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Delaware		2834		41-2142317
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

Faye H. Russell, Esq. Cheston J. Larson, Esq. Ali D. Fawaz, Esq. Latham & Watkins LLP 12636 High Bluff Drive, Suite 400 San Diego, CA 92130 (858) 523-5400		Mark B. Weeks, Esq. Ross L. Burningham, Esq. Ryan A. Murr, Esq. Heller Ehrman LLP 4350 La Jolla Village Drive, 7th Floor San Diego, CA 92122 (858) 450-8400

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

		Per Share				Total
Public offering price			$				$
Underwriting discount			$				$
Proceeds, before expenses, to us			$				$

	Deutsche Bank Securities

	Pacific Growth Equities, LLC

	JMP Securities

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		Page
Prospectus Summary			1
Risk Factors			8
Special Note Regarding Forward-Looking Statements			32
Use of Proceeds			34
Dividend Policy			34
Capitalization			35
Dilution			37
Selected Financial Data			39
Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Business			50
Management			76
Principal Stockholders			94
Certain Relationships and Related Party Transactions			98
Description of Capital Stock			102
Shares Eligible for Future Sale			106
Material U.S. Federal Income Tax Considerations to Non-U.S. Holders			109
Underwriting			112
Legal Matters			115
Experts			115
Where You Can Find Additional Information			115
Index to Financial Statements			F-1
EXHIBIT 3.2
EXHIBIT 3.3
EXHIBIT 3.5
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 23.1
EXHIBIT 24.2

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	•	reaching agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
	•	obtaining regulatory approval to commence a clinical trial;
	•	obtaining institutional review board approval to conduct a clinical trial at a prospective site;
	•	recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the same indication as our product candidates; and
	•	retaining patients who have initiated a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal issues, side effects from the therapy or who are lost to further follow-up.

	•	failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
	•	inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

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	•	unforeseen safety issues or any determination that a trial presents unacceptable health risks; or
	•	lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.

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	•	capital resources;
	•	development resources, including personnel and technology;
	•	clinical trial experience;
	•	regulatory experience;
	•	expertise in prosecution of intellectual property rights; and
	•	manufacturing, distribution and sales and marketing experience.

	•	limitations or warnings contained in a product’s FDA-approved labeling, including potential limitations or warnings for IV APAP that may be more restrictive than oral formulations of acetaminophen;
	•	changes in the standard of care for the targeted indications for either of our product candidates, including, in the case of omiganan, the decreasing use of 10% povidone-iodine, the comparator product in our ongoing Phase III clinical trial, in favor of another topical antiseptic, chlorhexidine, which change could reduce the marketing impact of any superiority claims that we could make following FDA approval;
	•	limitations inherent in the approved indication for either of our product candidates compared to more commonly-understood or addressed conditions, including, in the case of omiganan, the ability to promote omiganan to hospitals and physicians who may be more focused on an indication specifically for the prevention of CRBSIs compared to the prevention of LCSIs, the primary endpoint in our ongoing Phase III clinical trial; and
	•	potential advantages over, and availability of, alternative treatments, including, in the case of IV APAP, a number of products already used to treat acute pain in the hospital setting, and in the case of omiganan, a number of competitive topical products as well as a device that has been approved for wound dressing and prevention of catheter-related infections.

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	•	issue warning letters or untitled letters;
	•	require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
	•	impose other civil or criminal penalties;
	•	suspend regulatory approval;
	•	suspend any ongoing clinical trials;
	•	refuse to approve pending applications or supplements to approved applications filed by us;
	•	impose restrictions on operations, including costly new manufacturing requirements; or
	•	seize or detain products or require a product recall.

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	•	regulatory authorities may require the addition of labeling statements, specific warnings or a contraindication;
	•	regulatory authorities may withdraw their approval of the product;
	•	we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product; and
	•	our reputation may suffer.

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	•	exposure to unknown liabilities;
	•	disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies;
	•	incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;
	•	higher than expected acquisition and integration costs;
	•	increased amortization expenses;
	•	difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;
	•	impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and
	•	inability to retain key employees of any acquired businesses.

	•	manage our clinical trials effectively, including our planned Phase III clinical program for IV APAP, which will be conducted at numerous clinical trial sites, and our ongoing Phase III clinical trial for omiganan, which is being conducted at numerous clinical sites;
	•	manage our internal development efforts effectively while carrying out our contractual obligations to licensors and other third parties; and
	•	continue to improve our operational, financial and management controls, reporting systems and procedures.

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	•	withdrawal of clinical trial participants;
	•	termination of clinical trial sites or entire trial programs;
	•	decreased demand for our product candidates;
	•	impairment of our business reputation;
	•	costs of related litigation;
	•	substantial monetary awards to patients or other claimants;
	•	loss of revenues; and
	•	the inability to commercialize our product candidates.

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	•	our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
	•	our licensors might not have been the first to file patent applications for these inventions;
	•	others may independently develop similar or alternative technologies or duplicate any of our product candidates or technologies;
	•	it is possible that none of the pending patent applications licensed to us will result in issued patents;
	•	the issued patents covering our product candidates may not provide a basis for commercially viable active products, may not provide us with any competitive advantages, or may be challenged by third parties;
	•	we may not develop additional proprietary technologies that are patentable; or
	•	patents of others may have an adverse effect on our business.

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	•	infringement and other intellectual property claims which, with or without merit, can be expensive and time consuming to litigate and can divert management’s attention from our core business;
	•	substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor’s patent;
	•	a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it is not required to do;
	•	if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and
	•	redesigning our processes so they do not infringe, which may not be possible or could require substantial funds and time.

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	•	successfully complete our ongoing and planned clinical trials for IV APAP and omiganan;
	•	obtain regulatory approval for either of our two product candidates;
	•	assuming these regulatory approvals are received, manufacture commercial quantities of our product candidates at acceptable cost levels; and
	•	successfully market and sell any approved products.

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	•	fund our operations and continue to conduct adequate and well-controlled clinical trials to provide clinical data to support regulatory approval of marketing applications;
	•	continue our development activities;
	•	qualify and outsource the commercial-scale manufacturing of our products under cGMP; and
	•	commercialize IV APAP, omiganan or any other product candidates that we may in-license or acquire, if any of these product candidates receive regulatory approval.

	•	the rate of progress and cost of our clinical trials and other product development programs for IV APAP, omiganan and any other product candidates that we may in-license or acquire;
	•	the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates;
	•	the cost and timing of completion of an outsourced commercial manufacturing supply for each product candidate;
	•	the costs and timing of regulatory approval;
	•	the costs of establishing sales, marketing and distribution capabilities;
	•	the effect of competing technological and market developments; and
	•	the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish.

	•	the timing of milestone payments required under our license agreements for IV APAP and omiganan;

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	•	our execution of other collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements;
	•	our addition or termination of clinical trials or funding support;
	•	variations in the level of expenses related to our two existing product candidates or future development programs;
	•	any intellectual property infringement lawsuit in which we may become involved;
	•	regulatory developments affecting our product candidates or those of our competitors; and
	•	if either of our product candidates receives regulatory approval, the level of underlying hospital demand for our product candidates and wholesalers’ buying patterns.

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	•	incur immediate dilution of $           per share, based on an assumed initial public offering price of $           per share, the midpoint of our expected public offering price range; and
	•	contribute      % of the total amount invested to date to fund our company based on an assumed initial offering price to the public of $           per share, the mid point of our expected public offering price range, but will own only      % of the shares of common stock outstanding after the offering.

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	•	the results from our clinical trial programs, including our planned Phase III clinical program for IV APAP and our ongoing Phase III clinical trial for omiganan;
	•	the results of clinical trial programs for IV APAP and omiganan being performed by others;
	•	FDA or international regulatory actions, including failure to receive regulatory approval for any of our product candidates;
	•	failure of any of our product candidates, if approved, to achieve commercial success;
	•	announcements of the introduction of new products by us or our competitors;
	•	market conditions in the pharmaceutical and biotechnology sectors;
	•	developments concerning product development results or intellectual property rights of others;
	•	litigation or public concern about the safety of our potential products;
	•	actual and anticipated fluctuations in our quarterly operating results;
	•	deviations in our operating results from the estimates of securities analysts or other analyst comments;
	•	additions or departures of key personnel;
	•	third-party coverage and reimbursement policies;
	•	developments concerning current or future strategic collaborations; and
	•	discussion of us or our stock price by the financial and scientific press and in online investor communities.

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	•	shares will be eligible for sale on the date of this prospectus;
	•	shares will be eligible for sale upon the expiration of the lock-up agreements beginning 180 days after the date of this prospectus;
	•	shares will be eligible for sale, upon exercise of vested options, upon the expiration of the lock-up agreements, beginning 180 days after the date of this prospectus;
	•	shares will be eligible for sale, upon exercise of outstanding warrants, upon the expiration of the lock-up agreements, beginning 180 days after the date of this prospectus; and
	•	the remaining                     restricted shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods.

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	•	a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;
	•	a prohibition on stockholder action through written consent;
	•	a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, the president or by a majority of the total number of authorized directors;
	•	advance notice requirements for stockholder proposals and nominations;
	•	a requirement of approval of not less than 662/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our certificate of incorporation; and
	•	the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval.

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	•	our ability to successfully complete clinical development of our only two product candidates, IV APAP and omiganan, on expected timetables, or at all, which includes enrolling sufficient patients in our clinical trials and demonstrating the safety and efficacy of these product candidates in such trials;
	•	the content and timing of submissions to and decisions made by the FDA and other regulatory agencies, including foreign regulatory agencies, demonstrating to the satisfaction of the FDA and such other agencies the safety and efficacy of our product candidates;
	•	intense competition in our markets and the ability of our competitors, many of whom have greater resources than we do, to offer different or better therapeutic alternatives than our product candidates;
	•	market acceptance of and future development and regulatory difficulties relating to any product candidates for which we do receive regulatory approval;
	•	our ability to develop sales, distribution and marketing capabilities or enter into agreements with third parties to sell, distribute and market any of our product candidates that may be approved for sale;
	•	our ability to obtain coverage and reimbursement for any of our product candidates that may be approved for sale from the government or third-party payors, and the extent of such coverage and reimbursement, and the willingness of hospitals to pay for our product candidates versus less expensive therapies;
	•	our compliance with the agreements under which we license the rights to our product candidates;
	•	our reliance on third parties to conduct our clinical trials and manufacture our product candidates;
	•	our ability to grow our business by identifying and acquiring or in-licensing new product candidates, increasing the size of our organization and attracting and retaining key personnel;
	•	our and our licensors’ ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection of our product candidates and the rights relating thereto; and
	•	our short operating history, our lack of revenue and profitability, our significant historical operating losses and our ability to obtain additional funding to continue to operate our business, which funding may not be available on commercially reasonable terms, or at all.

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	•	approximately $58.0 million to fund clinical trials for IV APAP and omiganan and other research and development activities; and
	•	the remainder to fund working capital, capital expenditures and other general corporate purposes.

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	•	on an actual basis; and
	•	on a pro forma as adjusted basis to reflect the conversion of all outstanding shares of our preferred stock into 79,630,455 shares of common stock and our receipt of the estimated net proceeds from 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 page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us.

