugs used for postoperative pain may also contribute to POI by decreasing colonic motility via stimulation of mu-opioid receptors.

        The economic burden of POI is considerable. There are an estimated 360,000 bowel resection surgeries performed annually in the United States. A retrospective review, published in the Journal of Managed Care Pharmacy, of more than 17,000 patients in the United States in 2004 who underwent bowel resection surgery found that the mean hospital length of stay for patients suffering from prolonged POI was almost four full days longer. One of the key objectives of effective therapy is to accelerate postoperative GI recovery and enable hospital discharge as soon as possible.

    Gastroparesis

        Gastroparesis is a debilitating, chronic condition that has a significant impact on patients' lives. It is characterized by slow or delayed gastric emptying and evidence of gastric retention in the absence of mechanical obstruction. Muscular contractions in the stomach, which move food into the intestine, may be too slow, out of rhythm or cease altogether. As a result, the contents in the stomach do not move efficiently through the GI tract, resulting in multiple symptoms, including nausea, early satiety, bloating and upper abdominal pain.

        Gastroparesis can be a manifestation of many systemic illnesses, arise as a complication of select surgical procedures, or develop due to unknown causes. According to the American Motility Society Task Force on Gastroparesis, up to 4% of the population in the United States experiences symptomatic

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manifestations of gastroparesis. Any disease inducing neuromuscular dysfunction of the GI tract can result in gastroparesis, with diabetes being one of the leading known causes. In one study, it was reported that 29% of gastroparesis cases were found in association with diabetes, 13% developed as a complication of surgery and 36% were due to unknown causes. As the incidence of diabetes rises worldwide, the prevalence of gastroparesis is expected to rise correspondingly.

    Gastric Stasis in Critical Care

        A major treatment challenge in the critical care population is impaired gastrointestinal tract motility in the form of delayed gastric emptying. As a result, patients may not be able to eat normally due to the accumulation of gastric content and increased risks of vomiting and aspiration. Consequently, adequate nutrition, hydration, and electrolyte balance can be difficult to maintain and often necessitates the use of intravenous nutritional supplementation. This mode of nutritional supplementation in the critically ill patient population is expensive and associated with infection and a variety of metabolic abnormalities.

        Critical care patients with diminished GI motility also demonstrate impaired immunity and a subsequent increased incidence of systemic infections, including aspiration pneumonia, ICU-acquired sepsis and multi-organ dysfunction. The attenuated immunity is thought to be due to the inability to use the GI tract for nutrition. An intravenously-administered motility agent is a priority for such patients to improve gastric motility by increasing the tolerability and volume of normal feeding. Interventions that result in improved patient nutrition delivery have the potential to improve patient outcomes, resulting in reduced length of hospital stay and related costs.

        According to the Society for Critical Care Medicine, there are approximately 6,000 critical care units in the United States alone, caring for 55,000 critically ill patients each day. Delayed gastric emptying is common, occurring in approximately 50% of mechanically ventilated critically ill patients. GI dysfunction also occurs in approximately 80% of patients with burn injuries, 80% of patients with increased intracranial pressure after head injury, 70% of multi-trauma patients, 60% of patients with sepsis, 33% of patients with respiratory failure and 30% of patients with cardiac injury.

Limitations of Current and Historical Promotility Treatments

        Drugs that induce the resumption of normal GI motility have been tried for many years. Currently, there are limited treatment options for upper GI motility disorders. Promotility drugs such as Propulsid (cisapride) and Zelnorm (tegaserod), which had global sales in excess of $1.0 billion and $500 million, respectively, have been taken off the market for safety reasons. Reglan (metaclopramide), the only therapy presently indicated for the treatment of upper GI motility disorders, has received a blackbox warning from the FDA due to serious safety concerns. In addition erythromycin, an antibiotic, has shown limited efficacy, although it is not indicated for the treatment of upper GI motility disorders.

        Propulsid (cisapride), a serotonin receptor modulator, was originally brought to the market in the United States to treat nocturnal GERD. It was also used for a variety of motility disorders, such as gastroparesis, functional dyspepsia and refractory GERD. Cisapride, which launched in 1993, reached sales in excess of $1 billion in 1999. However, cisapride was voluntarily withdrawn from the market in 2000 when the risk of serious cardiac arrhythmias and death was believed to outweigh the health benefit.

        Zelnorm (tegaserod), a serotonin receptor modulator, was approved in the United States in 2002 for the short-term treatment of IBS with constipation in women, followed later by an approval for chronic constipation in 2004. Tegaserod was also believed to have some activity in upper GI motility disorders and reached sales in excess of $500 million in 2006. However, tegaserod was withdrawn from the marketplace in 2007 due to an increased risk of ischemic events, including heart attacks and strokes.

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        Reglan (metoclopramide), a mixed dopamine and serotonin receptor modulator, is the only drug indicated for the treatment of diabetic gastroparesis in the United States. Metoclopramide is somewhat effective for short-term use only; however, approximately 20% of patients must discontinue therapy due to intolerance and acute side effects, predominantly an involuntary movement disorder, known as tardive dyskinesia, the symptoms of which mimic Parkinson's disease. Even with this limitation, we estimate that approximately 958 extended million units of various formulations of metoclopramide were sold in 2008. In February 2009, the FDA required that a black box warning be added to the metoclopramide label because of the risk of tardive dyskinesia with long-term use, and recommended that its use be limited to 12 weeks.

        Erythromycin is a macrolide antibiotic that also is a motilin receptor agonist. While it has demonstrated limited efficacy in upper GI motility disorders, its use is associated with concerns for bacterial infection and development of antibiotic resistance. Like cisapride, erythromycin has significant potential to interact with other medications and has also been associated with cardiac arrhythmias and death.

        One additional medication, Motilium (domperidone), a dopamine receptor modulator, is not FDA-approved, but is available in the United States through various compounding pharmacies under a specific FDA restricted-access program. The efficacy of domperidone as a promotility agent is not fully established. In addition, studies have also demonstrated that domperidone, like cisapride, may cause heart rhythm abnormalities.

        Two agents, Entereg (alvimopan) and Relistor (methylnaltrexone), have recently been developed to counteract the negative effects of opioids on GI tract motility.

        Entereg (alvimopan), which was approved in the United States in 2008, is the only medication indicated for POI. Alvimopan is a peripherally acting, mu-opioid receptor antagonist that inhibits the GI effects of opioids without affecting central pain control. Alvimopan is only available in oral form and must be administered prior to surgery, which makes it a challenge to administer in this patient population. The primary benefit of alvimopan appears to occur in patients receiving opioid medications for pain management. The drug's benefit in those patients not receiving opioid medications remains uncertain. In addition, the FDA has mandated a blackbox warning on the alvimopan label due to serious safety concerns.

        Relistor (methylnaltrexone), a mu-opioid receptor antagonist, is indicated for the treatment of opioid-induced constipation in patients with advanced illness who are receiving palliative care, when response to laxative therapy has not been sufficient. It must be delivered subcutaneously due to poor oral bioavailability and has no effect in motility disorders occurring outside of opioid use. Two multinational, pivotal studies failed to demonstrate the benefit of methylnaltrexone in POI.

        In light of the limited number of safe and effective alternatives for patients with motility disorders, especially treatments for long-term use, we believe a substantial market exists for promotility therapeutics that are safe and effective.

Ghrelin

        Ulimorelin and TZP-102 are ghrelin agonists that may have significant advantages relative to current and formerly available promotility agents because of their novel mechanism of action. Ghrelin is a hormone produced mainly by cells of the stomach and has a highly potent and direct role in the stimulation of GI motility. Ghrelin provides a mechanism of action separate and distinct from the mechanisms of the products discussed above, which target the serotonin and dopamine receptors.

        We believe our product candidates, ulimorelin and TZP-102, are the first small molecule ghrelin agonists to be developed specifically to improve multiple symptoms of upper GI motility disorders. Pharmaceutical companies originally targeted ghrelin to treat growth hormone, or GH, deficiency disorders, such as short stature in children, but clinical trials in this area were unsuccessful. Most of

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these compounds had been optimized for their GH secretion properties, not their GI promotility activity. Our compounds are from a completely new structural class, macrocycles, designed by us utilizing our proprietary MATCH technology, not previously known to interact at the ghrelin receptor. Unlike the earlier ghrelin agonists, our compounds are highly selective and potent GI motility agents. We believe the pharmacokinetic properties of these compounds contribute to the prolonged action and excellent safety profile observed to date. We are not aware of other macrocyclic compounds in development as ghrelin agonists and promotility agents.

Our Clinical Product Candidates

        We utilized our MATCH drug discovery platform to discover the following product candidates with potential applications in treating motility and other disorders:

GRAPHIC

    Ulimorelin (Intraveneous Ghrelin Agonist)

        Ulimorelin is a first-in-class, small molecule ghrelin agonist that we are developing for the treatment of acute upper GI motility disorders. Ulimorelin accelerates the return of normal GI function in patients suffering from acute GI disorders. We believe ulimorelin has the potential to improve clinical outcomes in patients experiencing loss of motility function in conditions such as POI and gastric stasis. Ulimorelin is administered intravenously, which is the ideal method of delivery in patients hospitalized with these conditions. There are currently few safe and effective therapeutic options for these indications, and we believe that successful development of ulimorelin would fulfill a significant unmet medical need.

        We expect to commence two multinational Phase 3 clinical trials of ulimorelin for the management of POI following partial bowel resection surgery in the first half of 2011. The development of ulimorelin in Europe is the primary responsibility of our European partner, Norgine.

        In addition, we plan to expand our ulimorelin development program to the treatment of gastric stasis in critical care patients.

    Clinical Overview

        Our ulimorelin clinical program to date has consisted of six trials involving 577 subjects, 365 of whom received ulimorelin. Three of these trials were completed in healthy volunteers, one in POI following open partial large bowel resection and two in patients with symptoms of diabetic gastroparesis.

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        Phase 2 POI Trial.    Our Phase 2 POI trial was a multinational, multicenter, double-blind, dose-ranging, placebo-controlled trial employing an adaptive randomization design. We evaluated seven ulimorelin doses ranging from 20 to 600µg/kg against placebo, administered as single intravenous doses once daily. All subjects participating in the trial had undergone open partial large bowel resection. The trial consisted of 236 patients dosed with either ulimorelin or placebo. Demographic and baseline characteristics were comparable across treatment groups.

        The primary efficacy endpoint for this trial was time to recovery of GI function as defined by the time from the end of surgery to first bowel movement, or BM. Additionally, two important secondary endpoints measured were time from end of surgery to the later of first BM and tolerance of solid food, referred to as GI2, and proportion of subjects achieving GI recovery within 72 hours after surgery. As shown in the table below, statistically significant improvement versus placebo was noted at doses of 40, 80 and 480µg/kg, with trends toward statistical significance at all doses except 20µg/kg. The objective of the adaptive randomization was to determine the smallest dose that would have at least 90% probability of achieving the maximum treatment effect, or the ED90 dose. The probability of that dose being successful in Phase 3 was also assessed. In this trial, 480µg/kg was determined to be the ED90 dose, having the best probability of success in Phase 3. The probability of 480µg/kg being successful in Phase 3 was over 80%. At the 480µg/kg dose, the median difference from placebo for time to BM was 21.6 hours (p = 0.003). Analyzed against GI2, the primary endpoint that will be employed in our Phase 3 clinical trials, median difference from placebo for the 480µg/kg dose was 23.3 hours (p = 0.002). The effects of ulimorelin persisted even after accounting for multiple variables, including country, type/duration of surgery, age and opioid consumption. We believe that the observed difference from placebo in time to GI recovery in patients receiving ulimorelin is clinically relevant.

        Similarly, the proportion of subjects achieving an early recovery of GI motility within 72 hours post-surgery was also significantly greater in the 480µg/kg dose group compared to the placebo group, with 60% of patients meeting the GI2 endpoint in the 480µg/kg dose group versus 23% for patients receiving placebo. POI that lasts for more than 72 hours is considered clinically important and is currently observed in approximately 80% of patients undergoing bowel resection.

Phase 2 POI Trial: Time to Recovery of GI Function as defined by Time to BM and Time to GI2

 
   
  Time to BM   Time to GI2  
Dose (µg/kg)
  Number of
Subjects
  Median Time
(Hours)
  p-value   Median Time
(Hours)
  p-value  

Placebo

    69     89.6         91.3      

20

    27     79.2     0.265     79.2     0.134  

40

    38     70.1     0.005 *   73.0     0.006 *

80

    25     70.5     0.005 *   70.5     0.004 *

160

    15     74.6     0.078     81.3     0.331  

320

    18     76.3     0.074     82.2     0.368  

480

    25     68.0     0.003 *   68.0     0.002 *

600

    19     75.8     0.076     75.8     0.051  

All Ulimorelin Doses

    167     72.2     0.000 *   75.5     0.001 *

*
statistically significant, p £0.05

        Ulimorelin was generally well-tolerated and safe, with no dose dependent trends. We observed one or more treatment-emergent adverse events, or AEs, in 51.8% of patients receiving ulimorelin and 57.4% of patients receiving placebo. These AEs were consistent with the historical data for this patient population. The table below outlines the AEs experienced by 3% or more of patients receiving ulimorelin.

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Phase 2 POI Trial: Treatment Emergent Adverse Events in ³ 3% of Patients
Receiving Active Drug

 
  Placebo   All Ulimorelin Doses  
Adverse Event
  Number of
Subjects
  Percentage of
Total Subjects
  Number of
Subjects
  Percentage of
Total Subjects
 

Vomiting

    11     16.2     22     13.1  

Nausea

    18     26.5     21     12.5  

Fever

    4     5.8     12     7.2  

Wound Infection

    3     4.4     7     4.2  

Low Blood Albumin

    3     4.4     7     4.2  

Anastomotic Complications (includes leaks and fistulas)

    1     1.5     7     4.2  

Urinary Tract Infection

    3     4.4     6     3.6  

Anemia

    2     2.9     6     3.6  

Diarrhea

    2     2.9     5     3.0  

High Blood Pressure

    2     2.9     5     3.0  

High Blood Sugar

    1     1.5     5 *   3.0  

*
Three patients had concurrent type 2 diabetes

        For the partial bowel resection population, particular attention was paid to surgery-related AEs, such as anastomotic complications or leaks, which were reported in 4.2% and 1.5% of patients receiving ulimorelin and placebo, respectively. Our observed incidence of these events is within the range reported in published data for bowel resections, where a 3-8% incidence of anastomotic leaks has been consistently observed after surgery.

        Phase 2 Diabetic Gastroparesis Trial.    We have also conducted a proof of concept Phase 2 trial of ulimorelin in patients with symptoms of diabetic gastroparesis. This was a double-blind, randomized, placebo-controlled trial in 76 diabetic patients with moderate-to-severe symptoms due to gastroparesis. Patients were admitted to the hospital and adaptively randomized to receive a single 30-minute intravenous infusion of one of six ulimorelin doses ranging from 20 to 600µg/kg or placebo for four consecutive days. 57 patients received ulimorelin and 19 patients received placebo. Symptoms were evaluated daily with the Gastroparesis Cardinal Symptom Index, or GCSI. The GCSI consists of nine patient-rated symptom assessments, comprising three domains: (1) fullness/early satiety, (2) nausea/vomiting and (3) bloating, for quantifying the severity of gastroparesis. The 80µg/kg dose was identified as the most effective dose. On day 4, there was statistically significant improvement compared with placebo in the severity of loss of appetite and vomiting scores for that dose group (p = 0.034 and p = 0.006). In addition, the proportion of patients with at least 50% improvement in vomiting score was significantly higher with ulimorelin (p = 0.019) compared with placebo.

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        The treatment effects were most pronounced in patients with more severe nausea and vomiting at baseline. As shown in the figures below, there was also a significant increase in vomiting-free days in this subset of patients. In addition, a sustained decrease in vomiting severity was noted at the 30-day follow-up assessment. The pronounced and lasting effects of ulimorelin on vomiting are relevant to patients with acute episodes of severe gastroparesis who experience frequent and severe vomiting and nausea.

GRAPHIC

GRAPHIC

        All doses of ulimorelin used in this trial were well-tolerated. No dose-related trends were identified with respect to AEs. The observed AEs between ulimorelin and placebo treated subjects were similar in incidence, severity, and relationship to the study drug. The most common AEs in the ulimorelin treated subjects were diarrhea (3 subjects compared to 0 subjects for placebo) and hyperglycemia (6 subjects compared to 0 subjects for placebo). These events did not lead to the discontinuation of therapy. No other clinically relevant changes were observed with respect to laboratory, vital sign or the extensively evaluated electrocardiogram, or ECG, parameters.

