UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to

Somaxon Pharmaceuticals, Inc.

Delaware		20-0161599
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
420 Stevens Avenue, Suite 210, Solana Beach, CA		92075
(Address of principal executive offices)		(Zip Code)

(858) 480-0400
(Registrant’s telephone number, including area code)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.0001 per share		Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o          No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o          No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ          No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o          No þ

As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $12.3 million, based on the closing price of the registrant’s common stock on the Nasdaq Capital Market of $1.10 per share.

The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of March 18, 2010 was 25,892,553.

 

 

SOMAXON PHARMACEUTICALS, INC.

FORM 10-K — ANNUAL REPORT
For the Fiscal Year Ended December 31, 2009

Table of Contents

				Page
PART I
Item 1		Business			1
Item 1A		Risk Factors			14
Item 1B		Unresolved Staff Comments			33
Item 2		Properties			33
Item 3		Legal Proceedings			33
Item 4		Reserved			33
PART II
Item 5		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			33
Item 6		Selected Financial Data			38
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 7A		Quantitative and Qualitative Disclosures about Market Risk			50
Item 8		Financial Statements and Supplementary Data			50
Item 9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			50
Item 9A		Controls and Procedures			50
Item 9B		Other Information			51
PART III
Item 10		Directors, Executive Officers and Corporate Governance			52
Item 11		Executive Compensation			58
Item 12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			78
Item 13		Certain Relationships and Related Transactions, and Director Independence			81
Item 14		Principal Accountant Fees and Services			83
PART IV
Item 15		Exhibits and Financial Statement Schedules			84
Signatures					88
Exhibit 10.9
Exhibit 23.1
Exhibit 31.1
Exhibit 32.1

PART I

Forward-Looking Statements

Any statements in this report and the information incorporated herein by reference about our expectations, beliefs, plans, objectives, assumptions or future events or performance that are not historical facts are forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” or “would.” Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation, our ability to raise sufficient capital to meet U.S. Food and Drug Administration, or FDA, requirements and otherwise fund our operations, and to meet our obligations to parties under financing agreements, and the impact of any such financing activity on the level of our stock price; the impact of any inability to raise sufficient capital to fund ongoing operations, including the potential to be required to restructure the company or to be unable to continue as a going concern; our ability to successfully commercialize Silenor; the potential to enter into and the terms of any commercial partnership or other strategic transaction relating to Silenor; the scope, validity and duration of patent protection and other intellectual property rights for Silenor; whether the approved label for Silenor is sufficiently consistent with such patent protection to provide exclusivity for Silenor; the timing and results of non-clinical studies and post-approval regulatory requirements for Silenor, and the FDA’s agreement with our interpretation of such results; our ability to operate our business without infringing the intellectual property rights of others; inadequate therapeutic efficacy or unexpected adverse side effects relating to Silenor that could delay or prevent commercialization, or that could result in recalls or product liability claims; our ability to ensure adequate and continued supply of Silenor to successfully launch commercial sales or meet anticipated market demand; other difficulties or delays in development, testing, manufacturing and marketing of Silenor; the market potential for insomnia treatments, and our ability to compete within that market; our products, our expected future revenues, operations and expenditures and projected cash needs; and other risks detailed below in Part I — Item 1A “Risk Factors.”

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Corporate Information

We were incorporated in Delaware in August 2003. Our principal executive offices are located at 420 Stevens Avenue, Suite 210, Solana Beach, CA 92075, and our telephone number is (858) 480-0400. Our website address is www.somaxon.com. The information on, or accessible through, our website is not part of this report. Unless the context requires otherwise, references in this report and the information incorporated herein by reference to “Somaxon,” “we,” “us” and “our” refer to Somaxon Pharmaceuticals, Inc.

We have received a trademark registration from the U.S. Patent and Trademark Office, or USPTO, for our corporate name, SOMAXON PHARMACEUTICALS, for use in connection with pharmaceutical preparations for the treatment of neurological, psychiatric and rheumatologic disorders. We have obtained foreign trademark registrations for the trademark SOMAXON PHARMACEUTICALS in Europe, Canada, Japan and Australia. We have received trademark registrations for the trademark SILENOR in the U.S., Europe and Canada. All other trademarks, trade names and service marks appearing in this report are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of, us by the trademark or trade dress owners.

Item 1. Business

Overview

We are a specialty pharmaceutical company focused on the in-licensing, development and commercialization of proprietary branded products and late-stage product candidates for the treatment of diseases and disorders in the central nervous system therapeutic area. On March 18, 2010, the FDA notified us that it approved our New Drug Application, or NDA, for Silenor^® (doxepin) 3 mg and 6 mg tablets for the treatment of insomnia characterized by difficulty with sleep maintenance.

We believe that Silenor is highly differentiated from currently available insomnia treatments, and could have significant advantages in a large and growing market. Based on data from IMS Health, in 2009 the prescription market for the treatment of insomnia grew approximately 5% compared to 2008 to more than 67 million prescriptions. According to IMS Health, the insomnia market accounted for more than $2 billion in sales in 2009.

We have undertaken and continue to undertake activities to prepare for the commercial launch of Silenor. In addition, we continue to engage in discussions with third parties relating to the commercialization of Silenor.

Silenor for Insomnia

It is estimated that approximately one-third, or 70 million, of adult Americans are affected by insomnia. One study has found that approximately 20% of those who suffer from insomnia are treated with prescription medications. Silenor was approved by the FDA for the treatment of insomnia characterized by difficulty with sleep maintenance in March 2010. We believe that Silenor has the potential to offer significant benefits to patients with insomnia.

We in-licensed the patents and the development and commercial rights to Silenor and we are preparing for the commercial launch of this product in the U.S. market. Silenor is an oral tablet formulation of doxepin at strengths of 3 mg and 6 mg. Doxepin has been marketed and used for over 35 years at dosages from 75 mg to 300 mg per day and is indicated for the treatment of depression and anxiety. Doxepin has a well-established safety profile, but it has a range of pharmacologic effects at high doses that were not observed in our clinical development program. Our clinical development program for Silenor included four Phase 3 clinical trials, and the primary efficacy endpoint achieved statistical significance in each trial. Our clinical trials for Silenor also demonstrated a favorable safety and tolerability profile, including a low dropout rate, an adverse event profile comparable to placebo, no clinically meaningful next-day residual effects and no evidence of amnesia, complex sleep behaviors, hallucinations, tolerance or withdrawal effects.

Silenor binds to H₁ receptors in the brain and blocks histamine, which is believed to play an important role in the regulation of sleep. The leading approved insomnia medications, Ambien, Sonata and Lunesta, work by binding and activating a different set of brain receptors known as gamma aminobutyric acid, or GABA, receptors. Currently approved GABA receptor-activating drugs are designated by the Drug Enforcement Administration, or DEA, as Schedule IV controlled substances, which require additional registration and administrative controls.

Our Strategy

Our goal is to be a leading specialty pharmaceutical company focused on the in-licensing, development and commercialization of proprietary branded products and late-stage product candidates in the central nervous system therapeutic area. Our near-term focus is preparing for the commercial launch of Silenor. In addition, we continue to engage in discussions with third parties relating to the commercialization of Silenor. Specifically, we intend to:

	•		Maximize the value of Silenor. Silenor was approved by the FDA for the treatment of insomnia characterized by difficulty with sleep maintenance in March 2010. We believe that Silenor is highly differentiated from currently available insomnia treatments and could have significant advantages in a large and growing market. We have undertaken and continue to undertake activities to prepare for the commercial launch of Silenor. In addition, we continue to engage in discussions with third parties relating to the commercialization of Silenor. However, we cannot assure you that we will complete any strategic transaction, or that, if completed, any strategic transaction will be successful or on attractive terms.
	•		Selectively evaluate other products and late-stage product candidates that are differentiated. We intend to selectively evaluate products and product candidates that are differentiated and meet unmet medical needs in the central nervous system therapeutic area. We believe this therapeutic area is an excellent focal point for a specialty pharmaceutical company, as drugs treating diseases and disorders of the central nervous system represent significant market opportunities. To reduce risks, costs and time-to-market, we would focus our efforts on currently-marketed products and late-stage product candidates.
	•		Establish collaborations and outsourcing arrangements. We intend to seek opportunities to enter into strategic collaborations and outsourcing arrangements to drive growth and profitability. We believe that leveraging the capabilities of third parties will allow us to add efficiency to our operations and expand our commercial reach, including potentially outside of the United States.

Silenor (doxepin) for Insomnia

Disease Background and Market Opportunity

Sleep is essential for human performance, general health and well-being. Insomnia, the most common sleep complaint across all stages of adulthood, is a condition characterized by difficulty falling asleep, waking frequently during the night or too early, or waking up feeling unrefreshed. It is estimated that approximately one-third, or 70 million, of adult Americans are affected by insomnia. One study has found that only approximately 20% of those who suffer from insomnia are currently treated with prescription medications. Chronic insomnia, insomnia lasting more than four weeks, is often associated with a wide range of adverse conditions, including mood disturbances, difficulties with concentration and memory, and certain cardiovascular, pulmonary and gastrointestinal disorders. Chronic sleep deprivation has also been associated with an increased risk of depression, diabetes and obesity, among other disorders. The National Institutes of Health 2005 State-of-the-Science Conference statement on the treatment of insomnia stated that estimates placed the direct and indirect annual costs of chronic insomnia at tens of billions of dollars, but cautioned that such estimates were based on many assumptions and varied extensively.

The U.S. market for prescription products to treat insomnia grew to approximately 67 million prescriptions in 2009 according to IMS Health, a growth rate of 5% for the year. According to IMS Health, the insomnia market accounted for more than $2 billion in sales in 2009.

The current market-leading prescription products for the treatment of insomnia include GABA-receptor agonists such as Ambien, zolpidem, the generic form of Ambien, in various formulations, Ambien CR, a controlled-release formulation of Ambien, Lunesta, Sonata and zaleplon, the generic form of Sonata, in various formulations, melatonin agonists such as Rozerem, several hypnotic benzodiazepines such as temazapam (Restoril) and flurazepam (Dalmane), and sedating antidepressants such as trazodone (Desyrel).

According to physicians that we surveyed in our market research, one of the primary reasons they prescribe sedating antidepressants for the treatment of insomnia is that they generally are not associated with the risk of dependency. As a result, they are not Schedule IV controlled substances, and they may be administered for long periods of time. As an example, it is estimated that the majority of trazodone prescriptions are prescribed off-label for the treatment of insomnia.

In our market research, physicians indicated that they would prefer to prescribe sleep medications for their patients that provided a full seven to eight hours of sleep, that removed any risk of dependency and that minimized known side effects of many of the currently prescribed products such as memory impairment, hallucinations and complex sleep behaviors. Our Phase 3 clinical trial program for Silenor demonstrated that patients slept seven to eight hours with no evidence of dependence, tolerance, withdrawal, memory impairment, hallucinations or complex sleep behaviors. When presented with this product profile, the surveyed physicians indicated that Silenor could become the most widely prescribed insomnia product in their practice.

We believe that the introduction of new prescription treatments having different clinical profiles from currently marketed products, coupled with the increased awareness at both the patient and physician levels that chronic sleep deprivation can lead to deleterious health consequences, will translate into an increase in the treatment of insomnia and resultant prescription market growth.

Limitations of Current Therapies

According to a recent Sleep in America Poll, 65% of respondents reported experiencing insomnia symptoms a few nights a week. In addition, 71% of respondents often experienced awakenings during the night or waking up too early without being able to go back to sleep (sleep maintenance), and 26% had difficulty falling asleep (sleep onset). Historically, insomnia therapies have addressed sleep onset rather than sleep maintenance and duration. Only recently have therapies been approved with indications for sleep maintenance, although the ability of available drugs to maintain sleep throughout the night without unwanted next-day residual effects remains limited.

While there are a number of products currently available for the treatment of insomnia, we believe that the market is still underserved due in part to the limitations of current therapies. Our market research indicates that only 25% of patients being treated for insomnia with prescription medications claimed they were very satisfied with their current treatment. The high level of dissatisfaction is frequently attributed to characteristics associated with many of the currently marketed products. For example, 41% of patients claimed that their medication did not provide them with a full night’s sleep, almost one-third of patients claimed they woke feeling groggy, and 33% claimed to have suffered from memory impairment at some time after taking medication, with almost 80% reporting that they found memory lapse somewhat or very scary. Additionally, 24% of patients on prescription insomnia medication claimed that they were dependent on their medication and could not sleep without it.

As noted above, millions of people with insomnia currently do not take prescription medications to treat their disorder. In our market research, 28% of people suffering from insomnia cited fear of addiction as the reason they did not seek prescription treatment, which was the most cited reason. Almost 10% of respondents suggested they do not use prescription treatments because they are worried about safety issues. Many of these people take over-the-counter, or OTC, medication in an attempt to help them sleep. However, in our market research almost one-third of patients claimed their OTC medications did not work for them and 25% claimed that they woke feeling groggy.

In our market research, when consumers were asked their most favored prescription insomnia treatment attributes, the leading responses included:

	•		the ability to have a full night’s sleep, defined as seven to eight hours,
	•		the ability to wake feeling refreshed without next day residual effects,
	•		the ability to take the product over long periods of time without the risk of dependency, and
	•		the removal or limitation of concerns about side effects, such as memory impairment.

These consumers also indicated a lack of brand loyalty and an inclination to try newer medications that deliver these attributes.

We believe that the clinical profile of Silenor can address each of these concerns. When presented with the Silenor clinical profile in one of our market research studies, all participants indicated a willingness to try Silenor. In addition, when these participants were asked to rate whether the product met all of their desired characteristics for the treatment of insomnia, 90% of them rated Silenor either a 9 or 10 on a ten point scale (with 10 being the highest rating).

All drugs approved for the treatment of insomnia that act via the GABA receptors, as well as benzodiazepines and other GABA-receptor agonists, are deemed by the FDA and the DEA to have a potential for abuse and are classified by the DEA as Schedule IV controlled substances. As a result, many physicians are reluctant to prescribe, and patients are reluctant to take, scheduled drugs for chronic use in treating insomnia. The prescribing of a Schedule IV controlled substance brings scrutiny from the DEA and other regulatory bodies, and requires unique and burdensome registration and administrative controls. We believe that many physicians are uncomfortable prescribing controlled substances, especially when treating a patient with a history of addiction or when other effective, non-scheduled treatment options are available.

Drugs currently prescribed for insomnia may be associated with many unwanted side effects, such as dry mouth, unpleasant taste, blurred vision, residual next-day effects, amnesia, hallucinations, physical and psychological dependence, complex sleep behaviors such as sleep driving, hormonal changes and gastrointestinal effects. We believe that drugs with improved tolerability would be well received by both physicians and patients and will have the potential to accelerate the growth in the market.

Silenor and its Advantages

We believe that Silenor offers a number of advantages:

•

Non-scheduled. Because Silenor is not a Schedule IV controlled substance, it will be able to be freely sampled, facilitating initial physician and patient trial.

•

Safety and tolerability. In our clinical trials for Silenor, there was a low dropout rate, an adverse event profile comparable to placebo and no clinically meaningful next-day residual effects, and we did not observe any amnesia, complex sleep behaviors, hallucinations, tolerance or withdrawal effects or any effect on QT interval prolongation. In addition, high-dose doxepin has been prescribed for over 40 years for depression at up to 50 times our proposed maximum dosage for the treatment of insomnia.

•

Efficacy. The FDA has approved Silenor for the treatment of insomnia characterized by difficulty with sleep maintenance. Silenor is the first and only non-scheduled prescription sleep medication approved by the FDA for the treatment of the most commonly reported nighttime symptoms of insomnia: waking frequently during the night and/or waking too early and being unable to return to sleep (sleep maintenance). Silenor is approved for the treatment of both transient (short term) and chronic (long term) insomnia characterized by difficulty with sleep maintenance in both adults and elderly patients.

Silenor is an oral tablet formulation of doxepin at strengths of 3 mg and 6 mg. Doxepin belongs to a class of psychotherapeutic agents known as dibenzoxepin tricyclic compounds. Doxepin was first approved by the FDA in 1969 and was originally marketed by Pfizer Inc. under the brand name Sinequan. Doxepin is currently available in oral capsule form for depression and anxiety at strengths ranging from 10 mg to 150 mg, and in solution form at a concentration of 10 mg/mL. Therapeutic dosages of doxepin for its indicated uses range from 75 mg to 300 mg daily, and at these dosages, doxepin exhibits potent sedative properties. However, the available strengths of doxepin are seldom used in the treatment of insomnia as they leave many patients reporting next-day residual effects and other undesirable side effects. According to IMS data, doxepin accounted for less than 0.1% of the insomnia prescriptions written during 2009. We believe that doxepin at low dosages does not exhibit the same pharmacologic effects as high-dose doxepin, and in our clinical development program we observed a low dropout rate, an adverse event profile comparable to placebo and no clinically meaningful next-day residual effects. It has been hypothesized that doxepin’s sleep promoting effects derive primarily from potent H₁ histamine-blocking properties. It is believed that the drug does not work via any of the GABA receptors and, according to its FDA-approved labeling, does not appear to have any potential for dependency, addiction or abuse.

Regulatory Status and Non-clinical Development Program

We submitted our NDA for Silenor under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, an approach to seek regulatory approval for, among other things, new indications of drugs which have previously been approved by the FDA. The process allows a company to rely on published literature reports or the FDA’s findings of safety and efficacy for a previously-approved drug for which the company does not have a right of reference. Filers relying on this approach may not be required to duplicate some previously conducted research, accordingly saving time and money. On March 18, 2010, the FDA notified us that it approved our NDA for Silenor 3 mg and 6 mg tablets for the treatment of insomnia characterized by difficulty with sleep maintenance. We qualified for a three-year exclusivity period for Silenor beginning on the approval date.

In connection with the approval of our NDA for Silenor, the FDA imposed requirements upon us. The FDA has required us to implement a risk evaluation and mitigation strategy, or REMS, consisting of a medication guide and a timetable for assessment of its effectiveness. We are also required to complete a standard clinical trial assessing the safety and efficacy of Silenor in children aged 6 to 16 pursuant to the Pediatric Research Equity Act of 2003, or PREA, and to submit the final results of this trial by March 2015.

We are required to complete and submit the results of the standard two-year carcinogenicity study that the FDA requested us to conduct in May 2006. We initiated our two-year rat carcinogenicity study in August 2007, and we expect the study report in the second quarter of 2010.

Commercialization Strategy

We believe that the commercial success of Silenor will largely depend on gaining access to the highest prescribing physicians of insomnia treatments. IMS Health data indicates that psychiatrists, neurologists and sleep specialists represent more than 30% of the total prescriptions for the top deciles of prescribers of insomnia treatments.

We have undertaken and continue to undertake activities to prepare for the commercial launch of Silenor. In addition, we continue to engage in discussions with third parties relating to the commercialization of Silenor. However, we cannot assure you that we will complete any strategic transaction, or that, if completed, any strategic transaction will be successful or on attractive terms.

Technology In-Licenses

In a license agreement entered into in August 2003, as amended in October 2003 and September 2006, we acquired the exclusive, worldwide license from ProCom One, Inc., or ProCom, to certain patents to develop and commercialize low dosages of doxepin for the treatment of insomnia. Although our license to the low-dose doxepin patents is a worldwide license, we currently intend to develop and commercialize Silenor in the United States only, since patent protection for the current dosage form is limited to the United States. The term of the license extends until the last licensed patent expires, which is expected to occur no earlier than 2020. The license agreement is terminable at any time by us with 30 days notice if we believe that the use of the product poses an unacceptable safety risk or if it fails to achieve a satisfactory level of efficacy. Either party may terminate the agreement with 30 days notice if the other party commits a material breach of its obligations and fails to remedy the breach within 90 days, or upon the filing of bankruptcy, reorganization, liquidation, or receivership proceedings relating to the other party.

As consideration for the license, we paid $0.1 million as an option payment and $0.4 million as the first milestone payment for a total of $0.5 million for the period ended December 31, 2003. We paid $0.5 million in January 2005 and an additional $0.5 million in December 2006 in connection with the achievement of milestones. The approval of the Silenor NDA by the FDA in

March 2010 triggered an additional $1.0 million payment obligation to ProCom. We are also obligated to pay a royalty on worldwide net sales of the licensed products. We have the right to grant sublicenses to third parties. We also issued 84,000 shares of common stock to ProCom One contemporaneously with our Series A preferred stock financing.

In October 2006, we entered into a supply agreement pertaining to a certain ingredient used in our formulation for Silenor. In August 2008, we amended our supply agreement to provide us with the exclusive right to use this ingredient in combination with doxepin. As part of the amendment, we made an upfront license payment of $0.2 million and are obligated to pay a royalty on worldwide net sales of Silenor beginning as of the expiration of the statutory exclusivity period for Silenor in each country in which Silenor is marketed. Such royalty is only payable if one or more patents under the license agreement continue to be valid in each such country and a patent relating to our formulation for Silenor has not issued in such country.

Intellectual Property

We are the exclusive licensee of four U.S. patents from ProCom claiming the use of low dosages of doxepin and other antidepressants. U.S. Patent No. 6,211,229, “Treatment of Transient and Short Term Insomnia,” covers dosages of doxepin from 0.5 mg to 20 mg for use in the treatment of transient insomnia and expires in February 2020.

U.S. Patent No. 5,502,047, “Treatment for Insomnia,” claims the treatment of chronic insomnia using doxepin and expires in March 2013. Due to some prior art that we identified, we initiated a reexamination of our “Treatment for Insomnia” patent. The reexamination proceedings terminated and the USPTO issued a reexamination certificate narrowing certain claims, so that the broadest dosage ranges claimed by us are 0.5 mg to 20 mg for otherwise healthy patients with chronic insomnia and for patients with chronic insomnia resulting from depression, and 0.5 mg to 4 mg for all other chronic insomnia patients. We also requested reissue of this same patent to consider some additional prior art and to add intermediate dosage ranges below 10 mg. In two office actions relating to this reissue request, the USPTO raised no prior art objections to 32 of the 34 claims we were seeking and raised a prior art objection to the other two, as well as some technical objections. Each of the claims objected to by the USPTO related to dosage ranges having an upper limit of approximately 10 mg or higher. After further review of the prior art submitted, the USPTO withdrew all of its prior art objections. We then determined that the proposed addition of the intermediate dosage ranges and the resolution of the technical objections no longer warranted continuation of the reissue proceeding. As a result, we elected not to continue that proceeding. Because we are seeking to develop Silenor for indications consistent with the subject matter of our patent claims, we believe that our licensed patents will restrict the ability of competitors to market doxepin with identical drug labeling.

Additionally, we have the exclusive license from ProCom to a third patent in the series, U.S. Patent No. 5,643,897, which is a divisional of the ’047 patent and claims the treatment of chronic insomnia using amitriptyline, trimipramine, trazodone and mixtures thereof in a daily dosage of 0.5 mg to 20 mg. This patent expires in March 2013. A fourth patent to which we have an exclusive license from ProCom, U.S. Patent No. 6,344,487, claims a method of treating insomnia with low dosage forms (0.5 mg to 10 mg) of nortriptyline. This patent expires in June 2020. In addition, pursuant to our agreement with a supplier for a key ingredient used in our formulation of Silenor, we have the exclusive right to use this ingredient in combination with doxepin, and the exclusive license to the related patents and patent applications. We submitted for listing certain of these issued patents in the FDA’s publication “Approved Drug Product with Therapeutic Equivalence Evaluations,” commonly known as the Orange Book.

We have filed multiple patent applications resulting from unexpected findings from our development program. A brief summary of the content of these patent applications includes:

	•		Methods of improving pharmacokinetics,
	•		Formulations and manufacturing processes,
	•		Methods of preventing early awakenings and improving sleep efficiency,
	•		Methods of treating insomnia without sedative tolerance, rebound insomnia or weight gain, and
	•		Methods of treating insomnia in the elderly.

