sc13d

0000950123-10-085559.txt : 20100913 0000950123-10-085559.hdr.sgml : 20100913 20100913113434 ACCESSION NUMBER: 0000950123-10-085559 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20100913 DATE AS OF CHANGE: 20100913 GROUP MEMBERS: PETER KOLCHINSKY GROUP MEMBERS: RA CAPITAL HEALTHCARE FUND, L.P. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: CYPRESS BIOSCIENCE INC CENTRAL INDEX KEY: 0000716054 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 222389839 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-35589 FILM NUMBER: 101068565 BUSINESS ADDRESS: STREET 1: 4350 EXECUTIVE DRIVE,SUITE 325 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 8584522323 MAIL ADDRESS: STREET 1: 4350 EXECUTIVE DRIVE,SUITE 325 CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: IMRE CORP DATE OF NAME CHANGE: 19920703 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: RA CAPITAL MANAGEMENT, LLC CENTRAL INDEX KEY: 0001346824 IRS NUMBER: 830406777 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 20 PARK PLAZA, SUITE 905 CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 617-778-2500 MAIL ADDRESS: STREET 1: 20 PARK PLAZA, SUITE 905 CITY: BOSTON STATE: MA ZIP: 02116 SC 13D 1 b82649sc13d.htm SC 13D sc13d

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO §240.13D-1(a) AND
AMENDMENTS THERETO FILED PURSUANT TO §240.13d-2(a)

(Amendment No. )

Cypress Bioscience, Inc.

(Name of Issuer)

Common Stock, par value $0.001 per share

(Title of Class of Securities)

232674507

(CUSIP Number)

Peter Kolchinsky
RA Capital Management, LLC
20 Park Plaza, Suite 905
Boston, MA 02116

(Name, Address and Telephone Number of Person

Authorized to Receive Notices and Communications)

September 13, 2010

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. o

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).


CUSIP No.		66704V101

NAMES OF REPORTING PERSONS.

RA Capital Management, LLC

CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP

(a) o

(b) o

SEC USE ONLY

SOURCE OF FUNDS

CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)

CITIZENSHIP OR PLACE OF ORGANIZATION

Massachusetts

SOLE VOTING POWER

NUMBER OF

2,107,392¹

SHARED VOTING POWER

BENEFICIALLY

OWNED BY

EACH

SOLE DISPOSITIVE POWER

REPORTING

PERSON

2,107,392¹

WITH

SHARED DISPOSITIVE POWER

AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

2,107,392¹

CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES

PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

5.46%

TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)

¹ These shares represent 1,055,200 shares held by RA Capital Healthcare Fund, L.P. (the “Fund”) and 1,052,192 shares held by Blackwell Partners, LLC (“Blackwell”). RA Capital Management, LLC (“Capital”) is the general partner of Fund and the investment adviser of Blackwell. Peter Kolchinsky is the sole manager of Capital.


CUSIP No.		66704V101

NAMES OF REPORTING PERSONS.

Peter Kolchinsky

CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP

(a) o

(b) o

SEC USE ONLY

SOURCE OF FUNDS

CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)

CITIZENSHIP OR PLACE OF ORGANIZATION

United States

SOLE VOTING POWER

NUMBER OF

SHARED VOTING POWER

BENEFICIALLY

OWNED BY

2,107,392¹

EACH

SOLE DISPOSITIVE POWER

REPORTING

PERSON

WITH

SHARED DISPOSITIVE POWER

2,107,392¹

AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

2,107,392¹

CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES

PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

5.46%

TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)

¹ These shares represent 1,055,200 shares held by RA Capital Healthcare Fund, L.P. (the “Fund”) and 1,052,192 shares held by Blackwell Partners, LLC (“Blackwell”). RA Capital Management, LLC (the “Capital”) is the general partner of Fund and the investment adviser of Blackwell. Peter Kolchinsky is the sole manager of the Adviser.