        Other Clinical Trials of Ulimorelin.    In addition to our Phase 2 trials, we have also completed single and multiple ascending dose Phase 1 clinical trials in healthy volunteers, and a thorough ECG evaluation study, or "QTc" study, involving 160 healthy subjects. Prolongation of QTc is associated with elevated risk of cardiac arrhythmias and sudden death. Arrhythmias due to drug-induced QTc prolongation are the second most common cause for drug withdrawal and have been cause for increasing concern in the drug development arena. Our QTc study measured a multitude of electrophysiological parameters and no deleterious effect on these parameters was apparent. In a separate double-blind, cross-over trial of 10 subjects with diabetic gastroparesis, ulimorelin showed a statistically significant (p = 0.043) acceleration of gastric emptying of a solid meal relative to placebo.

        Our Planned Phase 3 POI Trials.    Based on our discussion with the FDA at our End of Phase 2 Meeting, and the advice we received through the Scientific Advice procedure with the EMA, we have

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determined the clinical trial design and endpoints for our Phase 3 program. We expect to commence two multinational Phase 3 POI clinical trials in the first half of 2011. Each trial will be comprised of 300 patients and will be conducted at approximately 50 sites in North America and Europe. In these double-blind, placebo-controlled trials, patients undergoing partial bowel resection will be evenly randomized to one of three treatment groups: ulimorelin 480µg/kg, 160µg/kg or placebo. These doses have previously been evaluated for tolerability, safety and efficacy in clinical trials, and were selected based on data from the Phase 2 POI trial. The Phase 3 trials will consist of a screening period, an in-patient treatment period, a follow-up phone call 14 days after the surgery and a follow-up clinic visit 35 days after the surgery. The initial dose will be implemented within one hour post surgery. Additional doses will be given once per day for up to a maximum of seven days until the primary endpoint is achieved. The use of opioids for postoperative pain is expected in all patients. The primary endpoint of each trial will be the time to GI recovery as defined by time to GI2. Secondary endpoints include:

    time from the end of surgery to first BM;

    proportion of subjects achieving GI2 by 72 hours post surgery;

    time to "met discharge criteria" defined as meeting all of the following criteria: effective transit of intestinal contents, tolerance of oral intake, analgesia consistent with discharge status and medically stable for discharge; and

    incidence of nausea and vomiting.

TZP-102 (Oral Ghrelin Agonist)

        TZP-102 is an orally-administered ghrelin agonist that we are developing for diabetic gastroparesis, a chronic upper GI motility disorder. Though targeting the same receptor as ulimorelin, TZP-102 is structurally different and distinct from ulimorelin. The compositions of matter of these two new chemical entities are claimed under separate patents and patent applications.

        TZP-102 has been granted fast track status by the FDA for the treatment of gastroparesis in diabetic patients. We expect to initiate a 12-week, multinational, multicenter, randomized placebo-controlled Phase 2b trial of TZP-102 in patients with diabetic gastroparesis in the third quarter of 2011, and to evaluate TZP-102 for the treatment of other upper GI motility disorders such as functional dyspepsia and refractory GERD.

    Clinical Overview

        The TZP-102 clinical program to date includes successfully completed Phase 1 and Phase 2 trials involving 137 subjects, 98 of whom received TZP-102. The single/multiple dose Phase 1 trial was conducted in healthy volunteers, while the Phase 2 trial was performed in subjects with diabetic gastroparesis.

        Phase 2 Diabetic Gastroparesis Trial.    We evaluated the efficacy and safety of TZP-102 in a 28-day, Phase 2 proof of concept trial of 92 patients with diabetic gastroparesis. Subjects were eligible for the trial if they had diabetes, delayed gastric emptying and overall GCSI symptom severity equal to or exceeding 2.66, which was considered to be moderately severe. Subjects were randomized to receive 10mg, 20mg or 40mg once-daily oral doses of TZP-102 or placebo for 28 days, followed by a 30-day withdrawal period. Symptoms were evaluated by patient-reported symptom severity scales during treatment on dosing days 8, 15 and 28 and during follow-up on days 42 and 58.

        The effect of TZP-102 on improvement of gastroparesis symptoms was evaluated by assessing the change from baseline in patient-reported symptom scores at each evaluation visit. Statistically significant improvements or trends towards significant improvement versus placebo were observed in multiple individual symptoms across all TZP-102 dose groups. While all doses of TZP-102 were

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superior over placebo, the maximum improvement in symptom scores was achieved at the 20mg dose. At the end of the 28-day treatment period, a statistically significant improvement versus placebo was observed with 20mg TZP-102 for each of the most prevelant and clinically relevant symptoms for this patient population, as shown in the table below.

Phase 2 Diabetic Gastroparesis Trial: Improvement over Placebo in Most Prevalent and
Clinically Relevant Symptoms

 
   
  TZP-102 20mg (n=21)  
Symptom
  Baseline
Score
  Improvement over
Placebo at Day 28
  p-value  

Nausea

    3.2     1.0     0.029 *

Early Satiety

    3.1     1.0     0.001 *

Bloating

    3.8     0.7     0.045 *

Upper Abdominal Pain

    2.7     0.7     0.043 *

Postprandial Fullness

    4.0     1.0     0.020 *

*
statistically significant p<0.05

        Based on discussions with the FDA at our meeting in November 2010, the primary endpoint for our Phase 2b trial will be based on patient-reported symptom scores for nausea, early satiety, bloating and upper abdominal pain. Baseline and day 28 data for these four most clinically relevant gastroparesis-related symptoms for all dose groups are presented in the figures below.

GRAPHIC

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        Improvement in symptoms was apparent as early as day 8 and continued during the 28-day treatment period. These effects reverted with discontinuation of treatment. Changes over time in the four clinically relevant symptoms for the 20mg TZP-102 dose and placebo groups are illustrated in the figures below.

GRAPHIC

        In addition to the gastroparesis-related symptoms above, we also evaluated upper abdominal discomfort, lower abdominal pain and lower abdominal discomfort, which are considered important in other GI motility disorders. Each of these symptoms markedly improved over time in patients receiving the 20mg TZP-102 dose and reached significance by day 28 with a p-value of 0.02. These data suggest that TZP-102 has potential use in other motility disorders as well.

        The effects on gastric emptying were assessed by breath testing on days 1 and 28. The proportion of patients with normalized gastric emptying on day 28, the final day of treatment, was 52.6% for 20mg TZP-102 and 36.0% for placebo, although these differences did not reach statistical significance. As in prior studies reported in medical literature, gastric emptying in individual patients correlated poorly with symptom improvement.

        All three doses of TZP-102 were well-tolerated during the four week treatment period. A total of 50 patients (75.8%) who received TZP-102 and 20 patients (76.9%) who received placebo experienced one or more treatment-emergent AE. The majority of these reported AEs were mild.

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        Due to the expected chronic use of this product candidate, we studied the effect of TZP-102 on certain pharmacological and physiological parameters including body weight, GH, insulin-like growth factor-1, or IGF-1, glucose profile and cardiovascular parameters. Body weight of subjects that were enrolled in the trial was measured at every trial visit. No significant treatment-related changes in body weight were observed. After 28 days of treatment the average body weight change from baseline was 0.4 kg, 0.0 kg, -0.2 kg and 0.3kg for patients receiving 10mg, 20mg, 40mg TZP-102 and placebo, respectively. Blood GH and IGF-1 concentrations were assessed before and hourly for four hours after the first and last administrations of TZP-102 on day 1 and day 28 visits. Transient and minimal increases in mean serum GH concentration were observed only with the 40mg TZP-102 dose. We observed no increase in GH concentration at the 10mg and 20mg doses. There was considerable variability in the assessments of IGF-1 concentrations among patients in each treatment group; however, these values remained within normal physiologic concentrations of IGF-1, and no significant effects were identified. Blood glucose levels, measured pre-meal and at one and two hours after initiation of a meal, did not indicate any clinically important differences in glucose profile between patients exposed to TZP-102 and placebo. Extensive ECG monitoring did not reveal any significant effects on various electrophysiological parameters.

        Phase 1 Trial.    The safety, pharmacokinetics and pharmacodynamics of escalating single and multiple dose regimens of TZP-102 were evaluated in a single and multiple ascending dose Phase 1 trial in 45 healthy subjects. Doses up to 80mg were well-tolerated. No clinically relevant differences in profile and/or incidence of adverse events, vital signs, ECG parameters and clinical chemistry data between single or multiple dose TZP-102 groups and placebo groups were observed. TZP-102 demonstrated good oral bioavailability that was estimated to range between 80 and 85%. Multiple-dose applications up to 14 days suggested no accumulation of the drug. An observed half-life of approximately 110 hours supports daily dosing for the product candidate.

        Our Planned 12-Week Phase 2b Trial.    We plan to initiate a 12-week, multinational, multicenter, randomized placebo-controlled Phase 2b trial of TZP-102 in patients with diabetic gastroparesis in the third quarter of 2011. We expect this trial will enroll approximately 200 patients at approximately 30 sites across North America and Europe. The trial population will consist of diabetic patients with gastroparesis, identified by the presence of relevant symptoms and delayed gastric emptying. Patients will be evenly randomized to one of three treatment groups comprised of TZP-102 20mg, 10mg or placebo. Based on our discussions with the FDA, we plan to use specific symptoms from the GCSI Daily Diary, or GCSI-DD, as a patient-reported outcomes instrument to assess efficacy in this patient population. The primary efficacy endpoint for the TZP-102 Phase 2b clinical trial will be based upon a change from baseline in total composite score of the specific symptoms included in the GCSI-DD, nausea, early satiety, bloating and upper abdominal pain. We will also explore the possibility of incorporating fullness into the final trial endpoint. In our Phase 2b clinical trial, we will continue to collect data on gastric emptying in an ongoing effort to assess its role in the evaluation of gastroparesis patients.

Other Preclinical Product Candidates

    TZP-201 (Motilin Antagonist)

        Motilin is a peptide hormone, localized in the GI tract, which is primarily responsible for the initiation of the migrating motor complex. These migrating motor complexes help facilitate the movement of indigestible substances through the GI tract.

        TZP-201 is a motilin antagonist that we are developing for the treatment of various forms of moderate-to-severe diarrhea. TZP-201 has demonstrated significant reduction in pre- and post-prandial migrating motor complex patterns in dog models with dose-dependent activity at a dose as low as 0.1 mg/kg. TZP-201 has also demonstrated reduction in the incidence of diarrhea in dogs treated with

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irinotecan, a potent chemotherapeutic with high incidence of diarrhea, more effectively than either of two current treatments, octreotide and loperamide. We intend to continue to evaluate TZP-201 for treatment of chemotherapy-induced diarrhea.

    TZP-301 (Ghrelin Antagonist)

        Antagonism of the ghrelin receptor has recently been identified as a strategy for the treatment of metabolic diseases due to the involvement of ghrelin in the control of energy balance and appetite. We are developing TZP-301, an oral ghrelin antagonist, for the treatment of obesity and other metabolic diseases. We have identified ghrelin antagonist lead compounds with potent binding and functional activity utilizing our MATCH technology. We intend to continue additional research into the safety and efficacy of these molecules.

Our Technology

        All of our product candidates have been identified using our MATCH (Macrocyclic Template Chemistry) proprietary drug discovery and medicinal chemistry technology. Our founder conducted the first experiments using MATCH in 1997, and the first library of compounds was built in 1998. The first patent application covering MATCH was filed in 1999. With MATCH, we have the ability to construct synthetic libraries of drug-like, orally administered macrocyclic compounds in a predictable and efficient manner. We have utilized MATCH for the optimization and development of proprietary small molecule macrocycles. Our macrocycles are a distinct class of small molecules with defined and predictable shapes. Although many macrocyclic compounds from natural sources or with complex chemistries have been successfully developed as marketed drugs, our compounds are completely synthetic.

        MATCH compounds mimic the favorable binding characteristics of proteins and peptides such as tight receptor binding for high potency and selectivity, while eliminating the drawbacks associated with these biomolecules—poor metabolic stability, low oral bioavailability, lack of membrane permeability, high manufacturing costs and antigenicity. In order to attain high affinity and to bind selectively to a targeted receptor, a successful mimetic must reproduce both the functionality and the orientation of the receptor-bound peptide ligand. Our macrocycles incorporate three recognition moieties locked in a defined, cyclic, three-dimensional structure by a proprietary non-peptide chemical fragment called a tether. MATCH enables us to vary these tethers in order to control and modulate spatial orientation. While the recognition moieties provide the elements that interact with the targeted receptor, the tethers define and control their unique conformation, ensuring tighter binding and improved potency. MATCH also enables the incorporation of recognition elements other than amino acids to explore the effects of other functionalized building blocks.

        MATCH possesses significant strategic advantages over traditional methods of drug discovery:

    accelerated hit-to-lead-to-clinic progression due to simultaneous and controlled variation of critical parameters to optimize compound affinity and selectivity;

    reliable, scalable chemistry;

    simultaneous scanning of diversity in composition and in conformation, which results in improved activity and selectivity;

    efficacy on multiple targets and multiple target classes;

    direct generation of lead compounds and use as a template from which further modifications can be performed;

    employs individual building blocks designed to enhance potential bioactivity and to modulate and optimize any observed activity;

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    low number of rotatable bonds, which favors high oral bioavailability and successful progression through the clinic; and

    provides metabolic and proteolytic stability and improved PK-ADME profile.

Strategic Partnerships

        We have entered into two strategic partnerships. One is a regional license for our most advanced product candidate, ulimorelin, and the second is a discovery and development collaboration based on our proprietary chemistry technology, MATCH.

    Norgine

        In June 2010, we entered into a license agreement with Norgine, a leading, GI-focused European specialty pharmaceutical company, that provides Norgine with exclusive rights to develop and commercialize ulimorelin in Europe, Australia, New Zealand, Middle East, North Africa and South Africa. We retain all other territories, including North America, South America and all of Asia. The license permits Norgine to develop and commercialize ulimorelin only in injectable formulations, and restricts us from developing and commercializing another injectable ghrelin agonist in the licensed territory, as long as Norgine commercializes ulimorelin in its territories.

        We will co-manage the Phase 3 development campaign with Norgine. We plan on running two multinational Phase 3 trials that will support regulatory approval in each of our territories. Norgine will share the cost of our planned Phase 3 clinical trials and the cost of procuring clinical manufacturing supply for the trials. Each party is solely responsible for the managing and cost of regulatory filings specific to its own territories. In addition, each party is solely responsible for the cost of any special studies required for regulatory approval only in its own territory. Norgine is obligated to use commercially reasonable efforts to commercialize ulimorelin in its territory.

        Norgine paid us an upfront license fee of $8 million and purchased $2 million in equity upon executing the license. In addition, Norgine is required to pay us up to approximately $150 million upon the completion of development and regulatory and sales milestones over the duration of the license. Norgine is obligated to pay tiered double-digit percentage royalties on product net sales for the shorter of ten years from commercialization of each product and the last to expire patent licensed to it under the agreement.

        The license will remain in effect until Norgine no longer has any royalty payment obligations to us on a product-by-product and country-by-country basis after which the license shall become fully-paid, royalty-free and non-exclusive. Either party has the right to terminate the agreement with respect to a specific product or country if the other fails to cure a material breach within ninety days after receiving notice thereof. Prior to the first commercial sale of any product in the licensed territory, Norgine may terminate the agreement without cause with three months prior written notice. After the first commercial sale, Norgine must provide six months prior written notice and the terms of termination are conditioned on our ability to transfer the commercialization to a third party within those months.

    Bristol-Myers Squibb

        In December 2009, we entered into a strategic collaboration with BMS to discover, develop and commercialize additional novel compounds discovered using our MATCH technology platform, other than our product candidates and internal programs, against a limited number of targets of interest to BMS. Under the terms of the agreement, BMS is funding our early lead discovery efforts on these targets and is also primarily responsible for optimizing the identified lead compounds. BMS will be solely responsible for preclinical and clinical development of all the products arising from this collaboration and for their commercialization globally.

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        All intellectual property is retained by us up to the point an early discovery candidate is identified, at which point we will license that candidate and the series of compounds related to that candidate to BMS. The targets the parties are developing collaboratively remain exclusive to BMS for a period of seven years, unless BMS terminates work on the target or if BMS fails to use commercially reasonable efforts in the discovery, development or commercialization of the products that result from the collaboration.

        BMS is obligated to use commercially reasonable efforts for at least one lead per target to obtain regulatory approvals and commercialize any products thereof after receiving regulatory approvals. BMS is obligated to provide us with a detailed report regarding the development and commercialization efforts and achievement of milestones. BMS is also solely responsible for the costs and expenses of preparing and submitting applications for obtaining regulatory approval with our reasonable cooperation.