We have included these findings in our approved label and, if the patents issue, we intend to list them in the FDA’s Orange Book. The combination of these patents, if issued, and our label could result in our patent protection being extended to 2028.

We have also filed multiple patent applications relating to potential future products containing doxepin for the treatment of insomnia. A brief summary of the content of these patent applications includes:

	•		Orally disintegrating formulations,
	•		Combination drug formulations, and
	•		Method of treating insomnia with ultra low dose doxepin.

Other Intellectual Property

Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties and confidential information and inventions agreements with employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secret information. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how, and we would not be able to prevent their use.

Third Party Intellectual Property

Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates may infringe.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product candidates infringe their intellectual property rights. If any of these intellectual property rights was found to cover our product candidates or their uses, we could be required to pay damages and could be restricted from commercializing our product candidates or from using our proprietary technologies unless we obtained a license to the intellectual property rights. A license may not be available to us on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable right, which could prohibit us from making, using or selling our product candidates.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including but not limited to:

	•		infringement and other intellectual property claims which, with or without merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;
	•		substantial damages for infringement, including treble damages and attorneys’ fees, which we may be required to pay if a court decides that the product candidate at issue infringes on or violates the third party’s rights;
	•		a court prohibiting us from selling or licensing the product candidate or using the proprietary technology unless the third party licenses its technology to us, which it is not required to do;
	•		if a license is available from the third party, we may have to pay substantial royalties or fees or grant cross-licenses to our technology; and
	•		redesigning our product candidates so they do not infringe, which may not be possible or may require substantial funds and time.

No assurance can be given that patents issued to third-parties do not exist, have not been filed, or could not be filed or issued, which contain claims covering our products or product candidates or methods. Because of the number of patents issued and patent applications filed in our technical areas or fields, we believe there is a risk that third parties may allege that they have patent rights encompassing our products or product candidates or methods.

Research and Development

Our research and development expenses were $4.3 million in 2009, $16.5 million in 2008 and $12.7 million in 2007. To date, our research and development expenses consist primarily of costs associated with our clinical trials managed by contract research organizations, or CROs, our non-clinical development program for Silenor, submitting and seeking approval of the NDA for Silenor, regulatory expenses, drug development costs, salaries and related employee benefits, and share-based compensation expense. During 2009, our most significant research and development costs were salaries, benefits, and share-based compensation expense, costs associated with the conduct of the continuing two-year carcinogenicity study for Silenor, costs associated with the resubmission of the Silenor NDA to the FDA and drug development costs pertaining to Silenor. In 2008 and 2007 our most significant costs were associated with our non-clinical development program for Silenor, a standard clinical trial that we voluntarily conducted during 2008 to evaluate the potential for ECG effects of doxepin (the active ingredient in Silenor) and the preparation and submission of our NDA for Silenor.

Silenor Competition

The FDA-approved products that are currently available for the treatment of insomnia consist of sedative hypnotics, including GABA-receptor agonists, hypnotic benzodiazepines and a melatonin agonist. In addition, products such as sedating antidepressants and other products which are not approved for the treatment of insomnia are sometimes prescribed for such use.

Ambien, a GABA-receptor agonist, and its generic equivalents have historically been the market share leaders in the insomnia segment. Generic versions of Ambien (zolpidem) entered the market in April 2007. According to data obtained from IMS Health, generic versions of Ambien accounted for approximately 52% of insomnia prescriptions in 2009. In September 2005, Sanofi-Synthélabo, Inc. launched Ambien CR, a controlled-release version of Ambien. Unlike Ambien, Ambien CR is indicated for the treatment of sleep maintenance insomnia and does not have a label restriction limiting the length of time of its use. Ambien CR accounted for approximately 10% of insomnia prescriptions in 2009 and branded Ambien accounted for approximately 1% of insomnia prescriptions in 2009 according to data obtained from IMS Health.

Lunesta, marketed by Sepracor Inc., a wholly-owned subsidiary of Dainippon Sumitomo Pharma Co., Ltd., is a GABA-receptor agonist that was approved in December 2004 by the FDA and was launched in the second quarter of 2005. Lunesta accounted for approximately 8% of insomnia prescriptions in 2009 according to data obtained from IMS Health. Lunesta is indicated for the treatment of insomnia and has been shown to decrease sleep latency and increase sleep maintenance. It was the first of several products to have the short-term use restriction removed from its label.

Sonata, a GABA-receptor agonist marketed by King Pharmaceuticals for the treatment of insomnia, and its generic equivalents accounted for less than 1% of insomnia prescriptions in 2009 according to data obtained from IMS Health.

Rozerem was launched by Takeda Pharmaceuticals North America, Inc. in September 2005 and accounted for approximately 1% of insomnia prescriptions in 2009 according to data obtained from IMS Health. Rozerem is indicated for the treatment of insomnia characterized by difficulty with sleep onset. It was the first drug approved for the treatment of insomnia that is not a Schedule IV controlled substance. With the exception of Rozerem, the approved medications for the treatment of insomnia all act on GABA receptors and are designated as Schedule IV controlled substances. Takeda Pharmaceuticals North America, Inc. conducted a clinical trial to evaluate the administration of a combination of Takeda’s product Rozerem and 3 mg of doxepin in patients with insomnia. We are unaware of the results of this trial.

A number of companies are marketing reformulated versions of previously approved GABA-receptor agonists. In March 2009, Meda AB and Orexo AB received approval from the FDA for Edluar, formerly known as Sublinox, a sublingual tablet formulation of zopidem, for the short-term treatment of insomnia. Meda and Orexo launched this product in the U.S. in the third quarter of 2009.

In December 2008, NovaDel Pharma, Inc. received approval from the FDA for ZolpiMist, an oral mist formulation of zolpidem for the short-term treatment of insomnia characterized by difficulties with sleep initiation. In November 2009, NovaDel and ECR Pharmaceuticals Company, Inc., a wholly owned subsidiary of Hi-Tech Pharmacal Co., Inc., entered into an exclusive license and distribution agreement to commercialize and manufacture ZolpiMist in the United States and Canada. ECR Pharmaceuticals announced that it plans to launch the product in the United States in the first half of 2010.

The remaining market is comprised of older generic benzodiazepines and sedative antidepressants. In addition to the currently approved or off-label products for the treatment of insomnia, a number of new products are expected to enter the insomnia market over the next several years. While the new entrants bring additional competition to the insomnia market, they are also expected to increase the awareness of insomnia and further expand the market. Additionally, we believe market growth will also be driven by the aging of the population and emerging awareness of the links between sleep, health and overall well-being.

Transcept Pharmaceuticals, Inc. submitted an NDA for Intermezzo, a low-dose sublingual tablet formulation of zolpidem, in 2008, and in October 2009, Transcept announced that it received a complete response letter from the FDA relating to such NDA. Transcept held a meeting with the FDA in January 2010 to discuss the implications of the complete response letter, and we do not know the impact that the complete response letter or this meeting will have on the potential approval of this product candidate. Transcept and Purdue Pharmaceutical Products L.P. have entered into an exclusive license and collaboration agreement to commercialize Intermezzo in the United States.

Alexza Pharmaceuticals, Inc. has announced positive results from a Phase 1 clinical trial of an inhaled formulation of zaleplon, the active pharmaceutical ingredient in Sonata. Somnus Therapeutics, Inc. has announced positive results from a Phase 1 clinical trial of a delayed-release formulation of zaleplon. Sanofi-Aventis has completed Phase 3 clinical trials for Ciltyri (eplivanserin), a 5HT2 antagonist, and submitted an NDA for this product to the FDA and The European Agency for the Evaluation of Medicinal Products, or EMEA, for the treatment of insomnia during the fourth quarter of 2008. In September 2009, Sanofi-Aventis announced that it received a complete response letter from the FDA relating to such NDA, and in December 2009 Sanofi-Aventis announced that it was discontinuing the eplivanserin development program.

Vanda Pharmaceuticals Inc. has completed two Phase 3 insomnia clinical trials of VEC-162, a melatonin receptor agonist. Vanda has announced that it intends to submit a marketing application for this product candidate in the United States in mid-2011.

Merck & Co., Inc. has completed two Phase 3 clinical trials of esmirtazapine, an H1 antagonist, for the treatment of insomnia. In February 2010, Merck announced that it was terminating its development program for esmirtazapine for strategic reasons. Merck also has MK-4305, an orexin antagonist, in Phase 3 clinical trials for the treatment of insomnia.

In addition, Actelion Pharmaceuticals Ltd. completed a Phase 3 clinical trial of almorexant, an orexin antagonist, in December 2009 for the treatment of insomnia. Based on the results of that clinical trial, Actelion announced that it was preparing further late-stage trials in adults and elderly patients to evaluate the long-term efficacy and safety of this product candidate. Actelion and GlaxoSmithKline announced a collaboration relating to almorexant under which GlaxoSmithKline received exclusive, worldwide rights to co-develop and co-commercialize almorexant together with Actelion.

Several other companies, including Sepracor, are evaluating 5HT2 antagonists as potential hypnotics, and Eli Lilly and Company is evaluating a potential hypnotic that is a dual histamine/5HT2 antagonist. Additionally, several companies are evaluating new formulations of existing compounds and other compounds for the treatment of insomnia.

Manufacturing

We have entered into a non-exclusive manufacturing services agreement with Patheon for the manufacture of commercial quantities of our Silenor 3 mg and 6 mg tablets. Although we are not required to purchase any minimum quantity of Silenor under the agreement, we have agreed to purchase from Patheon not less than specified percentages of our total annual commercial requirements from all suppliers of Silenor, which vary depending upon annual volume. The agreement provides for an initial five-year term beginning upon commencement of the manufacturing services, and thereafter automatically continues for successive twelve-month terms unless terminated by written notice at least eighteen months prior to the end of the then-current term. Either party may terminate the agreement upon written notice if the other party has failed to remedy a material breach of any of its representations, warranties or other obligations under the agreement within 60 days following receipt of written notice of such breach. In addition, either party may immediately terminate the agreement upon written notice if (1) the other party is declared insolvent or bankrupt by a court of competent jurisdiction, (2) a voluntary petition of bankruptcy is filed in any court of competent jurisdiction by such other party or (3) the agreement is assigned by such other party for the benefit of creditors. We may terminate the agreement upon 30 days prior written notice in the event that any governmental agency takes any action, or raises any objection, that prevents us from importing, exporting, purchasing or selling the product candidate. In addition, we may terminate the agreement upon twelve months’ prior written notice in connection with our partnering, collaboration, licensing, sublicensing, co-promotion, sale or divestiture of rights to the product candidate, provided that no such termination shall be effective before the third anniversary of the commencement date.

We have also entered into agreements with Plantex USA, Inc. to manufacture our supply of doxepin active pharmaceutical ingredient and with Anderson Packaging, Inc. to package Silenor finished products, and we have another agreement in place for the supply of a key ingredient contained in our formulation for Silenor. In August 2008, we entered into an amendment to our supply agreement providing us with the exclusive right to use this ingredient in combination with doxepin. Pursuant to the amended supply

agreement, we made an upfront license payment of $0.2 million and are obligated to pay a royalty on worldwide net sales of Silenor beginning as of the expiration of the statutory exclusivity period for Silenor in each country in which Silenor is marketed. Such royalty is only payable if one or more patents under the license agreement continue to be valid in each such country and a patent relating to our formulation for Silenor has not issued in such country.

We intend to sell any products we market through pharmaceutical wholesalers, who in turn will seek to distribute the products to retail pharmacies, mail order pharmacies, hospitals and other institutional customers. We have retained or intend to retain third-party service providers to perform a variety of functions related to the distribution of our products, including logistics management, sample accountability, storage and transportation.

Government Regulation

Governmental authorities in the United States and other countries extensively regulate the testing, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution, among other things, of pharmaceutical products. In the United States, the FDA, under the Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations, subjects pharmaceutical products to rigorous review. If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or allow us to manufacture or market our products, and we may be criminally prosecuted.

We and our manufacturers and CROs may also be subject to regulations under other federal, state, and local laws, including the Occupational Safety and Health Act, the Environmental Protection Act, the Clean Air Act and import, export and customs regulations as well as the laws and regulations of other countries.

FDA Approval Process

To obtain approval of a new product from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product and proposed labeling, including a proposed proprietary name for the product. The testing and collection of data and the preparation of necessary applications are expensive and time-consuming. The FDA may not act quickly or favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing our products.

The process required by the FDA before a new drug may be marketed in the United States generally involves the following: completion of non-clinical laboratory and animal testing in compliance with FDA regulations, submission of an IND, which must become effective before human clinical trials may begin, performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use, and submission and approval by the FDA of an NDA. The sponsor typically conducts human clinical trials in three sequential phases, but the phases may overlap. In Phase 1 clinical trials, the product is tested in a small number of patients or healthy volunteers, primarily for safety at one or more dosages. In Phase 2 clinical trials, in addition to safety, the sponsor evaluates the efficacy of the product on targeted indications, and identifies possible adverse effects and safety risks in a patient population. Phase 3 clinical trials typically involve testing for safety and clinical efficacy in an expanded population at geographically-dispersed test sites.

Clinical trials must be conducted in accordance with the FDA’s good clinical practices requirements. The FDA may order the partial, temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The institutional review board, or IRB, generally must approve the clinical trial design and patient informed consent at each clinical site and may also require the clinical trial at that site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

The applicant must submit to the FDA the results of the non-clinical and clinical trials, together with, among other things, detailed information on the manufacture and composition of the product and proposed labeling, in the form of an NDA, including payment of a user fee, unless the applicant qualifies for a waiver of the user fee. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the policies agreed to by the FDA under The Prescription Drug User Fee Act of 1992, or PDUFA, the FDA has ten months in which to complete its review of a standard NDA and respond to the applicant. The review process and the PDUFA goal date may be extended by three months if the FDA requests or the NDA sponsor otherwise provides additional information or clarification regarding information already provided in the submission within the three months prior to the PDUFA goal date. If the FDA’s evaluations of the NDA and the clinical and manufacturing procedures and facilities are favorable, the FDA

may issue an approval letter, authorizing commercial marketing of the drug for a specified indication. If the FDA is not sufficiently satisfied with the information in the NDA to issue an approval letter, the FDA may issue a complete response letter, which usually will describe all of the specific deficiencies that the FDA has identified in the NDA and when possible, recommend actions that the NDA sponsor may take to address the identified deficiencies.

On March 18, 2010, the FDA notified us that it approved our NDA for Silenor 3 mg and 6 mg tablets for the treatment of insomnia characterized by difficulty with sleep maintenance.

Section 505(b)(1) New Drug Applications

The approval process described above is premised on the applicant being the owner of, or having obtained a right of reference to, all of the data required to prove the safety and effectiveness of a drug product. This type of marketing application, sometimes referred to as a “full” or “stand-alone” NDA, is governed by Section 505(b)(1) of the Federal Food, Drug, and Cosmetic Act. A Section 505(b)(1) NDA contains full reports of investigations of safety and effectiveness, which includes the results of non-clinical studies and clinical trials, together with detailed information on the manufacture and composition of the product, in addition to other information.

Section 505(b)(2) New Drug Applications

As an alternate path to FDA approval for new indications, formulations or strengths of previously-approved products, a company may file a Section 505(b)(2) NDA, instead of a “stand-alone” or “full” NDA filing under Section 505(b)(1) as described above. Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The Hatch-Waxman Amendments permit the applicant to rely upon the FDA’s findings of safety and effectiveness for an approved product or on published information. We submitted our NDA for Silenor under Section 505(b)(2), and as such it relied, in part, on the FDA’s previous findings of safety and effectiveness for doxepin.

To the extent that the Section 505(b)(2) applicant is relying on the FDA’s findings for an already-approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book publication. Specifically, the applicant must certify that: (1) the required patent information relating to the listed patent has not been filed in the NDA for the approved product; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or will not be infringed by the manufacture, use or sale of the new product. A certification that the new product will not infringe the already approved product’s Orange Book-listed patents or that such patents are invalid is called a paragraph IV certification. If the applicant does not challenge the listed patents, the Section 505(b)(2) application will not be approved until all the listed patents claiming the referenced product have expired. The Section 505(b)(2) application may also not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired. With respect to Silenor, there are no patents listed in the FDA’s Orange Book publication relating to doxepin that have not expired, and there is no non-patent exclusivity that conflicted with our NDA. As a result, we did not submit a paragraph IV certification in connection with our NDA submission for Silenor.

Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If these companies successfully challenge the FDA’s interpretation of Section 505(b)(2), the FDA may be required to change its interpretation of Section 505(b)(2). This could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.

The Hatch-Waxman Act

Under the Hatch-Waxman Act, newly-approved drugs and indications benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, meaning that the FDA has not previously approved any other new drug containing the same active moiety. Hatch-Waxman prohibits the submission of an abbreviated new drug application, or ANDA, or a Section 505(b)(2) NDA for another version of such drug during the five-year exclusive period; however, as explained above, submission of an ANDA or Section 505(b)(2) NDA containing a paragraph IV certification is permitted after four years, which may trigger a 30-month stay of

approval of the ANDA or Section 505(b)(2) NDA. Protection under Hatch-Waxman will not prevent the submission or approval of another full NDA; however, the subsequent applicant would be required to conduct its own non-clinical and adequate and well-controlled clinical trials to demonstrate safety and effectiveness. The Hatch-Waxman Act also provides three years of marketing exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2) NDAs, for, among other things, new indications, formulations, or strengths of an existing drug, if new clinical investigations that were conducted or sponsored by the applicant are essential to the approval of the application. We received three years of marketing exclusivity for Silenor.

Pediatric Exclusivity

The Best Pharmaceuticals for Children Act, which was signed into law January 4, 2002, and which reauthorized Section 111 of the 1997 FDA Modernization Act, provides in some cases an additional six months of exclusivity for new or marketed drugs for specific pediatric studies conducted at the written request of the FDA. PREA authorizes the FDA to require pediatric studies for drugs to ensure the drugs’ safety and efficacy in children. PREA requires that certain NDAs or supplements to NDAs contain data assessing the safety and effectiveness for the claimed indication in all relevant pediatric subpopulations. Dosing and administration must be supported for each pediatric subpopulation for which the drug is safe and effective. The FDA may also require this data for approved drugs that are used in pediatric patients for the labeled indication, or where there may be therapeutic benefits over existing products. The FDA may grant deferrals for submission of data, or full or partial waivers from PREA. We received a waiver from PREA requirements for children below age 6, and a deferral of submission of final pediatric study data until March 2015 for children aged 6 to 16.

Other Regulatory Requirements

Any approved product that we market may also be subject to a number of post-approval regulatory requirements. If we seek to make certain changes to an approved product, such as promoting or labeling a product for a new indication, making certain manufacturing changes or product enhancements or adding labeling claims, we will need FDA review and approval before the change can be implemented. While physicians may use products for indications that have not been approved by the FDA, we may not label or promote the product for an indication that has not been approved. Securing FDA approval for new indications or product enhancements and, in some cases, for manufacturing and labeling claims, is generally a time-consuming and expensive process that may require us to conduct clinical trials under the FDA’s IND regulations. Even if such studies are conducted, the FDA may not approve any change in a timely fashion, or at all. In addition, adverse experiences associated with use of the products must be reported to the FDA, and FDA rules govern how we can label, advertise or otherwise commercialize our products.

There are post-marketing safety surveillance requirements that we will need to meet to continue to market an approved product. The FDA also may, in its discretion, require additional post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the sale or use of these products. The FDA has required us to develop a REMS, to ensure that the benefits of Silenor outweigh its risks. A REMS can include information to accompany the product, such as a patient package insert or a medication guide, a communication plan, elements to assure safe use, and an implementation system, and must include a timetable for assessment of the REMS. Our REMS for Silenor consists of a medication guide and a timetable for assessment of its effectiveness. In addition, the FDA may require modifications to the REMS at a later date if warranted by new safety information. Any future requirements imposed by the FDA may require substantial expenditures.

The FDA has also requested that all manufacturers of sedative-hypnotic drug products modify their product labeling to include stronger language concerning potential risks. These risks include severe allergic reactions and complex sleep-related behaviors, which may include sleep-driving. The FDA also recommended that the drug manufacturers conduct clinical studies to investigate the frequency with which sleep-driving and other complex behaviors occur in association with individual drug products. Our approved label for Silenor includes warnings relating to risks of complex sleep behaviors.

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal health care program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid or other federally financed health care programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal health care programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other health care companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. In addition, we and the manufacturers upon which we rely for the manufacture of our products are subject to requirements that drugs be manufactured, packaged and labeled in conformity with current good manufacturing practice, or cGMP. To comply with cGMP requirements, manufacturers must continue to spend time, money and effort to meet requirements relating to personnel, facilities, equipment, production and process, labeling and packaging, quality control, record-keeping and other requirements. The FDA periodically inspects drug manufacturing facilities to evaluate compliance with cGMP requirements.

Also, as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. This practice is regulated by the FDA and other governmental authorities, including, in particular, requirements concerning record-keeping and control procedures.

There have been a number of other legislative and regulatory proposals aimed at changing the healthcare system and pharmaceutical industry, including reductions in the cost of prescription products, changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products, proposals concerning reimportation of pharmaceutical products and proposals concerning safety matters. For example, in an attempt to protect against counterfeit drugs, the federal government and numerous states have enacted pedigree legislation. In particular, California has enacted legislation that requires development of an electronic pedigree to track and trace each prescription drug at the saleable unit level through the distribution system. California’s electronic pedigree requirement is scheduled to take effect beginning in January 2015.

Outside of the United States, our ability to market our products will also depend on receiving marketing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all of the risks associated with the FDA approval process described above. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country.

Third-Party Reimbursement and Pricing Controls

In the United States and elsewhere, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. It will be time-consuming and expensive for us or our strategic collaborators to go through the process of seeking reimbursement from Medicare and private payors. Our products may not be considered cost effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis.

In many foreign markets, including the countries in the European Union, pricing of pharmaceutical products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control.

While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability.

Employees

As of March 1, 2010, we had five employees, consisting of drug development and manufacturing, regulatory affairs, marketing and administration. We anticipate adding additional personnel as we continue to undertake activities to prepare for the commercialization of Silenor.

Available Information

We make available free of charge on or through our internet website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Our internet address is www.somaxon.com. Information is also available through the Securities and Exchange Commission’s website at www.sec.gov or is available at the Securities and Exchange Commission’s Public Reference Room located at 100 F Street, NE, Washington DC, 20549. Information on the operation of the Public Reference Room is available by calling the Securities and Exchange Commission at 800-SEC-0330.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this report, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We will require substantial additional funding and may be unable to raise capital when needed, which could force us to delay, reduce or eliminate planned activities or result in our inability to continue as a going concern.

We are a development stage company with no revenues, and our operations to date have generated substantial needs for cash. We expect our negative cash flows from operations to continue until we are able to generate significant cash flows from the commercialization of Silenor.

In July 2009, we completed a private placement of 5.1 million shares of our common stock at a price of $1.05 per share and seven-year warrants to purchase up to 5.1 million additional shares of our common stock, exercisable in cash or by net exercise at a price of $1.155 per share, for aggregate gross proceeds of $6.0 million and net proceeds of $5.7 million after deducting offering costs of $0.3 million. We believe, based on our current operating plan, that our cash, cash equivalents and marketable securities as of December 31, 2009 will be sufficient to fund our operations through the second quarter of 2010. We will need to obtain additional funds to finance our operations beyond that point.

The commercialization activities relating to Silenor we undertake are likely to result in the need for substantial additional funds. Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:

	•		the terms and timing of any collaborative, licensing and other arrangements that we may establish;
	•		the costs of establishing or contracting for sales and marketing and other commercial capabilities, if required;
	•		the extent to which we acquire or in-license new products, technologies or businesses;
	•		the rate of progress and cost of our non-clinical studies, clinical trials and other development activities;
	•		the scope, prioritization and number of development programs we pursue;
	•		the effect of competing technological and market developments; and
	•		the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

We intend to obtain any additional funding we require through strategic relationships, public or private equity or debt financings, assigning receivables or royalty rights, or other arrangements and cannot assure that such funding will be available on reasonable terms, or at all.