CUSIP No.		66704V101


1	NAMES OF REPORTING PERSONS. RA Capital Healthcare Fund, L.P.


2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
	(a) o
	(b) o

3	SEC USE ONLY



4	SOURCE OF FUNDS

	WC

5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)

	o

6	CITIZENSHIP OR PLACE OF ORGANIZATION

	Delaware

		7	SOLE VOTING POWER

NUMBER OF			1,055,200

SHARES		8	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			0

EACH		9	SOLE DISPOSITIVE POWER
REPORTING
PERSON			1,055,200

WITH		10	SHARED DISPOSITIVE POWER

			0

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

	1,055,200

12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES

	o

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

	2.73%

14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)

	PN

Item 1. Security and Issuer

			Name of Issuer: Cypress Bioscience, Inc. (the “Issuer”)

			Title of Class of Equity Securities: Common Stock, par value $0.001 per share

			Address of Issuer’s Principal Executive Offices: 4350 Executive Drive, Suite 325, San Diego, California 92121

Item 2. Identity and Background.

	(a)		Name:

			This joint statement on Schedule 13D is being filed by Peter Kolchinsky, RA Capital Management, LLC, and RA Capital Healthcare Fund, L.P., who are collectively referred to herein as the “Reporting Persons.” Mr. Kolchinsky (the “Manager”) is the manager of RA Capital Management, LLC (“Capital”), which is the investment adviser and sole general partner of RA Capital Healthcare Fund, L.P. (“Fund”) and serves as the investment adviser to a separate discretionary account. The Reporting Persons have entered into a Joint Filing Agreement, dated as of the date hereof, a copy of which is filed with this Schedule 13D as Exhibit 1 (which is incorporated herein by reference), pursuant to which the Reporting Persons have agreed to file this statement jointly in accordance with the provisions of Rule 13d-1(k) under the Act.

	(b)		Residence or Business Address:

			The address of the principal business office of each of the Reporting Persons is 20 Park Plaza, Suite 905, Boston, MA 02116.

	(c)		Principal Occupation:

			Peter Kolchinsky, Manager, RA Capital Management, LLC, 20 Park Plaza, Suite 905, Boston, MA 02116

	(d)		The Reporting Persons have not, during the last five years, been convicted in a criminal proceeding.

	(e)		The Reporting Person have not, during the last five years, been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws, and if so, identify and describe such proceedings and summarize the terms of such judgment, decree or final order.

	(f)		Citizenship or Place of Organization:

			Capital is a Massachusetts limited liability company. The Fund is a Delaware limited partnership. The Manager is a United States citizen.

Item 3. Source and Amount of Funds or Other Consideration

The Reporting Persons expended an aggregate of approximately $7,598,192 to purchase the 2,107,392 shares of the Issuer’s common stock in the open market. Such transactions were effected in open market purchases and acquired in the ordinary course of business. The Manager acquired his interest in the shares of the Issuer’s common stock through their ownership in Capital and Fund.

The Reporting Persons used its own funds for the purchases, none of which were borrowed or otherwise obtained from any other source.

Item 4. Purpose of Transaction

On September 13, 2010, the Reporting Persons sent to the Board of Directors of the Issuer a letter (the “Letter”) proposing that the Issuer take immediate steps to enter into immediate negotiations with Ramius and any other party for an acquisitions of the Issuer at a price of $4.00 per share or higher. A copy of the Letter is filed as Exhibit 2 to this Schedule 13D and is incorporated herein in its entirety by reference.

No assurances can be given that any of the proposals outlined in the Letter will be implemented or consummated.

Regardless whether or not the Issuer decides to implement any of the proposals set forth in the Letter, the Reporting Persons from time to time intend to review their investment in the Issuer on the basis of various factors, including the Issuer’s business, financial condition, results of operations and prospects, general economic and industry conditions, the securities markets in general and those for the Issuer’s shares of common stock in particular, as well as other developments and other investment opportunities. Based upon such review, the Reporting Persons will take such actions in the future as the Reporting Persons may deem appropriate in light of the circumstances existing from time to time. If the Reporting Persons believe that further investment in the Issuer is attractive, whether because of the market price of the Issuer’s Shares or otherwise, they may acquire shares of common stock or other securities of the Issuer either in the open market or in privately negotiated transactions. Similarly, depending on market and other factors, the Reporting Persons may determine to dispose of some or all of the Shares currently owned by the Reporting Persons or otherwise acquired by the Reporting Persons either in the open market or in privately negotiated transactions. In addition, the Reporting Person may in the future make additional proposals to the Issuer relating to, or that could result in, a change of control transaction, an extraordinary transaction, or change of the present Board of Directors or management of the Issuer.