				As of June 30, 2006
								Pro Forma
				Actual				as Adjusted(1)
				(In thousands, except share
				and par value amounts)
Cash and cash equivalents				$	42,881
Long-term debt, less current portion				$	5,968
Stockholders’ equity:
Preferred stock, $0.0001 par value actual and pro forma as adjusted; actual — 80,015,455 shares authorized; 79,630,455 issued and outstanding; pro forma as adjusted — 10,000,000 shares authorized; no shares issued and outstanding					—
	Series A-1 convertible preferred stock, actual — 8,085,108 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized; no shares issued and outstanding				1
	Series A-2 convertible preferred stock, actual — 18,060,347 shares authorized; 17,675,347 issued and outstanding; pro forma as adjusted — no shares authorized; no shares issued and outstanding				2
	Series A-3 convertible preferred stock, actual — 53,870,000 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized; no shares issued and outstanding				5
Common stock, $0.0001 par value; actual — 100,000,000 shares authorized; 8,551,740 shares issued and outstanding; pro forma as adjusted — 100,000,000 shares authorized;            shares issued and outstanding					1
Additional paid-in capital					79,954
Deficit accumulated during the development stage					(44,335	)
	Total stockholders’ equity				35,628
		Total capitalization		$	41,596

(1)

Each $1.00 increase or decrease in the assumed public offering price of $           per share would increase or decrease, respectively, the amount of cash and cash equivalents, additional paid-in capital and total capitalization by approximately $           million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us.

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	•	5,769,471 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2006 at a weighted average exercise price of $0.38 per share;
	•	385,000 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2006 at a weighted average exercise price of $1.00 per share; and
	•	shares of our common stock reserved for future issuance under our 2006 equity incentive award plan, which will become effective on the day prior to the day on which we become subject to the reporting requirements of the Exchange Act (including 1,678,789 shares of common stock reserved for future grant or issuance under our 2004 equity incentive award plan, which shares will be added to the shares to be reserved under our 2006 equity incentive award plan upon the effectiveness of the 2006 equity incentive award plan).

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Assumed initial public offering price per share							$
	Historical net tangible book value per share as of June 30, 2006		$	0.40
	Increase per share attributable to investors purchasing shares in this offering
Pro forma net tangible book value per share, as adjusted to give effect to this offering
Dilution to investors purchasing shares in this offering							$

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			Shares Purchased								Total Consideration
																			Average Price
			Number				Percent				Amount				Percent				Per Share
Existing stockholders before this offering				88,182,195					%		$	79,742,641					%		$	0.90
Investors purchasing shares in this offering
	Total							100.0	%		$					100.0	%		$

	•	5,769,471 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2006 at a weighted average exercise price of $0.38 per share;
	•	385,000 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2006 at a weighted average exercise price of $1.00 per share; and
	•	shares of our common stock reserved for future issuance under our 2006 equity incentive award plan, which will become effective on the day prior to the day on which we become subject to the reporting requirements of the Exchange Act (including 1,678,789 shares of common stock reserved for future grant or issuance under our 2004 equity incentive award plan, which shares will be added to the shares to be reserved under our 2006 equity incentive award plan upon the effectiveness of the 2006 equity incentive award plan).

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			Period from																Period from
			May 26, 2004																May 26, 2004
			(Inception)								Six Months Ended								(Inception)
			Through				Year Ended				June 30,								Through
			December 31,				December 31,												June 30,
			2004				2005				2005				2006				2006
			(In thousands, except per share amounts)
Statement of Operations Data:
Operating expenses:
	Research and development		$	2,233			$	6,126			$	2,402			$	32,374			$	40,734
	Marketing			41				240				142				317				598
	General and administrative			877				1,412				540				1,488				3,777
Total operating expenses				3,151				7,778				3,084				34,179				45,109
Loss from operations				(3,151	)			(7,778	)			(3,084	)			(34,179	)			(45,109	)
Other income (expense):
	Interest income			9				255				14				553				818
	Interest expense			—				—				—				(44	)			(44	)
Total other income				9				255				14				509				774
Net loss			$	(3,142	)		$	(7,523	)		$	(3,070	)		$	(33,670	)		$	(44,335	)
Basic and diluted net loss per share(1)			$	(0.86	)		$	(1.63	)		$	(0.68	)		$	(6.77	)
Shares used to compute basic and diluted net loss per share(1)				3,658				4,624				4,527				4,974
Pro forma basic and diluted net loss per share(1)							$	(0.36	)						$	(0.57	)
Shares used to compute pro forma basic and diluted net loss per share(1)								20,649								58,711

(1)	See Note 1 of Notes to Financial Statements for an explanation of the method used to compute the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts.

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		As of December 31,								As of
										June 30,
		2004				2005				2006
		(In thousands)
Balance Sheet Data:
Cash and cash equivalents and securities available-for-sale		$	4,271			$	15,025			$	42,881
Working capital			4,161				14,405				38,676
Total assets			4,536				15,769				46,355
Long-term debt, less current portion			—				—				5,968
Deficit accumulated during the development stage			(3,142	)			(10,665	)			(44,335	)
Total stockholders’ equity			4,422				14,623				35,628

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	Background

	Revenues

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	Research and Development Expenses

		Period from																Period from
		May 26, 2004																May 26, 2004
		(Inception)								Six Months Ended								(Inception)
		Through				Year Ended				June 30,								Through
		December 31,				December 31,												June 30,
Product Candidate		2004				2005				2005				2006				2006
		(In thousands)
IV APAP		$	—			$	—			$	—			$	25,698			$	25,698
Omiganan			2,001				4,802				1,850				5,038				11,841
Unallocated			232				1,324				552				1,638				3,195
		$	2,233			$	6,126			$	2,402			$	32,374			$	40,734

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	Marketing

	General and Administrative

	Interest and Other Income

	Income Taxes

	Research and Development Expenses

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	Stock-Based Compensation

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	Comparison of six months ended June 30, 2006 and 2005

	•	an increase of $25.7 million in our IV APAP program primarily as a result of a $25.0 million license fee which was immediately expensed as in-process research and development;
	•	an increase of $3.2 million in our omiganan program as a result of clinical trial and related costs for a Phase III clinical trial initiated in August 2005; and
	•	an increase of $1.1 million in unallocated expenses as a result of increased salaries and related personnel costs from increased research and development staff to support our clinical and regulatory efforts related to both omiganan and IV APAP.

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	Comparison of year ended December 31, 2005 to the period from May 26, 2004 (inception) through December 31, 2004

	•	an increase of $2.8 million in our omiganan program as a result of clinical trial and related costs offset by a decrease in license fees; and
	•	an increase of $1.1 million in unallocated expenses as a result of increased salaries and related personnel costs from increased research and development staff to support our initial clinical and regulatory efforts.

	•	from July 2004 to June 2006, we issued and sold a total of 8,551,740 shares of common stock for aggregate net proceeds of $0.6 million;
	•	from July 2004 to August 2004, we issued and sold a total of 8,085,108 shares of Series A-1 preferred stock for aggregate net proceeds of $7.5 million;
	•	from June 2005 to September 2005, we issued and sold 17,675,347 shares of Series A-2 preferred stock for aggregate net proceeds of $17.6 million; and
	•	in March 2006, we issued and sold a total of 53,870,000 shares of Series A-3 preferred stock for aggregate net proceeds of $53.8 million.

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	•	the progress of our clinical trials, including expenses to support the trials and milestone payments that may become payable to BMS or Migenix;
	•	our ability to establish and maintain strategic collaborations, including licensing and other arrangements;
	•	the costs involved in enforcing or defending patent claims or other intellectual property rights;
	•	the costs and timing of regulatory approvals;
	•	the costs of establishing sales or distribution capabilities;
	•	the success of the commercialization of our products; and
	•	the extent to which we in-license, acquire or invest in other indications, products, technologies and businesses.

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			Payments Due by Period
							Less Than
			Total				1 Year				1 - 3 Years				4-5 Years				After 5 Years
			(In thousands)
Long-term debt obligations(1)			$	—			$	—			$	—			$	—			$	—
Operating lease obligations(2)				147				147				—				—				—
License obligations(3)				—				—				—				—				—
	Total		$	147			$	147			$	—			$	—			$	—

(1)	Long-term debt obligations do not include $7.0 million of indebtedness incurred in June 2006 under our loan and security agreement with Silicon Valley Bank and Oxford Finance Corporation.
(2)	In May 2006, we entered into a six-year operating lease for 23,494 square feet of office space. Operating lease obligations do not include $6.7 million of non-cancelable operating lease payments related to this lease. Future minimum payments under the operating lease total $0.2 million, $1.0 million, $1.1 million, $1.1 million, $1.2 million, $1.2 million and $0.9 million for the years ending December 31, 2006, 2007, 2008, 2009, 2010, 2011 and 2012, respectively.
(3)	License obligations do not include additional payments of up to $77.0 million due upon the occurrence of certain milestones related to regulatory or commercial events. We may also be required to pay royalties on any net sales of the licensed products. License payments may be increased based on the timing of various milestones and the extent to which the licensed technologies are pursued for other indications. These milestone payments and royalty payments under our license agreements are not included in the table above because we cannot, at this time, determine when or if the related milestones will be achieved or the events triggering the commencement of payment obligations will occur.

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	•	IV APAP for the treatment of acute pain and fever. We are developing IV APAP in the U.S. market for the treatment of acute pain and fever. According to IMS Health, Inc., or IMS, an independent marketing research firm, over 500 million units of injectable analgesics, typically used to treat pain, were sold in the United States in 2005. Opioids such as morphine, meperdine, hydromorphone and fentanyl represent the majority of unit volume in the market but are associated with a variety of unwanted side effects including sedation, nausea, vomiting, constipation, cognitive impairment and respiratory depression. Ketorolac, a non-steroidal anti-inflammatory drug, or NSAID, is the only non-opioid injectable analgesic available for the treatment of acute pain in the United States. However, ketorolac carries strong warnings from the FDA for various side effects, including an increased risk of bleeding — a particularly troubling side-effect in the surgical setting.

In March 2006, we in-licensed the patents and the exclusive development and commercialization rights to IV APAP in the United States and Canada from BMS. IV APAP has been marketed outside the United States for approximately four years. Since its introduction in Europe in mid-2002, over 100 million doses of IV APAP have been administered to patients, and it has become the market share leader among injectable analgesics with 2005 sales of more than $140 million according to IMS. With approval in over 40 countries, the addition of IV APAP to our product pipeline is consistent with our strategy to in-license and develop pharmaceutical candidates with well-understood risk profiles. In the fourth quarter of 2006, we expect to initiate the remaining Phase III clinical trial requirements. We expect these Phase III clinical trial results to be available in the first half of 2008 and, if positive, to subsequently submit a new drug application, or NDA, in the second half of 2008.

	•	Omiganan for the prevention of intravascular catheter-related infections. We are developing omiganan for the prevention of intravascular catheter-related infections in the United States and Europe. According to the February 2004 Catheter: Global Markets & Technologies report from Theta Reports, eight million central venous catheters, or CVCs, were sold in the United States in 2003, and unit sales are projected to grow to 11 million by 2007. Although

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		CVCs have become an important part of medical care, they can give rise to dangerous and costly complications, including: LCSIs, which are infections at the catheter insertion site; catheter colonization, which is the growth of microorganisms on the portion of the catheter below the skin surface; and catheter-related bloodstream infections, or CRBSIs, which are infections in the bloodstream caused by microorganisms associated with the catheter. The Centers for Disease Control and Prevention, or the CDC, estimates that there are 250,000 CRBSIs each year in the United States. The attributable mortality rate of CRBSIs is approximately 12% to 25% with an average marginal cost to the healthcare system of $25,000 per infection. Currently, topical antiseptics are the primary agent used to cleanse the skin surface around the catheter insertion site prior to insertion. However, the utility of these antiseptics is limited, principally due to the relatively short duration of antimicrobial activity.