If we are unsuccessful in raising additional required funds, we may be required to delay, scale-back or eliminate plans or programs relating to our business, relinquish some or all rights to Silenor, renegotiate less favorable terms with respect to such rights than we would otherwise choose or cease operating as a going concern. In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management, and may result in unfavorable results that could further adversely impact our financial condition.

If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

The report of our registered public accounting firm for the year ended December 31, 2009 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investment.

Our success is dependent on the success of Silenor (doxepin).

To date the majority of our resources have been focused on the development of Silenor, and substantially all of our resources are now focused on preparing for the commercialization of Silenor. Our ability to generate product revenue in the near term will depend solely on the success of this product. Accordingly, any failure or significant delay in the commercialization of Silenor will have a substantial adverse impact on our business.

Even though Silenor received regulatory approval, it will still be subject to substantial ongoing regulation.

Even though U.S. regulatory approval has been obtained for Silenor, the FDA has imposed restrictions on its indicated uses or marketing and imposed ongoing requirements for post-approval studies or other activities. For example, the approved use of Silenor is limited to the treatment of insomnia characterized by sleep maintenance difficulty. In addition, the FDA has required us to implement a REMS consisting of a medication guide and a timetable for assessment of its effectiveness. We are also required to complete a standard clinical trial assessing the safety and efficacy of Silenor in children aged 6 to 16 pursuant to PREA, and to submit final results of this trial by March 2015. We also intend to complete and submit the results of the standard two-year carcinogenicity study that the FDA requested us to conduct in May 2006. We initiated our two-year rat carcinogenicity study in August 2007, and we expect the study report in the second quarter of 2010. Any issues relating to these restrictions or requirements could have an adverse impact on our ability to achieve market acceptance of Silenor and generate revenues from its sale.

Recently, the FDA has also requested that all manufacturers of sedative-hypnotic drug products modify their product labeling to include stronger language concerning potential risks. These risks include severe allergic reactions and complex sleep-related behaviors, which may include sleep-driving. The FDA also recommended that the drug manufacturers conduct clinical studies to investigate the frequency with which sleep-driving and other complex behaviors occur in association with individual drug products. Our approved label for Silenor includes warnings relating to risks of complex sleep behaviors.

Silenor will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information. For example, as a condition to approval of the NDA for Silenor, the FDA has required us to develop a REMS, to ensure that the benefits of Silenor outweigh its risks. A REMS can include information to accompany the product, such as a patient package insert or a medication guide, a communication plan, elements to assure safe use, and an implementation system, and must include a timetable for assessment of the REMS. Our REMS for Silenor consists of a medication guide and a timetable for assessment of its effectiveness. In addition, the FDA may require modifications to the REMS at a later date if warranted by new safety information. Any future requirements imposed by the FDA may require substantial expenditures.

Approved products, manufacturers and manufacturers’ facilities are subject to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or on us, including requiring withdrawal of the product from the market.

If our operations relating to Silenor fail to comply with applicable regulatory requirements, a regulatory agency may:

•

issue warning letters or untitled letters;

	•		impose civil or criminal penalties, including fines;
	•		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.

The pending non-clinical requirements requested by the FDA for Silenor could lead to additional restrictions or requirements.

The data from all of our clinical trials for Silenor were included in our NDA submission for Silenor. In addition, our NDA submission for Silenor included the results from several completed non-clinical studies that were required by the FDA, including our genotoxicity and reproductive toxicology studies and our 26-week transgenic mouse carcinogenicity study. The FDA requested that we conduct one additional non-clinical study, which is an ongoing two-year rat carcinogenicity study, and we intend to submit the results from this study post-approval.

We initiated our two-year rat carcinogenicity study in August 2007, and we expect the study report in the second quarter of 2010. As with any other non-clinical data, the results of our pending non-clinical carcinogenicity study for Silenor are subject to varying interpretations, and any resulting toxicology questions from the FDA could result in a suspension of our regulatory approval, adversely affect our product labeling or lead to additional studies. Any suspension of our regulatory approval would adversely impact our ability to derive revenues from the sale of Silenor, modifications to our product labeling could adversely impact usage and sales of Silenor, and additional non-clinical work could result in substantial additional costs.

Although we are pursuing discussions with other companies to facilitate the commercialization of Silenor, we may be unable to complete a collaboration or other strategic transaction on acceptable terms, or at all.

The commercial success of Silenor will largely depend on gaining access to the highest prescribing physicians of insomnia treatments. We continue to engage in discussions with third parties with the goal of entering into a collaboration or other strategic transaction relating to the commercialization of Silenor. The outcome of this process and the structure of any resulting transaction could vary depending on the interest and objectives of the parties. However, we cannot assure you that we will complete any collaboration or other strategic transaction, or that, if completed, any collaboration or other strategic transaction will be successful or on attractive terms.

Compared to a commercialization strategy that involves a third party collaborator, the commercialization of Silenor by us without such a collaborator could require substantially greater resources on our part and potentially adversely impact the timing and results of a launch of the product.

We also face competition in our search for parties with whom we may enter into a collaboration or other strategic transaction. These competitors may have access to greater financial resources than us and may have greater expertise in identifying, evaluating and consummating a collaboration or other strategic transaction. Moreover, we may devote resources to potential collaborations or other strategic transactions that are never completed, or we may fail to realize the anticipated benefits of such efforts.

If we are able to complete a collaboration or other strategic transaction, depending on the timing of the transaction and the outlook of the other party to the transaction, such other party could materially impact our plans for commercializing Silenor. Such modifications could result in additional costs or delays in any commercial launch of Silenor.

We are preparing for the commercialization of Silenor, and we will need to expend significant resources and recruit personnel to successfully commercialize Silenor.

We have undertaken and continue to undertake activities to prepare for the commercial launch of Silenor. We have developed a marketing strategy that will focus on high-prescribing physicians in the U.S. Even though several of our employees have been involved in the successful launch of new pharmaceutical products, as a company, we have limited commercial infrastructure and experience. We have not commercialized any products to date.

The commercialization process will require the expenditure by us of substantial financial and other resources. We intend to seek additional funding through various means. There can be no assurance, however, that such financing will be available on reasonable terms, if at all. If adequate funds are not available, we may be required to delay or cancel planned commercialization activities, or the effectiveness of such activities may be adversely impacted.

We may pursue a relationship with a contract sales organization to facilitate our sales efforts, and we may not be able to identify contract sales organizations with adequate sales capabilities or capacity. In addition, we may not be able to enter into agreements with these entities on commercially reasonable or acceptable terms, or at all. As a result, we may not be able to build a sales force of sufficient size or quality to effectively market and sell our products.

To the extent that we enter into any such arrangements with third parties, any revenues we receive from sales of our products in those markets will depend upon the efforts of such third parties, which in many instances will not be within our control. If any such contract sales organization fails to devote sufficient time and resources to Silenor, or if its performance is substandard or does not comply with applicable laws or regulations, the commercial success of Silenor could be adversely affected.

The patent rights that we have in-licensed covering Silenor are limited to certain low-dosage strengths in the United States, and our market opportunity for this product may be limited by the lack of patent protection for higher dosage strengths for which generic formulations are available and the lack of patent protection in other territories.

Although we have an exclusive, worldwide license for Silenor for the treatment of insomnia through the life of the last patent to expire, which is expected to occur in 2020, we do not have patent protection for Silenor in any jurisdiction outside the United States. In addition, although our in-licensed patent for the treatment of transient insomnia is scheduled to expire in 2020, our in-licensed patent for the treatment of chronic insomnia is scheduled to expire in March 2013. Accordingly, in the absence of additional patents or other alternatives to obtain additional exclusivity rights for Silenor, a competitor could attempt to market doxepin for a chronic insomnia indication as early as March 2013. Furthermore, the patent protection in the United States for Silenor for the treatment of insomnia is limited to dosages ranging from a lower limit of 0.5 mg to various upper limits up to 20 mg of the active ingredient, doxepin. Doxepin is prescribed at dosages ranging from 75 mg to 300 mg daily for the treatment of depression and anxiety and is available in generic form in strengths as low as 10 mg in capsule form, as well as in a concentrated liquid form dispensed by a marked dropper and calibrated for 5 mg. As a result, we may face competition from the off-label use of these or other dosage forms of generic doxepin. Off-label use occurs when a drug that is approved by the FDA for one indication is prescribed by physicians for a different, unapproved indication.

In addition, we do not have patent protection for Silenor in any jurisdiction outside the United States. Others may attempt to commercialize low-dose doxepin in the European Union, Canada, Mexico or other markets where we do not have patent protection for Silenor. Due to the lack of patent protection for doxepin in territories outside the United States and the potential for correspondingly lower prices for the drug in those markets, it is possible that patients will seek to acquire low-dose doxepin in those other territories. The off-label use of generic doxepin in the United States or the importation of doxepin from foreign markets could adversely affect the commercial potential for Silenor and adversely affect our overall business and financial results. We have submitted additional patent applications for Silenor in the United States and outside the United States, but we cannot assure that these will result in issued patents or additional protection in the United States or other jurisdictions.

If Silenor or any other product candidate we commercialize does not achieve broad market acceptance, the revenues that we generate from its sale will be limited.

The commercial success of Silenor or any other product candidate which we commercialize will depend upon the acceptance of the product by the medical community and reimbursement of the product by third-party payors, including government payors. The degree of market acceptance of any approved product will depend on a number of factors, including:

	•		our ability to provide acceptable evidence of safety and efficacy;
	•		relative convenience and ease of administration;
	•		prevalence and severity of any adverse side effects;

	•		limitations or warnings contained in a product’s FDA-approved labeling;
	•		availability of alternative treatments, including, in the case of Silenor, a number of competitive products already approved for the treatment of insomnia or expected to be commercially launched in the future;
	•		pricing and cost effectiveness;
	•		off-label substitution by chemically similar or equivalent products;
	•		effectiveness of our or our collaborators’ sales, marketing and distribution strategies; and
	•		our ability to obtain sufficient third-party coverage or reimbursement.

If Silenor or any other product candidate that we commercialize does not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue from the product, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of Silenor or any other product candidate that we commercialize may require significant resources and may never be successful.

We are subject to uncertainty relating to health care reform measures, reimbursement policies and regulatory proposals which, if not favorable to Silenor or any other product candidate that we commercialize, could hinder or prevent our commercial success.

Our ability to successfully commercialize Silenor and any other product to which we obtain rights, with or without a partner, will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish appropriate coverage and reimbursement levels for the cost of our products and related treatments. The continuing efforts of the government, insurance companies, managed care organizations and other payors of health care services to contain or reduce costs of health care may adversely affect:

	•		the ability to set a price we believe is fair for our products;
	•		the ability to generate revenues and achieve or maintain profitability;
	•		the future revenues and profitability of our potential customers, suppliers and collaborators; and
	•		the availability of capital.

In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription drugs and the reform of the Medicare and Medicaid systems. For example, the Medicare Prescription Drug Improvement and Modernization Act of 2003 provides a new Medicare prescription drug benefit which became effective in January 2006 and mandates other reforms. While we cannot predict the full outcome of the implementation of this legislation, it is possible that the new Medicare prescription drug benefit, which is managed by private health insurers and other managed care organizations, will result in additional government reimbursement for prescription drugs, which may make some prescription drugs more affordable but may further exacerbate industry-wide pressure to reduce prescription drug prices.

It is also possible that other legislative proposals will be adopted, particularly in view of the current presidential administration. For example, the current presidential administration has proposed a budget that would include significant amounts to finance the reform of the U.S. healthcare system. The U.S. Congress is considering a number of legislative and regulatory proposals with an objective of ultimately reducing healthcare costs by, among other things, limiting the level of reimbursement for pharmaceuticals. Legislative and regulatory actions under consideration in the U.S. include health care reform initiatives that could significantly alter the market for pharmaceuticals (such as private health insurance expansion, the creation of competing public health insurance plans, a variety of proposals that would reduce government expenditures for prescription drugs to help finance healthcare reform, or the eventual transition of the U.S. multiple payor system to a single payor system). Other actions under consideration include proposals for government intervention in pharmaceutical pricing, changes in government reimbursement, an

accelerated approval process for “follow-on” biologics, legalization of commercial drug importation into the U.S., and involuntary approval of medicines for OTC use. As a result of new proposals, we may determine to change our current manner of operation or change our contract arrangements, any of which could harm our ability to operate our business efficiently, obtain collaborators and raise capital. In addition, in certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may in some cases be unavailable or insufficient.

Many managed care organizations negotiate the price of medical services and products and develop formularies which establish pricing and reimbursement levels. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization’s patient population. The process for obtaining coverage can be lengthy and time-consuming, and we expect that it could take several months before a particular payor initially reviews our product and makes a decision with respect to coverage. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic or OTC products, our overall business and financial condition could be adversely affected.

In addition, third-party payors are increasingly challenging the prices charged for medical products and services. Also, current and any future legislative proposals to reform health care or reduce government insurance programs may result in lower prices for Silenor and any other product candidate that we commercialize or exclusion of our product candidates from coverage and reimbursement programs. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could harm our ability to market our products and significantly reduce our revenues from the sale of any approved product.

Further, there have been a number of legislative and regulatory proposals concerning reimportation of pharmaceutical products and safety matters. For example, in an attempt to protect against counterfeit drugs, the federal government and numerous states have enacted pedigree legislation. In particular, California has enacted legislation that requires development of an electronic pedigree to track and trace each prescription drug at the saleable unit level through the distribution system. California’s electronic pedigree requirement is scheduled to take effect beginning in January 2015. Compliance with California and future federal or state electronic pedigree requirements will likely require an increase in our operational expenses and will likely be administratively burdensome.

We expect intense competition in the insomnia marketplace for Silenor and any other product to which we acquire rights, and new products may emerge that provide different and/or better therapeutic alternatives for the disorders that our products are intended to treat.

We are developing Silenor for the treatment of insomnia, which will compete with well established drugs for this indication, including the branded and generic versions of Sanofi-Synthélabo, Inc.’s Ambien, King Pharmaceuticals, Inc.’s Sonata, and Lunesta, marketed by Sepracor Inc., a wholly-owned subsidiary of Dainippon Sumitomo Pharma Co., Ltd., all of which are GABA-receptor agonists, Takeda Pharmaceuticals North America, Inc.’s Rozerem, a melatonin receptor antagonist, and Sanofi-Synthélabo Inc.’s Ambien CR, a controlled-release formulation of the current GABA-receptor agonist, Ambien.

A number of companies are marketing reformulated versions of previously approved GABA-receptor agonists. In March 2009, Meda AB and Orexo AB received approval from the FDA for Edluar, formerly known as Sublinox, a sublingual tablet formulation of zopidem, for the short-term treatment of insomnia. Meda and Orexo launched this product in the U.S. in the third quarter of 2009.

In December 2008, NovaDel Pharma, Inc. received approval from the FDA for ZolpiMist, an oral mist formulation of zolpidem, for the short-term treatment of insomnia characterized by difficulties with sleep initiation. In November 2009, NovaDel and ECR Pharmaceuticals Company, Inc., a wholly owned subsidiary of Hi-Tech Pharmacal Co., Inc., entered into an exclusive license and distribution agreement to commercialize and manufacture ZolpiMist in the United States and Canada. ECR Pharmaceuticals announced that it plans to launch the product in the United States in the first half of 2010.

In addition to the currently approved products for the treatment of insomnia, a number of new products are expected to enter the insomnia market over the next several years. Transcept Pharmaceuticals, Inc. submitted an NDA for Intermezzo, a low-dose sublingual tablet formulation of zolpidem in 2008, and in October 2009, Transcept announced that it received a complete response letter from the FDA relating to such NDA. Transcept held a meeting with the FDA in January 2010 to discuss the implications of the complete response letter, and we do not know the impact that the complete response letter or this meeting will have on the potential approval of this product candidate. Transcept and Purdue Pharmaceutical Products L.P. have entered into an exclusive license and collaboration agreement to commercialize Intermezzo in the United States.

Alexza Pharmaceuticals, Inc. has announced positive results from a Phase 1 clinical trial of an inhaled formulation of zaleplon, the active pharmaceutical ingredient in Sonata. Somnus Therapeutics, Inc. has announced positive results from a Phase 1 clinical trial of a delayed-release formulation of zaleplon.

Sanofi-Aventis submitted an NDA for Ciltyri (eplivanserin), a 5HT2 antagonist, to the FDA for the treatment of insomnia during the fourth quarter of 2008. In September 2009, Sanofi-Aventis announced that it received a complete response letter from the FDA relating to such NDA, and in December 2009 Sanofi-Aventis announced that it was discontinuing the eplivanserin development program.

Vanda Pharmaceuticals Inc. has completed two Phase 3 clinical trials of VEC-162, a melatonin receptor agonist. Vanda has announced that it intends to submit a marketing application for this product candidate in the United States in mid-2011.

Takeda Pharmaceuticals North America, Inc. has conducted a clinical study to evaluate the administration of a combination of Takeda’s product Rozerem and 3 mg of doxepin in patients with insomnia. We are unaware of the results of this trial.

Merck & Co., Inc. has completed two Phase 3 clinical trials of esmirtazapine, an H1 antagonist, for the treatment of insomnia. In February 2010, Merck announced that it was terminating its development program for esmirtazapine for strategic reasons. Merck also has MK-4305, an orexin antagonist, in Phase 3 clinical trials for the treatment of insomnia.

Actelion Pharmaceuticals Ltd. completed a Phase 3 clinical trial of almorexant, an orexin antagonist, in December 2009. Based on the results of that clinical trial, Actelion announced that it was preparing further late-stage trials in adults and elderly patients to evaluate the long-term efficacy and safety of this product candidate. Actelion and GlaxoSmithKline have entered into a collaboration relating to almorexant under which GlaxoSmithKline received exclusive, worldwide rights to co-develop and co-commercialize almorexant together with Actelion.

Several other companies, including Sepracor, are evaluating 5HT2 antagonists as potential hypnotics, and Eli Lilly and Company is evaluating a potential hypnotic that is a dual histamine/5HT2 antagonist. Additionally, several other companies are evaluating new formulations of existing compounds and other compounds for the treatment of insomnia.

Furthermore, generic versions of Ambien and Sonata have been launched and are priced significantly lower than approved, branded insomnia products. Sales of all of these drugs may reduce the available market for, and could put downward pressure on, the price we are able to charge for any product developed by us for this indication, which could ultimately limit our ability to generate significant revenues.

The biotechnology and pharmaceutical industries are subject to rapid and intense technological change. We face, and will continue to face, competition in the development and marketing of Silenor or any other product candidate to which we acquire rights from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies. There can be no assurance that developments by others, including the development of other drug technologies and methods of preventing the incidence of disease, will not render Silenor or any other product candidate that we develop obsolete or noncompetitive.

Compared to us, many of our potential competitors have substantially greater:

	•		capital resources;
	•		research and development resources, including personnel and technology;
	•		regulatory experience;
	•		experience conducting non-clinical studies and clinical trials, and related resources;
	•		expertise in prosecution of intellectual property rights; and
	•		manufacturing, distribution and sales and marketing resources and experience.

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we can or may obtain patent protection or other intellectual property rights or seek to invalidate or otherwise challenge our intellectual property rights, limiting our ability to develop or commercialize product candidates. Our competitors may also develop drugs that are more effective and useful and less costly than ours and may be more successful than we are in manufacturing and marketing their products.

In addition, manufacturing efficiency and marketing capabilities are likely to be significant competitive factors. We currently have no commercial manufacturing capability and limited sales and marketing infrastructure.

Restrictions on or challenges to our patent rights relating to our products and limitations on or challenges to our other intellectual property rights may limit our ability to prevent third parties from competing against us.

Our success will depend on our ability to obtain and maintain patent protection for Silenor and any other product candidate we develop, preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. The patent rights that we have in-licensed relating to Silenor are limited in ways that may affect our ability to exclude third parties from competing against us. In particular, we do not hold composition of matter patents covering the active pharmaceutical ingredients of Silenor. Composition of matter patents on active pharmaceutical ingredients are a particularly effective form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use or other type of limitation. As a result, competitors who obtain the requisite regulatory approval can offer products with the same active ingredients as our products so long as the competitors do not infringe any method of use or formulation patents that we may hold.

The principal patent protection that covers, or that we expect will cover, Silenor consists of method of use patents. This type of patent protects the product only when used or sold for the specified method. However, this type of patent does not limit a competitor from making and marketing a product that is identical to our product for an indication that is outside of the patented method. Moreover, physicians may prescribe such a competitive identical product for off-label indications that are covered by the applicable patents. Although such off-label prescriptions may induce or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute.

Because products with active ingredients identical to ours have been on the market for many years, there can be no assurance that these other products were never used off-label or studied in such a manner that such prior usage would not affect the validity of our method of use patents. Due to some prior art that we identified, we initiated a reexamination of one of the patents we have in-licensed covering Silenor, (specifically, U.S. Patent No. 5,502,047, “Treatment for Insomnia”) which claims the treatment of chronic insomnia using doxepin in a daily dosage of 0.5 mg to 20 mg and expires in March 2013. The reexamination proceedings terminated and the USPTO issued a reexamination certificate narrowing certain claims, so that the broadest dosage ranges claimed by us are 0.5 mg to 20 mg for otherwise healthy patients with chronic insomnia and for patients with chronic insomnia resulting from depression, and 0.5 mg to 4 mg for all other chronic insomnia patients. We also requested reissue of this same patent to consider some additional prior art and to add intermediate dosage ranges below 10 mg. In two office actions relating to this reissue request, the USPTO raised no prior art objections to 32 of the 34 claims we were seeking and raised a prior art objection to the other two, as well as some technical objections. Each of the claims objected to by the USPTO related to dosages above 10 mg. After further review of the prior art submitted, the USPTO withdrew all of its prior art objections. We then determined that the proposed addition of the intermediate dosage ranges and the resolution of the technical objections no longer warranted continuation of the reissue proceeding. As a result, we elected not to continue that proceeding.

We also have multiple internally developed pending patent applications. No assurance can be given that the USPTO or other applicable regulatory authorities will allow pending applications to result in issued patents with the claims we are seeking, or at all.

Patent applications in the United States are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several months. As a result, we cannot be certain that the inventors of the issued patents that we in-licensed were the first to conceive of inventions covered by pending patent applications or that the inventors were the first to file patent applications for such inventions.

In addition, third parties may challenge our in-licensed patents and any of our own patents that we may obtain, which could result in the invalidation or unenforceability of some or all of the relevant patent claims, or could attempt to develop products utilizing the same active pharmaceutical ingredients as our products that do not infringe the claims of our in-licensed patents or patents that we may obtain.

If a third party files an NDA for a product containing doxepin for the treatment of insomnia at any time during which we have patents listed for Silenor in the FDA’s Orange Book publication, the applicant will be required to certify to the FDA concerning the listed patents. Specifically, the applicant must certify that: (1) the required patent information relating to the listed patent has not been filed in the NDA for the approved product; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or will not be infringed by the manufacture, use or sale of the new product. A certification that the new product will not infringe the Orange Book-listed patents for Silenor or that such patents are invalid is called a paragraph IV certification.

If the applicant has provided a paragraph IV certification to the FDA, the applicant must also send notice of the paragraph IV certification to us once the NDA has been accepted for filing by the FDA. We may then initiate a legal challenge to defend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving the NDA until the earliest of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the applicant. If we do not file a patent infringement lawsuit within the required 45-day period, the applicant’s NDA will not be subject to the 30-month stay.

We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our collaborators, employees and consultants. We also have invention or patent assignment agreements with our employees and certain consultants. There can be no assurance that inventions relevant to us will not be developed by a person not bound by an invention assignment agreement with us. There can be no assurance that binding agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by our competitors.

Litigation or other proceedings to enforce or defend intellectual property rights is often very complex in nature, may be expensive and time-consuming, may divert our management’s attention from our core business and may result in unfavorable results that could adversely impact our ability to prevent third parties from competing with us.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.