Item 5. Interest in Securities of the Issuer

(a) Amount beneficially owned and percentage of class:


RA Capital Management, LLC		2,107,392 shares of Common Stock, representing 5.46% of the class
Peter Kolchinsky		2,107,392 shares of Common Stock, representing 5.46% of the class
RA Capital Healthcare Fund, L.P.		1,055,200 shares of Common Stock, representing 2.73% of the class

(b) Voting and disposition powers:


Sole power to vote or direct the vote:

RA Capital Management, LLC		2,107,392 shares of Common Stock, representing 5.46% of the class
Peter Kolchinsky		0 shares of Common Stock, representing 0% of the class
RA Capital Healthcare Fund, L.P.		1,055,200 shares of Common Stock, representing 2.73% of the class

Shared power to vote or direct the vote:

RA Capital Management, LLC		0 shares of Common Stock, representing 0% of the class
Peter Kolchinsky		2,107,392 shares of Common Stock, representing 5.46% of the class
RA Capital Healthcare Fund, L.P.		0 shares of Common Stock, representing 0% of the class

Sole power to dispose or direct the disposition:

RA Capital Management, LLC		2,107,392 shares of Common Stock, representing 5.46% of the class
Peter Kolchinsky		0 shares of Common Stock, representing 0% of the class
RA Capital Healthcare Fund, L.P.		2,107,392 shares of Common Stock, representing 2.73% of the class

Shared power to dispose or direct the disposition:

RA Capital Management, LLC		0 shares of Common Stock, representing 0% of the class
Peter Kolchinsky		2,107,392 shares of Common Stock, representing 5.46% of the class
RA Capital Healthcare Fund, L.P.		0 shares of Common Stock, representing 0% of the class

(c) The Reporting Persons have engaged in the following transactions in the Issuer’s Common Stock during the last 60 days:


Entity	Transaction	Trade Date	Shares		Price/Share
RA Capital Healthcare Fund, LP	Open market purchase	19-Jul-10		75,225	$	3.3636
RA Capital Healthcare Fund, LP	Open market purchase	19-Jul-10		50,150	$	3.3575
Blackwell Partners, LLC	Open market purchase	19-Jul-10		74,775	$	3.3636
Blackwell Partners, LLC	Open market purchase	19-Jul-10		49,850	$	3.3575
RA Capital Healthcare Fund, LP	Open market purchase	29-Jul-10		100,300	$	3.595
RA Capital Healthcare Fund, LP	Open market purchase	29-Jul-10		150,450	$	3.5983
Blackwell Partners, LLC	Open market purchase	29-Jul-10		99,700	$	3.595
Blackwell Partners, LLC	Open market purchase	29-Jul-10		149,550	$	3.5983
RA Capital Healthcare Fund, LP	Open market purchase	30-Jul-10		5,015	$	3.585
Blackwell Partners, LLC	Open market purchase	30-Jul-10		4,985	$	3.585
RA Capital Healthcare Fund, LP	Open market purchase	4-Aug-10		25,075	$	3.6343
RA Capital Healthcare Fund, LP	Open market purchase	4-Aug-10		25,076	$	3.65
Blackwell Partners, LLC	Open market purchase	4-Aug-10		24,925	$	3.6343
Blackwell Partners, LLC	Open market purchase	4-Aug-10		24,924	$	3.65
RA Capital Healthcare Fund, LP	Open market purchase	5-Aug-10		12,538	$	3.6
Blackwell Partners, LLC	Open market purchase	5-Aug-10		12,462	$	3.6
RA Capital Healthcare Fund, LP	Open market purchase	6-Aug-10		46,439	$	3.55
Blackwell Partners, LLC	Open market purchase	6-Aug-10		46,161	$	3.55
RA Capital Healthcare Fund, LP	Open market purchase	9-Aug-10		11,234	$	3.6735
Blackwell Partners, LLC	Open market purchase	9-Aug-10		11,166	$	3.6735
RA Capital Healthcare Fund, LP	Open market purchase	27-Aug-10		50,000	$	3.48
RA Capital Healthcare Fund, LP	Open market purchase	27-Aug-10		92,500	$	3.465
Blackwell Partners, LLC	Open market purchase	27-Aug-10		92,500	$	3.465
Blackwell Partners, LLC	Open market purchase	27-Aug-10		50,000	$	3.48
RA Capital Healthcare Fund, LP	Open market purchase	30-Aug-10		58,115	$	3.2485
Blackwell Partners, LLC	Open market purchase	30-Aug-10		58,115	$	3.2485
RA Capital Healthcare Fund, LP	Open market purchase	31-Aug-10		3,350	$	3.1991
Blackwell Partners, LLC	Open market purchase	31-Aug-10		3,350	$	3.1991
RA Capital Healthcare Fund, LP	Open market purchase	1-Sep-10		48,981	$	3.2709
Blackwell Partners, LLC	Open market purchase	1-Sep-10		48,981	$	3.2709
RA Capital Healthcare Fund, LP	Open market purchase	2-Sep-10		13,802	$	3.27
RA Capital Healthcare Fund, LP	Open market purchase	2-Sep-10		84,100	$	3.3256
Blackwell Partners, LLC	Open market purchase	2-Sep-10		13,798	$	3.27
Blackwell Partners, LLC	Open market purchase	2-Sep-10		84,100	$	3.3256
RA Capital Healthcare Fund, LP	Open market purchase	3-Sep-10		18,750	$	3.3329
Blackwell Partners, LLC	Open market purchase	3-Sep-10		18,750	$	3.3329
RA Capital Healthcare Fund, LP	Open market purchase	7-Sep-10		100,000	$	3.3759
Blackwell Partners, LLC	Open market purchase	7-Sep-10		100,000	$	3.3759
RA Capital Healthcare Fund, LP	Open market purchase	8-Sep-10		83,400	$	3.3893
Blackwell Partners, LLC	Open market purchase	8-Sep-10		83,400	$	3.3893
RA Capital Healthcare Fund, LP	Open market purchase	9-Sep-10		700	$	3.38
Blackwell Partners, LLC	Open market purchase	9-Sep-10		700	$	3.842

(d) N/A

(e) N/A

Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer

The Reporting Persons have entered into a Joint Filing Agreement, dated as of the date hereof, a copy of which is filed with this Schedule 13D as Exhibit 1 (which is incorporated herein by reference), pursuant to which the Reporting Persons have agreed to file this statement jointly in accordance with the provisions of Rule 13d-1(k) under the Act.

Any of the Reporting Persons may from time to time acquire or dispose of Issuer securities. Such acquisitions or dispositions may be made in the open market or in privately negotiated transactions.

Item 7. Material to Be Filed as Exhibits


Exhibit 1	—	Joint Filing Agreement, dated September 13, 2010, among RA Capital Healthcare Fund, L.P., RA Capital Management, LLC and Peter Kolchinsky

Exhibit 2	—	Letter to the Board of Directors of the Issuer, dated September 13, 2010

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.


		DATE: September 13, 2010

		RA CAPITAL HEALTHCARE FUND, L.P.