        BMS paid us $10 million in upfront license fees upon execution of the agreement and will fund full-time equivalent costs and other research expenses for the initial two-year research term of the agreement. BMS has a right to extend, with funding, the research term for an additional year. We are entitled to development and regulatory milestone payments totaling approximately $80 million per target.

        In addition, BMS is obligated to pay us single-digit percentage royalties on a product-by-product, country-by-country basis for a period lasting the later of 10 years or the last to expire valid claim of any royalty-bearing patent licensed to BMS. We are responsible for paying certain third party royalties arising from the collaboration. We are also entitled to sales-based milestone payments.

        The agreement will remain in effect until BMS no longer has any payment obligations to us on a product-by-product and country-by-country basis. Either party has the right to terminate the agreement with respect to a specific product or target if the other fails to cure a material breach within 90 days after receiving notice thereof. BMS may also terminate the agreement without cause upon 90 days prior written notice so long as BMS provides payment in full of all amounts owed.

Intellectual Property and Proprietary Rights

    Overview

        We have been building and continue to build our intellectual property portfolio relating to ulimorelin, TZP-102 and our preclinical programs. We seek patent protection in the United States and internationally for our products, their methods of use, and processes for their manufacture, and for other technologies, where appropriate. Our policy is to actively seek to protect our proprietary position by, among other things, filing patent applications in the United States and abroad (including Europe, Canada, Japan and certain other countries when appropriate) relating to proprietary technologies that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our technology. For this and more comprehensive risks related to our intellectual property, please see "Risk Factors—Risks Related to Our Intellectual Property."

        Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for the technologies we consider important to our business, defend our patents, preserve the confidentiality of our trade secrets and operate our business without infringing the patents and proprietary rights of third parties.

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        We have established and continue to build proprietary positions for ulimorelin, TZP-102, our pipeline product candidates and technology in the United States and abroad.

    Patent Portfolio

        Our ulimorelin patent portfolio currently includes three issued U.S. patents, two of which have been subject to reissue, one of which has subsequently been allowed. In addition, this portfolio includes one allowed European patent that is in the process of being granted and validated, nine pending U.S. non-provisional patent applications, one pending U.S. provisional patent application, and 18 pending foreign patent applications that relate to issued U.S. patents or pending U.S. non-provisional patent applications. We own all of the issued patents and all of the pending applications.

        The issued U.S. patents and the allowed European patent, which are scheduled to expire in 2024, contain claims directed to, among other things, the ulimorelin molecule, pharmaceutical compositions containing the ulimorelin molecule and methods of using ulimorelin to treat gastrointestinal disorders. The pending applications contain claims directed to, among other things, methods of using ulimorelin to treat other disorders, intermediates for the molecule and processes for making the molecule. Corresponding patent applications are pending in Japan, Canada and other countries. Under our license agreement, Norgine is required to prosecute and maintain the patents related to ulimorelin molecule in Europe, Australia, New Zealand, Middle East, North Africa and South Africa. If claims in our pending U.S. provisional patent application covering the specific crystalline solvate form of ulimorelin are ultimately issued, they could expire in 2030.

        In addition to the patents and patent applications relating to ulimorelin, we currently have a pending U.S. non-provisional patent application and pending foreign counterpart patent applications in Europe, Japan, Canada, China, India, Brazil, Australia and other countries, which are directed to TZP-102 and other ghrelin modulator molecules, pharmaceutical compositions thereof, intermediates for these molecules, methods of using these molecules to treat various diseases and disorders, and to processes of synthesizing the molecules. The patent applications, if issued, could expire between 2027 and 2028. We own all of these pending applications.

        Our patent portfolio also contains patents and patent applications relating to our other pipeline products and our MATCH drug discovery technology. With regard to our TZP-201 product candidate, we have an issued U.S. patent and a granted European patent, each of which is scheduled to expire in 2024, and two pending U.S. non-provisional patent applications covering TZP-201 and other motilin antagonist molecules, pharmaceutical compositions thereof, intermediates for these molecules and methods of using these molecules to treat various diseases and disorders, as well as counterpart patent applications pending in Japan, Canada and other countries. Patents, if issued, from these applications could have terms expiring between 2024 and 2027. With regard to our TZP-301 product, we have two pending U.S. non-provisional patent applications and one pending international (PCT) patent application covering TZP-301 and other ghrelin antagonist/inverse agonist molecules, pharmaceutical compositions thereof and methods of using these molecules to treat various diseases and disorders, as well as counterpart patent applications pending in Europe, Japan and other countries. Patents, if issued, from these applications could have terms expiring between 2025 and 2030. With regard to our MATCH drug discovery technology, we have two issued U.S. patents and two granted European patents, with terms expiring in 2020 and 2024, six pending U.S. non-provisional patent applications and two pending international (PCT) patent applications, covering certain general macrocyclic compound classes, specific macrocyclic compounds, synthetic methods for making these compounds, uses of these compounds and intermediates for these compounds, as well as counterpart patent applications pending in Japan, Canada and other countries. Patents, if issued, from these applications could have terms expiring between 2020 and 2030. We own all of the issued patents and all of the pending applications mentioned, except for one of the pending PCT applications which is jointly owned with an academic partner relating to a specific use for a particular subclass of macrocyclic compounds.

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        The U.S. patent system permits the filing of provisional and non-provisional patent applications. A non-provisional patent application is examined by the U.S. Patent and Trademark Office, or USPTO, and can mature into a patent once the USPTO determines that the claimed invention meets the standards for patentability. A provisional patent application is not examined for patentability, and automatically expires 12 months after its filing date. As a result, a provisional patent application cannot mature into a patent. The requirements for filing a provisional patent application are not as strict as those for filing a non-provisional patent application. Provisional applications are often used, among other things, to establish an earlier filing date for a subsequent non-provisional patent application. The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent's term may be lengthened by patent term adjustment or PTA, which compensates a patentee for administrative delays by the USPTO in granting a patent. In view of a recent court decision, the USPTO is under greater scrutiny regarding its calculations where the USPTO erred in calculating the patent term adjustment for the patents in question denying the patentee a portion of the patent term to which it was entitled. Alternatively, a patent's term may be shortened if a patent is terminally disclaimed over another patent.

        The effective filing date of a non-provisional patent application is used by the USPTO to determine what information is prior art when it considers the patentability of a claimed invention. If certain requirements are satisfied, a non-provisional patent application can claim the benefit of the filing date of an earlier filed provisional patent application. As a result, the filing date accorded by the provisional patent application may supersede information that otherwise could preclude the patentability of an invention.

        The term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, or PTE, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, permits a PTE of up to five years beyond the expiration of the patent. The length of the PTE is related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when our pharmaceutical products receive FDA or other regulatory approval, we expect to apply for PTEs on patents covering those products. Depending upon the timing, duration and specifics of FDA approval of ulimorelin, TZP-102 and our other products, one or more of our U.S. patents may be eligible for limited patent term restoration.

    Other Intellectual Property Rights

        We seek trademark protection in the United States and internationally where available and when appropriate. We have filed for trademark protection for the Tranzyme and Tranzyme Pharma marks, which we use in connection with our pharmaceutical research and development collaborations as well as products. We currently have registered trademarks for Tranzyme and Tranzyme Pharma in the United States and Canada.

        We are aware of third party United States patents, and corresponding foreign counterpart applications, that contain broad claims related to a method of using a certain general type of compound, which may be construed to include ulimorelin and TZP-102, for the stimulation of gastrointestinal motility. Based on our analyses and supporting legal opinions, if any of the above third party patents were asserted against us, we do not believe our proposed products or activities would be found to infringe any valid claim of these patents. If we were to challenge the validity of this or any issued United States patent in court, we would need to overcome a statutory presumption of validity that attaches to every United States patent. This means that in order to prevail, we would have to

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present clear and convincing evidence as to the invalidity of the patent's claims. There is no assurance that a court would find in our favor on questions of infringement or validity.

        From time to time, we may find it necessary or prudent to obtain licenses from third party intellectual property holders. Where licenses are readily available at reasonable cost, such licenses are considered a normal cost of doing business. In other instances, however, we may use the results of internal analyses to guide our early-stage research away from areas where we are likely to encounter obstacles in the form of third party intellectual property. For example, where a third party holds relevant intellectual property and is a direct competitor, a license might not be available on commercially reasonable terms or available at all.

        It is impossible to establish with certainty that our technology platform or our product programs will be free of claims by third party intellectual property holders. Even with modern databases and on-line search engines, literature searches are imperfect and may fail to identify relevant patents and published applications. Even when a third party patent is identified, we may conclude, upon a thorough analysis, that we do not infringe some, if not all, of the claims of the patent or that some, if not all, of the claims of the patent are invalid. If the third party patent owner disagrees with our conclusion and we continue with the business activity in question, we might have patent litigation thrust upon us. Alternatively, we might decide to initiate litigation in an attempt to obtain a declaration that the third party patent is invalid or non-infringed by our activity or that the patent is enforceable. In either scenario, patent litigation typically is costly and time-consuming, and the outcome is uncertain. The outcome of patent litigation is subject to uncertainties that cannot be quantified in advance, for example, the credibility of expert witnesses who may disagree on technical interpretation of scientific data. Ultimately, in the case of an adverse outcome in litigation, we could be prevented from commercializing a product or using certain aspects of our technology platform as a result of patent infringement claims asserted against us. This could have a material adverse effect on our business.

        To protect our competitive position, it may be necessary to enforce our patent rights through litigation against infringing third parties. Litigation to enforce our own patent rights is subject to the same uncertainties discussed above. In addition, however, litigation involving our patents carries the risk that one or more of our patents will be held invalid (in whole or in part, on a claim-by-claim basis) or held unenforceable. Such an adverse court ruling could allow third parties to commercialize our products or our platform technology, and then compete directly with us, without payment to us.

    Confidential Information and Inventions Assignment Agreements

        We require our employees, consultants and members of our scientific advisory board to execute confidentiality agreements upon the commencement of employment, consulting or collaborative relationships with us. These agreements provide that all confidential information developed or made known during the course of the relationship with us be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed by the individual during employment shall be our exclusive property to the extent permitted by applicable law. Our consulting agreements also provide for assignment to us of any intellectual property resulting from services performed for us.

Sales and Marketing

        We intend to develop and commercialize our product candidates in the United States alone, or with partners, while out-licensing commercialization rights for other territories. Our goal is to retain significant control over the commercial execution of our products, while participating in a meaningful way in the economics of all drugs that we bring to market.

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        Our commercial strategy for ulimorelin, if approved, is to sell this product in the United States into acute care settings. We believe that the product candidate will initially be used primarily by a small number of specialty surgeons at hospitals. If approved for the indication we are seeking, we plan to demonstrate to hospital pharmacy and therapeutics committees the pharmacoeconomic benefits and improvements of ulimorelin to quality of care for post-surgical patients. In the United States, we intend to explore building an internal marketing and sales infrastructure necessary to market and sell ulimorelin. We will also explore the possibility of entering into strategic partnerships for the development and commercialization of ulimorelin. Outside the United States, we plan to use Norgine's existing in-house sales force or incumbent sales relationships in Europe, Australia, New Zealand, Middle East, North and South Africa. We also plan to explore using strategic partners for the development and commercialization of ulimorelin in Asia.

        Our strategy for TZP-102, if approved, will be to establish TZP-102 as the prescription product of choice for upper gastrointestinal motility disorders, initially gastroparesis. If the product is approved, our expectation is that TZP-102 would initially be sold to gastrointestinal and endocrinologist specialists. We also plan to utilize strategic partners or contract sales forces to assist in the commercialization of TZP-102, and with such partners, plan to build awareness in patient populations that the symptoms associated with gastroparesis can dramatically impact sufferers' quality of life. We anticipate that the product will be predominantly sold through primary care physicians.

Manufacturing

        We do not own or operate manufacturing facilities for the production of any of our product candidates, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently depend on third-party contract manufacturers for all of our required raw materials, drug substance and finished product for our preclinical research and clinical trials. We do not have any current contractual relationships for the manufacture of commercial supplies of any of our product candidates. If any of our products are approved by any regulatory agency, we intend to enter into agreements with third-party contract manufacturers for the commercial production of those products. We currently employ internal resources and third-party consultants to manage our manufacturing contractors.

Competition

        The pharmaceutical industry is characterized by intense competition and rapid innovation. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety and tolerability profile, reliability, convenience of dosing, price and reimbursement.

        We expect that, if approved, ulimorelin will compete directly with alvimopan for the management of POI and metoclopramide, erythromycin and domperidone as a treatment for both gastroparesis and gastric stasis, and that, if approved, TZP-102 will also compete directly with metoclopramide, erythromycin and domperidone as a treatment for gastroparesis.

        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 product 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. 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. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available.

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Finally, the development of new treatment methods for the diseases we are targeting could render our drugs non-competitive or obsolete.

Regulatory Matters

    Government Regulation and Product Approval

        Government authorities in the United States 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, export and import of products such as those we are developing. Our product candidates, including ulimorelin and TZP-102, must be approved by the FDA through the new drug application, or NDA, process before they may legally be marketed in the United States.

    United States Drug Development Process

        In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. The process of obtaining regulatory approvals and 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. The process required by the FDA before a drug may be marketed in the United States generally involves the following:

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

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

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

    submission to the FDA of an NDA for a new drug;

    satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with cGMP; 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 product candidate is identified for development, it enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity, formulation and stability, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, to the FDA as part of the IND. The sponsor must also include a protocol detailing, among other things, the objectives of the initial clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the initial clinical trial 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 places the clinical trial on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve

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any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during trials 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 GCP 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 clinical trial and the consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.

        Each new clinical protocol and any amendments to the 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 clinical trial, 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 1.  The product 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 may be conducted in patients.

    Phase 2.  Involves trials 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 and schedule.

    Phase 3.  Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These trials are intended to establish the overall risk/benefit ratio of the product and provide 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 1, Phase 2 and Phase 3 testing may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the 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 product 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 product. 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 drug proposed labeling and other relevant

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information, are submitted to the FDA as part of an NDA for a new drug, requesting approval to market the product. The submission of an NDA is subject to the payment of a substantial user fee; a waiver of such fee may be obtained under certain limited circumstances. For example, the agency will waive the application fee for the first human drug application that a small business or its affiliate submits for review.

        In addition, under the Pediatric Research Equity Act of 2003, or PREA, which was reauthorized under the Food and Drug Administration Amendments Act of 2007, 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 product 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 an NDA for filing. In this event, the NDA must be re-submitted with the additional information. The re-submitted 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 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. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. 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. An advisory committee is a panel of experts who provide advice and recommendations when requested by the FDA on matters of importance that come before the agency. The FDA is not bound by the recommendation of an advisory committee.

        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 data 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 will issue a complete response letter if the agency decides not to approve the NDA in its present form. The complete response letter usually describes all of the specific deficiencies that the FDA identified in the NDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application or request an opportunity for a hearing.

        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. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require Phase 4 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 that have been commercialized.

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    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, commonly 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 application for the extension must be submitted prior to the 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 dates, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA.

        Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States 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 the FDA to be essential to the approval of the application, for example new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions of use 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 studies necessary to demonstrate safety and effectiveness.

        Pediatric exclusivity is another type of exclusivity in the United States. 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 trial in accordance with an FDA-issued "Written Request" for such a trial. The current pediatric exclusivity provision was reauthorized in September 2007.

    Expedited Development and Review Programs

        The FDA has a fast track program that is intended to expedite or facilitate the process for reviewing new drugs that meet certain criteria. Specifically, new drugs are eligible for fast track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to the combination of the product and the specific indication for which it is being studied. The FDA granted fast track designation to ulimorelin for the treatment of severe gastroparesis and to TZP-102 for the treatment of gastroparesis in diabetic patients. A company whose drug receives fast track designation

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may be eligible for more frequent meetings with the FDA to discuss the drug's development plan and ensure collection of appropriate data needed to support drug approval, and more frequent correspondence from the FDA about such things as the design of the proposed clinical trials. In addition, for a fast track product, the FDA may consider for review on a rolling basis sections of the NDA before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.

        A fast track product may also be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. A fast track product is eligible for priority review if it has the potential to provide safe and effective therapy where no adequate alternative therapy exists or it offers a significant advance in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an NDA designated for priority review in an effort to facilitate the review. However, priority review status is only granted after an NDA has been submitted and there is no guarantee that any of our product candidates will receive it. Additionally, a fast track product may be eligible for accelerated approval. Drugs 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, which means that they may be approved on the basis of adequate and well-controlled clinical trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a 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 accelerated approval perform adequate and well-controlled post-marketing clinical trials. There is no guarantee that any of our product candidates will receive accelerated approval. Fast track designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.