As of March 1, 2010 we had five full-time employees. The commercialization of Silenor will require us to recruit and train a substantial number of sales and marketing personnel. Our management and personnel, systems and facilities currently in place may not be adequate to support this or other future growth. Our need to effectively manage our operations, growth and various projects requires that we:

	•		manage our commercialization efforts effectively while carrying out our contractual obligations to collaborators and other third parties and complying with all applicable laws, rules and regulations;
	•		continue to improve our operational, financial and management controls, reporting systems and procedures; and
	•		attract and retain sufficient numbers of talented employees.

We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our commercialization goals.

If the manufacturers upon whom we rely fail to produce our products in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues.

We do not manufacture Silenor, and we do not plan to develop any capacity to do so. We have a contract with Patheon Pharmaceuticals Inc. to manufacture our future required clinical supplies, if any, of Silenor, and we have entered into a manufacturing and supply agreement with Patheon to manufacture our commercial supply of Silenor. We have also entered into agreements with Plantex USA, Inc. to manufacture our supply of doxepin active pharmaceutical ingredient and with Anderson Packaging, Inc. to package Silenor finished products, and we have another agreement in place for the supply of a key ingredient contained in our formulation for Silenor.

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Our manufacturers may not perform as agreed or may terminate their agreements with us. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to launch Silenor or any other product candidate that we commercialize or provide any product candidates to patients in our clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of our clinical trials, increase the costs associated with maintaining our clinical trial program and, depending upon the period of delay, require us to commence new clinical trials at significant additional expense or terminate the clinical trials completely. In addition, any delay or interruption in our ability to meet commercial demand for Silenor will result in the loss of potential revenues.

In addition, all manufacturers of pharmaceutical products must comply with current good manufacturing practice, or cGMP, requirements enforced by the FDA through its facilities inspection program. The FDA is also likely to conduct inspections of our manufacturers’ facilities as part of their review of any marketing applications we submit. These cGMP requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.

Moreover, our manufacturers and suppliers may experience difficulties related to their overall businesses and financial stability, which could result in delays or interruptions of our supply of Silenor. We do not have alternate manufacturing plans in place at this time. If we need to change to other manufacturers, the FDA and comparable foreign regulators must approve these manufacturers’ facilities and processes prior to our use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for production.

Any of these factors could cause us to delay or suspend clinical trials, regulatory submissions, required approvals or commercialization of Silenor or any other product candidate that we develop, or entail higher costs or result in our being unable to effectively commercialize our products. Furthermore, if our manufacturers failed to deliver the required commercial quantities of raw materials, including bulk drug substance, or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.

Materials necessary to manufacture Silenor or any other product candidate that we develop or commercialize may not be available on commercially reasonable terms, or at all, which may delay development and commercialization.

Although we have contracted with suppliers of doxepin and other key raw materials for Silenor, we largely rely on our manufacturers to purchase from third-party suppliers the other materials necessary to produce our product candidates. Suppliers may not sell these materials to our manufacturers at the time we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these materials by our manufacturers. If our manufacturers or we are unable to purchase these materials for Silenor or any other product candidate that we commercialize, the commercial launch would be delayed or there would be a shortage in supply, which would materially affect our ability to generate sales revenues. If our manufacturers are unable to obtain these materials for our non-clinical studies or clinical trials of any other product candidate that we develop, product testing and potential regulatory approval could be delayed or suspended, significantly impacting our development programs.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.

Our commercial success depends upon our ability, together with our collaborators, to develop, manufacture, market and sell Silenor or any other product candidates that we develop and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties,

exist in the fields in which we and our collaborators are developing products. As the biotechnology and pharmaceutical industry expands and more patents are issued, the risk increases that our operations may give rise to claims that our products infringe the patent rights of others. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our products or proprietary technologies may infringe.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our products and/or proprietary technologies infringe their intellectual property rights. If our products, proprietary technologies or their uses infringe any of these intellectual property rights, we or our collaborators could be required to pay damages and could be unable to commercialize our products or use our proprietary technologies unless we or they obtained a license. A license may not be available to us or our collaborators on acceptable terms, or at all. In addition, during litigation, the intellectual property rights holder could obtain a preliminary injunction or other equitable right which could prohibit us from making, using or selling our products, technologies or methods.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, but not limited to:

•

infringement and other intellectual property claims which, with or without merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

	•		substantial damages for infringement, including treble damages and attorneys’ fees, which we may have to pay if a court decides that the product at issue infringes on or violates the third party’s rights;
	•		a court prohibiting us from selling or licensing the product unless the third party licenses its product rights to us, which it is not required to do;
	•		if a license is available from the third party, we may have to pay substantial royalties, fees and/or grant cross-licenses to our products; and
	•		redesigning our products or processes so they do not infringe, which may not be possible or may require substantial funds and time.

No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering our products, technology or methods. Because of the substantial number of patents issued and patent applications filed in our field, we believe there is a risk that third parties may allege they have patent rights encompassing our products, technology or methods.

Silenor or any other product candidate that we develop may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or commercialization.

Undesirable side effects caused by Silenor or any other product candidate that we develop could interrupt, delay or halt clinical trials, result in the denial or suspension of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, or cause us to evaluate the future of our development programs. Any of these occurrences could delay or prevent us from commercializing Silenor or any other product candidate that we develop and generating resulting revenues from their sale. In addition, the FDA may require, or we may undertake, additional clinical trials to support the safety profile of Silenor or our proposed labeling for Silenor.

Silenor will be subject to continual review by the FDA, and we cannot assure you that newly discovered or developed safety issues will not arise. With the use of any marketed drug by a wide patient population, serious adverse events may occur from time to time that initially do not appear to relate to the drug itself, and only if the specific event occurs with some regularity over a period of time does the drug become suspect as having a causal relationship to the adverse event. Any safety issues could cause us to suspend or cease marketing of our approved products, cause us to modify how we market our approved products, subject us to substantial liabilities, and adversely affect our revenues and financial condition.

In addition, if we or others identify undesirable side effects caused by Silenor or any other product candidate that we commercialize:

	•		regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;
	•		regulatory authorities may withdraw their approval of the product or place restrictions on the way it is prescribed;
	•		we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product or implement a REMS;
	•		we may be subject to related liability; and
	•		our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the affected product, which in turn could delay or prevent us from generating significant revenues from its sale.

We face potential product liability exposure, and, if successful claims are brought against us, we may incur substantial liability for a product and may have to limit its commercialization.

The sale of approved products and the use of product candidates by us in clinical trials expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

	•		decreased demand for our products;
	•		impairment of our business reputation;
	•		withdrawal of clinical trial participants;
	•		costs of related litigation;
	•		substantial monetary awards to patients or other claimants;
	•		loss of revenues; and
	•		the inability or lack of commercial rationale to continue development or commercialization of Silenor or any other product candidate.

We have obtained limited product liability insurance coverage for our clinical trials with a $5 million annual aggregate coverage limit, and our insurance coverage may not reimburse us at all or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of Silenor or any other product we commercialize, but the cost of this coverage could be substantial. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

We may never receive approval or commercialize our products outside of the United States.

In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all

of the risks regarding FDA approval in the United States as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could limit the uses of the product candidate and have an adverse effect on potential royalties and product sales. Such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.

We have licensed Silenor from a third party. If we default on any of our obligations under that license, or if the licensor exercises a right to terminate the license, we could lose rights to Silenor.

We in-licensed rights to Silenor through an exclusive licensing arrangement, and we may enter into similar licenses in the future. Under our license agreement for Silenor, we are required to use commercially reasonable efforts to develop and commercialize Silenor. In addition, our licensor for Silenor has the contractual right to terminate the license agreement upon the breach by or a specified insolvency event involving us. In the event that our licensor for Silenor terminates the license agreement, even though we would maintain ownership of our clinical data and the other intellectual property we have developed relating to Silenor, we would be unable to continue our commercialization activities relating to Silenor and our business and financial condition would be materially harmed.

Our failure to successfully acquire, develop and market additional product candidates or approved products may impair our ability to grow.

As part of our growth strategy, we intend to selectively evaluate products and product candidates. Because we neither have, nor currently intend to establish, internal research capabilities, we would be dependent upon pharmaceutical and biotechnology companies, university scientists and other researchers to sell or license products to us. The success of this strategy will depend upon our ability to identify, select and acquire promising pharmaceutical product candidates and products.

The process of evaluating, proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.

Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot assure you that any products that we develop or approved products that we acquire will be manufactured or produced profitably, successfully commercialized or widely accepted in the marketplace.

If we acquire or in-license products and fail to successfully integrate them into our operations, we may incur unexpected costs and disruptions to our business.

As part of our growth strategy, we intend to selectively evaluate products and product candidates that we believe may be a strategic fit with our business. Future acquisitions, however, may entail numerous operational and financial risks, including:

	•		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.

We have limited resources to identify and execute the evaluation, acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. In particular, we may compete with larger pharmaceutical companies and other competitors in our efforts to establish new collaborations and in-licensing opportunities. These competitors likely will have access to greater financial resources than us and may have greater expertise in identifying and evaluating new opportunities. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.

We may not be able to manage our business effectively if we are unable to attract and retain key personnel.

We may not be able to attract or retain qualified management, scientific, clinical and commercial personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Diego, California area. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development or commercialization objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose any members of our senior management team, we may not be able to find suitable replacements, and our business may be harmed as a result.

We are highly dependent on the product acquisition, development, regulatory and commercialization expertise of our senior management. If we lose one or more of the members of our senior management team or other key employees, our ability to implement our business strategy successfully could be seriously harmed. Replacing key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel.

In addition, we have advisors who assist us in formulating our product development, clinical, regulatory and commercialization strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development or commercialization of products that may compete with ours.

Our clinical trials may fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval.

Even though Silenor has received regulatory approval, before obtaining regulatory approvals for the commercial sale of any other product candidate we develop, we must demonstrate through clinical trials that the product candidate is safe and effective for use in each target indication.

The results from clinical trials that we complete may not be predictive of results obtained in future clinical trials, and there can be no assurance that we will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or result in marketable products. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier studies. If any product candidate that we develop is not shown to be safe and effective in clinical trials, or if the FDA does not deem the product candidate to be sufficiently safe and effective to warrant marketing approval, our business, financial condition and results of operations would be materially harmed.

We may be subject to claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

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

Risks Related to Our Finances and Capital Requirements

Capital raising activities, such as issuing securities, incurring debt, assigning receivables or royalty rights or entering into collaborations or other strategic transactions, may cause dilution to existing stockholders, restrict our operations or require us to relinquish proprietary rights and may be limited by applicable laws and regulations.

In July 2009, we completed a private placement of 5.1 million shares of our common stock at a price of $1.05 per share and seven-year warrants to purchase up to 5.1 million additional shares of our common stock, exercisable in cash or by net exercise at a price of $1.155 per share, for aggregate gross proceeds of $6.0 million and net proceeds of $5.7 million after deducting offering costs of $0.3 million. We believe, based on our current operating plan, that our cash, cash equivalents and marketable securities as of December 31, 2009 will be sufficient to fund our operations through the second quarter of 2010. We will need to obtain additional funds to finance our operations beyond that point.

To the extent that we raise any required additional capital by issuing equity securities, our existing stockholders’ ownership will be diluted. Any such dilution of the holdings of our current stockholders may result in downward pressure on the price of our common stock.

Any debt, receivables or royalty financing we enter into may involve covenants that restrict our operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments.

Debt financing, receivables assignments, royalty interest assignments and other types of financing are often coupled with an equity component, such as warrants to purchase stock. For example, in connection with our July 2009 private placement of equity securities, we issued to the investors warrants to purchase 5.1 million shares of our common stock, 3.8 million of which have not been exercised as of March 18, 2010. In addition, in connection with our committed equity financing facility transaction with Kingsbridge and our secured loan transaction with Silicon Valley Bank and Oxford Finance Corporation, we issued to Kingsbridge a warrant to purchase 165,000 shares of our common stock, we issued to Silicon Valley Bank a warrant to purchase 80,000 shares of our common stock and we issued to Oxford Finance Corporation a warrant to purchase 159,000 shares of our common stock. To the extent that any of these warrants, or any additional warrants that we issue in the future, are exercised by their holders, dilution of our existing stockholders’ ownership interests will result.

If we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.

In addition, rules and regulations of the SEC or other regulatory agencies may restrict our ability to conduct certain types of financing activities, or may affect the timing of and the amounts we can raise by undertaking such activities. For example, under current SEC regulations, at any time during which the aggregate market value of our common stock held by non-affiliates, or our public float, is less than $75 million, the amount that we can raise through primary public offerings of securities in any twelve-month period using one or more registration statements on Form S-3 will be limited to an aggregate of one-third of our public float. As of March 18, 2010, our public float was greater than $75 million.

We have never generated revenues or been profitable, and we may not be able to generate revenues sufficient to achieve profitability and, we will need substantial additional financing to operate our business.

We are a development stage company and have not generated any revenues or been profitable since inception, and it is possible that we will not achieve profitability. We incurred net losses of $14.4 million for the year ended December 31, 2009, $37.2 million for the year ended December 31, 2008, and $26.4 million for the year ended December 31, 2007. We expect to continue to incur significant operating losses and capital expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve significant revenues, if any, or that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and adversely affected.

In addition, the report of our registered public accounting firm for the year ended December 31, 2009 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, it is likely that investors will lose all or a part of their investment.

Our quarterly operating results may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. The revenues we generate, if any, and our operating results will be affected by numerous factors, including:

	•		commercialization activities relating to Silenor or any other product candidate that we may commercialize, or commercialization activities of our competitors;
	•		our addition or termination of development programs or funding support;
	•		variations in the level of expenses related to development of any product candidate that we develop;
	•		our entering into collaborations;
	•		any intellectual property infringement lawsuit in which we may become involved;
	•		non-cash charges which we incur, including relating to share-based compensation; and
	•		regulatory developments.

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

The use of our net operating loss and tax credit carryforwards may be limited.

Net operating loss carryforwards and research and development credits may expire and not be used. As of December 31, 2009, we had generated federal net operating loss carryforwards of approximately $143.9 million and state net operating loss carryforwards of approximately $141.0 million, the majority of which were generated in California. As of December 31, 2009, we have generated federal research and development tax credits of $4.3 million and California research and development tax credits of $2.0 million. Both federal net operating loss carryforwards and federal research and development tax credits have a 20-year carryforward period and begin to expire in 2023 and 2024, respectively. California net operating loss carryforwards have a ten year carryforward period and begin to expire in 2013. California research and development tax credits have no expiration.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of our net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50 percent occurs within a three-year period. We determined that such an ownership change occurred as of June 30, 2005 as a result of various stock issuances used to finance our development activities. This ownership change resulted in limitations on the utilization of tax attributes, including net operating loss carryforwards and tax credits. We estimate that approximately $0.3 million of our California net operating loss carryforwards were effectively eliminated. A portion of the remaining net operating losses limited by Section 382 becomes available for use each year.

We have not performed a Section 382 analysis since our initial public offering in December 2005. There is a risk that additional changes in ownership could have occurred since that date. If a change in ownership were to have occurred, it is possible that additional net operating loss carryforwards and research and development credit carryovers could be eliminated or restricted. In addition, future financing events may cause further changes in ownership under Section 382 which could cause our net operating loss carryforwards and credit carryforwards to be subject to future limitations.

Negative conditions in the global credit markets may have an impact on the value of our investment securities.

Our investment securities consist primarily of money market funds and corporate and United States government agency notes. We do not have any auction rate securities. In recent years there has been concern in the credit markets regarding the value of a variety of mortgage-backed securities and the resultant effects on various securities markets. While we do not believe that our investment securities have significant risk of default or illiquidity, we cannot provide absolute assurance that our investments are not subject to adverse changes in market value. If the credit ratings of the security issuers deteriorate and any decline in market value is determined to be other-than-temporary, we would be required to adjust the carrying value of the investments through impairment charges.

Risks Relating to Securities Markets and Investment in Our Stock

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

Persons who were our stockholders prior to the sale of shares in our initial public offering continue to hold a substantial number of shares of our common stock that they are able to sell in the public market. Significant portions of these shares are held by a small number of stockholders. Sales by our stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock.

Moreover, the holders of a substantial number of shares of common stock may have rights, subject to certain conditions, to require us to file registration statements to permit the resale of their shares in the public market or to include their shares in registration statements that we may file for ourselves or other stockholders. In our July 2009 private placement of equity securities, we agreed with the investors to file a registration statement covering the resale of the common stock they purchased and the common stock underlying the warrants they purchased. We filed a registration statement on Form S-3 relating to the resale of such shares, which was declared effective by the SEC in August 2009.

We have also registered all common stock that we may issue under our employee benefits plans. As a result, these shares can be freely sold in the public market upon issuance, subject to restrictions under the securities laws. In June 2009, we completed a one-time offer to exchange options to purchase shares of our common stock having an exercise price greater than $1.00 per share outstanding under our 2004 Equity Incentive Award Plan and 2005 Equity Incentive Award Plan, or the 2005 Plan, for replacement options to purchase a lesser number of shares of our common stock to be granted under the 2005 Plan. The exchange offer was open to our employees and directors as of March 1, 2009. All of the eligible participants tendered some or all of their stock options for exchange. Pursuant to the exchange offer, we accepted for exchange eligible options to purchase an aggregate of 4,320,000 shares of our common stock, representing 87% of the total shares of common stock underlying options eligible for exchange in the offer. The weighted average exercise price of the options tendered for exchange was $6.98. We granted, under the 2005 Plan, replacement options to purchase an aggregate of 2,880,000 shares of common stock in exchange for the eligible options tendered and accepted pursuant to the offer. The exercise price per share of each replacement option granted in the option exchange is $1.23.

In addition, certain of our directors, executive officers and large stockholders have established or may in the future establish programmed selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for the purpose of effecting sales of common stock. If any of these events causes a large number of our shares to be sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.

There may not be a viable public market for our common stock, and market volatility may affect our stock price and the value of your investment.

Our common stock had not been publicly traded prior to our initial public offering, which was completed in December 2005, and an active trading market may not develop or be sustained. We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Therefore, investors will have to rely on appreciation in our stock price and a liquid trading market in order to achieve a gain on their investment. The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Since our initial public offering on December 15, 2005 through March 18, 2010, the trading prices for our common stock have ranged from a high of $21.24 to a low of $0.18.

The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

	•		regulatory approval or other changes in the regulatory status of our products or product candidates;
	•		announcements of new products or technologies, commercial relationships or other events by us or our competitors;
	•		events affecting our existing in-license agreements and any future collaborations or other strategic transactions, commercial agreements and grants;
	•		variations in our quarterly operating results;
	•		decreased coverage and changes in securities analysts’ estimates of our financial performance;
	•		regulatory developments in the United States and foreign countries;
	•		fluctuations in stock market prices and trading volumes of similar companies;
	•		sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
	•		announcements concerning other financing activities;
	•		additions or departures of key personnel; and
	•		discussion of us or our stock price by the financial and scientific press and in online investor communities.

The realization of any of the risks described in these “Risk Factors” could have a dramatic and material adverse impact on the market price of our common stock. In addition, class action litigation has often been instituted against companies whose securities have experienced periods of volatility or declines in market price. Any such litigation brought against us could result in substantial costs and a diversion of management’s attention and resources, which could hurt our business, operating results and financial condition.

If we are unable to comply with the minimum requirements for listing on the Nasdaq Capital Market, we may be delisted from the Nasdaq Capital Market, which would likely cause the liquidity and market price of our common stock to decline.

Our stock is listed on the Nasdaq Capital Market. In order to continue to be listed on the Nasdaq Capital Market, we must meet specific quantitative standards, including maintaining a minimum bid price of $1.00 for our common stock, a public float of $1.0 million, and either $2.5 million in stockholders equity or a market capitalization of $35 million. We are currently in compliance with these standards, but it is possible that we may fail to be in compliance in the future.

If the Nasdaq Stock Market provides us with a notice of non-compliance, we may provide a plan to achieve and sustain compliance with continued listing requirements. If we submit the plan and it is accepted by Nasdaq, Nasdaq may grant us a period of up to 105 days from the date of the notice of non-compliance within which to regain compliance with the listing requirements. If Nasdaq determines that our plan is not sufficient to achieve and sustain compliance, or if we are unable to achieve compliance within such period, Nasdaq will provide written notice that our securities will be delisted. At such time, we may appeal the decision to a Nasdaq Listing Qualifications Panel. If that appeal is unsuccessful, our securities would be delisted.

If we were to be delisted from the Nasdaq Capital Market, trading, if any, in our shares may continue to be conducted on the Over-the-Counter Bulletin Board or in a non-Nasdaq over-the-counter market, such as the “pink sheets.” Delisting of our shares would result in limited release of the market price of those shares and limited analyst coverage and could restrict investors’ interest in our securities. Also, a delisting could have a material adverse effect on the trading market and prices for our shares and our ability to issue additional securities or to secure additional financing. In addition, if our shares were not listed and the trading price of our shares was less than $5.00 per share, our shares could be subject to Rule 15g-9 under the Exchange Act which, among other

things, requires that broker/dealers satisfy special sales practice requirements, including making individualized written suitability determinations and receiving a purchaser’s written consent prior to any transaction. In such case, our securities could also be deemed to be a “penny stock” under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure in connection with trades in those shares, including the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. Such requirements could severely limit the liquidity of our securities and our ability to raise additional capital in an already challenging capital market.

If we are unable to maintain an effective registration statement for the resale of shares under our July 2009 private placement, or if we are delisted from the Nasdaq Capital Market, Nasdaq Global Market, the New York Stock Exchange or the American Stock Exchange, we may be required to pay liquidated damages.

In July 2009, we issued 5.1 million shares of common stock at $1.05 per share and seven-year warrants to purchase up to 5.1 million additional shares of common stock, exercisable in cash or by net exercise at a price of $1.155 per share, for aggregate gross proceeds of $6.0 million and net proceeds of $5.7 million after deducting offering costs of $0.3 million. In connection with the private placement, we agreed to register for resale both the shares of common stock purchased by the investors and the shares of common stock issuable upon exercise of the warrants. The resale registration statement was filed and declared effective by the SEC in August 2009. We also agreed to other customary obligations regarding registration, including matters relating to indemnification, maintenance of the registration statement and payment of expenses.

We may be liable for liquidated damages if we do not maintain the effectiveness of the registration statement or the listing of our common stock on the Nasdaq Capital Market, the Nasdaq Global Market, the New York Stock Exchange or the American Stock Exchange, in each case for a period of ten consecutive days or for more than thirty days in any 365-day period. The amount of the liquidated damages is one percent per applicable ten or thirty day period, subject to an aggregate maximum of eight percent per calendar year, of the aggregate purchase price of the common stock purchased in the private placement then held by each investor that are registrable securities.

If our executive officers, directors and largest stockholders choose to act together, they may be able to control our operations and act in a manner that advances their best interests and not necessarily those of other stockholders.

As of March 18, 2010, our executive officers, directors and holders of 5 percent or more of our outstanding common stock beneficially owned approximately 52.2% of our common stock. As a result, these stockholders, acting together, would be able to control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

Investors may incur substantial dilution as a result of future equity issuances, and, as a result, our stock price could decline.

Based on our recurring losses, negative cash flows from operations and working capital levels, we will have to raise substantial additional funds. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, it is likely that investors will lose all or a part of their investment.

Because we will need to raise additional capital to fund our business, among other things, we may conduct substantial additional equity offerings. For example, in July 2009, we completed a private placement of 5.1 million shares of our common stock at a price of $1.05 per share and seven-year warrants to purchase up to 5.1 million additional shares of our common stock, exercisable in cash or by net exercise at a price of $1.155 per share, for aggregate gross proceeds of $6.0 million and net proceeds of $5.7 million after deducting offering costs of $0.3 million. This offering resulted, and future equity issuances will result, in dilution to investors. In addition, the exercise of outstanding options or warrants, including the warrants issued in our recent private placement, and any additional shares issued in connection with acquisitions or incentive programs, will result in dilution to investors.