		By:		RA Capital Management, LLC General Partner

		By:		/s/ Peter Kolchinsky
		Name:		Peter Kolchinsky
		Title:		Manager

		RA CAPITAL MANAGEMENT, LLC

		PETER KOLCHINSKY

		/s/ Peter Kolchinsky

EX-99.1 2 b82649exv99w1.htm EX-99.1 exv99w1

Exhibit 1

JOINT FILING AGREEMENT

Pursuant to Rule 13d-1(k)(1) under the Securities Exchange Act of 1934, as amended, the undersigned hereby agrees, as of September 13, 2010, that only one statement containing the information required by Schedule 13D, and each amendment thereto, need be filed with respect to the ownership by each of the undersigned of shares of Common Stock of Cypress Bioscience, Inc., and such statement to which this Joint Filing Agreement is attached as Exhibit 1 is filed on behalf of each of the undersigned.


		RA CAPITAL HEALTHCARE FUND, L.P.

		By:		RA Capital Management, LLC General Partner

		By:		/s/ Peter Kolchinsky
		Name:		Peter Kolchinsky
		Title:		Manager

		RA CAPITAL MANAGEMENT, LLC

		By:		/s/ Peter Kolchinsky
		Name:		Peter Kolchinsky
		Title:		Manager

		PETER KOLCHINSKY

		/s/ Peter Kolchinsky

EX-99.2 3 b82649exv99w2.htm EX-99.2 exv99w2

Exhibit 2

RA Capital Management, LLC
20 Park Plaza, Suite 905
Boston, MA 02116

September 13, 2010


TO:		Mr. Roger L. Hawley Dr. Amir Kalali Dr. Jay D. Kranzler Mr. Jon W. McGarity Dr. Perry B. Molinoff Dr. Tina S. Nova Mr. Daniel H. Petree

To the Board of Directors of Cypress:

We are a large stockholder of Cypress Bioscience, Inc. (the “Company”), having beneficial ownership over approximately 2,000,000 shares of the Company’s outstanding common stock. We are writing in response to the Company’s August 6, 2010 press release that publicly announced that the Board of Directors of the Company (the “Board”) rejected the offer previously made by Ramius LLC (“Ramius”) to purchase all of the issued and outstanding capital stock of the Company at a price of $4.00 per share. The Company’s press release stated that the Board rejected the offer by Ramius because it was not in the best interests of all of the Company’s stockholders and that the Company would continue to work with Jefferies & Company, Inc. and Perella Weinberg Partners to evaluate strategic alternatives.

We consider the Company’s stated objective, to “evaluate strategic alternatives”, to be too vague for our comfort given that the Company has just rejected the opportunity to negotiate with a potential acquirer. We would like to be explicit about what courses of action we would like the Company to take to represent our best interests so that the Company and the Board do not need to speculate on this matter. Certainly we do not speak for all stockholders but we are confident, given the recent trading history of Cypress stock, that many would agree with our position.

We are confident that it would be in the best interests of all stockholders for the Company to enter into immediate negotiations with Ramius and any other party for an acquisition of the Company at a price of $4.00/share or higher. However, even if the best offer the Company could come up with were as low as $3.00/share, taking this offer would represent a better outcome for all shareholders, in our opinion, than continuing to spend the Company’s remaining cash and royalty income on the current ill-conceived pipeline and on in-licensing new compounds. If the Company or the Board decides to contemplate the Company’s options for longer than an additional two weeks, we would like to see the Company stop all spending and distribute all current cash immediately to the Company’s shareholders, keeping only enough to fund the auction of the Savella royalty, whose proceeds we would also want the Company to distribute as soon as possible.

If the Company and the Board are convinced that there is value in the Company’s pipeline, the Company can try to raise additional capital from investors to fund the development of those programs but the Company most certainly does not have our support in spending the Company’s existing cash or royalty income on these new programs. We think the Company and the Board will discover that there is just as little interest among investors in the Bioline drug when the Company is pitching the story as when Bioline was pitching it in the year preceding the Company’s deal with them. The same is true for the other two assets the Company recently in-licensed.

We recognize that the Company and the Board may dismiss our letter in the same manner that the Company and the Board have dismissed Ramius on several occasions. Therefore, we would like to take this opportunity to create a public record urging the Company and the Board not to do so and stating very clearly that this is not in the best interests of any of the Company’s stockholders.