	Omiganan is a topical antimicrobial that has been demonstrated to be rapidly bactericidal and fungicidal with prolonged duration of activity against all microorganisms commonly found on the skin surface including multi-drug resistant microorganisms such as methicillin-resistant staphylococcus aureus, or MRSA. Importantly, resistance to omiganan has not been induced in the laboratory after extensive study nor has omiganan demonstrated potential to induce cross-resistance to other antimicrobial therapeutics. In July 2004, we in-licensed the patents and the exclusive development and commercialization rights to omiganan in North America and Europe for the prevention of device-related, surgical wound-related and burn-related infections.
	Omiganan has previously been studied in a large, completed Phase III trial that demonstrated statistically significant outcomes for the prevention of LCSIs and catheter colonization. The presence of an LCSI may result in replacement of the catheter and/or administration of antibiotics, both of which create additional costs to hospitals and have the potential for adverse safety outcomes. In addition, catheter colonization is well correlated with CRBSIs, according to a published review of clinical trials. In August 2005, we initiated a confirmatory Phase III clinical trial with a primary endpoint, the prevention of LCSIs. We reached agreement with the FDA on the trial design, endpoints and statistical analysis plan received through the special protocol assessment, or SPA, process. We expect these Phase III results to be available in the second half of 2007 and to subsequently submit an NDA for omiganan in the first half of 2008.

	•	Other product candidates. We are also exploring the opportunity to develop new formulations of omiganan for the prevention and treatment of other device-related, surgical wound-related and burn-related infections. We are currently preparing preclinical experiments in animal models prior to initiating human clinical trials.

	•	Obtain regulatory approval for our Phase III hospital product candidates, IV APAP and omiganan. We are applying the expertise of our development teams to conduct and successfully complete the Phase III clinical trials associated with each product candidate. We have designed our Phase III clinical programs in an effort to reduce clinical development risk, facilitate regulatory approval and optimize marketing claims. To that end,

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		we plan to resume a U.S. Phase III program later this year for IV APAP previously initiated by BMS, and we expect to submit an NDA in the second half of 2008 based on the previously completed trials and any further trials that may be required by the FDA. In addition, we have reached a written agreement with the FDA through the SPA process for a single confirmatory Phase III study of omiganan for the prevention of LCSIs.
	•	Build a highly leverageable sales organization targeting hospitals. We intend to build a commercial organization focused on promoting our products principally to hospitals in the United States. We believe that both IV APAP and omiganan can be effectively promoted by our own sales force targeting key hospitals in the United States. Importantly, the number of institutions comprising the hospital marketplace is relatively limited and we believe a small number of these institutions account for a substantial portion of the prescribing activity. The concentrated nature of this market creates the opportunity for significant marketing synergies as we intend to leverage our sales force across multiple therapeutic categories in the hospital. Outside the United States, we intend to establish strategic partnerships for the commercialization of our products where we have commercialization rights.
	•	Expand our product portfolio through acquiring or in-licensing additional late-stage, hospital-focused products with well-understood risk profiles. We will seek additional opportunities to acquire or in-license products to more fully exploit our clinical, regulatory, manufacturing, sales and marketing capabilities. We believe that our focus on the hospital market enables us to evaluate a broader range of products across multiple therapeutic areas for possible acquisition. In addition, competition from large pharmaceutical companies has generally diminished in the hospital marketplace as greater emphasis has shifted toward larger opportunities in the primary care setting. To reduce the time-to- market and the risks and costs of clinical development, we focus on products that are in late-stages of development, currently commercialized outside the United States or approved in the United States but with significant commercial potential for proprietary new uses or formulations.
	•	Pursue additional indications and commercial opportunities for our product candidates. We will seek to maximize the value of IV APAP, omiganan and any other product candidates we may in-license, acquire or develop by pursuing other indications and commercial opportunities for such candidates. For example, we have rights to develop and commercialize omiganan for additional indications related to the prevention and treatment of device-related, surgical wound-related and burn-related infections.

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Development

Stage in the

Development

Cadence

Product Candidate

Indication

United States

Stage in Europe

Commercial Rights

IV APAP(1)

Treatment of acute pain — adults

Phase III

Marketed (by BMS)

United States, Canada

Treatment of acute pain — pediatrics

Phase III

Marketed (by BMS)

United States, Canada

Treatment of fever — adults

Phase III

Marketed (by BMS)

United States, Canada

Treatment of fever — pediatrics

Phase III

Marketed (by BMS)

United States, Canada

Omiganan

Prevention of local catheter site infections

Phase III

Phase III

North America, Europe

	(1)	In March 2006, we in-licensed the patents and the exclusive development and commercialization rights to IV APAP in the United States and Canada from BMS. BMS has completed Phase III trials with respect to the above indications, excluding the treatment of fever in adults, for IV APAP in Europe and the United States, which we intend to use in our NDA filing following agreement with the FDA on additional clinical trials needed in the United States for approval. In the fourth quarter of 2006, we expect to initiate the remaining Phase III clinical trial requirements for submission in the United States. We expect these Phase III clinical trial results to be available in the first half of 2008 and, if positive, to submit an NDA in the second half of 2008.

	IV APAP for the Treatment of Acute Pain and Fever

	Acute Pain Background

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	Market for Injectable Analgesics

	Limitations of Current Therapies

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	Fever

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	IV APAP

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	Clinical Development History

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Outcome Measure		Result		p-value
Median time to morphine rescue		3.0 hours for IV APAP vs. 0.8 hours for placebo			<0.001
Reduction in morphine consumption over the 24-hour period		33% reduction (19.1mg) for IV APAP compared to placebo			<0.01

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	Clinical Development Plan

	•	Phase III trial in female patients with moderate-to-severe pain following total abdominal hysterectomy: this trial will be a randomized, placebo-controlled, double-blind, multi-center study to assess the efficacy and safety of single and multiple doses of IV APAP.
	•	Phase III trial in adults with fever: this trial will be a randomized, controlled, double-blind study to assess the efficacy and safety of single and multiple doses of IV APAP.
	•	Pharmacokinetic study in adult subjects: this trial will be a randomized, single center study to assess the pharmacokinetics of single and multiple doses of IV APAP compared to oral acetaminophen in adults.

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	•	Pharmacokinetic study in pediatric subjects: this trial will be a randomized, single center study to assess the pharmacokinetics of single and multiple doses of IV APAP compared to oral acetaminophen in children.
	•	Safety study in adult subjects: this trial will be an open-label, multi-center study to assess the safety of single and multiple doses of IV APAP in adults.
	•	Safety study in pediatric subjects: this trial will be an open-label, multi-center study to assess the safety of single and multiple doses of IV APAP in children.

	Omiganan for the Prevention of Intravascular Catheter-Related Infections

	Intravascular Catheter-Related Infections Background

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	Market for Antimicrobials to Prevent Intravascular Catheter Infections

	Limitations of Current Therapies

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	Omiganan

	•	broad spectrum bactericidal and fungicidal activity;
	•	activity against resistant strains, including MRSA;
	•	rapid and prolonged duration of effect;
	•	resistance to omiganan has not been induced in the laboratory;
	•	no demonstrated ability to generate cross-resistance to other antimicrobials;
	•	excellent safety profile; and
	•	convenient application.

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	Clinical Development History

Treatment Arm

Variable

10% povidone-iodine

omiganan

p-value

Catheter colonization present

232/583 (39.8)%

180/578 (31.1)%

0.002

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Treatment Arm

Variable

10% povidone-iodine

omiganan

p-value

LCSI present

48/699 (6.9)%

24/693 (3.5)%

0.004

Treatment Arm

Outcome

10% povidone-iodine

omiganan

p-value

Failure

18/699 (2.6)%

15/693 (2.2)%

0.622

Success

635/699 (90.8)%

630/693 (90.9)%

Indeterminate

46/699 (6.6)%

48/693 (6.9)%

	Clinical Development Plan

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	Additional Indications

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	IV APAP Agreement

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	Omiganan Agreement

	IV APAP

	Omiganan

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	IV APAP

	Injectable opioids

	•	Morphine is the leading product for the treatment of acute post-operative pain, and is available generically from several manufacturers;
	•	DepoDur, currently marketed by Endo Pharmaceuticals, is an extended release injectable formulation of morphine; and
	•	other injectable opioids, including fentanyl, meperidine and hydromorphone, each of which is available generically from several manufacturers.

	Injectable NSAIDs

	•	Ketorolac, an injectable NSAID, is available generically from several manufacturers.

	Product Candidates

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	Omiganan

	•	topical antiseptics such as povidone-iodine and chlorhexidine, each of which is available generically from several manufacturers;
	•	Neosporin, a topical antibacterial ointment containing polymyxin, neomycin and bacitracin, available generically from several manufacturers;
	•	Bactroban, a topical antibacterial containing mupirocin, available generically from several manufacturers; and
	•	BioPatch, a chlorhexidine-impregnated foam dressing, from Johnson & Johnson that is approved both for wound dressing and the prevention of catheter-related infections.

	FDA Approval Process

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	Special Protocol Assessment Process

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	Section 505(b)(2) New Drug Applications

	Fast Track Designation

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	The Hatch-Waxman Act

	Other Regulatory Requirements

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	Third-Party Reimbursement and Pricing Controls

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Name		Age				Position
Theodore R. Schroeder			51			President, Chief Executive Officer and Director
James B. Breitmeyer, M.D., Ph.D.			52			Executive Vice President, Development and Chief Medical Officer
William S. Craig, Ph.D.			56			Senior Vice President, Pharmaceutical Development and Manufacturing
Kenneth R. Heilbrunn, M.D.			48			Senior Vice President, Clinical Development
William R. LaRue			55			Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Richard E. Lowenthal			40			Vice President, Regulatory Affairs and Quality Assurance
Mike A. Royal, M.D., J.D.			52			Vice President, Clinical Development, Analgesics
David A. Socks			31			Vice President, Business Development
Cam L. Garner(1)			58			Chairman of the Board of Directors
Brian G. Atwood(2)			53			Director
Samuel L. Barker, Ph.D.			63			Director
Michael A. Berman, M.D.(2)(3)			63			Director
James C. Blair, Ph.D.(1)			67			Director
Alan D. Frazier(1)(3)			54			Director
Alain B. Schreiber, M.D.(2)			51			Director
Christopher J. Twomey(3)			46			Director

	(1)	Member of the Compensation Committee.
	(2)	Member of the Nominating/ Corporate Governance Committee.
	(3)	Member of the Audit Committee.

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	•	selecting and hiring our independent registered public accounting firm;
	•	evaluating the qualifications, independence and performance of our independent registered public accounting firm;
	•	approving the audit and non-audit services to be performed by our independent registered public accounting firm;
	•	reviewing the design, implementation, adequacy and effectiveness of our internal controls and our critical accounting policies;
	•	overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;
	•	reviewing with management and our auditors any earnings announcements and other public announcements regarding our results of operations;
	•	preparing the report that the SEC requires in our annual proxy statement; and
	•	reviewing and approving any related party transactions and reviewing and monitoring compliance with our code of conduct and ethics.