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

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders, and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits stockholders owning in excess of 15 percent of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if an offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

We expend substantial costs and management resources as a result of laws and regulations relating to corporate governance matters.

As a public reporting company, we must comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations adopted by the SEC and by the Nasdaq Stock Market, including expanded disclosures, accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, and other requirements has caused us to expend substantial costs and management resources and will continue to do so. Additionally, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or board committees or as executive officers. In June 2007, the Public Company Accounting Oversight Board approved Auditing Standard No. 5, and at the same time, the SEC issued guidance for management for complying with the requirements of Section 404. This auditing standard and the related management guidance provides a more risk-based approach to compliance and testing under Section 404. However, we still expect to incur substantial costs and to devote significant resources to corporate governance matters.

In addition, as a result of the workforce reductions we undertook in 2009 in order to reduce expenses, the efforts required to comply with Section 404 and the other corporate governance laws and regulations applicable to us are being undertaken by a smaller number of people. For example, in May 2009 the employment of our Chief Financial Officer was terminated in order to reduce expenses, resulting in our Chief Executive Officer undertaking the roles of both principal executive officer and principal financial officer. If we, or the third-party service providers on which we rely, fail to comply with any of these laws or regulations, or if our registered public accounting firm cannot complete any required attestation of our evaluation of our internal controls in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our corporate governance or internal controls, which could have an adverse effect on our business and our stock price.

Item 1B. Unresolved Staff Comments

We do not have any unresolved staff comments relating to our periodic or current reports.

Item 2. Properties

We lease approximately 2,000 square feet of space for our headquarters in San Diego, California subject to a lease arrangement that will expire in June 2010. We have no laboratory, research or manufacturing facilities.

Item 3. Legal Proceedings

We are not engaged in any material legal proceedings.

Item 4. Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock has been traded on the Nasdaq Stock Market since December 15, 2005 under the symbol SOMX. Prior to such time, there was no public market for our common stock. The following table sets forth the high and low sales prices per share of our common stock as reported on the Nasdaq Stock Market for the period indicated.

		Price Range
		High				Low
Year Ended December 31, 2008
First Quarter		$	5.95			$	3.69
Second Quarter			5.10				4.02
Third Quarter			4.80				2.54
Fourth Quarter		$	3.57			$	0.98
Year Ended December 31, 2009
First Quarter		$	2.50			$	0.18
Second Quarter			1.65				0.32
Third Quarter			4.78				0.70
Fourth Quarter		$	4.80			$	0.90

As of March 1, 2010, there were approximately 5,100 holders of record of our common stock.

Performance Graph

The following graph illustrates a comparison of the total cumulative stockholder return on our common stock since December 15, 2005, which is the date our common stock first began trading on the Nasdaq Stock Market, to two indices: the Nasdaq Composite Index and the Nasdaq Pharmaceuticals Index. The graph assumes an initial investment of $100 on December 15, 2005.

		December 31,
		2009				2008				2007				2006				2005
Somaxon Pharmaceuticals, Inc.		$	9.82			$	12.36			$	47.36			$	129.00			$	90.45
Nasdaq Composite Index			103.96				71.52				119.15				107.68				97.55
Nasdaq Pharmaceutical Index		$	106.40			$	94.69			$	101.77			$	96.77			$	98.86

The foregoing graph and table are furnished solely with this report, and are not filed with this report, and shall not be deemed incorporated by reference into any other filing under the Securities Act or the Exchange Act, whether made by us before or after the date hereof, regardless of any general incorporation language in any such filing, except to the extent we specifically incorporate this material by reference into any such filing.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and finance the growth and development of our business and do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors.

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes securities available under our equity compensation plans as of December 31, 2009 (in thousands, except per share data).

		Weighted								Shares				Total shares
		average per				Shares				issuable upon				issuable				Number of
		share				issuable upon				vesting of				under				securities
		exercise price				exercise of				outstanding				current				available for
		of stock				outstanding				restricted				outstanding				future
		options				stock options				stock units				awards				issuance
Equity compensation plans approved by security holders:
2004 Equity Incentive Award Plan		$	2.90				474				—				474				—
2005 Equity Incentive Award Plan			1.25				3,354				847				4,201				2,049
Total Equity Incentive Award Plans		$	1.45				3,828				847				4,675				2,049
2005 Employee Stock Purchase Plan															—				849
Total Equity compensation plans approved by security holders		$	1.45				3,828				847				4,675				2,898
Equity compensation plans not approved by security holders:
None.

We have share-based awards outstanding under the Somaxon Pharmaceuticals, Inc. 2004 Equity Incentive Award Plan and the 2005 Equity Incentive Award Plan for the benefit of our eligible employees, consultants, and directors. The 2004 Equity Incentive Award Plan was discontinued in November 2005 upon the adoption of the 2005 Equity Incentive Award Plan. No additional share-based awards will be granted under the 2004 Equity Incentive Award Plan and all share-based awards that are repurchased, forfeited, cancelled or expire will become available for grant under the 2005 Equity Incentive Award Plan. The 2005 Employee Stock Purchase Plan was adopted at the time of our initial public offering.

Stock options granted under the 2005 Equity Incentive Award Plan have an exercise price equal to the fair market value of the underlying common stock at the date of grant, have a ten year life and generally vest over a period of between one and four years for our employees and between one and three years for members of our board of directors, with some awards vesting upon the achievement of certain performance conditions. The vesting of the stock options issued pursuant to our one-time stock option exchange program which was completed in June 2009 is such that one-third vested immediately upon issuance of the replacement awards and the remaining two-thirds vest in equal monthly installments over the following two year period such that all the shares will be fully vested in June 2011.

Restricted shares of our common stock have also been granted under the 2005 Equity Incentive Award Plan, a portion of which vested upon the acceptance of our NDA for Silenor and the remainder of which vested upon approval of our NDA for Silenor.

Awards of restricted stock units, or RSUs, have also been granted under the 2005 Equity Incentive Award Plan. A portion of the RSUs vested at December 31, 2009. For employees and the chairman of the board, of the unvested RSUs as of December 31, 2009, half vested upon the approval by the FDA of our NDA for Silenor, and the remainder will vest upon the first commercial sale of Silenor in the United States. Members of our board of directors receive their quarterly retainers for service on the Board of Directors, or committees thereof, and their fees for attending meetings of the Board, and committees thereof, in RSUs. All of these RSUs vest upon the first open trading window under our Insider Trading Policy following the first commercial sale of Silenor in the United States. Any RSUs issued for service on the board after the first commercial sale of Silenor in the United States would vest upon the first open trading window under the Insider Trading Policy following the date of issuance.

The 2005 Equity Incentive Award Plan and 2005 Employee Stock Purchase Plan contain “evergreen” provisions which allow for annual increases in the number of shares available for future issuance. The 2005 Equity Incentive Award Plan’s evergreen provision provides for annual increases in the number of shares available for grant equal to the lesser of: (i) 2,000,000 shares, (ii) 5% of the then-total outstanding shares of capital stock (25,248,000 shares were outstanding at December 31, 2009), or (iii) such lesser amount as determined by the board of directors. Pursuant to this evergreen provision, on January 1, 2010, the number of

shares available for grant under the 2005 Equity Incentive Award Plan increased by 1,262,000 shares, resulting in a total of 3,311,000 shares available for grant at that time. The 2005 Employee Stock Purchase Plan’s evergreen provision provides for annual increases in the number of shares available for grant equal to the lesser of: (i) 300,000 shares, (ii) 1% of the then-total outstanding shares of capital stock (25,248,000 shares were outstanding at December 31, 2009), or (iii) such lesser amount as determined by the board of directors. Pursuant to this evergreen provision, on January 1, 2010, the number of shares available for grant under the 2005 Employee Stock Purchase Plan increased by 252,000 shares, resulting in a total of 1,102,000 shares available for grant at that time.

Recent Sales of Unregistered Securities

On December 1 and December 2, 2009, we issued an aggregate of 1,276,595 shares of our common stock to two of our warrant holders in connection with their exercise of outstanding warrants. We received gross proceeds of approximately $1.5 million upon exercise of these warrants. On December 2, 2009, we also issued an additional 183,333 shares of our common stock to another warrant holder in connection with its net exercise of an outstanding warrant. The number of shares issued upon the exercise of this warrant was reduced by approximately 16,667 shares to effect the net exercise of the warrant in accordance with its terms, and we therefore received no cash proceeds from the exercise. The issuances of shares of our common stock upon exercise of these warrants were not registered under the Securities Act of 1933, as amended, in reliance upon Section 4(2) of such Act.

Issuer Repurchases of Equity Securities

None.

Use of Proceeds

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-128871) that was declared effective by the Securities and Exchange Commission on December 14, 2005. On December 20, 2005, 5,000,000 shares of common stock were sold on our behalf at an initial public offering price of $11.00 per share, for an aggregate offering price of $55.0 million, managed by Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc., Piper Jaffray & Co. and Thomas Weisel Partners LLC.

We paid to the underwriters underwriting discounts and commissions totaling approximately $3.9 million in connection with the offering. In addition, we incurred expenses of approximately $1.3 million in connection with the offering, which when added to the underwriting discounts and commissions paid by us, amounts to total expenses of approximately $5.2 million. Thus, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were approximately $49.8 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.

As of December 31, 2009, we had used all of the $49.8 million of net proceeds from our initial public offering. Approximately $19.5 million was used in the development of Silenor, the preparation of the NDA submission for Silenor and activities to prepare for the potential commercialization of Silenor. An additional $1.0 million was spent to pursue the development of our other product candidates and for various payments according to the terms of our in-license agreements. Another $2.0 million was used to pay interest, debt issuance costs, and a final payment fee related to our loan obligation which was fully repaid in March 2009. An additional $27.3 million was used to fund our working capital requirements and for general corporate purposes.

Item 6. Selected Financial Data

The selected statement of operations data for the years ended December 31, 2009, 2008, 2007 and the period from August 14, 2003 (inception) through December 31, 2009 and the balance sheet data as of December 31, 2009 and 2008 have been derived from our audited financial statements included elsewhere in this annual report. The selected statement of operations data for the years ended December 31, 2006 and 2005, and the balance sheet data as of December 31, 2007, 2006, and 2005 have been derived from audited financial statements which are not included in this Form 10-K. Historical results are not necessarily indicative of future results. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this annual report (amounts in thousands, except per share data).

																						August 14,
																						2003
																						(inception)
																						through
		Year Ended December 31,																				December 31,
		2009				2008				2007				2006				2005				2009
Statement of Operations Data:
Operating Expenses
License fees		$	(999	)		$	165			$	490			$	1,165			$	482			$	5,861
Research and development			4,337				16,546				12,694				37,462				28,955				107,734
Marketing, general and administrative			10,874				18,809				15,614				11,744				4,814				64,776
Remeasurement of Series C warrant liability			—				—				—				—				5,649				5,649
Net operating expenses			14,212				35,520				28,798				50,371				39,900				184,020
Loss from operations			(14,212	)			(35,520	)			(28,798	)			(50,371	)			(39,900	)			(184,020	)
Interest and other income			30				903				2,387				3,961				1,413				8,852
Interest and other (expense)			(261	)			(2,610	)			—				—				—				(2,871	)
Net loss			(14,443	)			(37,227	)			(26,411	)			(46,410	)			(38,487	)			(178,039	)
Accretion of redeemable convertible stock to redemption value			—				—				—				—				(86	)			(86	)
Net loss applicable to common stockholders		$	(14,443	)		$	(37,227	)		$	(26,411	)		$	(46,410	)		$	(38,573	)		$	(178,125	)
Basic and diluted net loss applicable to common stockholders per share(1)		$	(0.69	)		$	(2.04	)		$	(1.45	)		$	(2.58	)		$	(33.30	)
Shares used to calculate net loss applicable to common stockholders per share(1)			20,952				18,281				18,187				17,981				1,158

		Year Ended December 31,
		2009				2008				2007				2006				2005
Balance Sheet Data:
Cash, cash equivalents and marketable securities		$	5,165			$	14,290			$	37,100			$	57,914			$	103,965
Working capital			3,404				4,258				34,385				51,334				93,088
Total assets			6,411				23,717				38,717				59,452				106,256
Total debt (1)			—				15,000				—				—				—
Deficit accumulated during development stage			(178,039	)			(163,596	)			(126,369	)			(99,958	)			(53,548	)
Total stockholders’ equity		$	4,241			$	5,106			$	35,176			$	52,357			$	93,455

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our financial statements and related notes appearing elsewhere in this Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the caption “Risk Factors” in this report.

Overview

Background

We are a specialty pharmaceutical company focused on the in-licensing, development and commercialization of proprietary branded products and late-stage product candidates for the treatment of diseases and disorders in the central nervous system therapeutic area. On March 18, 2010, the FDA notified us that it approved our NDA for Silenor 3 mg and 6 mg tablets for the treatment of insomnia characterized by difficulty with sleep maintenance.

We have undertaken and continue to undertake activities to prepare for the commercial launch of Silenor. In addition, we continue to engage in discussions with third parties relating to the commercialization of Silenor.

Since our founding in 2003, we have also entered into in-license agreements for nalmefene and acamprosate. In March 2009, we and BioTie Therapies Corp., or BioTie, entered into an agreement to mutually terminate the license agreement. Pursuant to this agreement, BioTie paid us a $1.0 million termination fee. In June 2009, we exercised our contractual right to terminate our agreement with the University of Miami for nalmefene for the treatment of nicotine dependence. We have no further commitments under our nalmefene program. With regards to acamprosate, we terminated the in-license agreement effective January 2008.

We have incurred significant losses since our inception in 2003. In December 2005, we completed our initial public offering. As of December 31, 2009, we had an accumulated deficit of approximately $178.0 million. We expect our accumulated deficit to continue to increase for the next several years as we seek to commercialize Silenor and potentially pursue development of other product candidates. We will need to raise additional funds through strategic relationships, public or private equity or debt financings, assigning receivables or royalty rights, or other arrangements and cannot assure that the funding will be available on attractive terms, or at all. Additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. If we are unsuccessful in our efforts to raise sufficient additional funds, we may be required to reduce or curtail our operations and costs, and we may be unable to continue as a going concern.

Revenues

As a development stage company, we have not generated any revenues to date, and we do not expect to generate any revenues from licensing, achievement of milestones or product sales until we enter into a strategic collaboration or are able to commercialize Silenor ourselves.

License Fees

Our license fees consist of the costs incurred to in-license our product candidates. We expense all license fees and milestone payments for acquired development and commercialization rights to operations as incurred since the underlying technology associated with these expenditures relates to our research and development efforts and has no alternative future use at this time.

In March 2009, we entered into an agreement with BioTie to mutually terminate our license for nalmefene for the treatment of impulse control and substance abuse disorders. Pursuant to the termination agreement, BioTie paid us a $1.0 million termination fee which we included as an offset to our license fees. In June 2009, we exercised our contractual right to terminate our agreement with the University of Miami for nalmefene for the treatment of nicotine dependence. We have no further commitments under our nalmefene program.

Research and Development Expenses

We expense all research and development costs to operations as incurred. To date, our research and development expenses consist primarily of costs associated with our clinical trials managed by our CROs, our non-clinical development program for Silenor and submitting and seeking approval of our NDA for Silenor, regulatory expenses, drug development costs, salaries and related employee benefits, and share-based compensation expense. During 2009, our most significant research and development costs were salaries, benefits, and share-based compensation expense, costs associated with the conduct of our continuing two-year carcinogenicity study for Silenor, costs relating to the resubmission of the Silenor NDA to the FDA and drug development costs pertaining to Silenor. In 2008 our most significant costs were associated with our development program for Silenor, including the conduct of a voluntary standard clinical trial designed to evaluate the potential for ECG effects of doxepin, which is the active ingredient in Silenor, the preparation of our NDA for Silenor and salaries, benefits and share-based compensation expense related to research and development personnel. During 2007 our most significant costs were associated with our development program for Silenor, including the conduct of standard toxicology studies requested by the FDA, and the preparation and submission of our NDA for Silenor as well as salaries, benefits and share-based compensation expense related to research and development personnel.

We use our internal research and development resources across several projects and many resources are not attributable to specific projects. Accordingly, we do not account for our internal research and development costs on a project basis. We use external service providers to conduct our non-clinical studies and clinical trials and to manufacture the product candidates used in our studies. These external costs are accounted for on a project basis.

At this time, due to the risks inherent in the drug development process with respect to product candidates we may develop, we are unable to estimate with any certainty the costs we will incur in the continued development for potential commercialization. Non-clinical and clinical development timelines, the probability of success and the costs of development of product candidates vary widely. The lengthy process of completing non-clinical testing, seeking regulatory approval, and conducting clinical trials requires the expenditure of substantial resources. Any failure by us or delay in obtaining regulatory approval, or completing non-clinical testing or clinical trials for Silenor or any future product candidates, would cause our research and development expense to increase and, in turn, have a material adverse effect on our results of operations. We expect our research and development expenses to remain a significant component of our operating expenses in the future as we continue our non-clinical studies and conduct post-approval development work for Silenor and potentially pursue development of other product candidates.

We cannot forecast with any degree of certainty whether Silenor will be subject to a future collaboration or other strategic transaction, when such arrangements will be secured, if at all, and to what degree such arrangement would affect our development plans and capital requirements. As a result, we cannot be certain when and to what extent we will receive cash inflows from the commercialization of Silenor or any related collaboration agreement, if at all.

Marketing, General and Administrative Expenses

Our marketing, general and administrative expenses consist primarily of salaries, benefits, share-based compensation expense, advertising and market research costs, insurance and facility costs, and professional fees related to our marketing, administrative, finance, human resources, legal and internal systems support functions. Because our NDA for Silenor has recently been approved by the FDA, we would expect our marketing, general and administrative expenses to increase as we add personnel and prepare for the potential commercial launch of Silenor.

We cannot forecast with any degree of certainty whether Silenor will be subject to a future collaboration or other strategic transaction, when such arrangements will be secured, if at all, and to what degree such arrangement would affect our commercialization plans and capital requirements. As a result, we cannot be certain when and to what extent we will receive cash inflows from the commercialization of Silenor or any related collaboration agreement, if at all.

Interest and Other Income

Interest and other income consist primarily of interest earned on our cash, cash equivalents, and marketable securities. We expect our interest income to increase to the extent that our cash, cash equivalents and marketable securities balances increase due to capital-raising activities, offset by decreases to the extent our cash, cash equivalents, and marketable securities balances decrease from continued operating losses.

Interest and Other (Expense)

Interest and other (expense) consist primarily of interest expense incurred on our outstanding debt which was repaid in full in March 2009. We have not incurred any interest expense since the repayment of this debt. However, we will need to raise additional financing, and if such financing is in the form of additional debt, our interest expense would increase.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

License Fees

To date, the costs related to patents and acquisition of our intellectual property have been expensed as incurred since the underlying technology associated with these expenditures is in connection with our development efforts and has no alternative future use. Certain of our license agreements contain provisions which obligate us to make milestone payments or provide other consideration if specified events occur. Determining whether these events will occur, and the timing of such events, requires judgment on the part of management. For instance, the approval of the NDA for Silenor triggered a $1.0 million milestone payment obligation to our licensor. As of December 31, 2009, we had not recognized this milestone in our financial statements, as FDA approval was not considered probable at that time.

Research and Development Expenses

Our research and development costs are expensed as incurred. Research and development expense includes internal costs such as salaries, benefits and share-based compensation expense, as well costs from external service providers relating to our clinical trials, non-clinical studies and our NDA filing for Silenor and drug development costs. Measurement of these external research and development expenses often requires judgment as we may not have been invoiced or otherwise notified of actual costs, making it necessary to estimate the efforts completed to date and the related expense. The period over which services are performed, the level of services performed as of a given date, and the cost of such services are often subjective determinations. Our principal vendors operate within terms of contracts which establish program costs and estimated timelines. We assess the status of our programs through regular discussions between our program management team and the related vendors. Based on these assessments, we determine the progress of our programs in relation to the scope of work outlined in the contracts, and recognize the related amount of expense accordingly. We adjust our estimates as actual costs become known to us. Changes in estimates could materially affect our results of operations.

Share-based Compensation

Share-based compensation expense for employees and directors is recognized in the statement of operations based on estimated amounts, including the grant date fair value, the probability of achieving performance conditions and the expected service period for awards with conditional vesting provisions. For stock options, we estimate the grant date fair value using the Black-Scholes valuation model which requires the use of multiple subjective inputs. Such subjective inputs include an estimate of future volatility, expected forfeitures and the expected term for the stock option award. Our stock did not have a readily available market prior to our initial public offering in December 2005, creating a relatively short history from which to obtain data to estimate volatility for our stock price. Consequently, we estimate our expected future volatility based on a combination of both comparable companies and our own stock price volatility to the extent such history is available. Our future volatility may differ from our estimated volatility at the grant date. We estimate the expected term of our options using guidance provided by the SEC’s Staff Accounting Bulletin, or SAB, No. 107 and SAB No. 110. This guidance provides a formula-driven approach for determining the expected term. Share-based compensation recorded in our statement of operations is based on awards expected to ultimately vest and has been reduced for estimated forfeitures. Our estimated forfeiture rates may differ from actual forfeiture rates which would affect the amount of expense recognized during the period.

We recognize the value of the portion of the awards that are expected to vest on a straight-line basis over the awards’ requisite service periods. The requisite service period is generally the time over which the Company’s share-based awards vest. Some of our share-based awards vest upon achieving certain performance conditions, generally pertaining to approval of the Silenor NDA by the FDA, the commercial launch of Silenor, or the achievement of financing or strategic objectives. Share-based compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met. If the performance condition is not considered probable of being achieved, then no expense is recognized until such time the performance condition is considered probable of being met. At that time, expense is recognized over the period during which the performance condition is likely to be achieved.

Determining the likelihood and timing of achieving performance conditions is a subjective judgment made by management which may affect the amount and timing of expense related to these share-based awards. For example, as of December 31, 2009, we had not recognized in our financial statements expense related to certain of our performance based awards because at that time it was not considered probable that the FDA would approve Silenor, or that we would achieve the commercial launch of Silenor, or that we would satisfy such other strategic objectives necessary for the awards to vest. Share-based compensation is adjusted to reflect the value of options which ultimately vest as such amounts become known in future periods. As a result of these subjective and forward-looking estimates, the actual value of our stock options realized upon exercise could differ significantly from those amounts recorded in our financial statements.

Net Operating Losses and Tax Credit Carryforwards

We have incurred significant net operating losses to date. As of December 31, 2009, we had federal net operating loss carryforwards of $143.9 million and California net operating loss carryforwards of $141.0 million. Federal net operating loss carryforwards expire 20 years after being generated and California net operating loss carryforwards expire ten years after being generated. We also have research and development credits as of December 31, 2009 of $4.3 million for federal purposes and $2.0 million for California purposes. Federal research and development credits expire 20 years after being generated and California research and development credits do not expire. We have fully reserved our net operating loss carryforwards and research and development credits until such time that it is more likely than not that they will be realized.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of our net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50 percent occurs within a three-year period. We determined that such an ownership change occurred as of June 30, 2005 as a result of various stock issuances used to finance our development activities. This ownership change resulted in limitations on the utilization of tax attributes, including net operating loss carryforwards and tax credits. We estimate that approximately $0.3 million of our California net operating loss carryforwards were effectively eliminated. A portion of the remaining net operating losses limited by Section 382 becomes available for use each year.

As of March 1, 2010, we have not updated our Section 382 analysis, which was completed in conjunction with our initial public offering in December 2005. There is a risk that additional changes in ownership could have occurred since that date. If a change in ownership were to have occurred, it is possible that additional net operating loss carryforwards and research and development credit carryovers could be eliminated or restricted. In addition, future financing events may cause further changes in ownership under Section 382 which could cause our net operating loss carryforwards and credit carryforwards to be subject to future limitations.