    Post-Approval Requirements

        Any drugs for which we receive FDA approval are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. The 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. Further, manufacturers of drugs must continue to comply with cGMP requirements, which are extensive and require considerable time, resources and ongoing investment to ensure compliance. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

        Drug manufacturers and other entities involved in the manufacturing 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. The cGMP requirements apply to all stages of the manufacturing process, including the production, processing, sterilization, packaging, labeling, storage and shipment of the drug. Manufacturers must establish validated systems to ensure that products meet specifications and regulatory standards, and test each product batch or lot prior to its release. We rely, and expect to continue to rely, on third parties for the production of clinical quantities of our product candidates. Future FDA and state inspections may identify compliance issues at the facilities of our contract

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manufacturers that may disrupt production or distribution or may require substantial resources to correct.

        The FDA may withdraw a product 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. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, warning letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties.

        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 to new legislation, the FDA regulations and policies are often revised or reinterpreted by the agency in ways that may significantly affect our business and our product candidates. It is impossible to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.

    Foreign Regulation

        In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our product candidates to the extent we choose to sell any products outside of the United States. 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 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. As in the United States, post-approval regulatory requirements, such as those regarding product manufacture, marketing, or distribution would apply to any product that is approved outside the Untied States.

Employees

        We currently have 39 employees, of which 23 are scientists engaged in discovery research, analytical and manufacturing support of our product candidates, six are scientists in our drug development operations and 10 are in general and administrative functions.

Facilities

        Our corporate headquarters and clinical development operations are located in Durham, North Carolina, where we lease and occupy approximately 2,192 square feet of office space. The lease on our headquarters expires in November 2010, but is renewable indefinitely on mutually agreed upon terms, including base rent and term. We expect to renew this lease for one year at the current base rent when our term expires at the end of November 2010. Our research operations are based in Sherbrooke, Quebec, where we lease approximately 7,323 square feet of office and laboratory space. The lease on these offices and laboratories expires in September 2011 and has a one year renewal option. We believe that our facilities are suitable and adequate for our current needs.

Legal Proceedings

        We are not currently a party to any material legal proceedings.

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MANAGEMENT

Executive Officers and Directors

        The following table sets forth certain information about our executive officers, key employees and directors as of the date of this prospectus:

Name
  Age   Position(s)

Executive Officers:

       

Vipin K. Garg, Ph.D. 

  53   President and Chief Executive Officer, and Director

Richard I. Eisenstadt

  52   Vice President, Finance and Chief Financial Officer

Helmut Thomas, Ph.D. 

  59   Senior Vice President, Research and Preclinical Development

Gordana Kosutic, M.D. 

  60   Vice President, Clinical and Regulatory Affairs

Non-Management Directors:

       

John H. Johnson(1)

  52   Chairman of the Board

Jean-Paul Castaigne(1)

  65   Director

Donald F. Corcoran(1)

  54   Director

Aaron Davidson(1)

  42   Director

Brenda D. Gavin, D.V.M.(1)

  62   Director

Alex Zisson(1)

  41   Director

(1)
Determined to be independent by our board of directors in accordance with the rules of the NASDAQ Stock Market and relevant federal securities laws and regulations.

    Executive Officers

        Vipin K. Garg, Ph.D. has served as our President and Chief Executive Officer since February 2000. Prior to joining us, he served as Chief Operating Officer of Apex Bioscience, Inc. (now Curacyte AG of Munich, Germany), where he was responsible for establishing a major strategic alliance with a Japanese pharmaceutical company and advancing the company's lead product into Phase 2 clinical development. Earlier he was Vice President of Product Development and Manufacturing at DNX, Inc. (NASDAQ: DNXX), and held management positions at Sepracor Inc. (NASDAQ: SEPR) and Bio-Response Inc. (acquired by Baxter International, Inc.). Dr. Garg has over twenty years of biotechnology industry experience in both technical and management positions and has managed combined operations in both the United States and Europe. Dr. Garg received his Ph.D. in Biochemistry in 1982 from the University of Adelaide, Australia, and his M.S. from Delhi University.

        Richard I. Eisenstadt has served as our Vice President, Finance since June 2003 and our Chief Financial Officer since December 2003. Prior to joining us, Mr. Eisenstadt served as senior financial advisor to several biotechnology companies with responsibilities including business and strategic planning, fundraising and financial reporting. He previously was Director of Finance at Cogent Neuroscience, Inc., or Cogent, where he was responsible for financial operations, including the establishment of two international joint ventures. Before Cogent, he spent twelve years with Nimbus CD International, Inc. (NASDAQ: NMBS), or Nimbus, where he was responsible for strategic and financial planning. His experience at Nimbus included an initial public offering and an acquisition of the company by Carlton Communications Plc., at which time the company was merged with Technicolor, Inc. (NYSE: TCH). Also, while at Nimbus, Mr. Eisenstadt established an international joint venture and was involved in several domestic and international acquisition and expansion opportunities. Mr. Eisenstadt received his MBA from James Madison University.

        Helmut Thomas, Ph.D. has served as our Senior Vice President, Research and Preclinical Development since June 2006. Prior to joining us, Dr. Thomas served as Vice President, Development,

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of LymphoSign Inc., or LymphoSign, beginning in 2004. Before LymphoSign, Dr. Thomas spent nine years with CIBA/Novartis Pharma, A.G., or Novartis, where he held several top-level management positions in Europe and the United States, culminating in his appointment as Executive Director, Global Project Manager and Leader of the PRIDE (Proof of Research In Development) Team Oncology. While at Novartis, he directed the preclinical development of more than 25 drug candidates. A highly accomplished biochemist and toxicologist with an extensive and productive career in drug discovery and development, Dr. Thomas is an author of over 140 scientific articles, book chapters and abstracts as well as a co-inventor on numerous patents. Dr. Thomas received his Ph.D. in biochemistry and organic chemistry from the University of Hannover, Germany.

        Gordana Kosutic, M.D. has served as our Vice President, Clinical and Regulatory Affairs since September 2005. Prior to joining us Dr. Kosutic served as Vice President of Clinical Development at Fulcrum Pharma Developments, Inc. Previously, she served as Vice President of Clinical and Regulatory Affairs at both Nobex Corporation and ClinTrials Research, Inc. (now part of Kendle International Inc.) and Director of Clinical Research at ICN Pharmaceuticals, Inc. Her research and clinical experience spans multiple therapeutic indications including gastrointestinal and metabolic diseases, osteoporosis, hepatitis, psychiatric disorders and cancer. She has extensive clinical development expertise encompassing strategic development and clinical trial design and implementation. Dr. Kosutic also actively participated in special committees for multiple products related to myocardial infarction, anti-coagulant drugs and anti-diabetic drugs. She is author or co-author of over 20 publications, abstracted presentations and patents. Dr. Kosutic received her medical degree from the School of Medicine, University of Belgrade, Serbia.

    Non-Management Directors

        John H. Johnson has served as the Chairman of our board of directors since November 2010. Mr. Johnson is the Senior Vice President and President of the Oncology Business Unit at Eli Lilly and Company, or Lilly, a position he has held since November 1, 2009. Prior to this appointment, he had served as Chief Executive Officer of ImClone Systems Inc., or ImClone, since August 2007 and was also a member of ImClone's board of directors until the company became a wholly-owned subsidiary of Lilly in November 2008. Previously, he served as company group chairman of Johnson and Johnson's Worldwide Biopharmaceuticals unit. Mr. Johnson began his career at Pfizer Inc. and then joined Johnson and Johnson in 2000 to help lead the company into the anti-infectives market. He left Johnson and Johnson in 2000 to join Parkstone Medical Information Systems as president and CEO, returning in 2002 as worldwide vice president, CNS/Psychiatry. He was then appointed president of Ortho Biotech Products Inc. and subsequently became responsible for Ortho Biotech Canada Inc. until he was named company group chairman in 2005. Mr. Johnson earned a B.S. degree from East Stroudsburg University of Pennsylvania. Mr. Johnson brings to our board more than two decades of experience in the biopharmaceutical and healthcare industry, including managing large product development pipelines and serving in key executive roles.

        Jean-Paul Castaigne, M.D. has served as one of our directors since June 2004. Dr. Castaigne is President and CEO of Angiochem Inc., or Angiochem, a position he has held since September 2006. Angiochem leverages its EPiC platform technology to create drugs that cross the blood brain barrier to treat brain diseases. In this capacity, he has advanced multiple clinical and preclinical drug candidates and leads the company's financing and partnering activities. Prior to joining Angiochem, he was COO and CSO of Conjuchem Inc. (TSX: CJB), or Conjuchem, a Montreal-based drug delivery company. Prior to joining Conjuchem in 2000, he was Vice President, World Wide Head of Global R&D at Groupe Fournier SA in France. Before that, he was with Novartis for over 10 years in a variety of international positions, including President and Managing Director for Sandoz Philippines and Director of Medical and R&D for Sandoz in France and as Corporate Vice-President, R&D, Medical and Regulatory in Canada, where he oversaw significant growth in the R & D operation. Earlier in his

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career, Dr. Castaigne worked for Cilag France (Johnson & Johnson) and Sanofi-Aventis in clinical and regulatory management. He received his M.D. from Paris University in 1975, held the position of Associate Professor of Oncology, Pneumology there in 1978, and received his advanced diploma in Management and Business Administration in 1987 from HEC Paris. We believe Dr. Castaigne's experience working in various pharmaceutical companies as well as his extensive knowledge of all aspects of our preclinical and clinical development plans make him a crucial member of our board of directors.

        Donald F. Corcoran has served as one of our directors since April 2001. Mr. Corcoran is the former President, Chief Executive Officer and a Director of MethylGene Inc. (TSX: MYG), or MethylGene, a Montreal based, chemistry-focused biopharmaceutical company formed in 1997. MethylGene's current goal is the discovery and development of rationally designed small molecule drugs against enzyme targets with an initial focus on cancer and infectious diseases. Mr. Corcoran led the formation of MethylGene during his tenure as Vice President, International Operations and Business Development at Hybridon, Inc (AMEX: HBY), or Hybridon. Prior to joining Hybridon in 1992, Mr. Corcoran was Business Planning Manager at Schering Plough Corporation and while employed at Lilly from 1982 to 1991, served in a variety of financial, accounting, marketing, human resources and acquisition/strategic planning positions. He began his business career as an administrator with Burke Rehabilitation Hospital, New York in 1978. Mr. Corcoran received an MBA from The Johnson Graduate School of Management, Cornell University in 1982. Mr. Corcoran's work experience in leading executive roles of public pharmaceuticals companies will be extremely valuable to us as we transition to becoming a public company following the completion of this offering.

        Aaron Davidson has served as one of our directors since May 2005. Mr. Davidson is a Managing Director of H.I.G. Ventures and focuses on investment opportunities in the life sciences sector. Prior to joining H.I.G. in 2004, he was a Vice President with Ventures West with a focus on venture investing in life science companies. Mr. Davidson began his career with Lilly, where he spent a decade in various management roles in the United States and Canada including business development, strategic planning, market research and financial planning. After Lilly he spent a year as the Vice President of Corporate Business Development at SYN-X Pharma Inc. Mr. Davidson currently serves on the boards of Alder Biopharmaceuticals, Inc., HyperBranch Medical Technology, Inc., NeurAxon Inc., Novadaq Technologies Inc. and Quinnova Pharmaceuticals, Inc. He served on the board of Salmedix Inc. prior to its acquisition by Cephalon, Inc. in June 2005 and the board of Oncogenex Pharmaceuticals Inc. prior to their public listing. Mr. Davidson earned his MBA from Harvard Business School and a Bachelor of Commerce degree from McGill University. Mr. Davidson has substantial experience in business development, strategic planning, market research and financial planning and has served a director of numerous companies.

        Brenda D. Gavin, D.V.M. has served as one of our directors since May 2005. She was a founding partner of Quaker BioVentures, a venture capital firm that invests in life science companies, and has been a partner at Quaker BioVentures from 2002 to the present. Dr. Gavin serves on the board of Tengion, Inc. (NASDAQ:TNGN) as well as several other private companies. Dr. Gavin received her Bachelor of Science from Baylor University, DVM from the University of Missouri and an MBA from the University of Texas, San Antonio. Dr. Gavin brings to the board substantial experience in our industry having served on the board of directors of more than 20 biopharmaceutical and life sciences companies, including their audit, compensation and corporate governance committees. She is also familiar with and has designed complex capital structures.

        Alex Zisson has served as one of our directors since May 2005. Since 2002, Mr. Zisson has been a Partner at Thomas, McNerney & Partners, a prominent health care venture capital firm that invests in life science and medical technology companies at all stages of development. He is currently a board member of several private life sciences companies, including Clarus Therapeutics, Inc, Quinnova Pharmaceuticals, Inc. and Zogenix, Inc. Before joining Thomas, McNerney & Partners, he spent

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11 years in the research department at Hambrecht & Quist (and its successor firms Chase H&Q and JPMorgan H&Q). During his tenure at H&Q, Mr. Zisson led research teams covering the biotechnology, specialty pharmaceuticals, large-cap pharmaceuticals, drug delivery and diagnostics industries. After the merger of Chase H&Q and JPMorgan, Mr. Zisson also became the firm's Health Care Strategist. He graduated magna cum laude from Brown University, where he was elected to Phi Beta Kappa. Mr. Zisson serves on the board of directors of numerous life sciences companies, has extensive knowledge of the health care and biopharmaceutical industries and has been instrumental in our development since joining our board in 2005.

Composition of our Board of Directors

        Our board of directors currently consists of seven members, all of whom were elected pursuant to the board composition provisions of our stockholders agreement, which agreement will terminate upon completion of this offering. Upon the termination of these provisions, there will be no further contractual obligations regarding the election of our directors. Our nominating and corporate governance committee and board of directors may therefore consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity, which is not limited to race, gender or national origin. We have no formal policy regarding board diversity. Our nominating and corporate governance committee's and board of directors' priority in selecting board members is identification of persons who will further the interests of our stockholders through their established records of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, and professional and personal experiences and expertise relevant to our growth strategy.

        Director Independence.    We have applied to have our common stock listed on the NASDAQ Global Market. Our board of directors has determined that John H. Johnson, Jean-Paul Castaigne, Donald F. Corcoran, Aaron Davidson, Brenda D. Gavin and Alex Zisson are independent under the applicable rules and regulations of the Securities and Exchange Commission and the NASDAQ Global Market. Upon the completion of this offering, we expect that the composition and functioning of our board of directors and each of our board committees will comply with all applicable rules and regulations of the Securities and Exchange Commission and the NASDAQ Global Market. There are no family relationships among any of our directors or executive officers.

        Staggered Board.    Immediately prior to the closing of this offering, our board of directors will be divided into three staggered classes of directors of the same or nearly the same number and each will be assigned to one of the three classes. At each annual meeting of the stockholders, a class of directors will be elected for a three year term to succeed the directors of the same class whose terms are then expiring. The terms of the directors will expire upon the election and qualification of successor directors at the annual meeting of stockholders to be held during the years 2012 for Class I directors, 2013 for Class II directors and 2014 for Class III directors.

    Our Class I directors will be                        and                         ;

    Our Class II directors will be                        and                         ;

    Our Class III directors will be                        ,                         and                         .

        Our certificate of incorporation and bylaws provide that the number of our directors shall be fixed from time to time by a resolution of the majority of 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 shall consist of one third of the board of directors.

        The division of our board of directors into three classes with staggered three-year terms may delay or prevent stockholder efforts to effect a change of our management or a change in control.

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Board Leadership Structure and Board's Role in Risk Oversight

        The positions of Chairman of the board and chief executive officer are presently separated and have historically been separated at our company. We believe that separating these positions allows our chief executive officer to focus on our day-to-day business, while allowing our Chairman of the board to lead the board of directors in its fundamental role of providing advice to, and independent oversight of, management. Our board of directors recognizes the time, effort and energy that the chief executive officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our Chairman, particularly as the board of directors' oversight responsibilities continue to grow. Our board of directors also believes that this structure ensures a greater role for the independent directors in the oversight of our company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of our board of directors. This leadership structure also is preferred by a significant number of our stockholders. Our board of directors believes its administration of its risk oversight function has not affected its leadership structure.

        While our amended and restated by-laws, which will be effective upon the completion of this offering, and corporate governance guidelines do not require that our Chairman and chief executive officer positions be separate, our board of directors believes that having separate positions is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.

        Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including risks relating to product candidate development, technological uncertainty, dependence on collaborative partners, uncertainty regarding patents and proprietary rights, comprehensive government regulations, having no commercial manufacturing experience, marketing or sales capability or experience and dependence on key personnel as more full discussed under "Risk Factors" in this prospectus. Management is responsible for the day-to-day management of risks we face, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.