	•	reviewing and recommending compensation and benefit plans for our executive officers and compensation policies for members of our board of directors and board committees;
	•	reviewing the terms of offer letters and employment agreements and arrangements with our officers;
	•	setting performance goals for our officers and reviewing their performance against these goals;
	•	evaluating the competitiveness of our executive compensation plans and periodically reviewing executive succession plans; and
	•	preparing the report that the SEC requires in our annual proxy statement.

	•	evaluating the composition, size and governance of our board of directors and its committees and making recommendations regarding future planning and the appointment of directors to our committees;
	•	administering a policy for considering stockholder nominees for election to our board of directors;

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	•	evaluating and recommending candidates for election to our board of directors;
	•	overseeing our board of directors’ performance and self-evaluation process; and
	•	reviewing our corporate governance principles and providing recommendations to the board regarding possible changes.

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															Long-Term
															Compensation
			Annual Compensation
											Other Annual				Securities				All Other
Name and Principal Position			Salary				Bonus				Compensation				Underlying Options				Compensation
Named Executive Officers
Theodore R. Schroeder			$	250,000			$	30,000				—				250,000				—
	President and Chief Executive Officer
Richard E. Lowenthal				220,000				25,430				—				564,000				—
	Vice President, Regulatory Affairs and Quality Assurance
William S. Craig, Ph.D.				220,000				23,161				—				350,000				—
	Senior Vice President, Pharmaceutical Development and Manufacturing
Kenneth R. Heilbrunn, M.D.(1)				206,250				6,000				—				350,000				—
	Senior Vice President, Clinical Development
David A. Socks				175,000				10,000				—				—				—
	Vice President, Business Development

(1)	Dr. Heilbrunn joined us as our Senior Vice President, Clinical Development in April 2005 and, therefore, the amounts set forth above reflect less than a full year.

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																		Potential Realizable
																		Value at Assumed
																		Annual Rates of
																		Stock Price
																		Appreciation for
		Individual Grants																Option Term
						% of
		Number of				Total Options
		Shares				Granted to
		Underlying				Employees				Exercise
		Options				In Last				Price Per				Expiration
Name		Granted				Fiscal Year				Share				Date				5%				10%
Theodore R. Schroeder			250,000				8.12%			$	0.10				12-29-2015			$				$
Richard E. Lowenthal			300,000				9.75%				0.10				2-15-2015
			264,000				8.58%				0.10				12-29-2015
William S. Craig, Ph.D.			350,000				11.37%				0.10				2-15-2015
Kenneth R. Heilbrunn, M.D.			350,000				11.37%				0.10				5-19-2015
David A. Socks			—				—				—				—

										Number of Securities
										Underlying								Value of Unexercised
										Unexercised Options at								In-the-Money Options at
		Number of								December 31, 2005								December 31, 2005
		Shares Acquired				Value
Name		on Exercise				Realized				Exercisable				Unexercisable				Exercisable				Unexercisable
Theodore R. Schroeder			1,000,000	(1)		$					—				—			$				$
Richard E. Lowenthal			564,000	(2)							—				—
William S. Craig, Ph.D.			—								350,000	(3)			—
Kenneth R. Heilbrunn, M.D.			—								350,000	(4)			—
David A. Socks			—								100,000	(5)			—

(1)	Of these 1,000,000 shares, 765,625 were unvested as of December 31, 2005.
(2)	Of these 564,000 shares, 489,000 were unvested as of December 31, 2005.
(3)	Of these 350,000 shares, 255,208 were unvested as of December 31, 2005.
(4)	Of these 350,000 shares, 350,000 were unvested as of December 31, 2005.
(5)	Of these 100,000 shares, 68,750 were unvested as of December 31, 2005.

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	Annual Bonus Plan

	2006 Equity Incentive Award Plan

	•	4% of our outstanding common stock on the applicable January 1; and
	•	a lesser amount determined by our board of directors.

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	•	Nonqualified stock options, or NQSOs, will provide for the right to purchase shares of our common stock at a specified price which may not be less than par value of a share of common stock on the date of grant, and usually will become exercisable (at the discretion of our compensation committee or the board of directors, in the case of awards to non-employee directors) in one or more installments after the grant date, subject to the participant’s continued employment or service with us and/or subject to the satisfaction of performance targets established by our compensation committee (or the board of directors, in the case of awards to non-employee directors). NQSOs may be granted for any term specified by our compensation committee (or the board of directors, in the case of awards to non-employee directors), but the term may not exceed ten years.
	•	ISOs will be designed to comply with the provisions of the Internal Revenue Code and will be subject to specified restrictions contained in the Internal Revenue Code. Among such restrictions, ISOs must have an exercise price of not less than the fair market value of a share of common stock on the date of grant, may only be granted to employees, must expire within a specified period of time following the optionee’s termination of employment, and must be exercised within the ten years after the date of grant. In the case of an ISO granted to an individual who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of our capital stock, the 2006 plan provides that the exercise price must be more than 110% of the fair market value of a share of common stock on the date of grant and the ISO must expire upon the fifth anniversary of the date of its grant.
	•	Restricted stock may be granted to participants and made subject to such restrictions as may be determined by our compensation committee (or the board of directors, in the case of awards to non-employee directors). Typically, restricted stock may be forfeited for no consideration if the conditions or restrictions are not met, and they may not be sold or otherwise transferred to third parties until restrictions are removed or expire. Recipients of restricted stock, unlike recipients of options, may have voting rights and may receive dividends, if any, prior to the time when the restrictions lapse.

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	•	Restricted stock units may be awarded to participants, typically without payment of consideration or for a nominal purchase price, but subject to vesting conditions including continued employment or on performance criteria established by our compensation committee (or the board of directors, in the case of awards to non-employee directors). Like restricted stock, restricted stock units may not be sold or otherwise transferred or hypothecated until vesting conditions are removed or expire. Unlike restricted stock, stock underlying restricted stock units will not be issued until the restricted stock units have vested, and recipients of restricted stock units generally will have no voting or dividend rights prior to the time when vesting conditions are satisfied.
	•	SARs may be granted in connection with stock options or other awards, or separately. SARs granted under the 2006 plan in connection with stock options or other awards typically will provide for payments to the holder based upon increases in the price of our common stock over the exercise price of the related option or other awards. Except as required by Section 162(m) of the Internal Revenue Code with respect to an SAR intended to qualify as performance-based compensation as described in Section 162(m) of the Internal Revenue Code, there are no restrictions specified in the 2006 plan on the exercise of SARs or the amount of gain realizable therefrom. Our compensation committee (or the board of directors, in the case of awards to non-employee directors) may elect to pay SARs in cash or in common stock or in a combination of both.
	•	Dividend equivalents represent the value of the dividends, if any, per share paid by us, calculated with reference to the number of shares covered by the stock options, SARs or other awards held by the participant.
	•	Performance awards (i.e., performance share awards, performance stock units, performance bonus awards, performance-based awards and deferred stock) may be granted by our compensation committee (or the board of directors, in the case of awards to non-employee directors) on an individual or group basis. Generally, these awards will be based upon specific performance targets and may be paid in cash or in common stock or in a combination of both. Performance awards may include “phantom” stock awards that provide for payments based upon increases in the price of our common stock over a predetermined period. Performance awards may also include bonuses that may be granted by our compensation committee (or the board of directors, in the case of awards to non- employee directors) on an individual or group basis, which may be paid on a current or deferred basis and may be payable in cash or in common stock or in a combination of both. The maximum amount of any such bonuses to a “covered employee” within the meaning of Section 162(m) of the Code shall not exceed $1,000,000 for any fiscal year during the term of the 2006 plan.
	•	Stock payments may be authorized by our compensation committee (or the board of directors, in the case of awards to non-employee directors) in the form of common stock or an option or other right to purchase common stock as part of a deferred compensation arrangement, made in lieu of all or any part of compensation, including bonuses, that would otherwise be payable to employees or consultants or members of our board of directors.

	•	the direct or indirect sale or exchange in a single or series of related transactions (other than an offering of our stock to the general public through a registration statement filed with the SEC) whereby any person or entity or related group of persons or entities (other than us, our subsidiaries, an employee benefit plan maintained by us or any of our subsidiaries or a person or entity that, prior to such transaction, directly or indirectly controls, is controlled

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		by, or is under common control with, us) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of more than 50% of the total combined voting power of our securities outstanding immediately after such acquisition;
	•	during any two-year period, individuals who, at the beginning of such period, constitute our board of directors together with any new director(s) whose election by our board of directors or nomination for election by our stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of our board of directors;
	•	the merger, consolidation, reorganization, or business combination in which the company is a party (whether directly involving the company or indirectly involving the company through one or more intermediaries, other than a merger, consolidation, reorganization, or business combination that results in our outstanding voting securities immediately before the transaction continuing to represent a majority of the voting power of the acquiring company’s outstanding voting securities or a merger, consolidation, reorganization, or business combination after which no person or entity owns 50% of the successor company’s voting power); and
	•	the sale, exchange or transfer of all or substantially all of our assets.

	•	Securities Laws. The 2006 plan is intended to conform to all provisions of the Securities Act and the Exchange Act and any and all regulations and rules promulgated by the SEC thereunder, including without limitation, Rule 16b-3. The 2006 plan will be administered, and awards will be granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations.
	•	General Federal Tax Consequences. Under current federal laws, in general, recipients of awards and grants of NQSOs, SARs, restricted stock, restricted stock units, dividend equivalents, performance awards and stock payments under the plan are taxable under Section 83 of the Internal Revenue Code upon their receipt of common stock or cash with respect to such awards or grants and, subject to Section 162(m) of the Internal Revenue Code, we will be entitled to an income tax deduction with respect to the amounts taxable to such recipients. However, Section 409A of the Internal Revenue Code provides certain new requirements on non-qualified deferred compensation arrangements. Certain awards under the 2006 plan are subject to the requirements of Section 409A, in form and in operation, such as restricted stock unit awards. We intend that all plan awards that are subject to Section 409A will satisfy the requirements of Section 409A. However, if a plan award is subject to and fails to satisfy the requirements of Section 409A, the recipient of that award may recognize ordinary income on the amounts deferred under the award, to the extent vested, which may be prior to when the compensation is actually or constructively received. Also, if an award that is subject to Section 409A fails to comply, Section 409A imposes an additional 20% federal income tax on compensation recognized as ordinary income, as well as interest on such deferred compensation.

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Under Sections 421 and 422 of the Internal Revenue Code, recipients of ISOs are generally not taxed on their receipt of common stock upon their exercises of ISOs if the ISOs and option stock are held for specified minimum holding periods and, in such event, we are not entitled to income tax deductions with respect to such exercises. Participants in the 2006 plan will be provided with detailed information regarding the tax consequences relating to the various types of awards and grants under the 2006 plan.