Debt and Interest Expense

In May 2008, we entered into a loan agreement under which we borrowed $15.0 million, less debt issuance costs of $0.2 million, for net proceeds of $14.8 million. In connection with the loan agreement, we issued warrants with a value of $0.9 million which was allocated to equity and resulted in a corresponding debt discount. In March 2009, we repaid the entire remaining $13.7 million principal amount of the loan, together with the final payment of $0.6 million required under the loan agreement. In connection with the repayment, we issued to one of the lenders a warrant to purchase an aggregate of 200,000 shares of common stock having a ten-year term and an exercise price of $0.25, which the lenders agreed to accept in lieu of the $0.9 million prepayment penalty required under the loan agreement. We no longer have any obligations under the loan agreement.

Prior to our repayment of the loan, the lenders had the right to declare the loan immediately due and payable in an event of default, which included, among other things, a material adverse change in our business, operations or financial condition or a material impairment in the prospect of repayment of the loan. Based on our recurring losses, negative cash flows from operations and working capital levels, and to reflect the lenders’ right to declare the loan immediately due and payable, we classified the December 31, 2008 outstanding debt balance as a current liability and classified the related restricted cash which collateralized this debt as a current asset. In addition, as of December 31, 2008, we fully accreted to interest expense the debt discount, debt issuance costs, final payment and the value of the warrants issued in lieu of the prepayment penalty.

Results of Operations

Comparisons of the Years Ended December 31, 2009, 2008 and 2007

License fees. License fees for the years ended December 31, 2009, 2008 and 2007 are summarized in the following table (in thousands, except percentages).

														Dollar Change								Percent Change
		Years Ended December 31,												2009 vs.				2008 vs.				2009 vs.				2008 vs.
		2009				2008				2007				2008				2007				2008				2007
Silenor		$	—			$	150			$	—			$	(150	)		$	150				(100	)%			N/A
Nalmefene and acamprosate			(999	)			15				490				(1,014	)			(475	)			(6,760	)%			(97	)%
Total license fees		$	(999	)		$	165			$	490			$	(1,164	)		$	(325	)			(705	)%			(66	)%

For the year ended December 31, 2009 compared to the year ended December 31, 2008, license fees decreased $1.2 million primarily due to the termination of our license agreement with BioTie for nalmefene in March 2009. Pursuant to the termination agreement, BioTie paid us a $1.0 million termination fee which we included as a reduction of license fees. Also contributing to the decrease was a payment we made of $0.2 million during the third quarter of 2008 under a license arrangement for the exclusive rights to purchase a certain ingredient used in our formulation for Silenor.

For the year ended December 31, 2008 compared to the year ended December 31, 2007, license fees decreased $0.3 million primarily due to a $0.5 million decrease related to acamprosate as a result of not incurring quarterly license payments after the license was terminated in the fourth quarter of 2007. Partially offsetting this decrease was a $0.2 million increase in license fees related to the Silenor program as a result of a payment made under an agreement entered into during the third quarter of 2008 pertaining to the exclusive rights to a key ingredient used in our formulation for Silenor.

Research and Development Expense. Research and development expense for the years ended December 31, 2009, 2008 and 2007 are summarized in the following table (in thousands, except percentages).

														Dollar Change								Percent Change
		Years Ended December 31,												2009 vs.				2008 vs.				2009 vs.				2008 vs.
		2009				2008				2007				2008				2007				2008				2007
Silenor development work		$	1,079			$	8,311			$	4,286			$	(7,232	)		$	4,025				(87	)%			94	%
Personnel and other costs			1,732				6,190				6,581				(4,458	)			(391	)			(72	)%			(6	)%
Share-based compensation expense			1,526				2,045				1,827				(519	)			218				(25	)%			12	%
Total research and development expense		$	4,337			$	16,546			$	12,694			$	(12,209	)		$	3,852				(74	)%			30	%

For the year ended December 31, 2009 compared to the year ended December 31, 2008, research and development expense decreased $12.2 million primarily due to a decrease in drug development activities for Silenor as a result of the completion during 2008 of our cardiac study for Silenor and the delay in the FDA approval process for Silenor. Offsetting these reductions in expense was a payment to our Silenor packaging supplier of $0.4 million in December 2009 in settlement for purchase authorizations for certain expired raw materials. Personnel and other costs decreased as a result of a reduction in headcount, which occurred as part of

our cost reduction measures. This reduction in headcount also caused a decrease in share-based compensation expense, but this decrease was partially offset by accelerated vesting and continued vesting under consulting arrangements for certain employees whose employment was terminated. The consulting arrangements were considered non-substantive for accounting purposes and the full value of the awards expected to vest over the consulting arrangement was expensed at the time employment was terminated. The decrease in share-based compensation expense was also offset by share-based compensation expense incurred in conjunction with our one-time stock option exchange program in June 2009.

For the year ended December 31, 2008 compared to the year ended December 31, 2007, research and development expense increased $3.9 million primarily due to costs incurred related to a standard clinical trial that we voluntarily conducted during 2008 to evaluate the potential for cardiac effects of doxepin, the active ingredient in Silenor. Silenor development costs also increased due to higher costs incurred during 2008 relating to efforts to prepare for the potential commercialization of Silenor, offset by a reduction in development expenses due to the completion during 2007 of the majority of the non-clinical studies requested by the FDA (our two-year rat carcinogenicity study remains on-going). Personnel and other costs decreased primarily due to bonus expense incurred during 2007, but which was not incurred during 2008 as we did not accrue for a bonus during 2008 given certain cost reduction activities. Share-based compensation, which is a non-cash expense, increased $0.2 million primarily due to share-based awards granted during 2008.

Marketing, General and Administrative Expense. Marketing, general and administrative expense for the years ended December 31, 2009, 2008 and 2007 are summarized in the following table (in thousands, except percentages).

														Dollar Change								Percent Change
		Years Ended December 31,												2009 vs.				2008 vs.				2009 vs.				2008 vs.
		2009				2008				2007				2008				2007				2008				2007
Marketing, personnel and general costs		$	6,237			$	14,555			$	8,961			$	(8,318	)		$	5,594				(57	)%			62	%
Share-based compensation			4,637				4,254				6,653				383				(2,399	)			9	%			(36	)%
Total marketing, general and administrative expenses		$	10,874			$	18,809			$	15,614			$	(7,935	)		$	3,195				(42	)%			20	%

For the year ended December 31, 2009 compared to the year ended December 31, 2008, marketing, general and administrative expense decreased $7.9 million primarily due to a reduction in market preparation activities as a result of the delay in the FDA approval process for Silenor. Personnel and related costs also decreased as a result of our cost reduction measures, including our reduction in headcount, our move to a smaller corporate facility, our board of directors receiving restricted stock units in lieu of cash compensation, and lower legal, audit and consulting fees during 2009. The decrease in personnel costs from the reduction in workforce was partially offset by expenses incurred in conjunction with severance arrangements entered into during 2009. Share-based compensation expense increased due to our one-time stock option exchange program completed in June 2009 and due to accelerated vesting and continued vesting under non-substantive consulting arrangements for certain employees whose employment was terminated during 2009. This increase in share-based compensation expense was partially offset by a decrease in share-based compensation expense from our reduction in headcount.

For the year ended December 31, 2008 compared to the year ended December 31, 2007, marketing, general and administrative expense increased $3.2 million primarily due to increased expenditures related to the preparation for the potential commercialization of Silenor, certain expenses incurred related to evaluating financing alternatives, and expense recognized from terminating our building lease. This was partially offset by bonus expense incurred during 2007, but not incurred in 2008 due to our cost reduction activities. Share-based compensation expense decreased primarily due to accelerated vesting for stock options during 2007 upon the departure of our chief executive officer, as well as certain stock options with higher grant date fair values becoming fully vested during 2008.

Interest and Other Income. Interest and other income for the years ended December 31, 2009, 2008 and 2007 are summarized in the following table (in thousands, except percentages).

														Dollar Change								Percent Change
		Years Ended December 31,												2009 vs.				2008 vs.				2009 vs.				2008 vs.
		2009				2008				2007				2008				2007				2008				2007
Interest and other income		$	30			$	903			$	2,387			$	(873	)		$	(1,484	)			(97	)%			(62	)%

For the year ended December 31, 2009 compared to the year ended December 31, 2008, interest and other income decreased $0.9 million due to lower average cash and marketable security balances as a result of our continued net operating losses and repayment of our debt in March 2009, as well as lower interest rates earned on our cash and marketable securities compared to the prior year.

For the year ended December 31, 2008 compared to the year ended December 31, 2007, interest and other income decreased $1.5 million primarily due to lower average cash and marketable security balances during 2008 as a result of continued net operating losses, as well as lower interest rates earned on our cash and marketable securities during 2008.

Interest and Other (Expense). Interest and other (expense) for the years ended December 31, 2009, 2008 and 2007 are summarized in the following table (in thousands, except percentages).

														Dollar Change								Percent Change
		Years Ended December 31,												2009 vs.				2008 vs.				2009 vs.				2008 vs.
		2009				2008				2007				2008				2007				2008				2007
Interest and other (expense)		$	(261	)		$	(2,610	)		$	—			$	2,349			$	(2,610	)			(90	)%			N/A

For the year ended December 31, 2009 compared to the year ended December 31, 2008, interest and other (expense) decreased $2.3 million due to our repayment in full of the outstanding balance of our debt facility in March 2009. We will not incur additional interest expense on this debt going forward.

For the year ended December 31, 2008 compared to the year ended December 31, 2007, interest and other (expense) increased $2.6 million primarily due to interest expense incurred on a debt facility we entered into during the second quarter of 2008. In the fourth quarter of 2008, we classified our outstanding debt balance as a current liability and as of December 31, 2008, we fully accreted the debt discount, debt issuance costs, final payment and the value of the warrants issued in lieu of the prepayment penalty to interest expense. We did not have any debt or related interest expense prior to 2008.

Liquidity and Capital Resources

Since inception, our operations have been financed through the private placement of equity securities and our initial public offering. Through December 31, 2009, we received cumulative net proceeds of approximately $148.3 million as follows:

	•		Net proceeds of $90.0 million from the sale and issuance of an aggregate of 73,448,000 shares of preferred stock as follows: From August 2003 through January 2004, we issued and sold an aggregate of 2,300,000 shares of Series A preferred stock for net proceeds of $2.3 million. From April 2004 through June 2004, we issued and sold an aggregate of 23,000,000 shares of Series B preferred stock for net proceeds of $22.9 million after deducting offering costs of $0.1 million. In June 2005, we issued and sold 40,741,000 shares of Series C redeemable preferred stock for aggregate net proceeds of $54.8 million after deducting offering costs of $0.2 million. In September 2005, the warrant instrument issued in conjunction with the June 2005 Series C stock issuance was exercised, and we issued and sold an additional 7,407,000 shares of Series C redeemable preferred stock for net proceeds of $10.0 million.
	•		Net proceeds of $49.8 million from the sale and issuance of 5,000,000 shares of our common stock in our initial public offering in December 2005, after deducting offering costs of $5.2 million. In conjunction with our initial public offering, all of our outstanding shares of preferred stock were converted into 12,242,000 shares of common stock at a ratio of six shares of preferred stock converting into one share of common stock.
	•		Net proceeds of $5.7 million from the sale and issuance of 5,106,000 shares of our common stock and warrants to purchase 5,106,000 shares of our common stock in a private placement in July 2009, after deducting financing costs of $0.3 million.
	•		Since our inception in August 2003 through December 31, 2009, we have issued an aggregate of 468,000 shares of common stock upon exercise of stock options from which we have received aggregate proceeds of $1.3 million. We also have issued an aggregate of 1,460,000 shares of common stock from the exercise of warrants, resulting in aggregate gross proceeds of $1.5 million.

As of December 31, 2009, we had $5.2 million in cash and cash equivalents. We have invested a substantial portion of our available cash in money market funds placed with reputable financial institutions for which credit loss is not anticipated. The capital markets have recently been highly volatile and there has been a lack of liquidity for certain financial instruments, especially those with exposure to mortgage-backed securities and auction rate securities. This lack of liquidity has made it potentially difficult for the fair value of these types of instruments to be determined. Our money market funds are with institutions that have minimal mortgage-backed security exposure and we do not hold any auction rate securities. All of our investments in money market funds continue to be highly rated, highly liquid and have readily determinable fair values. As a result, none of our securities are considered to be impaired.

We have established guidelines relating to credit rating, diversification and maturities of our investments to preserve principal and maintain liquidity. The diversity in maturities of our holdings provides us the capability to generally hold our securities until maturity, which we regularly do. This allows any temporary changes in the value of our securities due to market volatility to be recovered by the time the securities mature. To date, realized gains and losses from the sale of securities prior to their maturity have been negligible.

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:

	•		the terms and timing of any collaborative, licensing and other arrangements that we may establish;
	•		the costs of establishing or contracting for sales and marketing and other commercial capabilities, if required;
	•		the extent to which we acquire or in-license new products, technologies or businesses;
	•		the rate of progress and cost of our non-clinical studies, clinical trials and other development activities;
	•		the scope, prioritization and number of development programs we pursue;
	•		the effect of competing technological and market developments; and
	•		the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

Cash Flows

We expect to continue to incur losses and have negative cash flows from operations in the foreseeable future as we seek to commercialize Silenor and potentially pursue the development of other product candidates. For the year ended December 31, 2009, net cash used in operating activities was $9.6 million, compared to $29.1 million for the year ended December 31, 2008. The decrease in net cash used in operating activities was primarily due to our cost reduction measures, including the termination of employment of a large portion of our workforce. In addition, during 2008 we voluntarily conducted a standard clinical trial to evaluate the potential for ECG effects of doxepin, the active ingredient in Silenor, and prepared for the potential commercialization of Silenor.

We cannot be certain if, when, or to what extent we will receive cash inflows from the commercialization of Silenor. We expect our operating expenses to be substantial over the next few years as we seek to commercialize Silenor and potentially pursue the development of other product candidates. Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources and through strategic relationships, public or private equity or debt financings, assigning receivables or royalty rights or other arrangements.

However, we may not be successful in obtaining additional financing when needed. If available, financing may not be obtained on terms favorable to us or our stockholders. We also may not be successful in entering into strategic collaboration agreements, or in receiving milestone or royalty payments under those agreements. If we are unsuccessful in raising sufficient additional funds, we may be required to delay, scale-back or eliminate development plans or programs relating to our business, relinquish some or all rights to Silenor or renegotiate less favorable terms with respect to such rights than we would otherwise choose, or cease operating as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

We have an effective shelf registration statement on Form S-3 on file with the SEC. This registration statement could allow us to obtain additional financing. However, our ability to obtain such additional financing will still be subject to the SEC’s rules and regulations relating to eligibility to use Form S-3. Under current SEC regulations, at any time during which the aggregate market value of our common stock held by non-affiliates, or public float, is less than $75.0 million, the amount we can raise through primary public offerings of securities in any twelve-month period using shelf registration statements will be limited to an aggregate of one-third of our public float. As of March 18, 2010, our public float was greater than $75.0 million.

As a result of recent volatility in the capital markets, the cost and availability of credit has been and may continue to be adversely affected. Concern about the stability of the markets in general and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the United States and international markets and economies may adversely affect our ability to obtain additional financing on terms acceptable to us, or at all. If these market conditions continue, they may limit our ability to timely replace maturing liabilities and to access the capital markets to meet liquidity needs.

The report of our registered public accounting firm for the year ended December 31, 2009 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about or ability to continue as a going concern. If we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which these assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investment.

In response to the FDA’s delay of the PDUFA date for Silenor in November 2008 and the complete response letter we received from the FDA in February 2009, we implemented certain cost reduction measures. From December 2008 through May 2009, we completed a reduction in our workforce which eliminated employment for 36 employees, and we currently have five remaining full-time employees. In addition, in November 2008, our Board of Directors amended the Director Compensation Policy to provide that non-employee directors will receive their quarterly retainers for service on the Board of Directors or committees thereof and their fees for attending meetings of the Board and committees thereof in RSUs under our 2005 Equity Incentive Award Plan in lieu of cash compensation. The compensation arrangement of David Hale, our Chairman of the Board, was also amended in November 2008 so that his cash compensation for his former role as Executive Chairman of the Board was payable in RSUs. Mr. Hale has since reassumed his position as our non-Executive Chairman of the Board effective June 9, 2009, and as such he is compensated for his services in RSUs under the Director Compensation Policy. In addition, we did not make a cash bonus award under our 2008 Incentive Plan, and we have not made a cash bonus award under our 2009 Incentive Plan. Furthermore, we have been and will continue working with certain of our suppliers and vendors to manage our cash expenditures relating to our operations.

Common Stock Financing

In July 2009, we completed a private placement of 5.1 million shares of our common stock at a price of $1.05 per share and warrants to purchase up to 5.1 million additional shares of our common stock, exercisable in cash or by net exercise at a price of $1.155 per share, for gross proceeds of $6.0 million and net proceeds of $5.7 million after deducting offering costs of $0.3 million. The warrants are immediately exercisable and expire in July 2016.

In connection with the private placement, we filed a registration statement with the SEC for the resale of both the shares of common stock purchased by the investors and the shares of common stock issuable upon exercise of the warrants. We also agreed to other customary obligations regarding registration, including matters relating to indemnification, maintenance of the registration statement and payment of expenses. The resale registration statement was declared effective by the SEC in August 2009.

We may be liable for liquidated damages if we do not maintain the effectiveness of the registration statement or the listing of the common stock on the Nasdaq Capital Market, the Nasdaq Global Market, the New York Stock Exchange or the American Stock Exchange, in each case for a period of ten consecutive days or for more than thirty days in any 365-day period. The amount of the liquidated damages is one percent per applicable ten or thirty day period, subject to an aggregate maximum of eight percent per calendar year, of the aggregate purchase price of the common stock purchased in the private placement then held by each investor that are registrable securities. We do not believe it is probable we will be required to pay liquidated damages, and we have not recognized any amounts in our financial statements related to such potential liquidated damages.

Loan and Security Agreement

In May 2008, we entered into the Loan Agreement with Silicon Valley Bank and Oxford Finance Corporation under which we borrowed $15.0 million, less debt issuance costs of $0.2 million, for net proceeds of $14.8 million. In connection with entering into the Loan Agreement, we issued warrants to Silicon Valley Bank and Oxford Finance Corporation to purchase an aggregate of approximately 239,000 shares of our common stock. The warrants have an exercise price of $4.385 per share and a ten-year term. In March 2009, we repaid the entire remaining $13.7 million principal amount of the loan, together with the final payment of $0.6 million required under the Loan Agreement. In connection with the repayment, we issued to one of the lenders a warrant to purchase an aggregate of 200,000 shares of common stock having a ten-year term and an exercise price of $0.25, which the lenders agreed to accept in lieu of the $0.9 million prepayment penalty required under the Loan Agreement. We no longer have any obligations under the Loan Agreement.

Committed Equity Financing Facility

In May 2008, we entered into a Committed Equity Financing Facility, or CEFF, with Kingsbridge Capital Ltd., or Kingsbridge, pursuant to which Kingsbridge committed to provide capital financing for a period of three years through the purchase of a maximum of approximately 3,672,000 newly-issued shares of our common stock, subject to certain limitations as set forth in the common stock purchase agreement. We did not issue and sell any shares of our common stock under the CEFF. In July 2009, we terminated the CEFF and no longer have any obligations under the agreements relating to the CEFF. In connection with entering into the CEFF, we issued to Kingsbridge a warrant to purchase 165,000 shares of our common stock at the purchase price of $5.4175 per share. The warrant remains exercisable, subject to certain exceptions, until November 2013.

Contractual Obligations

We have entered into license agreements to acquire the rights to develop and commercialize Silenor. Pursuant to these agreements, we obtained exclusive, sub-licenseable rights to the patents and know-how for certain indications. We generally are required to make upfront payments as well as additional payments upon the achievement of specific development and regulatory approval milestones. We are also obligated to pay royalties under the agreements until the later of the expiration of the applicable patent or the applicable last date of market exclusivity following the first commercial sale.

The following table describes our commitments to settle contractual obligations in cash as of December 31, 2009 (in thousands):

		Payments Due By Period
						2011				2013
						through				through
		2010				2012				2014				After 2015				Total
Operating lease obligations		$	9			$	7			$	—			$	—			$	16
Total		$	9			$	7			$	—			$	—			$	16

The approval of our NDA for Silenor triggered a milestone payment obligation of $1.0 million to ProCom One Inc., and we are also obligated to make revenue-based royalty payments. These milestone and royalty payments are not included in the table above because as of December 31, 2009, we could not determine when or if the related milestone would be achieved or the events triggering the commencement of payment obligations would occur.

We have contracted with various consultants, drug manufacturers, and other vendors to assist in clinical trial work, pre-clinical studies, data analysis, the submission of our NDA and related information to the FDA, the regulatory review process relating to the NDA and preparation for the potential commercial launch of Silenor. The contracts are terminable at any time, but obligate us to reimburse the providers for any time or costs incurred through the date of termination.

We have employment agreements with each of our current employees that provide for severance payments and accelerated vesting for certain share-based awards if their employment with us is terminated under specified circumstances.

In order to reduce expenditures, we terminated the employment of six employees in March 2009 and one additional employee on April 1, 2009. Each of the terminated employees entered into a separation agreement under which we paid two months of the employee’s base salary upon separation and agreed to pay 110% of the remaining benefits to which the employee was contractually entitled upon the earliest to occur of: (1) the completion of a financing or series of financings of at least $10.0 million, (2) a change of control, or (3) an insolvency event involving us, in each case provided that such event occurs prior to February 15, 2010, after which the remaining severance benefits are eliminated. We paid $0.2 million under these separation agreements in 2009, and we have a remaining deferred severance obligation of $0.6 million. Each of the affected employees entered into a consulting agreement with us that expired December 31, 2009. The former employees vested in their share-based awards during the term of the consulting agreements. We recorded charges totaling $1.5 million during the first quarter of 2009 in conjunction with this reduction in workforce for severance paid, severance owed, accelerated vesting for certain share-based awards, and continued vesting of share-based awards under consulting agreements. In March 2010, the compensation committee of our Board of Directors approved the grant of common stock to the affected employees in settlement of the deferred severance obligation, conditioned upon the receipt of customary releases from the recipients.

From April 2009 through May 2009, in order to further reduce expenditures, we reduced our workforce by an additional six employees. Each of the terminated employees entered into a separation agreement pursuant to which we paid two months of the employee’s base salary upon separation and agreed to pay 110% of the remaining benefits to which the employee was contractually entitled upon the earliest to occur of: (1) the completion of a financing or series of financings of at least $10.0 million, (2) a change of control, (3) an insolvency event involving us, or (4) December 31, 2010. We paid $0.3 million under the separation agreements in 2009 and we have a remaining deferred severance obligation of $1.1 million. Each of the affected employees entered into a consulting agreement with us that will expire on June 30, 2010. The former employees will continue to vest in their share-based awards during the terms of their consulting agreements. In total, we recorded charges during the second quarter of 2009 in conjunction with this reduction in workforce totaling $3.0 million for severance paid, severance owed, accelerated vesting for certain share-based awards, and continued vesting of share-based awards under consulting arrangements.

The following table summarizes severance expense incurred in 2009 and our remaining unpaid severance obligations as of December 31, 2010 (amounts in thousands).

		Year ended
		December 31,
		2009
Beginning severance liability		$	—
Severance benefits incurred			2,172
Severance benefits paid			(513	)
Ending severance liability		$	1,659

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standard Board, or FASB, issued Accounting Standards Update, or ASU, No. 2009-13 “Revenue Recognition,” which provides guidance on recognizing revenue in arrangements with multiple deliverables. This standard impacts the determination of when the individual deliverables included in a multiple element arrangement may be treated as a separate unit of accounting. It also modifies the manner in which the consideration received from the transaction is allocated to the multiple deliverables and no longer permits the use of the residual method of allocating arrangement consideration. This accounting standard is effective for the first reporting period ending after June 15, 2010, with early adoption permitted. The Company is still evaluating the potential future effects of this guidance.