        Our board of directors is actively involved in oversight of risks that could affect us. This oversight is conducted primarily through committees of the board of directors, but the full board of directors has retained responsibility for general oversight of risks. Our board of directors satisfies this responsibility through full reports by each committee chair regarding the committee's considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within our company as our board of directors believes that full and open communication between management and the board of directors is essential for effective risk management and oversight.

Committees of our Board of Directors

        Our board of directors has established a compensation committee, audit committee and nominating and corporate governance committee.

        Compensation Committee.    The current members of our compensation committee are                        , who is the chair of the committee,                         and                         . Each of the members of our compensation committee is independent under the applicable rules and regulations of the SEC, Nasdaq Stock Market and the Internal Revenue Service. Our compensation committee

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reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee's responsibilities include:

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

    evaluating the performance of these officers in light of those goals and objectives;

    setting the compensation of these officers based on such evaluations;

    administering the issuance of stock options and other awards under our stock plans; and

    reviewing and evaluating, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter.

        Audit Committee.    The current members of our audit committee are                        , who is the chair of the committee                        and                         . All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq Stock Market. Our board has determined that                        is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of Nasdaq Stock Market.                        ,                         and                         are independent directors as defined under the applicable rules and regulations of the SEC and Nasdaq Stock Market. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq Stock Market. Our audit committee's responsibilities include:

    overseeing our corporate accounting and financial reporting process;

    evaluating the independent auditors' qualifications, independence and performance;

    determining the engagement of the independent auditors;

    reviewing and approving the scope of the annual audit and the audit fee;

    discussing with management and the independent auditors the results of the annual audit and the review of our quarterly financial statements;

    approving the retention of the independent auditors to perform any proposed permissible non-audit services;

    monitoring the rotation of partners of the independent auditors on our engagement team as required by law;

    reviewing our critical accounting policies and estimates;

    overseeing our internal audit function; and

    annually reviewing the audit committee charter and the audit committee's performance.

        Nominating and Corporate Governance Committee.    The current members of our nominating and corporate governance committee are                        , who is the chair of the committee,                         and                         . Each of the members of our nominating and corporate governance committee is independent under the applicable rules and regulations of the SEC and Nasdaq Stock Market. The nominating and corporate governance committee's responsibilities include:

    making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board;

    overseeing our corporate governance guidelines; and

    reporting and making recommendations to our board concerning governance matters.

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        Other Committees.    Our board of directors may establish other committees as it deems necessary or appropriate from time to time.

Compensation Committee Interlocks and Insider Participation

        None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Code of Business Conduct and Ethics

        We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

Executive Compensation

    Compensation Discussion and Analysis

        Introduction.    This section discusses our executive compensation policies and arrangements as they relate to our named executive officers who are listed in the compensation tables set forth below. The following discussion should be read together with the compensation tables and related disclosure set forth below.

        Our named executive officers, or NEOs, for the year ended December 31, 2009 are listed in the table below.

Name
  Title
Vipin K. Garg, Ph.D.    Chief Executive Officer and President
Richard I. Eisenstadt   Chief Financial Officer and Vice President, Finance
Helmut Thomas, Ph.D.    Senior Vice President, Research and Preclinical Development
Gordana Kosutic, M.D.    Vice President, Clinical and Regulatory Affairs

        With respect to these NEOs, our board of directors determined initial compensation for these persons based primarily on negotiations between our board and our NEOs prior to their being hired and our board's past practices and experiences with companies such as ours.

        We expect that, following the completion of this offering, our Compensation Committee will undertake a substantial review of our existing compensation programs, objectives and philosophy and determine whether such programs, objectives and philosophy are appropriate after we have become a public company. In addition, as we gain experience as a public company, we expect that the specific direction, emphasis and components of our executive compensation program will continue to evolve.

Executive Compensation Objectives and Philosophy

        The key objectives of our executive compensation programs are (1) to attract, motivate, reward and retain superior executive officers with the skills necessary to successfully lead and manage our business; (2) to achieve accountability for performance by linking annual cash incentive compensation to the achievement of measurable performance objectives; and (3) to align the interests of our executive officers and our equity holders through short- and long-term incentive compensation programs. For our NEOs, these short- and long-term incentives are designed to accomplish these objectives by providing a significant correlation between our results of operations and their total compensation.

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        We expect to provide our NEOs with a significant portion of their compensation through cash incentive compensation contingent upon the achievement of operational and personal performance metrics as well as through equity compensation. These two elements of executive compensation are aligned with the interests of our stockholders because the amount of compensation ultimately received will vary with our company's financial and operational performance. Equity compensation derives its value from our equity value, which in the future is likely to fluctuate based on our financial and operational performance.

        We seek to apply a consistent philosophy to compensation for all executive officers. Our compensation philosophy is based on the following core principles.

    To Pay for Performance

        Individuals in leadership roles are compensated based on a combination of total company and individual performance factors. Total company performance is evaluated primarily on the degree to which pre-established operational objectives are met. Individual performance is evaluated based upon several individualized leadership factors, including:

    individual contribution to attaining specific operational objectives;

    building and developing individual skills and a strong leadership team; and

    developing an effective infrastructure to support business development and growth.

    To Pay Competitively

        We are committed to providing a total compensation program designed to retain our highest performing employees and attract superior leaders to our company. We have established compensation levels that we believe are competitive based on our board's experience with pay practices and compensation levels for companies such as ours.

    To Pay Equitably

        We believe that it is important to apply generally consistent guidelines for all executive officer compensation programs. In order to deliver equitable pay levels, our board considers depth and scope of accountability, complexity of responsibility, qualifications and executive performance, both individually and collectively as a team.

        In addition to short- and long-term compensation, we have found it important to provide certain of our executive officers with competitive post-employment compensation. Post-employment compensation consists primarily of two main types—severance pay and benefits continuation. We believe that these benefits are important considerations for our executive officer compensation package, as they afford a measure of financial security in the event of certain terminations of their employment and also enable us to secure their cooperation following termination. We have sought to ensure that each combined compensation package is competitive at the time the package is negotiated with the executive officer. We elect to provide post-employment compensation to our executive officers on a case-by-case basis as the employment market, the qualifications of potential employees and our hiring needs dictate.

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Compensation Committee Review of Compensation

        We expect that following this offering, our Compensation Committee will review compensation elements and amounts for NEOs on an annual basis and at the time of a promotion or other change in level of responsibilities, as well as when competitive circumstances or business needs may require. We may, but do not currently, use a third party consultant to assist us with determining compensation levels. We expect that each year our Compensation Committee will compile a report of benchmark data for executive positions for similar companies, including summaries of base salary, annual cash incentive plan opportunities and awards and long-term incentive award values. We have not yet determined the companies that we will benchmark our compensation packages against, but we expect that the Compensation Committee will determine this list after completion of this offering and that it will compare our pay practices and overall pay levels with other leading industry organizations and, where appropriate, with non-industry organizations when establishing our pay guidelines.

        We expect that the CEO will provide compensation recommendations to the Compensation Committee for executives other than himself based on this data and the other considerations mentioned in this Compensation Discussion and Analysis. We expect that the Compensation Committee will recommend a compensation package that is consistent with our compensation philosophy, strategically positioned at the median of the peer group and competitive with other organizations similar to ours.

        We expect that the Compensation Committee will consider input from our CEO and CFO, regarding benchmarking and recommendations for base salary, annual incentive targets and other compensation awards. The Compensation Committee will likely give significant weight to our CEO's and CFO's judgment when assessing performance and determining appropriate compensation levels and incentive awards for our other NEOs.

Elements of Compensation

        As discussed throughout this Compensation Discussion and Analysis, the compensation policies applicable to our NEOs are reflective of our pay-for-performance philosophy, that the role of executive officers is to enhance equity holder value over the long term.

        The elements of our compensation program are:

    base salary;

    performance-based cash incentives;

    equity incentives; and

    certain additional executive benefits and perquisites.

        Base salary, performance-based cash incentives and long-term equity-based incentives are the most significant elements of our executive compensation program and, on an aggregate basis, they are intended to substantially satisfy our program's overall objectives. Typically the Compensation Committee has, and following the offering, the Compensation Committee will seek to, set each of these elements of compensation at the same time to enable it to simultaneously consider all of the significant elements and their impact on compensation as a whole. Taking this comprehensive view of all compensation components allows us also to make compensation determinations that will reflect the principles of our compensation philosophy and related guidelines with respect to allocation of compensation among certain of these elements and total compensation. We strive to achieve an appropriate mix between the various elements of our compensation program to meet our compensation objectives and philosophy; however, we do not apply any rigid allocation formula in setting our executive compensation, and we may make adjustments to this approach for various positions after giving due consideration to prevailing circumstances, the individuals involved and their responsibilities and performance.

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    Base Salary

        We provide a base salary to our executive officers to compensate them for their services during the year and to provide them with a stable source of income. The base salaries for our NEOs in 2009 were established by our board of directors, based in large part on the recommendation of our management and our Compensation Committee's review of other factors, including:

    the individual's performance, results, qualifications and tenure;

    the job's responsibilities;

    pay mix (base salary, annual cash incentives, equity incentives, perquisites and other executive benefits);

    compensation practices in our industry; and

    our financial position.

        The annual base salaries in effect for each of our NEOs employed by us as of December 31, 2009 and December 31, 2010, are as follows.

Name
  Base Salary
2009 ($)
  Base Salary
2010 ($)
 

Vipin K. Garg, Ph.D. 

    280,800     287,820  

Richard I. Eisenstadt

    188,240     192,946  

Helmut Thomas, Ph.D. 

    260,000     266,500  

Gordana Kosutic, M.D. 

    244,400     250,510  

        In setting base salaries for 2009, our Compensation Committee considered the prevailing market conditions and our financial position and decided not to increase the base salaries of our NEOs in 2009. In early 2010, in connection with setting the 2010 base salaries for our NEOs, our Compensation Committee considered the prevailing market conditions, our financial position and the absence of base salary raises in 2009, and decided to increase the base salary of each of our NEOs by 2.5% over their 2009 base salaries.

        In the future, we expect that salaries for executive officers will be reviewed annually, as well as at the time of a promotion or other change in level of responsibilities, or when competitive circumstances or business needs may require. As noted above, we expect that the Compensation Committee will recommend a compensation package that is consistent with our compensation philosophy, strategically positioned at market median of our to-be-determined peer group.

    Performance-Based Cash Incentives

        We pay annual performance-based cash incentives or bonuses in order to align the compensation of our NEOs with our short-term operational and performance goals and to provide near-term rewards for our NEOs to meet these goals. From time to time, our Compensation Committee has exercised its discretion in determining cash incentive amounts and making individual awards, but generally our performance-based cash incentives are made under our annual cash incentive plan. Our annual cash incentive plan for our CEO is based on the attainment by our company of non-financial operational goals and for all other NEOs is based on two components: the attainment by our company of non-financial operational goals and the achievement by each NEO of personal and often subjective performance goals. The final evaluation made by our Compensation Committee combines often subjective assessments of each of our company's operational goals and each NEO's personal goals and does not involve a mathematical analysis or pre-established weighting of each goal. Each of these components allows us to establish appropriately aggressive performance expectations and incentives that align business performance expectations to the prevailing market and economic conditions.

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        The following table shows each NEO's target bonus under our annual cash incentive plan as a percentage of base salary for 2009.

 
  Target Bonus as a
Percentage of Base Salary
 
Name
  Target (%)   Maximum (%)  

Vipin K. Garg, Ph.D. 

    35     35  

Richard I Eisenstadt

    20     20  

Helmut Thomas, Ph.D. 

    20     20  

Gordana Kosutic, M.D. 

    10     10  

        The actual payout to our NEOs, other than our CEO, under our annual cash incentive plan is calculated as follows: first, our Compensation Committee determines the percentage of corporate objectives attained and then multiplies that percentage by our NEOs' target bonus percentage to determine each NEOs' maximum bonus eligibility percentage, and second, our Compensation Committee determines the percentage of personal objectives achieved and then multiplies that percentage by each NEOs' maximum bonus eligibility percentage to determine the actual payout amount. For example, if our Compensation Committee determines that we attained 50% of our corporate objectives, then our CFO's maximum bonus eligibility is 10%, or 20% multiplied by 50%. If our Compensation Committee also determines that our CFO achieved 75% of his personal performance objectives, then our CFO's actual bonus payout is 7.5%, or 10% multiplied by 75%, of his annual base salary. The actual payout to our CEO under our annual cash incentive plan is based entirely on the attainment of our corporate objectives. For example, if our board determines that we attained 50% of our corporate objectives, then our CEO's actual bonus payout is 17.5%, or 35% multiplied by 50%, of his annual base salary.

        We do not disclose our company and personal performance goals. We believe that disclosure of these goals would result in serious competitive harm and be detrimental to our operating performance because the components of our performance goals for 2009 contain highly sensitive data, such as regulatory, strategic partnering and other non-financial operational goals. These goals are intended to be realistic and reasonable, but challenging, in order to drive performance by our NEOs.

        The personal performance goals vary for each NEO whose bonus is based in part on personal performance goals and are based on specific priorities in the NEO's area of responsibility, which may include, among others, regulatory and operating performance measures, as well as more subjective goals such as achievement of operational goals or implementation of specific plans, publications or projects in each NEO's area of management. Each year, our CEO and each NEO jointly determine what the NEO's performance priorities will be for the year, and our CEO makes a recommendation to our Compensation Committee. Our Compensation Committee reviews these recommendations, may have further discussions with the CEO or the NEO and then makes a final determination as to the personal performance goals.

        After our fiscal year 2009 ended, our Compensation Committee reviewed the company's performance against its goals and determined that the company performance component of our annual cash incentive plan was 0%. This decision was primarily due to slower than expected clinical and business development accomplishments. As a result, none of our NEOs received any cash incentive compensation for the fiscal year ended 2009. However, our Compensation Committee recognized the accomplishment of our collaboration agreement with Bristol-Myers Squibb Company, which was not originally included in the 2009 cash incentive plan previously communicated to the NEOs, and awarded our CEO a discretionary bonus of $50,000. In addition, our Compensation Committee, based on the recommendation of our CEO, allocated an additional $50,000 in discretionary bonuses to employees who contributed to this accomplishment. Our CFO and Senior Vice President, Research and Preclinical Development were allocated $20,000 and $25,000, respectively, from this amount. These discretionary

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bonus amounts are set forth in the "Summary Compensation Table" under "Compensation Tables" below.

        After our fiscal year 2009 ended, each of our NEOs prepared an assessment of his or her performance against his or her personal performance goals and discussed them with our CEO, who then made a recommendation to our Compensation Committee. Our Compensation Committee reviewed these recommendations, undertook a similar process with our CEO regarding his personal performance goals and made a determination of overall performance against these goals for each NEO. Since our Compensation Committee determined that the company performance component of our annual cash incentive plan for 2009 was 0%, the evaluation of each NEO's personal performance goals did not factor into determining the amount of annual cash incentive compensation for 2009.

        We expect that following this offering our Compensation Committee will more directly assess the performance of our NEOs. Many of the personal performance goals are qualitative in nature. Accordingly, the final evaluation made by our Compensation Committee often combines subjective assessments of each of the NEO's goals and does not involve a mathematical analysis or pre-established weighting of each goal. Our Compensation Committee ultimately determines a single percentage representing overall performance against each NEO's personal goals in the aggregate.

        The target bonus percentages for our NEOs under our annual cash incentive plan for 2010 are the same as under the annual cash incentive plan for 2009. We do not believe that disclosure of our 2010 company and personal performance goals is relevant to an understanding of compensation for our 2009 fiscal year, and we therefore have not disclosed them. In addition, because the components of our performance goals for 2010 contain highly sensitive data, such as our regulatory, business development and performance goals, we believe that such disclosure would result in serious competitive harm and be detrimental to our operating performance. Our performance goals are intended to be realistic and reasonable, but challenging, in order to drive performance by our NEOs.

    Equity Incentives

        All of our NEOs have received equity incentive grants under our 2001 Stock Option Plans or 2003 Stock Option Plan, which is described below, in the form of stock options. To date, we have used stock option grants as our principal form of equity incentives because they are an effective means to align the long-term interests of our executive officers with those of our stockholders. The offer of options attempts to achieve this alignment by providing our NEOs with equity incentives that vest over time or upon the occurrence of certain events. The options serve also to reward our NEOs for performance. The value of an option is at risk for the NEO and is entirely dependent on the value of a share of our stock above the option's strike price. The value of our stock is dependent in many ways on management's success in achieving our goals. If the price of our common stock drops, for any reason, over the option's vesting period, the value of the option to the executive will drop and could become worthless if the price of the underlying stock remains below the option's strike price. In determining the number of stock options to be granted to executives, we take into account the individual's position, scope of responsibility, ability to affect profits and shareholder value and the individual's historic and recent performance and the value of stock options in relation to other elements of the individual executive's total compensation.