	•	Section 162(m) Limitation. In general, under Section 162(m) of the Internal Revenue Code, income tax deductions of publicly-held corporations may be limited to the extent total compensation (including base salary, annual bonus, stock option exercises and non-qualified benefits paid) for certain executive officers exceeds $1 million (less the amount of any “excess parachute payments” as defined in Section 280G of the Internal Revenue Code) in any one year. However, under Section 162(m), the deduction limit does not apply to certain “performance-based compensation” if an independent compensation committee determines performance goals, and if the material terms of the performance-based compensation are disclosed to and approved by our stockholders. In particular, stock options and SARs will satisfy the “performance-based compensation” exception if the awards are made by a qualifying compensation committee, the 2006 plan sets the maximum number of shares that can be granted to any person within a specified period and the compensation is based solely on an increase in the stock price after the grant date. Specifically, the option exercise price must be equal to or greater than the fair market value of the stock subject to the award on the grant date. Under a Section 162(m) transition rule for compensation plans of corporations which are privately held and which become publicly held in an initial public offering, the 2006 plan will not be subject to Section 162(m) until a specified transition date, which is the earlier of (i) the material modification of the 2006 plan, (ii) the issuance of all employer stock and other compensation that has been allocated under the 2006 plan, or (iii) the first annual meeting of stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the initial public offering occurs. After the transition date, rights or awards granted under the 2006 plan, other than options and SARs, 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.

	2004 Equity Incentive Award Plan

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	•	NQSOs provide for the right to purchase shares of our common stock at a specified price, which for purposes of the 2004 plan prior to the date of this offering, may be no less than 85% of the fair market value on the date of grant, and usually will become exercisable (at the discretion of our compensation committee (or the board of directors, in the case of awards to non-employee directors), in one or more installments after the grant date, subject to the participant’s continued employment or service with us and/or subject to the satisfaction of performance targets established by our compensation committee (or the board of directors, in the case of awards to non-employee directors). NQSOs may be granted for a maximum 10-year term.
	•	ISOs are designed to comply with the provisions of the Internal Revenue Code and will be subject to specified restrictions contained in the Internal Revenue Code and as further described above in connection with the 2006 Equity Incentive Award Plan.

	•	a merger or consolidation of us with or into any other corporation or other entity or person; or
	•	a sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of our outstanding securities or all or substantially all of our assets.

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	401(k) Plan

	•	any breach of their duty of loyalty to the corporation or its stockholders;
	•	acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
	•	unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or
	•	any transaction from which the director derived an improper personal benefit.

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	•	each person known to us to be the beneficial owner of more than 5% of our common stock;
	•	each named executive officer and two additional executive officers;
	•	each of our directors; and
	•	all of our executive officers and directors as a group.

Percentage of

Common Stock

Number of

Beneficially Owned

Shares

Beneficially

Prior to

After

Beneficial Owner

Owned

Offering

Offering

5% or Greater Stockholders:

Funds affiliated with Domain Associates, L.L.C.(1)

22,964,492

26.0

%

One Palmer Square, Suite 515

Princeton, NJ 08542

ProQuest Investments III, L.P.(2)

12,322,698

13.9

90 Nassau Street, 5th Floor

Princeton, NJ 08542

Frazier Healthcare V, LP(3)

10,100,000

11.4

601 Union Street, Suite 3200

Seattle, WA 98101

Funds affiliated with Versant Ventures II, L.L.C.(4)

8,100,000

9.2

3000 Sand Hill Road

Building 4, Suite 210

Menlo Park, CA 94025

Funds affiliated with Technology Partners(5)

8,000,000

9.1

100 Shoreline Highway

Suite 282, Building B

Mill Valley, CA 94941

BB Biotech Ventures II, L.P.(6)

7,000,000

7.9

Trafalgar Court, Les Banques

St Peter Port, Guernsey, Channel Islands

GY1 3QL

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							Percentage of
							Common Stock
			Number of				Beneficially Owned
			Shares
			Beneficially				Prior to				After
Beneficial Owner			Owned				Offering				Offering
Directors and Executive Officers:
	Theodore R. Schroeder(7)			4,043,740				4.5
	James B. Breitmeyer, M.D., Ph.D.(8)			705,000				*
	William S. Craig, Ph.D.(9)			705,303				*
	Kenneth R. Heilbrunn, M.D.(10)			650,000				*
	William R. LaRue(11)			899,000				1.0
	Richard E. Lowenthal(12)			564,000				*
	Mike A. Royal, M.D., J.D.(13)			375,000				*
	David A. Socks(14)			1,692,728				1.9
	Cam L. Garner(15)			4,250,123				4.8
	Brian G. Atwood(4)			8,100,000				9.2
	Samuel L. Barker, Ph.D.(16)			100,000				*
	Michael A. Berman, M.D.(17)			100,000				*
	James C. Blair, Ph.D.(1)			22,964,492				26.0
	Alan D. Frazier(3)			10,100,000				11.4
	Alain B. Schreiber, M.D.(2)			12,322,698				13.9
	Christopher J. Twomey(18)			100,000				*
	Executive officers and directors as a group (16 persons)(19)			67,672,084				71.2

	*	Represents beneficial ownership of less than one percent of our outstanding common stock.

	(1)	Includes 22,612,155 shares of common stock owned by Domain Partners VI, L.P., 242,337 shares of common stock owned by DP VI Associates, L.P. and 110,000 shares of common stock owned by Domain Associates, L.L.C. Of the 110,000 shares owned by Domain Associates, 86,875 will be subject to our right of repurchase within 60 days of August 28, 2006. Dr. Blair is a member of our board of directors and a managing member of Domain Associates, L.L.C. and a managing member of One Palmer Square Associates VI, L.L.C., which is the general partner of Domain Partners VI, L.P. and DP VI Associates, L.P. Dr. Blair disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.
	(2)	Includes 12,212,698 shares of common stock owned by ProQuest Investments III, L.P. and 50,000 shares of common stock owned by ProQuest Management LLC. Of the 50,000 shares owned by ProQuest Management, 17,500 will be subject to our right of repurchase within 60 days of August 28, 2006. Also includes 60,000 shares Dr. Schreiber has the right to acquire pursuant to outstanding options which are immediately exercisable, 55,000 of which would be subject to our right of repurchase within 60 days of August 28, 2006. Dr. Schreiber is a member of our board of directors and a managing member of ProQuest Management LLC and a managing member of ProQuest Associates III LLC, the ultimate general partner of ProQuest Investments III, L.P.
	(3)	Includes 100,000 shares Mr. Frazier has the right to acquire pursuant to outstanding options which are immediately exercisable, 87,500 of which would be subject to our right of repurchase within 60 days of August 28, 2006. The voting and disposition of the shares held by Frazier Healthcare V, LP is determined by FHM V, LLC, which is the general partner of FHM V, LP, which is the general partner of Frazier Healthcare V, LP. Mr. Frazier is a member of our board of directors and a managing member of FHM V, LLC. Mr. Frazier disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.

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	(4)	Includes 7,782,747 shares of common stock owned by Versant Venture Capital II, L.P., 147,695 shares of common stock owned by Versant Affiliates Fund II-A, L.P. and 69,558 shares of common stock owned by Versant Side Fund II, L.P. Also includes 100,000 shares Mr. Atwood has the right to acquire pursuant to outstanding options which are immediately exercisable, 87,500 of which would be subject to our right of repurchase within 60 days of August 28, 2006. Mr. Atwood is a member of our board of directors and a managing member of Versant Ventures II, L.L.C., which is the general partner of each of these Versant funds. Mr. Atwood disclaims beneficial ownership of shares owned by these Versant funds except to the extent of his pecuniary interest therein.
	(5)	Includes 7,520,000 shares of common stock owned by Technology Partners Fund VII, L.P. and 480,000 shares of common stock owned by Technology Partners Affiliates VII, L.P. The voting and disposition of the shares held by Technology Partners Fund VII, L.P. and Technology Partners Affiliates VII is determined by TP Management VII, L.L.C., which is the general partner of each of these Technology Partners funds. John E. Ardell III, Ira Ehrenpreis, James Glasheen, Sheila Mutter and Roger J. Quy share voting and dispositive authority over the shares held by Technology Partners.
	(6)	The voting and disposition of the shares held by BB Biotech Ventures II, L.P. is determined by its general partner, BB Biotech Ventures GP (Guernsey) Limited. Christopher Wilfred Cochrane, Benedict Peter Goronwy Morgan and Hans Jorg Graf, in their capacities as directors of the general partner, share voting and dispositive authority over the shares held by BB Biotech Ventures.
	(7)	Includes 2,043,740 shares Mr. Schroeder has the right to acquire pursuant to outstanding options which are immediately exercisable, all of which would be subject to our right of repurchase within 60 days of August 28, 2006. Also includes 1,000,000 unvested shares acquired by Mr. Schroeder upon the early exercise of stock options, 609,375 of which will be subject to our right of repurchase within 60 days of August 28, 2006.
	(8)	Includes 705,000 shares Dr. Breitmeyer has the right to acquire pursuant to outstanding options that are immediately exercisable, all of which would be subject to our right of repurchase within 60 days of August 28, 2006.
	(9)	Includes 705,303 shares Dr. Craig has the right to acquire pursuant to outstanding options which are immediately exercisable, 537,595 of which would be subject to our right of repurchase within 60 days of August 28, 2006.

	(10)	Includes 650,000 shares Dr. Heilbrunn has the right to acquire pursuant to outstanding options that are immediately exercisable, 518,750 of which would be subject to our right of repurchase within 60 days of August 28, 2006.
	(11)	Includes 44,000 shares acquired by Mr. LaRue upon exercise of stock options, 30,250 of which will be subject to our right of repurchase within 60 days of August 28, 2006. These 44,000 shares are held by a trust for the benefit of Mr. LaRue’s family. Also includes 855,000 shares of common stock Mr. LaRue has the right to acquire pursuant to outstanding options that are immediately exercisable, all of which would be subject to our right of repurchase within 60 days of August 28, 2006.

(12)	Includes 564,000 shares acquired by Mr. Lowenthal upon the exercise of stock options, 426,500 of which will be subject to our right of repurchase within 60 days of August 28, 2006. These 564,000 shares are held of record by a trust for the benefit of Mr. Lowenthal’s family.
(13)	Includes 375,000 shares Dr. Royal has the right to acquire pursuant to outstanding options which are immediately exercisable, all of which would be subject to our right of repurchase within 60 days of August 28, 2006.
(14)	Includes 842,728 shares Mr. Socks has the right to acquire pursuant to outstanding options which are immediately exercisable, 790,645 of which would be subject to our right of repurchase within 60 days of August 28, 2006.

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(15)	Includes 2,293,740 shares acquired by Mr. Garner upon the exercise of stock options, 2,058,414 of which will be subject to our right of repurchase within 60 days of August 28, 2006. Of these 2,293,740 shares, 2,153,740 shares are held of record by a trust for which Mr. Garner serves as trustee and 140,000 shares are held by a limited liability company for which Mr. Garner is the sole member. Also includes 1,750,000 shares acquired by Mr. Garner as one of our co-founders. Of these 1,750,000 shares, 1,600,000 shares are held by a limited liability company for which Mr. Garner is the sole member and 150,000 shares are held by siblings of Mr. Garner. Also includes 206,383 shares acquired by a limited liability company for which Mr. Garner is the sole member.
(16)	Includes 100,000 shares Dr. Barker has the right to acquire pursuant to outstanding options which are immediately exercisable, 91,667 of which would be subject to our right of repurchase within 60 days of August 28, 2006.
(17)	Includes 100,000 shares Dr. Berman has the right to acquire pursuant to outstanding options which are immediately exercisable, 90,000 of which would be subject to our right of repurchase within 60 days of August 28, 2006.
(18)	Includes 100,000 shares acquired by Mr. Twomey upon exercise of stock options, 91,667 of which would be subject to our right of repurchase within 60 days of August 28, 2006. These 100,000 shares are held of record by a trust for the benefit of Mr. Twomey’s family.
(19)	Includes 6,636,771 shares of common stock subject to outstanding options which are immediately exercisable, 6,237,397 of which would be subject to our right of repurchase within 60 days of August 28, 2006. Includes 4,161,740 shares of common stock acquired upon the exercise of options, 3,320,581 of which will be subject to our right of repurchase within 60 days of August 28, 2006.