The Record

As of June 30, 2010, the Company had $2.73/share of cash, royalties exceeding $0.32/share expected over the next 12 months, and a plan to create additional value by spending the cash on new drug development.

However, in the month following the announcement of the Bioline licensing agreement (June 21, 2010), over 37 million shares representing the majority of the Company’s float traded below $2.50/share, with 10 days of trading at or below $2.25, and the stock hit a low of $2.09. There is absolutely no question that the overwhelming vote of the shareholders during that period was that the Company had made a mistake. They assigned a negative (less than zero) value to the Company’s pipeline and its business plan, and concluded that the Company had destroyed value by committing cash and future resources to the Bioline drug. We know this is what shareholders concluded because of the extensive, deliberate, and prolonged selling of shares by shareholders at a price that reflected a below-cash value of the whole company.

For an entire month, investors weighed the evidence and concluded that the Company and its pipeline were worth less than zero. Had the stock price recovered quickly, within a few days, one could have assumed that the drop in price was due to a transient inefficiency caused by a few investors not appreciating the merits of the licensing deal while savvier investors stepped in to snap up shares and bid them back up to pre-deal price. But to have such high volume selling at stock prices below the cash per share for such a long time is nothing short of damning.

When on July 19, 2010 Ramius announced their desire to negotiate for an acquisition of Cypress for a price of $4.00/share, the stock rapidly rose to trade over $3.00/share, with 44 million shares trading at an average price of $3.52/share from July 19^th through August 25th. Again, there can be no question that the majority vote of the shareholders during that period was that the prospect of being bought out by Ramius or anyone at $4.00/share or higher was more compelling than pursuing the Company’s current business plan.

We consider the recent trading history of the stock to be clear evidence that shareholders thought that the Company had a positive enterprise value prior to the Bioline announcement, that it had a negative enterprise value after the Bioline announcement (anticipating that management would burn cash without creating value), and that the only way they will generate a return on their investment is if the Company were sold to Ramius or another acquirer.

In case there was any doubt, one can even see how on August 26^th, immediately after the Company announced the in-licensing of two more drugs, the stock sold off again over several days with high volume. Given that Ramius has offered $4.00/share to buy the company, why would shareholders sell the stock on this news for as much as a 22% discount to this price (stock sold for a low of $3.13/share on August 31, 2010) unless, as a result of the news, they were now more fearful than before that management was intent on blocking the sale of the Company to Ramius or another suitor.

The fact is that the Company’s stock is now held to a large extent by shareholders who believe that there is more value in selling the Company to Ramius or a higher bidder in an expeditious manner than in letting the Company continue to operate as it has been. Management and the Board may think that many of these shareholders bought the stock recently and somehow their interests are less important than the interests of shareholders that the Company considers loyal to its long-term strategy. The fact is that a huge number of these “loyal” shareholders voted with their feet and couldn’t sell their stock fast enough well under the $4.00/share Ramius is now offering for the Company. Had you not disappointed those shareholders who believed your pipeline had value, they may have remained shareholders, you would have had a mandate to continue with your plans to operate the Company as you had been doing, and your stock would have reflected your shareholders’ support of your plan by trading with a positive enterprise value.

But now, in light of the large trading volume in the stock since the Ramius offer was announced and the fact that the stock price traded up as a result of the Ramius offer, it is clear that many of your current shareholders actually bought stock thinking that it would be a good outcome if the Company were sold at a price of $4.00 per share or higher. The greatest fear of your current stockholders is that management and the Board might actually choose not to sell the Company at a price of $4.00 per share or higher and that all of the Company’s cash will be spent on

its pipeline. The Company now has a new set of shareholders who see value in a different strategy, and it is the fiduciary duty of the Board and management to consider their best interests. If management or the Board has any doubts that the Company’s current shareholders want management and the Board to sell the company for $4.00/share or more to Ramius or another acquirer, then you should call a shareholder meeting and give everyone a chance to vote. But do not claim that rejecting any negotiations with Ramius is somehow in shareholders’ best interests; negotiations with Ramius are exactly what shareholders want from management and the Board.