        We may in the future grant other forms of equity incentives, such as restricted stock or performance shares (shares that vest only upon achievement of performance goals established at the time of grant), subject to the Compensation Committee's discretion, to ensure that our executives are focused on long-term value creation. We expect that the Compensation Committee will periodically review the equity awards previously awarded to management, the performance of our business and the performance of our stock. We expect that the Compensation Committee will establish levels of equity incentive holdings for our NEOs such that the portion of overall compensation that is variable is

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consistent with our pay-for-performance philosophy and competitive within our industry. The Compensation Committee is expected to determine appropriate levels of equity awards based on these factors and may make additional grants.

        Stock options granted by us to date have an exercise price equal to or greater than the fair market value of our common stock on the date of grant and generally expire ten years after the date of grant. Stock options are subject to vesting, with 100% of the options in each grant vesting over time at a rate of 25% of the total grant on the first anniversary of the vesting start date and the remaining 75% vesting in 12 equal quarterly installments over the first 12 quarters following the first anniversary of the vesting start date.

        The amount of each of these awards was designed to establish a desired percentage ownership level for each of our NEOs that our board believed was commensurate with their respective roles and responsibilities and based on similarly situated employees of other companies that members of our board had experience with. No new awards were granted in 2009 because there was no dilution to the NEOs' ownership in that year.

    Additional Executive Benefits and Perquisites

        We provide our executive officers with executive benefits that the board believes are reasonable and in the best interests of the company and its stockholders which consist of the following benefits:

    health insurance;

    vacation and sick days;

    long-term disability; and

    a 401(k) plan.

        In addition, we pay life insurance premiums for our CEO. We have no structured perquisite benefits, such as club memberships or company vehicles, for any executive officer, including our NEOs.

Accounting and Tax Considerations

        In determining which elements of compensation are to be paid, and how they are weighted, we also take into account whether a particular form of compensation will be deductible under Section 162(m) of the Code. Section 162(m) generally limits the deductibility of compensation paid to our NEOs to $1 million during any fiscal year unless such compensation is "performance-based" under Section 162(m). However, under a Section 162(m) transition rule for compensation plans or agreements of corporations which are privately held and which become publicly held in an initial public offering, compensation paid under a plan or agreement that existed prior to the initial public offering will not be subject to Section 162(m) until the earlier of (1) the expiration of the plan or agreement; (2) a material modification of the plan or agreement; (3) the issuance of all employer stock and other compensation that has been allocated under the plan; or (4) the first meeting of stockholders at which directors are to be elected that occurs after the close of the third calendar year following the year of the initial public offering, or the Transition Date. After the Transition Date, certain rights or awards granted under the plan, will not qualify as "performance-based compensation" for purposes of Section 162(m) unless such rights or awards are granted or vest upon pre-established objective performance goals, the material terms of which are disclosed to and approved by our stockholders.

        Our compensation program is intended to maximize the deductibility of the compensation paid to our NEOs to the extent that we determine it is in our best interests. Consequently, we may rely on the exemption from Section 162(m) afforded to us by the transition rule described above for compensation paid pursuant to our pre-existing plans.

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Risk Management Practices

        When determining our compensation policies and practices, our Compensation Committee considered various matters relative to the development of a reasonable and prudent compensation program, including whether the policies and practices were reasonably likely to have a material adverse effect on us. We believe that the mix and design of our executive compensation plans and policies do not encourage management to assume excessive risks and are not reasonably likely to have a material adverse effect on us for the following reasons: we offer an appropriate balance of short and long-term incentives and fixed and variable amounts; our variable compensation is based on a balanced mix of criteria; and our Compensation Committee has the authority to adjust variable compensation as appropriate.

Compensation Tables

        The following tables provide information regarding the compensation earned during our most recently completed fiscal year by our NEOs.

    Summary Compensation Table—2009

        The following table shows the compensation earned by our NEOs during the fiscal year ended December 31, 2009.

Name and Principal Position
  Year   Base
Salary
($)
  Bonus
($)
  All Other
Compensation
($)
  Total
($)
 

Vipin K. Garg, Ph.D.
Chief Executive Officer; President

    2009     280,800     50,000     8,069 (1)   338,869  

Richard I. Eisenstadt
Chief Financial Officer; Vice President, Finance

   
2009
   
188,240
   
20,000
   
6,437

(2)
 
214,677
 

Helmut Thomas, Ph.D.
Senior Vice President, Research and Preclinical Development

   
2009
   
260,000
   
25,000
   
3,822

(2)
 
288,822
 

Gordana Kosutic, M.D.
Vice President, Clinical and Regulatory Affairs

   
2009
   
244,400
   
   
7,350

(2)
 
251,750
 

(1)
Consists of a company matching contribution to our 401(k) plan of $7,350 and company-paid life insurance premiums paid of $ 719.

(2)
Consists of a company matching contribution to our 401(k) plan.

    Grants of Plan-Based Awards—2009

        During fiscal year ended December 31, 2009, each of our NEOs participated in our performance-based cash incentive plan in which each officer was eligible for awards set forth below under "Estimated Potential Payouts Under Non-Equity Incentive Plan Awards". For a detailed discussion of our performance-based cash incentive plan, refer to "—Compensation Discussion and Analysis—Performance-based cash incentives."

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        We did not make any equity award grants to our NEOs during fiscal year ended December 31, 2009.

 
  Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
 
Name
  Threshold
($)(1)
  Target
($)
  Maximum
($)
 

Vipin K. Garg, Ph.D. 

      $ 98,280   $ 98,280  

Richard I. Eisenstadt

      $ 37,650   $ 37,650  

Helmut Thomas, Ph.D. 

      $ 52,000   $ 52,000  

Gordana Kosutic, M.D. 

      $ 24,440   $ 24,440  

(1)
There is no "threshold" amount established under our annual cash incentive plan.

    Outstanding Equity Awards at Fiscal Year-End—2009

        The table below sets forth certain information regarding the outstanding equity awards held by our NEOs as of December 31, 2009.

 
  Option Awards  
Name
  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  Option
Exercise
Price(1)
  Vesting
Start Date
  Option
Expiration
 

Vipin K. Garg, Ph.D. 

    42,328     0   $ 1.62     9/14/2001     8/14/2011  

    136,445     0   $ 1.84     1/1/2004     1/1/2014  

    631,227     0   $ 0.25     5/12/2005     8/9/2015  

    421,875     28,125   $ 0.25     1/25/2006     2/16/2016  

    340,312     154,688   $ 0.35     1/4/2007     2/1/2017  

    261,384     261,385   $ 0.54     10/26/2007     2/19/2018  

    228,711     294,058   $ 0.54     2/1/2008     2/19/2018  

Richard I. Eisenstadt

   
3,135
   
0
 
$

1.62
   
8/12/2003
   
8/12/2013
 

    1,254     0   $ 1.62     10/7/2003     10/7/2013  

    22,171     0   $ 1.84     1/1/2004     1/1/2014  

    134,154     0   $ 0.25     5/12/2005     8/9/2015  

    83,705     5,581   $ 0.25     1/25/2006     2/16/2016  

    96,250     43,750   $ 0.35     1/4/2007     2/1/2017  

    58,085     58,086   $ 0.54     10/26/2007     2/19/2018  

    50,824     65,347   $ 0.54     2/1/2008     2/19/2018  

Helmut Thomas, Ph.D. 

   
218,750
   
31,250
 
$

0.54
   
6/5/2006
   
2/19/2018
 

    68,750     31,250   $ 0.54     1/4/2007     2/19/2018  

    52,128     52,128   $ 0.54     10/26/2007     2/19/2018  

    45,612     58,644   $ 0.54     2/1/2008     2/19/2018  

Gordana Kosutic, M.D. 

   
126,000
   
0
 
$

0.25
   
10/4/2005
   
10/4/2015
 

    65,625     4,375   $ 0.25     1/25/2006     2/16/2016  

    52,937     24,063   $ 0.35     1/4/2007     2/01/2017  

    40,659     40,660   $ 0.54     10/26/2007     2/19/2018  

    35,577     45,743   $ 0.54     2/1/2008     2/19/2018  

(1)
The options covered by the respective grant vest and become exercisable at a rate of 25% of the total grant on the first anniversary of the vesting start date and the remaining 75% vesting in 12 equal quarterly installments over the first 12 quarters following the first anniversary of the vesting start date. See "—Compensation Discussion and Analysis—Elements of Compensation—Equity Incentives."

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    Option Exercises and Stock Vested

        There were no option awards exercised by any of our NEOs during fiscal year ended December 31, 2009, and none of our NEOs hold any other stock awards, including any that vested during fiscal year ended December 31, 2009.

    Pension Benefits

        Our NEOs did not participate in or have account balances in any qualified or nonqualified defined benefit plans sponsored by us.

    Deferred Compensation

        We do not currently provide any deferred compensation program or benefits but may elect to do so in the future.

Employment and Change in Control Agreements

        Vipin K. Garg, Ph.D.    On February 20, 2007, we entered into an Amended and Restated Agreement of Employment with Dr. Garg, our President and Chief Executive Officer, providing for his continued employment, effective as of the signing date. This employment agreement, as amended on July 16, 2008, provides for an initial term of three years with automatic renewals each year thereafter unless terminated by either us or Dr. Garg. Dr. Garg's base salary was originally set at $270,000 per year, subject to annual review and increases based on Dr. Garg's performance and the company's performance. Dr. Garg is also eligible to receive an annual bonus payment of up to 35% of his annual base salary, based on achievement of certain performance milestones identified by our board of directors in consultation with Dr. Garg. Furthermore, he is eligible to participate in our group benefits programs, including but not limited to medical insurance, vacation and retirement plans, and will be provided with life insurance and the ability to participate in a 401(k) plan. In the event Dr. Garg is terminated by us without cause, as defined in the employment agreement, or he resigns with good reason, as defined in the employment agreement, including any material reduction in base compensation or material diminution in title, duties or responsibilities as President and Chief Executive Officer, Dr. Garg will be entitled to receive (i) continued payment of his base salary for 12 months, (ii) a pro-rata portion of his bonus for the year of termination and (iii) continuation of his taxable and non-taxable benefits for 12 months, subject to the limits under the Treasury Regulation Section 1.409A-1(b)(9)(v)(D). Additionally, all of Dr. Garg's stock options that would have otherwise vested during the 12 month period from the date of termination (assuming no termination had occurred) shall vest immediately. In the event that Dr. Garg is terminated for cause or he terminates his employment without good reason, Dr. Garg will not be entitled to the payments and benefits described above unless mutually agreed upon in writing. Dr. Garg's employment agreement also includes a two-year non-solicitation covenant and a one year non-compete covenant following the termination of Dr. Garg's employment.

        We also entered into a Change in Control Agreement with Dr. Garg effective as of June 13, 2008 providing for certain benefits to Dr. Garg in the event of the termination of his employment following a change in control. In the event that Dr. Garg's employment is terminated (i) by us for any reason other than for cause, as defined in the agreement (other than by reason of his death or permanent disability) or (ii) by Dr. Garg for good reason as defined in the agreement, including substantial reduction or diminishment of duties, responsibilities or salary or relocation of Dr. Garg's place of employment by more than 50 miles, in either case, in immediate anticipation of, concurrently with, or within 12 months following a change in control, Dr. Garg will be entitled to receive (a) an amount equal to 12 months' of his then-current monthly base salary (less all applicable deductions for withholding taxes and the like) payable as a single lump sum, (b) an amount equal to: (x) the percentage of his annual base salary received as a bonus payment for the preceding calendar year multiplied by (y) his base salary for the year of termination, and (c) an amount equal to the cost of the

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premium for continued health insurance coverage at the same coverage level and on the same terms and conditions which applied immediately prior to the date of termination for 12 months from the date of termination.

        Richard I. Eisenstadt.    Effective June 13, 2008, we entered into a Change in Control Agreement with Mr. Eisenstadt, our Vice President, Finance and Chief Financial Officer, providing for certain benefits to Mr. Eisenstadt in the event of the termination of his employment following a change in control. In the event that Mr. Eisenstadt's employment is terminated (i) by us for any reason other than for cause, as defined in the agreement (other than by reason of his death or permanent disability) or (ii) by Mr. Eisenstadt for good reason as defined in the agreement, including substantial reduction or diminishment of duties, responsibilities or salary or relocation of Mr. Eisenstadt's place of employment by more than 50 miles, in either case, in immediate anticipation of, concurrently with, or within 12 months following a change in control, Mr. Eisenstadt will be entitled to receive (a) an amount equal to six months' of his then-current monthly base salary (less all applicable deductions for withholding taxes and the like) payable as a single lump sum, (b) an amount equal to: (x) the percentage of his annual base salary received as a bonus payment for the preceding calendar year multiplied by (y) his base salary for the year of termination, and (c) an amount equal to the cost of the premium for continued health insurance coverage at the same coverage level and on the same terms and conditions which applied immediately prior to the date of termination for six months from the date of termination.

        Helmut Thomas, Ph.D.    On June 13, 2008, we entered into a Change in Control Agreement with Dr. Thomas, our Senior Vice President, Research and Preclinical Development, providing for certain benefits to Dr. Thomas in the event of his termination of employment following a change in control. In the event that Dr. Thomas' employment is terminated (i) by us for any reason other than for cause, as defined in the agreement (other than by reason of his death or permanent disability) or (ii) by Dr. Thomas for good reason as defined in the agreement, including substantial reduction or diminishment of duties, responsibilities or salary or relocation of Dr. Thomas' place of employment by more than 50 miles, in either case, in immediate anticipation of, concurrently with, or within 12 months following a change in control, Dr. Thomas will be entitled to receive (a) an amount equal to 12 months' of his then-current monthly base salary (less all applicable deductions for withholding taxes and the like) payable as a single lump sum, (b) an amount equal to: (x) the percentage of his annual base salary received as a bonus payment for the preceding calendar year multiplied by (y) his base salary for the year of termination, and (c) an amount equal to the cost of the premium for continued health insurance coverage at the same coverage level and on the same terms and conditions which applied immediately prior to the date of termination for 12 months from the date of termination.

        Gordana Kosutic, M.D.    Effective June 13, 2008, we entered into a Change in Control Agreement with Dr. Kosutic, our Vice President, Clinical and Regulatory Affairs, providing for certain benefits to Dr. Kosutic in the event of the termination of her employment following a change in control. In the event that Dr. Kosutic's employment is terminated (i) by us for any reason other than for cause, as defined in the agreement (other than by reason of her death or permanent disability) or (ii) by Dr. Kosutic for good reason as defined in the agreement, including substantial reduction or diminishment of duties, responsibilities or salary or relocation of Dr. Kosutic's place of employment by more than 50 miles, in either case, in immediate anticipation of, concurrently with, or within 12 months following a change in control, Dr. Kosutic will be entitled to receive (a) an amount equal to six months' of her then-current monthly base salary (less all applicable deductions for withholding taxes and the like) payable as a single lump sum, (b) an amount equal to: (x) the percentage of her annual base salary received as a bonus payment for the preceding calendar year multiplied by (y) her base salary for the year of termination, and (c) an amount equal to the cost of the premium for continued health insurance coverage at the same coverage level and on the same terms and conditions which applied immediately prior to the date of termination for six months from the date of termination.

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Potential Payments Upon Termination and Change in Control

        Assuming each NEO's employment was terminated under each of the circumstances set forth below, or a change in control occurred, on December 31, 2009, the estimated values of payments and benefits to each NEO are set forth in the following table. In the case of a change in control, the amounts set forth below assume that each NEO was terminated without cause or resigned for good reason on December 31, 2009 as well. See "—Employment and Change in Control Agreements."

        Payments upon certain terminations of employment as set forth in the table below are determined by the terms of our CEO's employment agreement and the respective NEO's change in control agreements. See "—Employment and Change in Control Agreements." The amounts payable upon a change in control represent accelerated vesting of options and are determined by the terms of the equity incentive plan under which the options have been granted and the terms of the grant agreement governing the options. See "—Elements of Compensation—Benefit Plans." Grant agreements for options under our stock option plans generally have provided for 100% acceleration of unvested options for all grantees in connection with a change in control because our board of directors believes that this accelerated vesting provides our employees an incentive to assist in the successful completion of a change in control transaction.

Name
  Benefit   Without cause or
for good reason
  Change in
control
 

Vipin K. Garg, Ph.D. 

  Base salary continuation   $ 280,800   $ 280,800  

  Bonus(1)     49,140     98,280  

  Continuation of benefits(2)     22,525     21,805  

  Vesting of Options(3)          
               

 

Total

    352,465     400,885  
               

Richard I. Eisenstadt

 

Base salary continuation

   
   
94,120
 

  Bonus(1)         18,824  

  Continuation of benefits(2)         3,760  

  Vesting of Options(3)          
               

 

Total

        116,704  
               

Helmut Thomas, Ph.D. 