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	•	the amounts involved exceeded or will exceed $60,000; 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.

		Shares of Preferred Stock
Investor		Series A-1				Series A-2				Series A-3
Funds affiliated with Domain Associates, L.L.C.(1)			3,989,362				6,365,130				12,500,000
ProQuest Investments III, L.P.(2)			2,393,618				3,819,080				6,000,000
Frazier Healthcare V, LP(3)			—				—				10,000,000
Funds affiliated with Versant Ventures II, L.L.C.(4)			—				—				8,000,000
Funds affiliated with Technology Partners(5)			—				—				8,000,000
BB Biotech Ventures II, L.P.(6)			—				3,000,000				4,000,000
Cam L. Garner(7)			106,383				—				100,000

(1)	Includes 3,947,061 shares of Series A-1 preferred stock, 6,297,638 shares of Series A-2 preferred stock and 12,367,456 shares of Series A-3 preferred stock owned by Domain Partners VI, L.P., and 42,301 shares of Series A-1 preferred stock, 67,492 shares of Series A-2 preferred stock, and 132,544 shares of Series A-3 preferred stock owned by DP VI Associates, L.P. Dr. Blair, a member of our board of directors, is a managing member of Domain Associates, L.L.C. and a managing member of One Palmer Square Associates VI, L.L.C., which is the general partner of Domain Partners VI, L.P. and DP VI Associates, L.P.
(2)	The voting and disposition of the shares held by ProQuest Investments III, L.P. is determined by ProQuest Associates III LLC, the ultimate general partner of ProQuest Investments III, L.P. Dr. Schreiber, a member of our board of directors, is a managing member of ProQuest Associates III LLC.
(3)	The voting and disposition of the shares held by Frazier Healthcare V, LP is determined by FHM V, LLC, which is the general partner of FHM V, LP, which is the general partner of Frazier Healthcare V, LP. Mr. Frazier, a member of our board of directors, is a managing member of FHM V, LLC.

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(4)	Includes 7,782,747 shares of Series A-3 preferred stock owned by Versant Venture Capital II, L.P., 147,695 shares of Series A-3 preferred stock owned by Versant Affiliates Fund II-A, L.P., and 69,558 shares of Series A-3 preferred stock owned by Versant Side Fund II, L.P. Mr. Atwood, a member of our board of directors, is a managing member of Versant Ventures II, L.L.C., which is the general partner of each of these Versant funds.
(5)	Includes 7,520,000 shares of Series A-3 preferred stock owned by Technology Partners Fund VII, L.P. and 480,000 shares of Series A-3 preferred stock owned by Technology Partners Affiliates VII, L.P. The voting and disposition of the shares held by Technology Partners Fund VII, L.P. and Technology Partners Affiliates VII is determined by TP Management VII, L.L.C., which is the general partner of each of these Technology Partners funds. John E. Ardell III, Ira Ehrenpreis, James Glasheen, Sheila Mutter and Roger J. Quy share voting and dispositive authority over the shares held by Technology Partners.
(6)	The voting and disposition of the shares held by BB Biotech Ventures II, L.P. is determined by its general partner, BB Biotech Ventures GP (Guernsey) Limited. Christopher Wilfred Cochrane, Benedict Peter Goronwy Morgan and Hans Jorg Graf, in their capacities as directors of the general partner, share voting and dispositive authority over the shares held by BB Biotech Ventures.
(7)	Shares held by a limited liability company for which Mr. Garner is the sole member.

Investor		Common Stock
Cam L. Garner(1)			1,750,000
Theodore R. Schroeder(2)			1,000,000
David A. Socks			850,000

(1)	Of these 1,750,000 shares, 1,600,000 shares are held by a limited liability company for which Mr. Garner is the sole member and 150,000 shares are held by siblings of Mr. Garner.
(2)	Shares held by a trust for the benefit of Mr. Schroeder’s family.

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	•	In November 2004, we granted to Dr. Schreiber an option to purchase 40,000 shares of our common stock at an exercise price of $0.10 per share, vesting over 16 calendar quarters from September 2004.
	•	In November 2005, we granted to Dr. Blair an option to purchase 40,000 shares of our common stock at an exercise price of $0.10 per share, vesting over 16 calendar quarters from September 2005.
	•	In November 2005, we granted to each of Dr. Schreiber and Mr. Garner an option to purchase 10,000 shares of our common stock at an exercise price of $0.10 per share, vesting over four calendar quarters from September 2005.
	•	In December 2005, we granted to Mr. Garner an option to purchase 1,362,000 shares of our common stock at an exercise price of $0.10 per share, vesting over four years from December 2005.
	•	In May 2006, we granted to Mr. Garner an option to purchase 781,740 shares of our common stock at an exercise price of $0.34 per share, vesting over four years from February 2006.
	•	In May 2006, we granted to Dr. Berman an option to purchase 40,000 shares of our common stock at an exercise price of $0.34 per share, vesting over 16 calendar quarters from April 2006.
	•	In May 2006, we granted to each of Messrs. Atwood and Frazier an option to purchase 40,000 shares of our common stock at an exercise price of $0.34 per share, vesting over 16 calendar quarters from March 2006.
	•	In July 2006, we granted to Mr. Twomey an option to purchase 100,000 shares of our common stock at an exercise price of $0.80 per share, vesting over 12 calendar quarters from July 2006.
	•	In July 2006, we granted to each of Mr. Atwood, Drs. Berman and Blair, Mr. Frazier and Dr. Schreiber an option to purchase 60,000 shares of our common stock at an exercise price of $0.80 per share, vesting over 12 calendar quarters from July 2006.
	•	In August 2006, we granted to Dr. Barker an option to purchase 100,000 shares of our common stock at an exercise price of $0.80 per share, vesting over 12 calendar quarters from August 2006.

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	Undesignated Preferred Stock

	Stockholder Meetings

	Requirements for Advance Notification of Stockholder Nominations and Proposals

	Elimination of Stockholder Action by Written Consent

	Election and Removal of Directors

	Delaware Anti-Takeover Statute

	Amendment of Charter Provisions

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	•	shares will be eligible for sale on the date of this prospectus;
	•	shares will be eligible for sale upon the expiration of the lock-up agreements, as more particularly and except as described below, beginning 180 days after the date of this prospectus;
	•	shares will be eligible for sale, upon exercise of vested options, upon the expiration of the lock-up agreements, as more particularly and except as described below, beginning 180 days after the date of this prospectus;
	•	shares will be eligible for sale, upon exercise of outstanding warrants, upon the expiration of the lock-up agreements, as more particularly and except as described below, beginning 180 days after the date of this prospectus; and
	•	the remaining                     restricted shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods.

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	•	one percent of the number of common shares then outstanding, which will equal                      shares immediately after this offering (assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants); or
	•	the average weekly trading volume of our common shares on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

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	•	the gain is effectively connected with the conduct by the non-U.S. holder of a U.S. trade or business (in which case the special rules described below apply);
	•	the non-U.S. holder is an individual who holds our common stock as a capital asset (generally, an asset held for investment purposes) and who is present in the U.S. for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met;
	•	the non-U.S. holder was a citizen or resident of the United States and thus is subject to special rules that apply to expatriates; or
	•	the rules of the Foreign Investment in Real Property Tax Act, or FIRPTA (described below) treat the gain as effectively connected with a U.S. trade or business.

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		Number
		of Shares
Underwriter
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Deutsche Bank Securities Inc.
Pacific Growth Equities, LLC
JMP Securities LLC
Total

Per Share

Without Option

With Option

Public offering price

$

$

$

Underwriting discount

$

$

$

Proceeds, before expenses, to us

$

$

$

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	•	offer, pledge, sell or contract to sell any common stock,
	•	sell any option or contract to purchase any common stock,
	•	purchase any option or contract to sell any common stock,
	•	grant any option, right or warrant for the sale of any common stock,
	•	lend or otherwise dispose of or transfer any common stock,
	•	request or demand that we file a registration statement related to the common stock, or
	•	enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock, whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.

	•	the valuation multiples of publicly traded companies that the representatives believe to be comparable to us,
	•	our financial information,
	•	the history of, and the prospects for, our company and the industry in which we compete,
	•	an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues,
	•	the present state of our development, and

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	•	the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

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Report of Independent Registered Public Accounting Firm			F-2
Balance Sheets			F-3
Statements of Operations			F-4
Statements of Stockholders’ Equity			F-5
Statements of Cash Flows			F-6
Notes to Financial Statements			F-7

F-1

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	/s/ Ernst & Young LLP

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																Pro Forma
																Stockholders’
				December 31,												Equity at
												June 30,				June 30,
				2004				2005				2006				2006
												(Unaudited)				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	4,271,229			$	8,025,285			$	42,881,305
	Securities available-for-sale				—				7,000,000				—
	Prepaid expenses and other current assets				3,854				526,173				438,274
Total current assets					4,275,083				15,551,458				43,319,579
Property and equipment, net					108,735				117,740				770,693
Restricted cash					—				—				1,581,130
Other assets					152,159				100,000				683,405
Total assets				$	4,535,977			$	15,769,198			$	46,354,807
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	68,509			$	715,781			$	1,860,993
	Accrued liabilities				45,965				430,220				1,749,955
Current portion of long-term debt					—				—				1,032,457
Total current liabilities					114,474				1,146,001				4,643,405
Deferred rent					—				—				116,309
Long-term debt, less current portion					—				—				5,967,543
Commitments
Stockholders’ equity:
	Preferred stock, $0.0001 par value:
		Series A-1 convertible preferred stock, 8,085,108 shares authorized, issued and outstanding at December 31, 2004 and 2005 and June 30, 2006 (unaudited); aggregate liquidation preference of $7,600,002; no shares issued and outstanding pro forma (unaudited)			809				809				809			$	—
		Series A-2 convertible preferred stock, 12,900,001 shares, 17,675,347 shares and 18,060,347 shares authorized at December 31, 2004 and 2005 and June 30, 2006 (unaudited), respectively; no shares, 17,675,347 shares and 17,675,347 shares issued and outstanding at December 31, 2004 and 2005 and June 30, 2006 (unaudited), respectively; aggregate liquidation preference of $17,675,347; no shares issued and outstanding pro forma (unaudited)			—				1,767				1,767				—
		Series A-3 convertible preferred stock, 53,870,000 shares authorized at June 30, 2006 (unaudited); 53,870,000 shares issued and outstanding at June 30, 2006 (unaudited); aggregate liquidation preference of $53,870,000; no shares issued and outstanding pro forma (unaudited)			—				—				5,387				—
	Common stock, $0.0001 par value; 33,000,000 shares, 40,000,000 shares and 100,000,000 shares authorized at December 31, 2004 and 2005 and June 30, 2006 (unaudited), respectively; 4,680,000 shares, 7,616,000 shares and 8,551,740 shares issued and outstanding at December 31, 2004 and 2005 and June 30, 2006 (unaudited), respectively; 88,182,195 shares issued and outstanding pro forma (unaudited)				468				762				855				8,818
	Additional paid-in capital				7,562,463				25,472,308				79,953,466				79,953,466
	Stock subscription receivable				—				(187,600	)			—				—
	Deficit accumulated during the development stage				(3,142,237	)			(10,664,849	)			(44,334,734	)			(44,334,734	)
Total stockholders’ equity					4,421,503				14,623,197				35,627,550			$	35,627,550
Total liabilities and stockholders’ equity				$	4,535,977			$	15,769,198			$	46,354,807