Appeal to Individual Board Members

We feel it is necessary to appeal to each of you individually to make sure that you understand that shareholders hold you personally responsible, as members of the Board and presumed fiduciaries, and that each of you will be to blame if you continue to allow the Company to neglect shareholders’ best interests by spurning direct negotiations with interested potential acquirers such as Ramius.

Mr. Roger Hawley, you are currently the CEO of a private company, Zogenix, which has just filed an S-1 to go public. Zogenix, no doubt, has investors to whom you answer and whose interests you represent. You are also on the board of other companies that depend on the support of investors. What message are you sending current investors and prospective investors of all your other companies when, against the publicly expressed wishes of major shareholders of the Company, you continue to support a business plan for the Company that is preventing the Company’s shareholders from realizing a return on their investment? The Company has for years now been wasting its resources on one failed in-licensed program after another, as was outlined clearly in Arcadia Capital Advisors’s most recent letter (September 7, 2010) to the Board. Management has a track record that suggests to us that they have been running the company as their own personal non-profit CRO. We ask that you put a stop to this ongoing violation of Cypress shareholders’ interests. If you do not, should current and future shareholders of Zogenix worry that the same thing is going to happen to them someday?

Dr. Amil Kalali, given your current role as Vice President of Medical and Scientific Services at Quintiles, a respected global CRO, we can appreciate that you are an insightful board member when it comes to matters of how to run clinical trials. We see from your bio that you sit on many scientific advisory boards and on the boards of non-profit organizations. But, from your bio, it would appear that serving on the Cypress board is among the first of your experiences as a fiduciary of a public company. We ask that you give very careful consideration to whether you are currently representing shareholders’ best interests when you support the Company’s plan to spend its cash and royalty stream on clinical programs. You must have a great appreciation for the risks of drug development. What we have tried to make clear in this letter is that the Company’s shareholders do not want to see the Company risk its current cash and the value of its royalty stream on these programs. In light of this, why are you continuing to substitute your judgment for that of the shareholders’ as to what is in their best interests?

Mr. Jon McGarity, your biography mentioned that you run EthiX Associates, which specializes in pharmaceutical business planning and strategy. You clearly understand the risks of drug development, the value of cash, and the importance of taking shareholders’ perspective into account when risking their cash on drug development. You have the expertise to appreciate that Cypress could very well lose all of its cash and squander its royalty stream on these new programs that better capitalized companies were willing to pass on (Note: It is clear that Bioline, Alexza, and Marina had all shopped them around; all three are public companies eager to maximize value). CNS drugs, in particular, are extremely difficult to bring to market because of the high safety hurdles, difficultly in finding good animal models, and especially the subjective endpoints susceptible to placebo-effect. It’s up to the management team to match the right investors with their plan. However, management does not have the support of the Company’s shareholders, who would prefer to see management preserve cash and sell the Company. Maybe the key question is, if you bundled Cypress’ three new drugs into a brand new company, would you be able to raise capital from new investors to fund further development? If you think so, then we urge you to spearhead this effort. However, the current shareholders are clearly distressed at the prospect of the Company pursuing this agenda using shareholders’ current cash and royalty stream. While shareholders are unable to call a Special Meeting in which to voice their best interests, we are confident that, with your years of experience, you must have a good sense of what shareholders would say if you were to ask them. We therefore ask you to do the right thing and stop the Company from risking current shareholders’ capital on these new programs and grant shareholders the opportunity to realize a return on their investment by selling the Company to Ramius or a higher bidder.

Dr. Perry Molinoff, your bio highlights your considerable experience in neuroscience and CNS drug development. We know you appreciate the risks involved in this field, especially since you also presided over the challenging development of Palatin’s melanocortin agonist and the associated loss of shareholders’ capital. We ask that you explain to your fellow board members the tremendous risks involved in each of the three programs that the company wants to pursue, including schizophrenia, smoking cessation, and autism. The last indication in particular may as well be a science project given the lack of validated endpoints and untested regulatory process. These indications do represent areas of great unmet need, but if pharmaceutical companies flush with cash did not see fit to spend a tiny fraction of their billions of dollars developing these drugs, why are you prepared to allow a small and clearly under-capitalized company like Cypress to spend what little cash it has on such risky programs? Why are you and the rest of the Board so willing to take the risk of supporting this strategy in the face of clear shareholder opposition? We ask that you participate in a frank and open discussion of the risks of pursuing CNS drug development with your fellow board members and then vote to allow shareholders to realize the upside of letting Ramius or a higher bidder acquire the company and dispatch the pipeline as they see fit; if those drugs have any value, someone else will bid on them.