 

Base salary continuation

   
   
260,000
 

  Bonus(1)         52,000  

  Continuation of benefits(2)         1,070  

  Vesting of Options(3)          
               

 

Total

        313,070  
               

Gordana Kosutic, M.D. 

 

Base salary continuation

   
   
122,200
 

  Bonus(1)         12,220  

  Continuation of benefits(2)         9,580  

  Vesting of Options(3)          
               

 

Total

        144,000  
               

(1)
Amounts shown for bonus in connection with a change in control represent the target bonus the NEO would have earned for fiscal 2009, based on the assumption that the NEO's employment terminated as of the last day of the fiscal year, in accordance with the NEO's employment agreement. The amount set forth in the table reflects 100% of the target bonus under our annual cash incentive plan because this table assumes that the NEOs were terminated as of the last day of the fiscal year and we had not yet determined the amount of the bonuses payable to our NEOs under our annual cash incentive plan for fiscal 2009.

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(2)
Amounts shown for continuation of benefits represent estimates for the continuation of health, medical, life and group life insurance benefits afforded to the NEOs and eligible family members in accordance with the NEO's employment agreement and/or change in control agreement.

(3)
There was no public market for our common stock in 2009. We have estimated the market value of the unvested options shares based on an assumed initial public offering price of $            per share, which is the midpoint of the range listed on the cover page of this prospectus.

Director Compensation—2009

        Upon election to our board, each of our non-employee directors who are not affiliated with any 5% or greater stockholder was granted options to purchase shares of our common stock, subject to an annual vesting over a four-year period from the date of grant. In addition, each of these directors is granted, annually, options to purchase shares of our common stock, subject to vesting over a one-year period from the date of grant. The exercise price of the options was greater than or equal to the fair market value of a share of our common stock at the time of grant. In addition, our non-employee directors who are not affiliated with any 5% or greater stockholder receive $1,000 per board meeting attended, $500 per committee meeting attended and $750 for chairing a committee.

        All directors have received and will continue to receive reimbursement for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the board.

        The following table sets forth a summary of the compensation we paid to our non-employee directors in 2009.

Name(1)
  Fees Earned
or Paid in
Cash(2)
  Stock
Awards
  All Other
Compensation
  Total  

Jean-Paul Castaigne

  $ 7,000   $   $ 17,000 (3) $ 24,000  

Donald F. Corcoran

  $ 7,500       $   $ 7,500  

(1)
Mr. Johnson is omitted from this table because he joined our board in November 2010. Dr. Garg, Mr. Davidson, Dr. Gavin and Mr. Zisson have been omitted from this table because they received no compensation for serving on our board of directors. Dr. Garg's compensation as President and Chief Executive Officer for 2009 is detailed in "—Summary Compensation Table," "—Grants of Plan-Based Awards," "—Outstanding Equity Awards at Fiscal Year-End" and "—Option Exercises and Stock Vested" above.

(2)
Non-employee directors who are not affiliated with any 5% or greater stockholder receive $1,000 per board meeting attended, $500 per committee meeting attended and $750 for chairing a committee.

(3)
We are party to a consulting agreement with Dr. Castaigne pursuant to which he was paid $17,000 during 2009. Pursuant to the agreement, Dr. Castaigne primarily undertakes special projects at the request of our CEO.

Benefit Plans

        Our officers, employees, non-employee directors and other key persons (including consultants and prospective employees) are entitled to participate in various benefit plans as described below, subject to the discretion of the administrators of the plans. Prior to completion of this offering, our equity awards were granted out of the Tranzyme Pharma Plan, the 2003 Stock Option Plan, the 2001 Employee Stock Option Plan and the 2001 Non-Employee Stock Option Plan. There were an aggregate of 8,001,272 shares of common stock authorized under these plans. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. The available shares under these plans at the time of this offering will be reserved for the issuance of awards under the 2011

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Equity Incentive Plan. Generally, shares that are forfeited or canceled from awards under the 2011 Equity Incentive Plan, the 2004 Stock Option Plan, the 2003 Stock Option Plan, the 2001 Employee Stock Option Plan and the 2001 Non-Employee Stock Option Plan also will be available for future awards. As of the date of this prospectus, no awards had been granted under the 2011 Equity Incentive Plan.

    2011 Equity Incentive Plan

        Introduction.    Our 2011 Equity Incentive Plan was adopted by our board of directors and approved by our stockholders on                        , 2011 and will become effective upon the completion of this offering. The 2011 Equity Incentive Plan permits us to make grants of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, cash-based awards, performance shares and dividend equivalent rights to our executives, employees, non-employee directors and consultants.

        Share Reserve.    Shares of common stock plus the number of shares of common stock reserved and still available under the Tranzyme Pharma Plan, the 2003 Stock Option Plan, the 2001 Non-Employee Stock Option Plan and the 2001 Employee Stock Option Plan at the time of this offering will be reserved for the issuance of awards under the 2011 Equity Incentive Plan. 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 2011 Equity Incentive Plan, the Tranzyme Pharma Plan, the 2003 Stock Option Plan, the 2001 Employee Stock Option Plan and the 2001 Non-Employee Stock Option Plan also will be available for future awards.

        Administration.    The 2011 Equity Incentive Plan is administered by either the board or the compensation committee of our board of directors (in either case, the "administrator"). The administrator has full power and authority to select the 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 2011 Equity Incentive Plan.

        Eligibility.    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 2011 Equity Incentive Plan, subject to the discretion of the administrator. There are certain limits on the number of awards that may be granted under the 2011 Equity Incentive 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. The maximum performance-based award payable to any grantee in a performance cycle is                         shares of common stock or $            if the award is payable in cash. These limits are intended to comply with Section 162(m) of the Code. In addition, no more than              shares of common stock may be granted in the form of incentive stock options.

        Types of Awards.    The types of awards that are available for grant under the 2011 Equity Incentive Plan are:

    incentive stock options;

    nonqualified stock options;

    stock appreciation rights;

    restricted stock awards and units;

    unrestricted stock awards;

    performance share awards;

    cash based awards;

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    dividend equivalent rights; and

    combinations of the above awards.

        The exercise price of stock options awarded under the 2011 Equity Incentive 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 2011 Equity Incentive 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 stock 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 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.

        Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the administrator. The administrator may also award restricted stock units, which entitle the participant to receive one share of common stock at the time the unit vests. 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. The administrator will determine the number of shares of restricted stock or restricted stock units granted to any employee. Our 2011 Equity Incentive Plan also gives the administrator discretion to grant stock awards free of any restrictions.

        Performance share awards are awards entitling the grantee to receive shares of our common stock upon the attainment of performance goals.

        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.

        Section 162(m).    In connection with performance-based awards (other than stock options or stock appreciation rights) that are intended to satisfy the requirements of Section 162(m) of the Code, each eligible participant's stock or cash award will be based on one or more pre-established performance targets determined in the discretion of the administrator. 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.

        Transferability.    Unless otherwise determined by the administrator or provided for in a written agreement evidencing an award, our 2011 Equity Incentive 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.

        Change in Control.    Except as otherwise provided by the administrator and evidenced in a particular award, in the event of a merger, sale or dissolution, or a similar change in control unless assumed or continued by any successor entity, all stock options and stock appreciation rights granted under the 2011 Equity Incentive Plan will terminate automatically unless the successor entity agrees to assume the awards. In the event the awards are to be terminated, the administrator may provide for payment in exchange for the termination of the awards. Furthermore, at any time the administrator may provide for the acceleration of exercisability and/or vesting of an award.

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        Term.    Unless earlier terminated by our board of directors, the 2011 Equity Incentive Plan will expire on the tenth anniversary of the latest date our stockholders approved the plan, including any subsequent amendment or restatement. No awards will be granted under the 2011 Stock Option and Incentive Plan after that date.

        Amendment or Termination.    Our board of directors may amend, suspend, or terminate the 2011 Equity Incentive Plan in any respect at any time, subject to stockholder approval where such approval is required by applicable law or stock exchange rules. Further, certain material amendments to the 2011 Equity Incentive Plan will be subject to approval by our stockholders, including any amendment that increases the number of shares available for issuance under the 2011 Equity Incentive Plan or expands the types of awards available under, the eligibility to participate in, or the duration of, the plan. No amendment to the 2011 Equity Incentive Plan may materially impair any of the rights of a participant under any awards previously granted without his or her written consent. The administrator may not, without prior stockholder approval reduce the exercise price of outstanding stock options or stock appreciation rights or effect repricing through cancellation and re-grants or cancellation of stock options or stock appreciation rights in exchange for cash.

The 2004 Stock Option Plan of Tranzyme Pharma Inc.

    Effective upon the adoption of our 2011 Stock Option and Incentive Plan in connection with this offering, our board of directors and Tranzyme Pharma's board of directors decided not to grant any further awards under the Tranzyme Pharma Plan.

        Introduction.    The Tranzyme Pharma Plan was adopted by the board of directors of Tranzyme Pharma Inc. (f/k/a Neokimia Inc.) on June 3, 2004. The Tranzyme Pharma Plan was amended and restated by the board of directors of Tranzyme Pharma on April 26, 2005 in connection with the Series A Financing. The Tranzyme Pharma Plan, permits us to make grants of stock options to Tranzyme Pharma's executives, employees, non-employee directors and consultants. As of September 30, 2010, stock options to purchase an aggregate of 423,910 shares of Tranzyme Pharma Inc's common exchangeable shares were outstanding under the Tranzyme Pharma Plan.

        In the event that any outstanding awards under the Tranzyme Pharma Plan, are cancelled, forfeited or otherwise terminated without being exercised, the number of shares underlying such award becomes available for grant under the 2011 Equity Incentive Plan. All options granted under this plan expire ten years after the date of grant provided however that options granted to ten percent shareholders expire after five years.

        Administration.    The Tranzyme Pharma Plan is administered by the board of directors of Tranzyme Pharma. The board of directors has full power and authority to approve forms of agreements for use, to select the participants to whom awards will be granted, to make any combination of awards to participants, to determine fair market value, 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 Tranzyme Pharma Plan. The board of directors can also delegate such powers to executive officers, but the board must fix by a board resolution the maximum number of shares eligible to be awarded and the maximum number of shares for any one optionee made by such executive officers.

        Eligibility.    All of Tranzyme Pharma's employees, directors, consultants and other contributors are eligible to participate in the Tranzyme Pharma Plan, subject to the discretion of the administrator.

        Types of Awards.    Options are the only type of award available for grant under the 2004 Stock Option Plan.

        Transferability.    Unless otherwise determined by the administrator or provided for in a written agreement evidencing an award, the Tranzyme Pharma Plan does not permit the transfer of stock

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options except in the event of death and only the recipient of a stock option may exercise an award during the recipient's lifetime.

        Repurchase of Shares.    Common exchangeable shares acquired upon exercise of a stock option and any gain realized upon exercise of any stock option may be subject to repurchase by, or forfeiture to, Tranzyme Pharma at the discretion of Tranzyme Pharma's board of directors if the applicable award agreement provides for the repurchase.

        Conversion.    Upon completion of this offering, each outstanding award under the Tranzyme Pharma Plan shall be cancelled in exchange for the same number of awards under our 2011 Equity Incentive Plan, subject to adjustment as set forth in the Tranzyme Pharma Plan.

        Change in Control.    Except as otherwise provided by the administrator and evidenced in a particular award, in the event of a merger or consolidation, sale of all or substantially all of Tranzyme Pharma's assets or capital stock or a similar change in control, any unexercisable portion of an award shall become immediately exercisable as of a date prior to the change in control, and, each outstanding award, to the extent not exercised prior to the change in control, shall terminate as of the effective time of the change in control.

        Term.    Unless earlier terminated by Tranzyme Pharma's board of directors, the Tranzyme Pharma Plan will expire on June 3, 2014. No awards may be granted under the Tranzyme Pharma Plan after the expiration date.

        Amendment or Termination.    The board may amend, suspend, or terminate the Tranzyme Pharma Plan in any respect at any time without stockholder approval, subject to stockholder approval where such approval is required by applicable law or stock exchange rules. No amendment to the Tranzyme Pharma Plan, as amended and restated, may materially impair any of the rights of a participant under any awards previously granted without his or her written consent.

The 2003 Stock Option Plan of Tranzyme, Inc.

    Effective upon the adoption of our 2011 Stock Option and Incentive Plan in connection with this offering, our board of directors decided not to grant any further awards under the 2003 Stock Option Plan.

        Introduction.    The 2003 Stock Option Plan was adopted by our board of directors of on December 15, 2003 and approved by our shareholders on December 16, 2003. The 2003 Stock Option Plan was amended by our board of directors on June 3, 2004 and April 26, 2005, effective May 12, 2005, then amended and restated by our board of directors on October 23, 2007. The 2003 Stock Option Plan, as amended and restated, permits us to make grants of non-qualified stock options to our executives, employees, non-employee directors and consultants. Incentive stock options may also be granted to our executives and key employees. As of September 30, 2010, stock options to purchase an aggregate of 4,722,717 shares of common stock were outstanding under the 2003 Stock Option Plan.

        In the event that any outstanding awards under the 2003 Stock Option Plan, are cancelled, forfeited or otherwise terminated without being exercised, the number of shares underlying such award becomes available for grant under the 2011 Equity Incentive Plan. All options granted under this plan expire ten years after the date of grant provided however that options granted to ten percent shareholders expire after five years.

        Administration.    The 2003 Stock Option Plan is administered by either the board or the compensation committee of our board of directors (in either case, the "administrator"). The administrator has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award

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and to determine the specific terms and conditions of each award, subject to the provisions of the 2003 Stock Option Plan.

        Eligibility.    All of our employees, directors, consultants and other contributors are eligible to participate in the 2003 Stock Option Plan, subject to the discretion of the administrator.

        Types of Awards.    The types of awards that are available for grant under the 2003 Stock Option Plan are:

    incentive stock options;

    nonstatutory stock options; and

    any combination of the above awards.

        The exercise price of stock options awarded under the 2003 Stock 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 stock option may be exercised and, subject to the provisions of the 2003 Stock Option Plan, the period of time, if any, after retirement, resignation, death, disability or other termination of employment during which options may be exercised. To qualify as incentive stock 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.

        Transferability.    Unless otherwise determined by the administrator or provided for in a written agreement evidencing an award, the 2003 Stock Option Plan does not permit the transfer of stock options except in the event of death and only the recipient of a stock option may exercise an award during the recipient's lifetime.

        Repurchase of Shares.    Shares of common stock acquired upon exercise of a stock option and any gain realized upon exercise of any stock option may be subject to repurchase by, or forfeiture to, us at the discretion of our board of directors if the applicable award agreement provides for the repurchase.

        Change in Control.    Except as otherwise provided by the administrator and evidenced in a particular award, in the event of a merger or consolidation, sale of all or substantially all of our assets or capital stock or a similar change in control, any unexercisable portion of an award shall become immediately exercisable as of a date prior to the change in control as determined by our board. Each outstanding award, to the extent not exercised prior to the change in control, shall terminate as of the effective time of the change in control, unless the successor entity elects to assume outstanding awards or replace the outstanding awards with a comparable award to purchase shares of capital stock of the successor corporation.

        Term.    Unless earlier terminated by our board of directors, the 2003 Stock Option Plan will expire on December 15, 2013. No awards may be granted under the 2003 Stock Option Plan after the expiration date.

        Amendment or Termination.    Our board of directors may amend, suspend, or terminate the 2003 Stock Option Plan in any respect at any time, subject to stockholder approval where such approval is required by applicable law or stock exchange rules. No amendment to the 2003 Stock Option Plan may materially impair any of the rights of a participant under any awards previously granted without his or her written consent.

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The 2001 Non-Employee Stock Option Plan of Tranzyme, Inc.

    Effective upon the adoption of our 2003 Stock Option and Incentive Plan in connection with this offering, our board of directors decided not to grant any further awards under the 2001 Non-Employee Stock Option Plan.

        Introduction.    The 2001 Non-Employee Stock Option Plan was adopted by our board of directors and approved by our shareholders on August 14, 2001 along with the 2001 Employee Stock Option Plan. The 2001 Non-Employee Stock Option Plan was amended by our board of directors on December 15, 2003 and April 26, 2005, effective May 12, 2005. The 2001 Non-Employee Stock Option Plan, as amended, permits us to make grants of non-qualified stock options to our directors, advisory board directors, consultants or similar persons associated with the Company who are deemed by the board, in its sole discretion, to be eligible. As of September 30, 2010, stock options to purchase an aggregate of 11,010 shares of common stock were outstanding under the 2001 Non-Employee Stock Option Plan.