Item 7A.		Quantitative and Qualitative Disclosures about Market Risk

Our cash and cash equivalents at December 31, 2009 consists primarily of money market funds. The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. We also periodically invest in United States government debt securities. To the extent we hold securities other than money market funds, our primary exposure to market risk is interest rate sensitivity. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment will probably decline. To minimize this risk, we intend to continue to maintain our portfolio of cash, cash equivalents and marketable securities in a variety of securities consisting of money market funds and United States government debt securities, all with various maturities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. We also generally time the maturities of our investments to correspond with our expected cash needs, allowing us to avoid realizing any potential losses from having to sell securities prior to their maturities.

Recently, there has been concern in the credit markets regarding the value of a variety of mortgage-backed securities and the resultant effect on various securities markets. Our cash is invested in accordance with a policy approved by our board of directors which specifies the categories, allocations, and ratings of securities we may consider for investment. We do not believe our cash and cash equivalents have significant risk of default or illiquidity. We made this determination based on discussions with our treasury managers and a review of our holdings. While we believe our cash and cash equivalents are well diversified and do not contain excessive risk, we cannot provide absolute assurance that our investments will not be subject to future adverse changes in market value.

Item 8.		Financial Statements and Supplementary Data

See the list of financial statements filed with this report under Part IV — Item 15 below.

Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.		Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who is both our principal executive officer and our principal financial officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, who is both our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2009.

Management’s Report on Internal Control over Financial Reporting

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer, who is both our principal executive officer and our principal financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer, who is both our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting. Based on its evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2009, the end of our most recent fiscal year. This annual report does not include an attestation report of PricewaterhouseCoopers LLP, our independent registered public accounting firm, regarding internal control over financial reporting as of December 31, 2009. Management’s report was not subject to attestation by PricewaterhouseCoopers LLP pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.		Other Information

On March 18, 2010, Jesse I. Treu, Ph.D. informed us that he does not intend to stand for re-election as a director at our 2010 annual meeting of stockholders, but he will continue his service as a director until such meeting. In addition, on March 18, 2010, Kurt C. Wheeler resigned from our board of directors and the compensation and nominating/corporate governance committees thereof effective as of such date. Neither Dr. Treu’s decision to not stand for re-election nor Mr. Wheeler’s resignation resulted from any disagreement with us concerning any matter relating to our operations, policies or practices.

PART III

Item 10.		Directors, Executive Officers and Corporate Governance

Board of Directors

At March 19, 2010, our board of directors consisted of the following members:

Name		Age		Position with the Company
David F. Hale		61		Chairman of the Board
Richard W. Pascoe		46		Director, President and Chief Executive Officer
Erle T. Mast		47		Director, Chairman of the Audit Committee
Jesse I. Treu, Ph.D.		62		Director, Chairman of the Compensation Committee
Kurt von Emster		42		Director, Chairman of the Nominating / Corporate Governance Committee
Terrell A. Cobb		60		Director
Michael L. Eagle		62		Director
Thomas G. Wiggans		58		Director

David F. Hale is one of our co-founders and has served as Chairman of the Board of Directors since our founding in August 2003. He also served as our interim Chief Executive Officer from January 2008 until August 2008. Mr. Hale has served as Chairman and Chief Executive Officer of Hale BioPharma Ventures since May 2006. Mr. Hale served as President and Chief Executive Officer of CancerVax Corporation, a biotechnology company, from October 2000 until it merged with Micromet AG in 2006. He served as a director of CancerVax from December 2000 until the merger with Micromet Inc., and he currently serves as Chairman of Micromet’s board of directors. Prior to joining CancerVax, he was President and Chief Executive Officer of Women First HealthCare, Inc., a pharmaceutical company, from January 1998 to May 2000. Mr. Hale served as President, Chief Executive Officer and Chairman of Gensia Inc., a pharmaceutical company which became Gensia Sicor, from May 1987 to November 1997. Prior to joining Gensia, Mr. Hale was President and Chief Executive Officer of Hybritech Inc. Mr. Hale serves as Chairman of the Board of Santarus, Inc. and the privately held companies SkinMedica, Inc., Ridge Diagnostics, Automedics, Inc., Advantar Laboratories, Crisi Medical Systems and Neurelis, Inc. Mr. Hale was formerly a director of Metabasis Therapeutics, Inc. from 1998 through January 2010, including its Chairman of the Board from 2006 through January 2010.

Mr. Hale is a member of the boards of directors of industry organizations including BIOCOM/San Diego and the Biotechnology Industry Organization (BIO) and is Chairman of CONNECT, and is a member of the board of directors of Rady Children’s Hospital and Health Center and the Sanford-Burnham Medical Research Institute. Mr. Hale received a B.A. degree in Biology and Chemistry from Jacksonville State University. Mr. Hale’s depth and diversity of experience on boards of directors and in senior management of public and private specialty pharmaceutical companies, as well as his personal and professional integrity, ethics and values, led the board of directors to conclude that Mr. Hale should serve as a director of the company and as its non-executive chairman of the board.

Richard W. Pascoe joined as our President and Chief Executive Officer in August 2008. Before joining us, Mr. Pascoe was the Chief Operating Officer at ARIAD Pharmaceuticals, an emerging oncology company, where he led commercial operations, manufacturing, information services, program and alliance management and business development. Mr. Pascoe held a series of senior management roles at King Pharmaceuticals, Inc., including senior vice president of neuroscience marketing and sales and vice president positions in both international sales and marketing and hospital sales. He also held positions in the commercial groups at Medco Research, Inc. (which was acquired by King), COR Therapeutics, Inc. (where he helped lead the successful launch of eptifibatide [Integrilin^®]), B. Braun Interventional and the BOC Group. Mr. Pascoe served as a commissioned officer in the United States Army following his graduation from the United States Military Academy at West Point where he received a B.S degree in Leadership. Mr. Pascoe’s appointment as our President and Chief Executive Officer and the board’s belief that the company’s chief executive officer should serve on the board, as well as Mr. Pascoe’s depth and diversity of experience in senior management of public specialty pharmaceutical companies and his personal and professional integrity, ethics and values, led the board of directors to conclude that Mr. Pascoe should serve as a director of the company.

Erle T. Mast has served on our board of directors since June 2008. Mr. Mast currently serves as Executive Vice President and Chief Financial Officer and is a co-founder of Clovis Oncology, Inc., an emerging biopharmaceutical company. Previously, Mr. Mast was Chief Financial Officer of Pharmion Corporation from 2002 until its acquisition by Celgene Corporation in March 2008. Mr. Mast was also an Executive Vice President of Pharmion from February 2006 until the acquisition. He was Vice President of Finance for Dura Pharmaceuticals, Inc. from 1997 until its acquisition by Elan Corporation, plc in 2000, and thereafter he was Chief Financial Officer of Elan’s Global Biopharmaceuticals business until 2002. Prior to that, Mr. Mast was a partner with Deloitte & Touche, LLP. Mr. Mast has been a director of Zogenix, Inc. since 2008 and was a director of Verus Pharmaceuticals, Inc. from 2007 to 2009. Mr. Mast graduated from California State University, Bakersfield with a degree in business administration. Mr. Mast’s depth and diversity of experience on boards of directors and in senior management of public and private specialty pharmaceutical companies, including his specific experience and skills that qualify Mr. Mast to be our “audit committee financial expert” as that term is defined in the rules and regulations established by the Securities and Exchange Commission, as well as his personal and professional integrity, ethics and values, led the board of directors to conclude that Mr. Mast should serve as a director of the company.

Jesse I. Treu, Ph.D. has served as a member of our board of directors since December 2003. Dr. Treu has been a Partner of Domain Associates since its inception 25 years ago. He has been a director of over 30 early-stage health care companies, 18 of which have so far become public companies. Present board memberships include Afferent Pharmaceuticals, Altea Therapeutics, Aesthetic Sciences, CoLucid, Regado Biosciences and Tandem Diabetes Care, Inc. He has also served as a Founder, President and Chairman of numerous venture stage companies. Dr. Treu also served as a director of BiPar Sciences from 2007 to 2009, Celladon Corporation from 2005 to 2006, Northstar Neuroscience from 2002 to 2007 and SenoRx from 1999 to 2008. Prior to the formation of Domain, Dr. Treu had twelve years of experience in the health care industry. He was Vice President of the predecessor organization to The Wilkerson Group, and its venture capital arm, CW Ventures. While at CW Ventures, he served as President and CEO of Microsonics, a pioneer in computer image processing for cardiology. From 1977 through 1982, Dr. Treu led new product development and marketing planning for immunoassay and histopathology products at Technicon Corporation, which is now part of Siemens Diagnostics. Dr. Treu began his career with General Electric Company in 1973, initially as a research scientist developing thin film optical sensors for immunoassay testing, and later serving on the corporate staff with responsibility for technology assessment and strategic planning. Dr. Treu received his B.S. from Rensselaer Polytechnic Institute and his M.A. and Ph.D. in physics from Princeton University. Dr. Treu’s depth and diversity of experience on boards of directors and in senior management of public and private specialty pharmaceutical companies and in evaluating and investing in biotech companies, as well as his personal and professional integrity, ethics and values, led the board of directors to conclude that Dr. Treu should serve as a director of the company. In March 2010, Dr. Treu informed us that he does not intend to stand for re-election at our 2010 annual meeting of stockholders, but he will continue his service as a director until such meeting.

Kurt von Emster, CFA has served as a member of our board of directors since August 2005. Mr. von Emster is currently Managing Director of venBio LLC. From November 2000 through February 2009, Mr. von Emster was a General Partner and Portfolio Manager for the MPM BioEquities Fund. Prior to joining MPM, Mr. von Emster spent 11 years with Franklin Templeton Group as a Vice President and Portfolio Manager where he managed over $2 billion in health and biotech funds. In his tenure at Franklin, Mr. von Emster was responsible for building the health care group and was responsible for conceiving and developing seven different life science investment products for Franklin. Mr. von Emster holds the Chartered Financial Analyst designation (CFA), is a member of the Association for Investment Management and Research and is a member of the Security Analysts of San Francisco. Mr. von Emster currently serves on the boards of directors of Facet Biotech Corporation, a publicly traded biotechnology company, and Metabolex, a private drug development company. He has a degree from the University of California at Santa Barbara in Business and Economics. Mr. von Emster’s depth and diversity of experience on boards of directors of public and private biotechnology companies and in evaluating and investing in biotech companies, as well as his personal and professional integrity, ethics and values, led the board of directors to conclude that Mr. von Emster should serve as a director of the company.

Terrell A. Cobb has served as a member of our board of directors since August 2003. Mr. Cobb is the founder and currently serves as President of ProCom One, a drug development company, a position he has held since 1998. We license Silenor from ProCom One, Inc. as described in further detail under Part III — Item 13, “Certain Relationships and Related Transactions, and Director Independence” of this report. From 1995 to the present, Mr. Cobb has served as a consultant focusing on business development activities in the pharmaceutical industry. Mr. Cobb previously spent 15 years in various positions at Johnson and Johnson. Mr. Cobb has founded four specialty pharmaceutical companies, has held senior management positions in several start-up organizations, including Pharmaco and Scandipharm, and has acted as an advisor and consultant to other drug development companies. He received a B.A. degree from Mercer University in Chemistry and Psychology. Mr. Cobb’s depth and diversity of experience on boards of directors and in senior management of public and private specialty pharmaceutical companies, as well as his personal and professional integrity, ethics and values, led the board of directors to conclude that Mr. Cobb should serve as a director of the company. In addition, ProCom One has the right to designate one member of our board of directors, and ProCom One has designated Mr. Cobb to serve in such role.

Michael L. Eagle has served on our board of directors since May 2007. Mr. Eagle served as Vice President of Manufacturing for Eli Lilly and Company from 1994 through 2001 and held a number of executive management positions with Eli Lilly and its subsidiaries throughout his career there. Since retiring from Eli Lilly, he has served as a founding member of Barnard Life Sciences, LLC. Mr. Eagle serves on the boards of directors of Micrus Endovascular Corporation, a medical device company, and Cardio Polymers, Inc., formerly known as Symphony Medical, a private medical device company. Mr. Eagle earned his B. S. degree in mechanical engineering from Kettering University and an M.B.A. from the Krannert School of Management at Purdue University. He serves on the Board of Trustees of the La Jolla Playhouse and Futures for Children. Mr. Eagle’s depth and diversity of experience on boards of directors and in senior management of public and private pharmaceutical and medical device companies, as well as his personal and professional integrity, ethics and values, led the board of directors to conclude that Mr. Eagle should serve as a director of the company.

Thomas G. Wiggans has served on our board of directors since June 2008. Mr. Wiggans served as Chief Executive Officer of Peplin, Inc. from August 2008 until Peplin’s acquisition by LEO Pharma A/S in November 2009, and as Chairman of Peplin’s Board of Directors from October 2007 until such acquisition. Mr. Wiggans served as Chief Executive Officer of Connetics Corporation from 1994 until December 2006 when Connetics was acquired by Stiefel Laboratories, Inc. Mr. Wiggans was also Chairman of the Board of Connetics from January 2006 until the acquisition. From 1992 to 1994, Mr. Wiggans served as President and Chief Operating Officer of CytoTherapeutics Inc. He served in various positions at Ares-Serono Group from 1980 to 1992, including President of its U.S. pharmaceutical operations and Managing Director of its U.K. pharmaceutical operations. Mr. Wiggans currently serves on the boards of directors of Sangamo Biosciences, Inc., Onyx Pharmaceuticals, Inc. and Victory Pharma Inc. Mr. Wiggans also served as a director of Corthera, Inc. from 2009 to 2010. He is also on the Board of Trustees of the University of Kansas Endowment Association. In addition, Mr. Wiggans is Chairman of the Biotechnology Institute, a non-profit educational organization. Mr. Wiggans holds a B.S. in Pharmacy from the University of Kansas and an M.B.A. from Southern Methodist University. Mr. Wiggans’ depth and diversity of experience on boards of directors and in senior management of public and private specialty pharmaceutical companies, as well as his personal and professional integrity, ethics and values, led the board of directors to conclude that Mr. Wiggans should serve as a director of the company.

Director Nomination Process and Other Corporate Governance Matters

Director Qualifications

In evaluating director nominees, the nominating/corporate governance committee considers the following factors:

	•		personal and professional integrity, ethics and values;
	•		experience in corporate management, such as serving as an officer or former officer of a publicly held company;
	•		experience in our industry and with relevant social policy concerns;
	•		experience as a board member of another publicly held company;
	•		diversity of expertise and experience in substantive matters pertaining to our business relative to other board members; and
	•		practical and mature business judgment.

The nominating/corporate governance committee’s goal is to assemble a board of directors that brings to our company a variety of perspectives and skills derived from high quality business and professional experience.

Other than the foregoing, there are no stated minimum criteria for director nominees, although the nominating/corporate governance committee may also consider such other factors as it may deem to be in the best interests of our company and our stockholders. The nominating/corporate governance committee does, however, believe it appropriate for at least one, and preferably, several, members of our board of directors to meet the criteria for an “audit committee financial expert” as defined by SEC rules, and that a majority of the members of our board of directors meet the definition of “independent director” under the Nasdaq Stock Market qualification standards. The nominating/corporate governance committee also believes it appropriate for our President and Chief Executive Officer to serve as a member of our board of directors.

Identification and Evaluation of Nominees for Directors

The nominating/corporate governance committee identifies nominees for director by first evaluating the current members of our board of directors willing to continue in service. Current members with qualifications and skills that are consistent with the nominating/corporate governance committee’s criteria for board service and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of our board of directors with that of obtaining a new perspective.

If any member of our board of directors does not wish to continue in service or if our board of directors decides not to re-nominate a member for re-election, the nominating/corporate governance committee identifies the desired skills and experience of a new nominee in light of the criteria above. The nominating/corporate governance committee generally polls our board of directors and members of management for their recommendations. The nominating/corporate governance committee may also review the composition and qualification of the boards of directors of our competitors, and may seek input from industry experts or analysts. The nominating/corporate governance committee reviews the qualifications, experience and background of the candidates. In making its determinations, the nominating/corporate governance committee evaluates each individual in the context of our board of directors as a whole, with the objective of assembling a group that can best perpetuate the success of our company and represent stockholder interests through the exercise of sound business judgment. After review and deliberation of all feedback and data, the nominating/corporate governance committee makes its recommendation to our board of directors. Historically, the nominating/corporate governance committee has not relied on third-party search firms to identify director candidates. The nominating/corporate governance committee may in the future choose to do so in those situations where particular qualifications are required or where existing contacts are not sufficient to identify an appropriate candidate.

We have not received director candidate recommendations from our stockholders, and we do not have a formal policy regarding consideration of such recommendations. However, any recommendations received from stockholders will be evaluated in the same manner that potential nominees suggested by board members, management or other parties are evaluated.

Board Leadership and Risk Oversight

We believe it is the chief executive officer’s responsibility to manage the company and the chairman’s responsibility to lead the board. As directors continue to have more oversight responsibilities than ever before, we believe it is beneficial to have an independent chairman whose sole job is leading the board. By having another director serve as chairman of the board, Mr. Pascoe will be able to focus his entire energy on managing the company.

We believe our chief executive officer and our chairman have an excellent working relationship that has allowed Mr. Pascoe to make a good transition into the role of president and chief executive officer since joining the company in August of 2008. By clearly delineating the role of the chairman position in our corporate governance guidelines, we ensure there is no duplication of effort between the chief executive officer and the chairman. We believe this provides strong leadership for our board, while also positioning Mr. Pascoe as the leader of the company in the eyes of our collaborators, vendors, employees and other stakeholders.

Our board has six independent members and three non-independent members. A number of our independent board members are currently serving or have served as members of senior management of other public companies and have served as directors of other public companies. We have three board committees comprised solely of independent directors, each with a different independent director serving as chair of the committee. We believe that the number of independent, experienced directors that make up our board, along with the independent oversight of the board by the non-executive chairman, benefits our company and our stockholders.

Our audit committee is primarily responsible for overseeing the company’s risk management processes on behalf of the full board. The audit committee receives reports from management at least quarterly regarding the company’s assessment of risks. In addition, the audit committee reports regularly to the full board of directors, which also considers the company’s risk profile. The audit committee and the full board of directors focus on the most significant risks facing the company’s business and the company’s general risk management strategy, and also ensure that risks undertaken by the company are consistent with the board’s appetite for risk. While the board oversees the company’s risk management, company management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.

Pursuant to our bylaws and our corporate governance guidelines, our board determines the best board leadership structure for our company from time to time. As part of our annual board self-evaluation process, we evaluate our leadership structure to ensure that the board continues to believe that it provides the optimal structure for our company and stockholders. We recognize that different board leadership structures may be appropriate for companies in different situations. We believe our current leadership structure, with Mr. Pascoe serving as chief executive officer and Mr. Hale serving as chairman of the board, is the optimal structure for our company at this time.

Audit Committee and Financial Expert

Our audit committee currently consists of Mr. Mast (chair), Mr. Eagle, and Mr. Wiggans, each of whom our board of directors has determined is independent within the meaning of the independent directors standards of the Securities and Exchange Commission and the Nasdaq Stock Market, Inc. Our board of directors has determined that Mr. Mast qualifies as an “audit committee financial expert” as that term is defined in the rules and regulations established by the Securities and Exchange Commission.

Audit Committee Report

The audit committee oversees our financial reporting process on behalf of our board of directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. In fulfilling its oversight responsibilities, the audit committee reviewed the audited financial statements in our annual report with management, including a discussion of any significant changes in the selection or application of accounting principles, the reasonableness of significant judgments, the clarity of disclosures in the financial statements and the effect of any new accounting initiatives.

The audit committee reviewed with PricewaterhouseCoopers LLP, who are responsible for expressing an opinion on the conformity of these audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters as are required to be discussed with the audit committee under generally accepted auditing standards, including the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, Communication with Audit Committees. In addition, the audit committee has discussed with PricewaterhouseCoopers LLP their independence from management and our company, has received from PricewaterhouseCoopers LLP the written disclosures and the letter required by the Public Company Accounting Oversight Board, Rule 3526 Communication with Audit Committees Concerning Independence, and has considered the compatibility of non-audit services with the independence of our registered public accounting firm.

The audit committee met with PricewaterhouseCoopers LLP to discuss the overall scope of their audit. The meetings with PricewaterhouseCoopers LLP were held, with and without management present, to discuss the results of their examination, their comments on our internal controls and the overall quality of our financial reporting.

Based on the reviews and discussions referred to above, the audit committee has recommended to our board of directors that the audited financial statements be included in our annual report for the year ended December 31, 2009.

This Audit Committee Report is furnished solely with this report, and is not filed with this report, and shall not be deemed incorporated by reference into any other filing under the Securities Act or the Exchange Act, whether made by us before or after the date hereof, regardless of any general incorporation language in any such filing, except to the extent we specifically incorporate this material by reference into any such filing.

The foregoing report has been furnished by the audit committee.

Erle T. Mast, Chairman
Michael L. Eagle
Thomas G. Wiggans

Executive Officers

At March 18, 2010, our executive officers consisted of the following:

Name		Age		Position with the Company
Richard W. Pascoe		46		President and Chief Executive Officer
Jeffrey W. Raser		49		Senior Vice President, Sales and Marketing
Brian T. Dorsey		41		Vice President, Product Development
Matthew W. Onaitis		39		Vice President, General Counsel and Secretary

See “Board of Directors” for the biography of Mr. Pascoe.

Jeffrey W. Raser is one of our co-founders and has served as our Senior Vice President, Sales and Marketing since our inception in August 2003. From 2000 to 2003, Mr. Raser was the Senior Vice President, Corporate Development and Marketing for CancerVax Corporation, a biopharmaceutical company focused on the development of immunotherapeutic products for the treatment of cancer. Prior to CancerVax, from 1998 to 2000 he served as Senior Vice President of Sales and Marketing for Women First HealthCare, a specialty pharmaceutical company. Mr. Raser also held a variety of positions at Roche Laboratories, a pharmaceutical company, in sales, marketing and strategic planning and at Lederle Laboratories, a pharmaceutical company, in government and corporate affairs. Mr. Raser holds a B.A. from Franklin and Marshall College.

Brian T. Dorsey joined us as Executive Director, Manufacturing and Program Management in March 2005. He was later promoted to Vice President, Manufacturing and Program Management in November 2006 and named Vice President, Product Development in January 2007. From April 2002 to March 2005, Mr. Dorsey served as Head of Project Management, Medical Writing and Library Services at Maxim Pharmaceuticals Inc., a biopharmaceutical company. From May 2001 to April 2002, Mr. Dorsey served as Director, Head of Biopharmaceutical Project Management at Baxter Bioscience, a division of Baxter Healthcare Corporation. Previously, Mr. Dorsey served as a Global Project Leader / Project Director at Pfizer Global Research and Development (Agouron). Mr. Dorsey received his B.S. in chemistry and his Masters degree in executive leadership, both from the University of San Diego.

Matthew W. Onaitis joined us as Vice President, Legal Affairs and Secretary in May 2006, and became our Vice President, General Counsel and Secretary in January 2007. From January 2006 to May 2006, Mr. Onaitis served as Associate General Counsel at Biogen Idec Inc., a biopharmaceutical company. From June 2004 to December 2005, Mr. Onaitis was Director, Legal Affairs at Elan Corporation plc, a biopharmaceutical company. Mr. Onaitis practiced corporate and commercial law with the law firm of Clifford Chance US LLP from July 2002 to June 2004, which included a secondment to Elan from October 2003 to June 2004. From April 2000 to July 2002, Mr. Onaitis practiced corporate and commercial law with the law firm of Brobeck, Phleger & Harrison LLP. Mr. Onaitis holds a J.D. from Stanford Law School and a B.S. in mechanical engineering from Carnegie Mellon University.

Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Exchange Act, directors, officers and beneficial owners of 10% or more of our common stock are required to file with the Securities and Exchange Commission on a timely basis initial reports of beneficial ownership and reports of changes regarding their beneficial ownership of our common stock. Officers, directors and 10% beneficial owners are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms that they file.

Based solely on our review of the copies of such forms received and the written representations from certain reporting persons, we have determined that no officer, director or 10% beneficial owner known to us was delinquent with respect to their reporting obligations as set forth in Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2009.

Code of Ethics

Our company has established a Code of Business Conduct and Ethics that applies to our officers, directors and employees which is available on our internet website at www.somaxon.com. The Code of Ethics contains general guidelines for conducting the business of our company consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K.

Item 11.		Executive Compensation

Compensation Discussion and Analysis

Philosophy

All of our compensation programs are designed to attract and retain key employees, to motivate them to achieve key strategic performance measures and to reward them for superior performance. Different compensation programs are geared toward short and longer-term performance with the overarching goal of providing our employees with incentives to increase stockholder value over the long term. Executive compensation programs impact all employees by creating an environment of goals, rewards and expectations. Because we believe the performance of every employee is important to our success, we are mindful of the effect of executive compensation and incentive programs on all of our employees.

We believe that the compensation of our executives should largely reflect their success as a management team, rather than as individual contributors, in attaining key operating objectives. As a result, we believe that the performance of the executives in managing our company, considered in light of general economic and specific company, industry and competitive conditions, should be the main basis for determining their overall compensation.

Overview of Total Compensation and Process

Elements of total compensation for our executives include:

	•		salary,
	•		annual, variable, performance-based bonus awards, generally payable in cash,
	•		equity-based incentive awards, and
	•		other benefits.

Each of these is described in more detail below.

The compensation committee has the primary authority to determine our company’s compensation philosophy and to establish compensation for our executive officers. In the first quarter of each year, the compensation committee, which consists entirely of independent members of our board of directors, reviews the performance of each of our executive officers during the previous year. In connection with this review, the compensation committee typically reviews and resets base salaries for our executive officers, determines their incentive bonuses relating to prior year performance, approves elements of the incentive bonus plan for the current year, including target bonuses and corporate objectives, and grants stock options to all of our executive officers and certain other eligible employees. The compensation committee also has the discretion to make adjustments to executive compensation at other times during the year.

In making these compensation decisions, it has been the practice of our compensation committee to review the historical levels of each element of each executive officer’s total compensation (salary, bonus, stock incentive awards and other benefits) and to compare each element with that of the executive officers in an appropriate group of comparable specialty pharmaceutical companies.

With respect to the compensation committee’s executive compensation review in early 2009, the committee authorized management to engage Remedy Compensation Consulting, or Remedy, to perform an assessment of the group of comparable specialty pharmaceutical companies used by the committee in reviewing executive compensation. Our management reviewed with Remedy the comparison group that we used in 2008, and this review resulted in a new comparison group that possessed the following characteristics at the time of selection:

	•		market capitalizations below $275 million,
	•		most advanced product candidate in Phase 2b or later,
	•		limited commercial infrastructure,
	•		less than 175 employees, and
	•		a reasonable expectation that we could compete with these companies to fill senior management positions.

The compensation committee then approved the companies comprising the comparison group. The companies in the group were:

		• Acadia Pharmaceuticals Inc.		• Neurocrine BioSciences, Inc.
		• Affymax, Inc.		• NeurogesX, Inc.
		• Alexza Pharmaceuticals, Inc.		• Orexigen Therapeutics, Inc.
		• ARIAD Pharmaceuticals, Inc.		• Pain Therapeutics, Inc.
		• Cadence Pharmaceuticals, Inc.		• Poniard Pharmaceuticals, Inc.
		• IDM Pharma		• Telik, Inc.
		• La Jolla Pharmaceuticals, Inc.		• Trubion Pharmaceuticals, Inc.
		• MAP Pharmaceuticals		• Vanda Pharmaceuticals Inc.
		• MDRNA, Inc.

Our management then compiled competitive executive compensation information from each of the companies in this comparison group for the compensation committee to review and analyze. With respect to executive officers for which the publicly available competitive information from the comparison group was not sufficient to provide meaningful analysis, our management also provided the compensation committee with competitive information relating to such officers’ positions from the 2008 Radford Survey — Biotechnology Benchmark.

With respect to the compensation committee’s executive compensation review in early 2010, the committee authorized management to engage Barney & Barney Compensation Consulting, or Barney & Barney, to perform an assessment of our group of comparable specialty pharmaceutical companies. Our management reviewed with Barney & Barney the comparison group that we used in 2009, and this review resulted in a new comparison group that possessed the following characteristics at the time of selection:

	•		market capitalizations below $350 million,
	•		most advanced product in Phase 2b or with a product approved or commercialized in the last 24 months,
	•		less than 175 employees, and
	•		a reasonable expectation that we could compete with these companies to fill senior management positions.

The compensation committee then approved the companies comprising the comparison group. The companies in the group were:

		• Acadia Pharmaceuticals Inc.		• Neurocrine BioSciences, Inc.
		• Alexza Pharmaceuticals, Inc.		• NeurogesX, Inc.
		• ARIAD Pharmaceuticals, Inc.		• Orexigen Therapeutics, Inc.
		• Biocryst Pharmaceuticals Inc.		• Pain Therapeutics, Inc.
		• Bionovo Inc.		• Poniard Pharmaceuticals, Inc.
		• Cypress Bioscience Inc.		• Questcor Pharmaceuticals, Inc.
		• Dyax Corp.		• Telik, Inc.
		• Dynavax Technologies Corp.		• Transcept Pharmaceuticals Inc.
		• Ligand Pharmaceuticals, Inc.		• Trubion Pharmaceuticals, Inc.
		• MDRNA, Inc.		• Vanda Pharmaceuticals Inc.

The changes made to the selection criteria for the 2010 comparison group reflect a desire on the part of the compensation committee to include for their consideration on a forward-looking basis, in advance of the commercialization of Silenor, a small number of companies having commercial operations. The committee intends to review compensation information relating to this smaller group both separately and as part of the entire comparison group, in each case in light of the company’s status with respect to commercialization efforts, in considering future compensation determinations.

Barney & Barney will compile competitive executive compensation information from each of the companies in this comparison group for the compensation committee to review and analyze. With respect to executive officers for which the publicly available competitive information from the comparison group is not sufficient to provide meaningful analysis, Barney & Barney also will provide the compensation committee with competitive information relating to such officers’ positions from one or more executive compensation surveys.

With respect to survey data not relating to our comparison groups that was reviewed by the compensation committee, the identities of the individual companies included in the surveys were not provided to the compensation committee, and the compensation committee did not refer to individual compensation information for such companies. Instead, the compensation committee only referred to the statistical summaries of such surveys.

While we believe that comparisons to market data are a useful tool, we do not believe that it is appropriate to establish executive compensation levels based solely on a comparison to competitive data. While compensation paid by other companies is a factor that the compensation committee considers in assessing the reasonableness of compensation, the compensation committee does not rely entirely on that data to determine executive officer compensation. Instead, the compensation committee incorporates flexibility into our compensation programs and in the assessment process to respond to and adjust for the evolving business environment. As a result of this approach, there are no comparative guidelines, such as percentiles, used by our compensation committee in making compensation determinations relative to the compensation data from our comparison group. In addition, the compensation committee has discretion to make stock awards to executive officers that are outside of the ranges in previously-approved stock option grant guidelines. Our compensation committee relies upon the judgment of its members in making executive compensation decisions, after reviewing the following factors:

	•		our performance against corporate objectives for the previous year,
	•		difficulty in achieving desired results in the previous year and the current year,
	•		value of the executive’s unique leadership and other skills and capabilities to support our long-term performance,
	•		historical compensation versus performance,
	•		status relative to similarly-situated executives from our comparison group or from compensation surveys,
	•		the executive’s performance generally, including against individual objectives, if any, for the previous year, and
	•		the impact that any compensation awards that are payable in cash would have on our cash position.

The data regarding the compensation history and the relevant comparison group for each executive officer are provided to our Chief Executive Officer, the Chairman of the Board and the compensation committee. Our Chief Executive Officer then makes compensation recommendations to the compensation committee with respect to the executive officers who report to him. Our Chairman of the Board makes compensation recommendations to the compensation committee with respect to the Chief Executive Officer. The compensation committee considers, but is not bound to accept, these recommendations with respect to executive officer compensation. No executive officer is present at the time that his or her compensation is being discussed or determined.

Our Chairman of the Board, David F. Hale, was appointed as Executive Chairman of the Board in December 2007, and assumed the role of Interim Chief Executive Officer on January 1, 2008. Richard W. Pascoe joined us as President and Chief Executive Officer in August 2008, with Mr. Hale retaining the position of Executive Chairman of the Board. Mr. Hale returned to his prior role as non-Executive Chairman of the Board as of our annual meeting of stockholders on June 9, 2009.

Mr. Hale’s compensation for his roles as Executive Chairman of the Board and Interim Chief Executive Officer was set solely by the compensation committee with no input from management. At the time that Mr. Hale agreed to serve in these positions, the compensation committee and our board of directors approved base compensation and bonus targets for Mr. Hale for his service in these positions. When Mr. Pascoe started as our President and Chief Executive Officer in August 2008, the compensation committee approved Mr. Pascoe’s base compensation and bonus targets for his service in such roles, and adjusted Mr. Hale’s base compensation and bonus targets given his continuing role as Executive Chairman of the Board. Mr. Hale’s base compensation was not reviewed and adjusted as part of our normal, annual executive compensation review, but the compensation committee determined Mr. Hale’s bonus and equity compensation as part of such review. Once Mr. Hale returned to the role of non-Executive Chairman of the Board in June 2009, his compensation thereafter was determined under our Director Compensation Policy that was previously approved by our board of directors.

Our policy for allocating between long-term and currently paid compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our company and our stockholders. A significant percentage of total compensation is allocated to incentive compensation as a result of the philosophy mentioned above. We have no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Rather, the compensation committee reviews historical and competitive information and applies its judgment in light of the company’s then-current circumstances regarding current and long-term goals to determine the appropriate level and mix of incentive compensation.

Elements of Executive Compensation

Summary Compensation Table

The following “Summary Compensation Table” summarizes the compensation received by our Executive Chairman, including compensation received after he returned to service as our non-executive chairman of the board, our President and Chief Executive Officer, our former Chief Financial Officer and our three other most highly compensated executive officers, or our Named Executive Officers, in the fiscal years ended December 31, 2009, 2008 and 2007. This table provides an all-inclusive presentation of the various cash and non-cash elements that comprise total compensation for each of the Named Executive Officers. The “Salary” column is the gross wages earned during each year listed. The “Stock Awards” column is the grant date fair value of stock awards issued during each respective year, adjusted for our assessment of the probability that performance conditions will be achieved. The grant date fair value was determined in accordance with the provisions of Statement of Financial Accounting Standards No. 123(R) Share Based Payment, or SFAS No. 123(R), using the stock price on the date of grant. The “Option Awards” column is the grant date fair value of stock options granted during each respective year, adjusted for our assessment of the probability that performance conditions will be achieved. The grant date fair value was determined in accordance with the provisions of SFAS No. 123(R) using the Black-Scholes valuation model with assumptions described in more detail in our audited financial statements included in this report. None of the awards with performance conditions were considered probable of achieving their vesting conditions at the date of grant. Therefore the grant date fair value of such performance awards for purposes of the Summary Compensation Table was zero. The full grant date fair value of awards which vest upon achieving performance conditions is, however, provided in the footnote. Except as set forth below, no Named Executive Officer earned any pension or other nonqualified deferred compensation, or perquisites exceeding $10,000 during 2009, 2008 or 2007.

																										Change in
																										Pension Value
																										and
																										Nonqualified
																		Option				Non-Equity				Deferred
						Salary				Bonus				Stock				Awards ($)				Incentive Plan				Compensation				All Other
Name and Principal Position		Year				($)				($) (1)				Awards ($)				(2)				Compensation ($)				Earnings ($)				Compensation				Total
David F. Hale, Chairman of the Board and former Interim Chief Executive Officer (3)			2009			$	91,376			$	—			$	—			$	424,220			$	—				N/A			$	—			$	515,596
			2008			$	289,091			$	36,000			$	15,125			$	—			$	—				N/A			$	—			$	340,216
			2007			$	19,646			$	—			$	57,000			$	1,150,781			$	—				N/A			$	162,189			$	1,389,616
Richard W. Pascoe, President and Chief Executive Officer and Current Director (4)			2009			$	415,000			$	—			$	—			$	1,461,045			$	—				N/A			$	—			$	1,876,045
			2008			$	163,484			$	—			$	24,200			$	1,313,800			$	—				N/A			$	206,845			$	1,708,329
Jeffrey W. Raser, Senior Vice President, Sales and Marketing			2009			$	270,150			$	—			$	—			$	831,989			$	—				N/A			$	—			$	1,102,139
			2008			$	268,484			$	38,588			$	15,125			$	293,166			$	—				N/A			$	—			$	615,363
			2007			$	255,208			$	62,781			$	57,000			$	416,995			$	—				N/A			$	—			$	791,984
Brian T. Dorsey, Vice President, Product Development			2009			$	253,000			$	—			$	—			$	786,025			$	—				N/A			$	—			$	1,039,025
			2008			$	250,029			$	34,500			$	15,125			$	244,305			$	—				N/A			$	—			$	543,959
			2007			$	218,466			$	59,477			$	57,000			$	208,751			$	—				N/A			$	—			$	543,694
Matthew W. Onaitis, Vice President and General Counsel			2009			$	236,250			$	—			$	—			$	957,609			$	—				N/A			$	—			$	1,193,859
			2008			$	234,797			$	33,750			$	15,125			$	244,305			$	—				N/A			$	—			$	527,977
			2007			$	224,323			$	53,501			$	57,000			$	553,329			$	—				N/A			$	—			$	888,153
Meg M. McGilley, former Vice President and Chief Financial Officer (5)			2009			$	114,276			$	—			$	—			$	167,711			$	—				N/A			$	42,500			$	324,487
			2008			$	252,578			$	35,438			$	15,125			$	244,305			$	—				N/A			$	—			$	547,446
			2007			$	234,375			$	54,844			$	57,000			$	416,995			$	—				N/A			$	—			$	763,214

The following table provides the full grant date fair values for all share-based awards included in the Summary Compensation Table that were granted with performance-based vesting conditions, assuming that the highest level of performance will be achieved in each case.

						Grant Date								Grant Date				Option
						Fair Value				Stock Award				Fair Value				Award
						of Stock				Vesting				of Option				Vesting
Name and Principal Position		Year				Awards $				Conditions				Awards				Conditions
David F. Hale, Chairman of the Board and former Interim Chief Executive Officer.			2009			$	201,167				(1	)		$	39,982				(2	)
			2008			$	30,250				(3	)		$	—				N/A
			2007			$	228,000				(4	)		$	—				N/A
Richard W. Pascoe, President and Chief Executive Officer and Current Director			2009			$	100,001				(1	)		$	119,947				(2	)
			2008			$	228,400				(3	)			—				N/A
Jeffrey W. Raser, Senior Vice President, Sales and Marketing			2009			$	47,219				(1	)		$	79,965				(2	)
			2008			$	30,250				(3	)		$	—				N/A
			2007			$	228,000				(4	)		$	—				N/A
Brian T. Dorsey, Vice President, Product Development			2009			$	43,864				(1	)		$	79,965				(2	)
			2008			$	30,250				(3	)		$	—				N/A
			2007			$	228,000				(4	)		$	—				N/A
Matthew W. Onaitis, Vice President and General Counsel			2009			$	41,089				(1	)		$	79,965				(2	)
			2008			$	30,250				(3	)		$	—				N/A
			2007			$	228,000				(4	)		$	—				N/A
Meg M. McGilley, former Vice President and Chief Financial Officer			2009			$	41,440				(1	)		$	—				N/A
			2008			$	30,250				(3	)		$	—				N/A
			2007			$	228,000				(4	)		$	—				N/A

Base Salary

As a general matter, the base salary for each executive officer is initially established through negotiation at the time the officer is hired, taking into account the officer’s qualifications, experience, prior salary and competitive salary information. The compensation committee annually reviews and sets the base salaries of our Chief Executive Officer and other members of senior management. Each of our executive officers has entered into an employment agreement with us that prohibits the compensation committee from decreasing his or her base salary as part of this annual review process. Salaries are also reviewed in the case of promotions or other significant changes in responsibilities. In each case, the compensation committee assesses individual performance against job responsibilities, our overall company performance, our budget for merit increases and competitive salary information. Base salary is intended to provide a baseline of compensation that does not fluctuate, absent merit-based increases.

For his service as our Executive Chairman of the Board, Mr. Hale received a monthly salary of $15,000 per month throughout 2008. From January 1 through June 9, 2009, when Mr. Hale assumed his prior role as non-Executive Chairman of the Board, Mr. Hale received such compensation in the form of RSUs which vest on our first open trading window following the first commercial sale of Silenor in the United States.

In February 2009, the compensation committee undertook its annual review of the compensation levels of each of the Named Executive Officers, which included an analysis of 2008 individual and corporate performance, historical compensation awards, anticipated contribution to 2009 corporate goals and comparisons to data from the companies in our comparison group and compensation surveys, if applicable, with respect to each such executive officer. As part of this process, our management recommended to the compensation committee that increases in the base salaries of our employees were not advisable in light of our then-current cash position. The compensation committee agreed with this recommendation, and at that time base salaries were kept at then-current levels for each of our Named Executive Officers.

Bonus Awards

It is the compensation committee’s objective to have a significant percentage of each executive officer’s total compensation be contingent upon our performance as well as upon his or her own level of performance and contribution toward our performance. This allows executive officers to receive bonus compensation in the event certain specified corporate performance measures are achieved, with individual performance also historically taken into account by the compensation committee for executive officers other than our Chief Executive Officer. Individual performance was also not taken into account when determining bonus compensation for Mr. Hale for his past service as our Executive Chairman of the Board and Interim Chief Executive Officer.

In 2009, our compensation committee adopted the 2009 Incentive Plan. This plan was designed to reward our executive officers for the achievement of annual performance goals. Pursuant to the plan, the committee designated for each executive officer a target bonus amount, expressed as a percentage of his or her base salary. For 2009, the target bonus percentage for our Chief Executive Officer was 45% of his base salary, and the target bonus percentage for each other executive officer was 35% of his or her base salary. The target bonus percentage for Mr. Hale, for his role as Executive Chairman of the Board, was 45% of the amount of total salary he received during 2009 in that role.

The calculation of the bonuses to be paid to our Named Executive Officers for 2009 would be entirely dependent upon the achievement of our corporate performance goals. Our 2009 corporate performance goals were established by our board of directors and included objectives relating to: (1) regulatory activities relating to our product candidate Silenor, (2) establishing a strategic collaboration regarding Silenor, and (3) our financing activities and financial performance.

Objectives relating to Silenor regulatory activities included the approval of the NDA for Silenor in the fourth quarter of 2009. With respect to establishing a strategic collaboration regarding Silenor, our goal was to complete a collaboration or to have an alternative strategic plan approved by our board of directors by the end of 2009. Our objectives relating to financing activities were to complete one or more financings in 2009 to meet our board-approved budget and to maintain operating expenses at or below the levels set forth in such budget.

With respect to our corporate goals, our compensation committee places performance into one of four categories: excellent in view of prevailing conditions, acceptable in view of prevailing conditions, meeting some but not all objectives, or not acceptable in view of prevailing conditions. Each of these categorizations results in a range of multipliers to the target amount of the bonus. The compensation committee has discretion with respect to the actual multiplier to apply in each case. For 2009, the ranges were 75% to 150% for excellent performance, 50% to 75% for acceptable performance, 25% to 50% for performance meeting some but not all objectives and 0% for unacceptable performance. The primary factor in the determination of the bonus is the achievement of corporate objectives, but the compensation committee also takes other factors into account, such as individual contribution to corporate goals, historical compensation awards, anticipated contribution to future corporate goals and the impact that the payment of bonuses in cash would have on our cash position. As a result, the ultimate payment of bonuses is within the subjective discretion of our compensation committee, notwithstanding performance relating to pre-established objectives.

In February 2009, the compensation committee undertook its annual review of the compensation levels and performance of the company and each of the Named Executive Officers. As part of this process, our management recommended to the compensation committee that the payment of cash bonuses to our employees under the previously-approved 2008 Incentive Plan was not advisable in light of our then-current cash position. The compensation committee agreed with this recommendation, and determined that cash bonuses would not be paid under the 2008 Incentive Plan. In lieu of such cash bonuses, the committee granted RSUs under our 2005 Equity Incentive Award Plan. The committee granted each such Named Executive Officer other than Mr. Pascoe a number of RSUs calculated by dividing the bonus amount to which such Named Executive Officer would otherwise have been entitled under the 2008 Incentive Plan by $2.18, the closing price of our common stock on the Nasdaq Stock Market on the grant date of February 17, 2009. Pursuant to Mr. Pascoe’s employment agreement with us, Mr. Pascoe was entitled to a cash bonus of $100,000 in lieu of any performance-based bonus under the 2008 Incentive Award Plan. The employment agreement was amended such that in lieu of such cash bonus Mr. Pascoe was granted 45,872 RSUs, which is equal to such bonus amount divided by $2.18, the closing price of our common stock on the Nasdaq Stock Market on the grant date of February 17, 2009. The RSUs would have vested in full six months after the consummation by us of a financing or a strategic collaboration, or the last in a series of financing or strategic collaboration transactions, in which we receive an aggregate of at least $25 million in unrestricted cash in 2009, subject to the executive’s continued employment by or service to us on such date. In addition, the RSUs would vest in full upon a change of control transaction involving us. The company did not meet that threshold, so all of these RSUs were forfeited as of December 31, 2009.

To date, the compensation committee has not considered the payment of any bonuses under our 2009 Incentive Plan.

Equity-Based Awards

We generally provide equity-based incentive award compensation to our executive officers through grants of stock options. We have also periodically awarded restricted stock and restricted stock units to our executive officers. Stock awards allow us to:

	•		enhance the link between the creation of stockholder value and long-term executive incentive compensation,
	•		provide an opportunity for increased equity ownership by executives, and
	•		maintain competitive levels of total compensation.

Stock option grant levels are determined based on market data and vary among executive officers based on their positions and performance. Newly hired or promoted executive officers also typically receive stock option grants in connection with those events. We have guidelines that provide ranges of options to be granted to our employees, including our executive officers, based on their positions and whether the grants are being made in connection with hiring or on a performance basis thereafter. These guidelines were adopted by our compensation committee after considering recommendations provided by our independent compensation

consultant that were based upon option grant data from our comparison group and the statistical summaries of compensation data presented to them based on available surveys. Our compensation committee considers the ranges contained in our guidelines in making determinations regarding the size of option grants, but it is not bound to comply with these ranges.

In making determinations relating to the size of stock option grants and other equity awards, the compensation committee takes into account a number of factors, such as the relative performance of the executive, individual scope of duties, the value of existing long-term incentive awards, prior contributions to company performance, the importance to the company of anticipated future performance, the size of prior grants and competitive market data. Based upon these factors, the compensation committee determines the size of equity awards at levels it considers appropriate to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value.

In addition, the board of directors has implemented a Policy Regarding Equity Awards. With respect to equity awards that may be granted to our executive officers, this policy provides that:

	•		equity awards may be granted only at meetings of the compensation committee or the board of directors,
	•		the grant date shall be the date that the meeting approving the equity award was held, or if later, the date of commencement of employment of a newly-hired executive officer,
	•		the exercise price of a stock option may not be less than the fair market value of a share of our common stock on the grant date,
	•		grants of equity awards to executive officers shall not be permitted if the compensation committee determines that at the time of grant its members are in possession of material, non-public information concerning the company, and
	•		the material terms of each equity award are communicated to the executive officer in a timely manner.