F-3

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Table of Contents

			Period from																Period from
			May 26, 2004																May 26, 2004
			(Inception)																(Inception)
			Through				Year Ended				Six Months Ended June 30,								Through
			December 31,				December 31,												June 30,
			2004				2005				2005				2006				2006
											(Unaudited)				(Unaudited)				(Unaudited)
Operating expenses:
	Research and development		$	2,233,357			$	6,126,226			$	2,401,589			$	32,373,970			$	40,733,553
	Marketing			41,114				240,361				142,501				316,541				598,016
	General and administrative			877,146				1,411,810				539,914				1,487,980				3,776,936
Total operating expenses				3,151,617				7,778,397				3,084,004				34,178,491				45,108,505
Loss from operations				(3,151,617	)			(7,778,397	)			(3,084,004	)			(34,178,491	)			(45,108,505	)
Other income (expense):
	Interest income			9,380				255,785				13,996				552,501				817,666
	Interest expense			—				—				—				(43,895	)			(43,895	)
Total other income				9,380				255,785				13,996				508,606				773,771
Net loss			$	(3,142,237	)		$	(7,522,612	)		$	(3,070,008	)		$	(33,669,885	)		$	(44,334,734	)
Basic and diluted net loss per share			$	(0.86	)		$	(1.63	)		$	(0.68	)		$	(6.77	)
Shares used to compute basic and diluted net loss per share				3,658,356				4,623,517				4,526,865				4,974,000
Pro forma basic and diluted net loss per share							$	(0.36	)						$	(0.57	)
Shares used to compute pro forma basic and diluted net loss per share								20,648,526								58,711,140

F-4

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Table of Contents

			Series A-1								Series A-2								Series A-3																								Deficit
			Convertible								Convertible								Convertible																								Accumulated
			Preferred Stock								Preferred Stock								Preferred Stock								Common Stock								Additional				Stock				During the				Total
																																			Paid-In				Subscription				Development				Stockholders’
			Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Receivable				Stage				Equity
Issuance of common stock to founders for cash at $0.001 per share in July				—			$	—				—			$	—				—			$	—				4,500,000			$	450			$	4,050			$	—			$	—			$	4,500
Exercise of common stock options for cash at $0.10 per share in December				—				—				—				—				—				—				180,000				18				17,982				—				—				18,000
Issuance of Series A-1 preferred stock for cash at $0.94 per share, net of $59,573 of offering costs, in July and August				8,085,108				809				—				—				—				—				—				—				7,539,620				—				—				7,540,429
Issuance of common stock options for consulting services in November				—				—				—				—				—				—				—				—				811				—				—				811
	Net loss and comprehensive loss			—				—				—				—				—				—				—				—				—				—				(3,142,237	)			(3,142,237	)
Balance at December 31, 2004				8,085,108				809				—				—				—				—				4,680,000				468				7,562,463				—				(3,142,237	)			4,421,503
Exercise of common stock options at $0.10 per share in February, June and December, net of the repurchase of 30,000 shares at $0.10 per share				—				—				—				—				—				—				2,936,000				294				293,306				(187,600	)			—				106,000
Issuance of Series A-2 preferred stock for cash at $1.00 per share, net of $57,041 of offering costs, in June and September				—				—				17,675,347				1,767				—				—				—				—				17,616,539				—				—				17,618,306
Net loss and comprehensive loss				—				—				—				—				—				—				—				—				—				—				(7,522,612	)			(7,522,612	)
Balance at December 31, 2005				8,085,108				809				17,675,347				1,767				—				—				7,616,000				762				25,472,308				(187,600	)			(10,664,849	)			14,623,197
Exercise of common stock options for cash between $0.10 and $0.34 per share in January through June (unaudited)				—				—				—				—				—				—				935,740				93				281,099				—				—				281,192
Collection of stock subscription receivable (unaudited)				—				—				—				—				—				—				—				—				—				187,600				—				187,600
Issuance of Series A-3 preferred stock for cash at $1.00 per share, net of $94,987 of offering costs, in March (unaudited)				—				—				—				—				53,870,000				5,387				—				—				53,769,626				—				—				53,775,013
Issuance of warrants in connection with loan and security agreement in February (unaudited)				—				—				—				—				—				—				—				—				313,572				—				—				313,572
Employee stock- based compensation recognized under SFAS No. 123(R) (unaudited)				—				—				—				—				—				—				—				—				116,861				—				—				116,861
Net loss and comprehensive loss (unaudited)				—				—				—				—				—				—				—				—				—				—				(33,669,885	)			(33,669,885	)
Balance at June 30, 2006 (unaudited)				8,085,108			$	809				17,675,347			$	1,767				53,870,000			$	5,387				8,551,740			$	855			$	79,953,466			$	—			$	(44,334,734	)		$	35,627,550

F-5

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Table of Contents

					Period from																Period from
					May 26, 2004																May 26, 2004
					(Inception)																(Inception)
					Through				Year Ended				Six Months Ended June 30,								Through
					December 31,				December 31,												June 30,
					2004				2005				2005				2006				2006
													(Unaudited)				(Unaudited)				(Unaudited)
Operating activities
Net loss					$	(3,142,237	)		$	(7,522,612	)		$	(3,070,008	)		$	(33,669,885	)		$	(44,334,734	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation				8,389				36,876				15,771				28,862				74,127
		Stock-based compensation				811				—				—				116,861				117,672
		Non-cash interest expense				—				—				—				41,665				41,665
		Changes in operating assets and liabilities:
			Prepaid expenses and other assets			(56,013	)			(470,160	)			(260,033	)			59,799				(466,374	)
			Accounts payable, accrued liabilities and deferred rent			114,474				1,031,527				1,157,612				2,310,041				3,456,042
Net cash used in operating activities						(3,074,576	)			(6,924,369	)			(2,156,658	)			(31,112,657	)			(41,111,602	)
Investing activities
Purchases of marketable securities						(100,000	)			(7,000,000	)			—				—				(7,100,000	)
Maturities of marketable securities						—				—				—				7,000,000				7,000,000
Restricted cash						—				—				—				(1,581,130	)			(1,581,130	)
Purchases of property and equipment						(117,124	)			(45,881	)			(10,719	)			(681,815	)			(844,820	)
Net cash provided by (used in) investing activities						(217,124	)			(7,045,881	)			(10,719	)			4,737,055				(2,525,950	)
Financing activities
Proceeds from issuance of common stock, net						22,500				106,000				109,000				456,609				585,109
Proceeds from sale of preferred stock, net of issuance costs						7,540,429				17,618,306				13,661,958				53,775,013				78,933,748
Borrowings under debt agreements						—				—				—				7,000,000				7,000,000
Net cash provided by financing activities						7,562,929				17,724,306				13,770,958				61,231,622				86,518,857
Increase in cash and cash equivalents						4,271,229				3,754,056				11,603,581				34,856,020				42,881,305
Cash and cash equivalents at beginning of period						—				4,271,229				4,271,229				8,025,285				—
Cash and cash equivalents at end of period					$	4,271,229			$	8,025,285			$	15,874,810			$	42,881,305			$	42,881,305
Supplemental schedule of non-cash investing and financing activities
	Issuance of warrants in connection with loan and security agreement				$	—			$	—			$	—			$	313,572			$	313,572

F-6

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Table of Contents

1.	The Company and Summary of Significant Accounting Policies

	The Company and Basis of Presentation

	Use of Estimates

	Unaudited Interim Financial Statements

	Unaudited Pro Forma Stockholders’ Equity

	Cash and Cash Equivalents

F-7

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Table of Contents

	Investment Securities Available-for-Sale

	Fair Value of Financial Instruments

	Concentration of Credit Risk

	Property and Equipment

	Impairment of Long-Lived Assets

F-8

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Table of Contents

	Research and Development

	Income Taxes

	Stock-Based Compensation

F-9

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Table of Contents

Employee Stock Options
Risk-free interest rate			4.36 – 5.08	%
Dividend yield			0.00	%
Expected life of options (years)			6.06 – 6.08
Volatility			70.00	%

F-10

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Table of Contents

	Comprehensive Income

	Net Loss Per Share

F-11

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Table of Contents

			Period from
			May 26, 2004
			(Inception)
			Through				Year Ended				Six Months Ended June 30,
			December 31,				December 31,
			2004				2005				2005				2006
Historical
Numerator:
Net loss			$	(3,142,237	)		$	(7,522,612	)		$	(3,070,008	)		$	(33,669,885	)
Denominator:
	Weighted average common shares outstanding			3,680,548				5,277,468				4,770,055				7,826,825
	Weighted average unvested common shares subject to repurchase			(22,192	)			(653,951	)			(243,190	)			(2,852,825	)
Weighted average common shares outstanding				3,658,356				4,623,517				4,526,865				4,974,000
Basic and diluted net loss per share			$	(0.86	)		$	(1.63	)		$	(0.68	)		$	(6.77	)
Pro Forma
Net loss used above							$	(7,522,612	)						$	(33,669,885	)
Pro forma basic and diluted net loss per share							$	(0.36	)						$	(0.57	)
Shares used above								4,623,517								4,974,000
Pro forma adjustments to reflect assumed weighted average effect of conversion of preferred stock								16,025,009								53,737,140
Pro forma shares used to compute basic and diluted net loss per share								20,648,526								58,711,140
Historical weighted average anti-dilutive securities not included in diluted net loss per share calculation
Preferred stock				5,661,130				16,025,009				8,085,108				53,737,140
Common stock options				—				—				—				1,345,271
Common stock subject to repurchase				22,192				653,951				243,190				2,852,825
				5,683,322				16,678,960				8,328,298				57,935,236

2.	Securities Available-for-Sale

F-12

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3.	Property and Equipment

						December 31,
														June 30,
		Useful Lives				2004				2005				2006
Leasehold improvements			2 years			$	1,146			$	1,146			$	1,146
Computer equipment and software			3 years				55,245				63,972				186,006
Furniture and equipment			5 years				60,733				94,982				94,982
Manufacturing equipment			7 years				—				—				122,500
Construction in-process			—				—				—				437,281
							117,124				160,100				841,915
Less accumulated depreciation							(8,389	)			(42,360	)			(71,222	)
						$	108,735			$	117,740			$	770,693

4.	Related Party Transactions

5.	Commitments

	Loan and Security Agreement

F-13

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Table of Contents

	Facility Leases

6.	License Agreements and Acquired Development and Commercialization Rights

F-14

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Table of Contents

7.	Stockholders’ Equity

	Convertible Preferred Stock

F-15

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	Stock Options

F-16

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Table of Contents

		Options				Weighted Average
		Outstanding				Exercise Price
Granted			1,225,000			$	0.10
Exercised			(180,000	)		$	0.10
Balance at December 31, 2004			1,045,000			$	0.10
Granted			3,077,000			$	0.10
Exercised			(2,966,000	)		$	0.10
Balance at December 31, 2005			1,156,000			$	0.10
Granted			5,549,211			$	0.43
Exercised			(935,740	)		$	0.30
Balance at June 30, 2006			5,769,471			$	0.38