        In the event that any outstanding awards under the 2001 Non-Employee Stock Option Plan, are cancelled, forfeited or otherwise terminated without being exercised, the number of shares underlying such award becomes available for grant under the 2011 Equity Incentive Plan. All options granted under this plan expire ten years after the date of grant provided however that options granted to ten percent shareholders expire after five years.

        Administration.    The 2001 Non-Employee Stock Option Plan is administered by either the board or the compensation committee of our board of directors (in either case, the "administrator"). The administrator has full power and authority to select the 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 2001 Non-Employee Stock Option Plan.

        Eligibility.    All directors, advisory board directors, consultants or similar persons associated with the Company who are deemed by the board, in its sole discretion, to be eligible are eligible to participate in the 2001 Non-Employee Stock Option Plan, subject to the discretion of the administrator.

        Types of Awards.    Only nonstatutory stock options are available for grant under the 2001 Non-Employee Stock Option Plan. The exercise price of stock options awarded under the 2001 Non-Employee Stock 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 stock option may be exercised and, subject to the provisions of the 2001 Non-Employee Stock Option Plan the period of time, if any, after retirement, resignation, death, disability or other termination of employment during which options may be exercised.

        Transferability.    Unless otherwise determined by the administrator or provided for in a written agreement evidencing an award, the 2001 Non-Employee Stock Option Plan does not permit the transfer of stock options except in the event of death and only the recipient of a stock option may exercise an award during the recipient's lifetime.

        Repurchase of Shares.    Shares of common stock acquired upon exercise of a stock option and any gain realized upon exercise of any stock option may be subject to repurchase by, or forfeiture to, us at the discretion of our board of directors if the applicable award agreement provides for the repurchase.

        Change in Control.    Except as otherwise provided by the administrator and evidenced in a particular award, in the event of a merger or consolidation, sale of all or substantially all of our assets or capital stock or a similar change in control, the administrator or the successor entity may assume

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outstanding awards, provide that the awards must be exercised within a specified period of time or terminate the awards in exchange for a cash payment. Furthermore, subject to certain limitations, the administrator may provide for the acceleration of exercisability and/or vesting of an award.

        Term.    Unless earlier terminated by our board of directors, the 2001 Non-Employee Stock Option Plan will expire on August 14, 2011. No awards may be granted under the 2001 Non-Employee Stock Option Plan after the expiration date.

        Amendment or Termination.    Our board of directors may amend, suspend, or terminate the 2001 Non-Employee Stock Option Plan in any respect at any time, subject to stockholder approval where such approval is required by applicable law or stock exchange rules. Further, any material amendments to the 2001 Non-Employee Stock Option Plan will be subject to approval by our stockholders, including any amendment that increases the number of shares available for issuance under the 2001 Non-Employee Stock Option Plan, or expands the types of awards available under, the eligibility to participate in, or the duration of, the plan. No amendment to the 2001 Non-Employee Stock Option Plan may materially impair any of the rights of a participant under any awards previously granted without his or her written consent.

The 2001 Employee Stock Option Plan of Tranzyme, Inc.

    Effective upon the adoption of our 2003 Stock Option and Incentive Plan in connection with this offering, our board of directors decided not to grant any further awards under the 2001 Employee Stock Option Plan.

        Introduction.    The 2001 Employee Stock Option Plan was adopted by our board of directors and approved by our shareholders on August 14, 2001 along with the 2001 Non-Employee Stock Option Plan. The 2001 Employee Stock Option Plan was amended by our board of directors on December 15, 2003 and April 26, 2005, effective May 12, 2005. The 2001 Employee Stock Option Plan, as amended, permits us to make grants of non-qualified stock options or incentive stock options to our key employees. As of September 30, 2010, stock options to purchase an aggregate of 46,967 shares of common stock were outstanding under the 2001 Employee Stock Option Plan.

        In the event that any outstanding awards under the 2001 Employee Stock Option Plan, are cancelled, forfeited or otherwise terminated without being exercised, the number of shares underlying such award becomes available for grant under the 2011 Equity Incentive Plan. All options granted under this plan expire ten years after the date of grant provided however that options granted to ten percent shareholders expire after five years.

        Administration.    The 2001 Employee Stock Option Plan is administered by either the board or the compensation committee of our board of directors (in either case, the "administrator"). The administrator has full power and authority to select the 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 2001 Employee Stock Option Plan.

        Eligibility.    All of our employees are eligible to participate in the 2001 Employee Stock Option Plan, subject to the discretion of the administrator.

        Types of Awards.    The types of awards that are available for grant under the 2001 Employee Stock Option Plan are:

    incentive stock options;

    nonstatutory stock options; and

    any combination of the above awards.

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        The exercise price of stock options awarded under the 2001 Employee Stock 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 stock option may be exercised and, subject to the provisions of the 2001 Employee Stock Option Plan, the period of time, if any, after retirement, resignation, death, disability or other termination of employment during which options may be exercised. To qualify as incentive stock 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.

        Transferability.    Unless otherwise determined by the administrator or provided for in a written agreement evidencing an award, the 2001 Employee Stock Option Plan does not permit the transfer of stock options except in the event of death and only the recipient of a stock option may exercise an award during the recipient's lifetime.

        Repurchase of Shares.    Shares of common stock acquired upon exercise of a stock option and any gain realized upon exercise of any stock option may be subject to repurchase by, us or forfeiture to, at the discretion of our board of directors if the applicable award agreement provides for the repurchase.

        Change in Control.    Except as otherwise provided by the administrator and evidenced in a particular award, in the event of a merger or consolidation, sale of all or substantially all of our assets or capital stock or a similar change in control, the administrator or the successor entity may assume outstanding awards, provide that the awards must be exercised within a specified period of time or terminate the awards in exchange for a cash payment. Furthermore, subject to certain limitations, the administrator may provide for the acceleration of exercisability and/or vesting of an award.

        Term.    Unless earlier terminated by our board of directors, the 2001 Employee Stock Option Plan will expire on August 14, 2011. No awards may be granted under the 2001 Employee Stock Option Plan after the expiration date.

        Amendment or Termination.    Our board of directors may amend, suspend, or terminate the 2001 Employee Stock Option Plan in any respect at any time, subject to stockholder approval where such approval is required by applicable law or stock exchange rules. Further, any material amendments to the 2001 Employee Stock Option Plan, will be subject to approval by our stockholders, including any amendment that increases the number of shares available for issuance under the 2001 Employee Stock Option Plan or expands the types of awards available under, the eligibility to participate in, or the duration of, the plan. No amendment to the 2001 Employee Stock Option Plan may materially impair any of the rights of a participant under any awards previously granted without his or her written consent.

Limitation of Liability and Indemnification Arrangements

        As permitted by the Delaware General Corporation Law, we intend to adopt provisions in our amended and restated certificate of incorporation and amended and restated bylaws, which will be effective upon the completion 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 for 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;

    any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or

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

        These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.

        In addition, our amended and restated bylaws, which will be effective upon the completion of this offering, provide that:

    we will indemnify our directors, officers and, at the discretion of our board of directors, certain employees to the fullest extent permitted by the Delaware General Corporation Law; and

    advance expenses, including attorneys' fees, to our directors and, at the discretion of our board of directors, to our officers and certain employees, in connection with legal proceedings, subject to limited exceptions.

        We also intend to enter into indemnification agreements with each of our executive officers and directors. These agreements will provide that we will indemnify each of our directors to the fullest extent permitted by the Delaware General Corporation Law and advance expenses to each indemnitee in connection with any proceeding in which indemnification is available.

        We also maintain management liability insurance to provide insurance coverage to our directors and officers for losses arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act of 1933, as amended, or the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

        These provisions may discourage stockholders from bringing a lawsuit against our directors in the future for any breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder's investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors, officers and certain employees pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.

        At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.

Rule 10b5-1 Sales Plans

        Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan and subject to the lock-up agreements described under "Underwriting", a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

        We describe below transactions and series of similar transactions, since January 1, 2007, to which we were a party or will be a party, in which:

    the amounts involved exceeded or will exceed $120,000; and

    a director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

        We believe that all of the transactions described below were made on terms no less favorable to us than could have been obtained from unrelated third parties on an arms-length basis.

Private Placements of Securities

    Issuance of Series A Preferred Stock

        In January 2007, October 2007 and February 2008, we issued an aggregate of 23,454,566 shares of our Series A Preferred Stock at $1.00 per share and 7,545,434 shares of our Series A-1 Voting Non-Equity Preferred Stock at $0.00001 per share and Tranzyme Pharma issued an aggregate of 7,545,434 shares of its Class A Preferred Exchangeable Shares at $1.00 per share for an aggregate purchase price of $31.0 million. The Class A Preferred Exchangeable Shares of Tranzyme Pharma are exchangeable into shares of our Series A Preferred Stock on a 1-for-1 basis, subject to adjustment. Shares of our Series A-1 Voting Non-Equity Preferred Stock are entitled to vote with shares of our Series A Preferred Stock but otherwise receive no economic benefits.

    Convertible Note Financing

        In October 2008, February 2009 and June 2009 we issued subordinated convertible promissory notes, or the US Notes, and Tranzyme Pharma issued subordinated convertible promissory notes, or the Canada Notes, having an aggregate principal amount of $15.0 million to some of our investors. The US Notes and Canada Notes had an annual interest rate equal to the prime rate announced by the Wall Street Journal on the date of issuance plus 2%. All principal and accrued interest under the US Notes and Canada Notes was convertible at the option of the holder into shares of our Series A Preferred Stock and shares of Tranzyme Pharma's Class A Preferred Exchangeable Shares, respectively, at $1.00 per share. Payment by us and Tranzyme Pharma under the US Notes and Canada Notes was subordinated to our payment obligations to Oxford Finance Corporation and Silicon Valley Bank. On September 30, 2010, all holders of the US Notes and Canada Notes elected to convert their notes into shares of our Series A Preferred Stock and shares of Tranzyme Pharma's Class A Preferred Exchangeable Shares, respectively, in accordance with their terms.

        The following table sets forth the number of shares of our Series A Preferred Stock and Series A-1 Voting Non-Equity Preferred Stock and Class A Preferred Exchangeable Shares of Tranzyme Pharma

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that were issued in January 2007, October 2007, February 2008 and September 2010 to our 5% stockholders and their affiliates in the following amounts and for the following purchase prices:

Name(1)
  Shares of Series A
Preferred
Stock
  Shares of Series A-1
Voting Non-Equity
Preferred Stock
  Class A Preferred
Exchangeable
Shares
  Total Purchase
Price
 

Entities affiliated with Thomas, McNerney & Partners(2)

    11,578,549           $ 11,578,549  

Quaker Bioventures, L.P. 

    11,578,551           $ 11,578,551  

HIG Ventures—Tranzyme, Inc. 

    11,578,551           $ 11,578,551  

BDC Capital Inc. 

    2,151,014     3,679,170     3,679,170   $ 5,830,184  

Entities affiliated with Desjardins Venture Capital(3)

        4,699,692     4,699,692   $ 4,699,692  

(1)
See "Principal Stockholders" for more information about shares held by certain of these entities.

(2)
Beneficial ownership consists of 11,122,936 shares of our Series A Preferred Stock purchased by Thomas, McNerney & Partners, L.P., 413,354 shares of our Series A Preferred Stock purchased by TMP Nominee, LLC and 42,259 shares of Series A Preferred Stock purchased by TMP Associates, L.P.

(3)
Beneficial ownership consists of 3,726,359 shares of our Series A-1 Voting Non-Equity Preferred Stock and 3,726,359 shares of Tranzyme Pharma's Class A Preferred Exchangeable Shares purchased by Capital regional et coopératif Desjardins (CRDC), 725,761 shares of our Series A-1 Voting Non-Equity Preferred Stock and 725,761 shares of Tranzyme Pharma's Class A Preferred Exchangeable Shares purchased by Desjardins Venture Capital Inc. and 247,572 shares of our Series A-1 Voting Non-Equity Preferred Stock and 247,572 shares of Tranzyme Pharma's Class A Preferred Exchangeable Shares purchased by Desjardins Capital de Développement Estrie Inc. (DCDE).

Transactions with Our Executive Officers, Directors and 5% Stockholders

    Indemnification Agreements

        We intend to enter into indemnification agreements with each of our directors and certain of our executive officers. These agreements will require us to indemnify these individuals and, in certain cases, affiliates of such individuals, to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.

    Registration Rights

        Certain of our directors and 5% stockholders are party to an agreement providing for rights to register under the Securities Act certain shares of our capital stock. For more information regarding the registration rights granted pursuant to this agreement, see the section entitled "Description of Capital Stock—Registration Rights."

    Employment and Change in Control Agreements

        We have entered into employment agreements with certain of our executive officers and change in control agreements with all of our executive officers, which provide for severance benefits and acceleration of the vesting of awards. For more information regarding these agreements, see the sections entitled "Executive Compensation—Employment and Change in Control Agreements" and "Executive Compensation—Potential Payments Upon Termination or Change in Control."

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    Consulting Agreement

        We have entered into a consulting agreement with Jean-Paul Castaigne, one of our directors. For more information regarding this agreement, see the section entitled "Director Compensation—Consulting Agreements."

    Stock Option Awards

        For more information regarding stock option awards granted to our named executive officers and directors, see the sections entitled "Executive Compensation—Outstanding Equity Awards at Year End" and "Director Compensation—Director Compensation."

Policies and Procedures for Related Party Transactions

        Our board of directors reviews and approves transactions with directors, officers, and holders of 5% or more of our voting securities and their affiliates, each, a related person. Prior to this offering, the material facts as to the related person's relationship or interest in any related party transaction were disclosed to our board of directors, and the transaction was not considered approved by our board of directors unless a majority of the directors who were not interested in the transaction approve the transaction. Our policy with respect to approval of related person transactions in effect prior to this offering is not in writing.

        We have adopted a written related person transaction approval policy that will govern the review of related person transactions following the closing of this offering. Pursuant to this policy, if we want to enter into a transaction with a related person or an affiliate of a related person, our general counsel will review the proposed transaction to determine, based on applicable NASDAQ and SEC rules, if such transaction requires pre-approval by the audit committee and/or board of directors. If pre-approval is required, such matters will be reviewed at the next regular or special audit committee and/or meeting of the board of directors. We may not enter into a related person transaction unless our general counsel has either specifically confirmed in writing that no further reviews are necessary or that all requisite corporate reviews have been obtained.

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PRINCIPAL STOCKHOLDERS

        The following table presents information concerning the beneficial ownership of the shares of our common stock as of September 30, 2010 by:

    each person we know to be the beneficial owner of 5% or more of our outstanding shares of our capital stock;

    each of our directors and executive officers; and

    all of our executive officers and directors as a group.

        We have determined beneficial ownership in accordance with Securities and Exchange Commission rules. The information does not necessarily indicate beneficial ownership for any other purpose. Under these rules, a person is deemed to be a beneficial owner of our common stock if that person has a right to acquire ownership within 60 days by the exercise of vested options or the conversion of our preferred stock. A person is also deemed to be a beneficial holder of our common stock if that person has or shares voting power, which includes the power to vote or direct the voting of our common stock, or investment power, which includes the power to dispose of or to direct the disposition of such common stock. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder.

        In the table below, percentage of beneficial ownership prior to this offering is presented based on                                    shares of common stock deemed to be outstanding as of                                    , and percentage of beneficial ownership subsequent to this offering in the table below is presented based on                        shares of common stock deemed to be outstanding as of                        , giving effect to (1) the issuance of an aggregate of                                    shares of our common stock issuable upon the automatic exchange of all of the outstanding common exchangeable shares of Tranzyme Pharma in connection with this offering, as described in "Description of Capital Stock—Exchangeable Shares" elsewhere in this prospectus; (2) the automatic conversion of all outstanding shares of our preferred stock into an aggregate of                                    shares of our common stock in connection with this offering; and (3)                                      shares of our common stock to be newly issued and sold by us in this offering. The table below assumes that the underwriters will not exercise their option to purchase additional shares. Shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of                        are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other

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person. Unless indicated below, the address of each individual listed below is c/o Tranzyme, Inc., 4819 Emperor Boulevard, Suite 400, Durham, NC 27703.

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  Shares Beneficially
Owned Prior to Offering
  Shares Beneficially
Owned After Offering
 
Name and Address of Beneficial Owner
  Number   Percent   Number   Percent  

Stockholders owning approximately 5% or more

                         

BDC Capital Inc.(1)

    8,671,788     12.1 %            

Entities affiliated with Desjardins Venture Capital(2)

    8,834,226     12.4 %            

HIG Ventures(3)

    15,328,551     21.4 %            

Quaker BioVentures, L.P.(4)

    15,328,551     21.4 %            

Entities affiliated with Thomas, McNerney and Partners(5)

    15,328,549     21.4 %