Dr. Tina Nova, you serve on a number of boards and have been involved with many companies and therefore have the experience to know that supporting the Company’s plan to spend shareholders’ capital in the hope of hitting a home run despite the opposition of shareholders is a losing proposition. Any company looking for additional board members will consider the message it would be sending to its shareholders if it were to appoint a Cypress Board member. If you want that message to be that the Cypress Board knows the value of shareholders’ capital and how not to waste it, then please consider that the proper course of action is to put a stop to the Company’s wasteful strategy immediately and push through the sale of the Company.

Mr. Daniel Petree, your biography shows that you have experience in investment banking and manage a boutique firm, which no doubt gives you expertise in executing transactions not unlike the three Cypress recently completed. We assume that you supported the Bioline deal but didn’t realize at the time that shareholders would disapprove of it and would vote against it by selling the shares to the point where the Company’s enterprise value was negative. Now you know how unhappy shareholders are about the deal, which you and Jay Kranzler spearheaded as the only two members of both the Finance Committee and Strategic Committee, an arrangement we think was unwise and which the rest of the board should not have condoned. And now that you know, we believe that it is incumbent on you to serve as a proper fiduciary to your shareholders, even if that means voting in favor of making the best effort to sell the Company quickly and therefore negotiating with Ramius. If the assets you helped identify have clinical value, they will find a new home.

And finally, Dr. Jay Kranzler, it was our sincere hope that you would have done the right thing by entering into discussions with Ramius after their first letter and quickly sought other buyers. But the fact that you both rejected Ramius’ request to enter into discussions and then in-licensed two more drugs demonstrated a shocking disregard of the interests of Cypress shareholders. You teach a course on the business of biotechnology at The Rady School of Management at UC San Diego and are its sole Executive in Residence; you could still be remembered as a recognized authority on the drug repurposing paradigm but if you continue down this path we think that you will most likely be remembered as a poignant business lesson to students and executives alike on what not to do when at the helm of a company. We wish your board had steered you better.

From our conversations with you over the years, we felt that you understood the importance of having a mandate from your shareholders to risk capital on drug development in a calculated and prudent manner. Instead, we have watched you steer Cypress towards excessively risky programs, squandering the resources of the Company, and cause the Company’ stock to trade for less than cash value. This Company is not your personal non-profit research organization. Yes, it would be wonderful to find a treatment for autism, help people stop smoking, and give patients with schizophrenia respite from their debilitating symptoms. Under the right circumstances, we might have offered to provide funding to one or more of these programs provided the rest of the business plan were well thought out. But the Company only gets to pursue those goals if it first wins over the shareholders. Instead, you and the Company have been dismissive of the shareholders, not bothering to win their support for the Company’s agenda. The fact that the Company’s stock dropped as much as it did and stayed down for as long as it did after the Bioline announcement is proof that the Company does not have shareholders’ support. The fact that shareholders sold the stock when they saw the Company in-license two more drugs after rejecting Ramius’

offer was proof that they would have preferred that the Company negotiated with Ramius than pursue a scorched-earth policy, spending all the cash so that acquirers lose interest.

To reiterate, we hope management and the Board will do the right thing and immediately negotiate with Ramius and others to sell the Company for the best price you can secure. Until such a transaction is consummated, we would like the Company to cut all spending on every pipeline program and conserve cash.

Sincerely,

RA Capital Healthcare Fund, L.P.
By: RA Capital Management, LLC, its general partner

Peter Kolchinsky
Managing Member