December 31, 2005

Options Outstanding

Options Exercisable

Weighted

Average

Weighted

Weighted

Remaining

Average

Average

Exercise

Number

Contractual

Exercise

Number

Exercise

Price

Outstanding

Life (in years)

Price

Exercisable

Price

$0.10

1,156,000

9.24

$

0.10

989,521

$

0.10

F-17

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Table of Contents

		June 30, 2006
		Options Outstanding												Options Exercisable
						Weighted												Weighted
						Average				Weighted								Average				Weighted
						Remaining				Average								Remaining				Average
Exercise		Number				Contractual				Exercise				Number				Contractual				Exercise
Price		Outstanding				Life (in years)				Price				Exercisable				Life (in years)				Price
$0.10			1,017,000				8.72			$	0.10				852,394				8.69			$	0.10
$0.34			3,714,471				9.86			$	0.34				3,561,771				9.86			$	0.34
$0.80			1,038,000				9.96			$	0.80				1,005,000				9.96			$	0.80
			5,769,471				9.68			$	0.38				5,419,165				9.70			$	0.39

	Shares Reserved For Future Issuance

		December 31,				June 30,
		2005				2006
Conversion of preferred stock			25,760,455				79,630,455
Common stock options granted and outstanding			1,156,000				5,769,471
Preferred stock warrants outstanding			—				385,000
Common stock options reserved for future issuance			228,000				1,678,789
			27,144,455				87,463,715

8.	Income Taxes

F-18

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Table of Contents

		December 31,				December 31,
		2004				2005
Deferred tax assets:
Net operating loss carryforwards		$	361,000			$	3,528,000
Tax credit carryforwards			29,000				359,000
Capitalized research and development			591,000				520,000
Other, net			157,000				111,000
Total deferred tax assets			1,138,000				4,518,000
Valuation allowance for deferred tax assets			(1,138,000	)			(4,518,000	)
Net deferred taxes		$	—			$	—

9.	Employee Benefit Plan

F-19

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Table of Contents

Item 13.	Other Expenses of Issuance and Distribution

			Amount
Item			to be Paid
SEC Registration Fee			$	9,229
NASD Filing Fee				9,125
Nasdaq Global Market Listing Fee				100,000
Legal Fees and Expenses				*
Accounting Fees and Expenses				*
Printing and Engraving Expenses				*
Blue Sky, Qualification Fees and Expenses				*
Transfer Agent and Registrar Fees				*
Miscellaneous Expenses				*
	Total		$	*

*	To be completed by amendment.

Item 14.	Indemnification of Directors and Officers

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Table of Contents

Item 15.	Recent Sales of Unregistered Securities

	1. In July 2004, we issued 4,500,000 shares of common stock to a limited liability company and individual investors for aggregate consideration of $4,500.
	2. In July and August 2004, we issued and sold an aggregate of 8,085,108 shares of Series A-1 preferred stock to certain venture capital funds and individual investors at a per share price of $0.94, for aggregate consideration of $7,600,001.52. Upon completion of this offering, these shares of Series A-1 preferred stock will convert into 8,085,108 shares of our common stock.
	3. In June and September 2005, we issued and sold an aggregate of 17,675,347 shares of Series A-2 preferred stock to certain existing and new investors at a per share price of $1.00, for aggregate consideration of $17,675,347. Upon completion of this offering, these shares of Series A-2 preferred stock will convert into 17,675,347 shares of our common stock.
	4. In February 2006, in connection with a loan and security agreement, we issued two warrants to two lenders to purchase an aggregate of 385,000 shares of Series A-2 preferred stock, at an initial exercise price of $1.00 per share, subject to adjustment. The warrants are exercisable through the later of February 2016 or five years from the closing of this offering. These warrants will be exercisable for an aggregate of 385,000 shares of common stock at an exercise price of $1.00 per share upon the completion of this offering.
	5. In March 2006, we issued and sold an aggregate of 53,870,000 shares of Series A-3 preferred stock to certain existing and new investors at a per share price of $1.00, for aggregate consideration of $53,870,000. Upon completion of this offering, these shares of Series A-3 preferred stock will convert into 53,870,000 shares of our common stock.
	6. Since our inception through June 30, 2006, we granted stock options to purchase 9,851,211 shares of our common stock at exercise prices from $0.10 to $0.80 per share to our employees, consultants and directors under our 2004 equity incentive award plan. Since our inception through June 30, 2006, we issued and sold an aggregate of 4,081,740 shares of our common stock to our employees, consultants and directors at prices from $0.10 to $0.34 per share pursuant to exercises of options granted under our 2004 equity incentive award plan. During this period, 30,000 unvested shares were repurchased by us at $0.10 per share resulting in a net of 4,051,740 shares issued and sold under our 2004 equity incentive award plan.

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Item 16.	Exhibits and Financial Statement Schedules

Exhibit
Number				Description
	1.1*			Form of Underwriting Agreement
	3.1(1)			Restated Certificate of Incorporation of the Registrant, as currently in effect
	3.2			Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, as currently in effect
	3.3			Form of Amended and Restated Certificate of Incorporation of the Registrant, to be in effect upon completion of the offering
	3.4(1)			Amended and Restated Bylaws of the Registrant, as currently in effect
	3.5			Form of Amended and Restated Bylaws of the Registrant, to be in effect upon completion of the offering
	4.1*			Form of the Registrant’s Common Stock Certificate
	4.2(1)			Amended and Restated Investor Rights Agreement dated February 21, 2006
	4.3(1)			Warrant issued by Registrant in February 2006 to Silicon Valley Bank
	4.4(1)			Warrant issued by Registrant in February 2006 to Oxford Finance Corporation
	5.1*			Opinion of Latham & Watkins LLP
	10.1			Form of Director and Executive Officer Indemnification Agreement
	10.2			Form of Executive Officer Employment Agreement
	10.3#(1)			2004 Equity Incentive Award Plan and forms of option agreements thereunder
	10.4#			Director Equity Compensation Policy
	10.5#			2006 Equity Incentive Award Plan and forms of option and restricted stock agreements thereunder
	10.6			Form of Amended and Restated Restricted Common Stock Purchase Agreement
	10.7#			2006 Corporate Bonus Plan
	10.8(1)			Sublease dated August 31, 2004 by and between the Registrant and Townsend and Townsend and Crew, LLP
	10.9(1)			Lease dated May 12, 2006 by and between the Registrant and Prentiss/ Collins Del Mar Heights LLC
	10.10†(1)			Collaboration and License Agreement dated July 30, 2004 by and between the Registrant and Migenix Inc. (formerly Micrologix Biotech Inc.)
	10.11†(1)			IV APAP Agreement (US and Canada) dated February 21, 2006 by and between the Registrant and Bristol-Myers Squibb Company
	10.12†(1)			License Agreement dated December 23, 2002 by and among SCR Pharmatop and Bristol-Myers Squibb Company
	10.13(1)			Loan and Security Agreement dated February 17, 2006 by and among the Registrant, Silicon Valley Bank and Oxford Finance Corporation
	23.1			Consent of Ernst & Young LLP, independent registered public accounting firm
	23.2*			Consent of Latham & Watkins LLP (included in Exhibit 5.1)
	24.1(1)			Power of Attorney
	24.2			Power of Attorney

	*	To be filed by amendment.

(1)	Filed with the Registrant’s Registration Statement on Form S-1 on July 17, 2006.

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	†	Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the Registration Statement and submitted separately to the Securities and Exchange Commission.
	#	Indicates management contract or compensatory plan.

Item 17.	Undertakings

	(a) We will provide to the underwriters at the closing as specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
	(b) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from a form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of this registration statement as of the time it was declared effective.
	(c) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-4

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	CADENCE PHARMACEUTICALS, INC.

	By:	/s/ Theodore R. Schroeder

	Theodore R. Schroeder
	President and Chief Executive Officer

Signature				Title		Date
/s/ Theodore R. Schroeder   Theodore R. Schroeder				President, Chief Executive Officer and Director (Principal Executive Officer)		August 30, 2006
/s/ William R. LaRue   William R. LaRue				Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)		August 30, 2006
*   Cam L. Garner				Chairman of the Board of Directors		August 30, 2006
*   Brian G. Atwood				Director		August 30, 2006
*   Samuel L. Barker, Ph.D.				Director		August 30, 2006
*   Michael A. Berman, M.D.				Director		August 30, 2006
*   James C. Blair, Ph.D.				Director		August 30, 2006
*   Alan D. Frazier				Director		August 30, 2006

II-5

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Table of Contents

Signature				Title		Date
*   Alain B. Schreiber, M.D.				Director		August 30, 2006
*   Christopher J. Twomey				Director		August 30, 2006
*By:		/s/ Theodore R. Schroeder   Theodore R. Schroeder Attorney-in-Fact

II-6

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Table of Contents

Exhibit
Number				Description
	1.1*			Form of Underwriting Agreement
	3.1(1)			Restated Certificate of Incorporation of the Registrant, as currently in effect
	3.2			Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, as currently in effect
	3.3			Form of Amended and Restated Certificate of Incorporation of the Registrant, to be in effect upon completion of the offering
	3.4(1)			Amended and Restated Bylaws of the Registrant, as currently in effect
	3.5			Form of Amended and Restated Bylaws of the Registrant, to be in effect upon completion of the offering
	4.1*			Form of the Registrant’s Common Stock Certificate
	4.2(1)			Amended and Restated Investor Rights Agreement dated February 21, 2006
	4.3(1)			Warrant issued by Registrant in February 2006 to Silicon Valley Bank
	4.4(1)			Warrant issued by Registrant in February 2006 to Oxford Finance Corporation
	5.1*			Opinion of Latham & Watkins LLP
	10.1			Form of Director and Executive Officer Indemnification Agreement
	10.2			Form of Executive Officer Employment Agreement
	10.3#(1	)		2004 Equity Incentive Award Plan and forms of option agreements thereunder
	10.4#			Director Equity Compensation Policy
	10.5#			2006 Equity Incentive Award Plan and forms of option and restricted stock agreements thereunder
	10.6			Form of Amended and Restated Restricted Common Stock Purchase Agreement
	10.7#			2006 Corporate Bonus Plan
	10.8(1)			Sublease dated August 31, 2004 by and between the Registrant and Townsend and Townsend and Crew, LLP
	10.9(1)			Lease dated May 12, 2006 by and between the Registrant and Prentiss/ Collins Del Mar Heights LLC
	10.10†(	1)		Collaboration and License Agreement dated July 30, 2004 by and between the Registrant and Migenix Inc. (formerly Micrologix Biotech Inc.)
	10.11†(	1)		IV APAP Agreement (US and Canada) dated February 21, 2006 by and between the Registrant and Bristol-Myers Squibb Company
	10.12†(	1)		License Agreement dated December 23, 2002 by and among SCR Pharmatop and Bristol-Myers Squibb Company
	10.13(1	)		Loan and Security Agreement dated February 17, 2006 by and among the Registrant, Silicon Valley Bank and Oxford Finance Corporation
	23.1			Consent of Ernst & Young LLP, independent registered public accounting firm
	23.2*			Consent of Latham & Watkins LLP (included in Exhibit 5.1)
	24.1(1)			Power of Attorney
	24.2			Power of Attorney

*	To be filed by amendment.

(1)	Filed with the Registrant’s Registration Statement on Form S-1 on July 17, 2006.

†	Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the Registration Statement and submitted separately to the Securities and Exchange Commission.
#	Indicates management contract or compensatory plan.

 

 

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