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EX-32 - EX-32 - CYPRESS BIOSCIENCE INCa55504exv32.htm
EX-31.1 - EX-31.1 - CYPRESS BIOSCIENCE INCa55504exv31w1.htm
EX-23.1 - EX-23.1 - CYPRESS BIOSCIENCE INCa55504exv23w1.htm
EX-31.2 - EX-31.2 - CYPRESS BIOSCIENCE INCa55504exv31w2.htm
EX-21.1 - EX-21.1 - CYPRESS BIOSCIENCE INCa55504exv21w1.htm
EX-10.21 - EX-10.21 - CYPRESS BIOSCIENCE INCa55504exv10w21.htm
EX-10.19 - EX-10.19 - CYPRESS BIOSCIENCE INCa55504exv10w19.htm
EX-10.18 - EX-10.18 - CYPRESS BIOSCIENCE INCa55504exv10w18.htm
EX-10.20 - EX-10.20 - CYPRESS BIOSCIENCE INCa55504exv10w20.htm
Table of Contents

 
 
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
     
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                                           
Commission File No. 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware   22-2389839
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
4350 Executive Drive, Suite 325
San Diego, California

(Address of principal executive
offices)
  92121
(Zip Code)
Registrant’s telephone number, including area code: (858) 452-2323
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
     
Title of Each Class:   Name of Exchange on which Registered
     
Common Stock $.001 Par Value   The NASDAQ Stock 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 o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o   Accelerated Filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller Reporting Company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
     The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2009 was approximately $277.4 million*
     The number of shares outstanding of the Registrant’s common stock as of March 2, 2009 was 37,983,754.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed subsequent to the date hereof with the Commission pursuant to Regulation 14A in connection with the Registrant’s 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the Registrant’s fiscal year ended December 31, 2009.
 
*   Calculated based on 29,451,276 shares of common stock held as of June 30, 2009 by non-affiliates and a per share market price of $9.42. Excludes 8,683,165 shares of common stock held by directors and executive officers and stockholders whose ownership exceeds ten percent of the common stock outstanding at June 30, 2009, who are deemed to be affiliates only for purposes of this calculation. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant.
 
 

 


 

CYPRESS BIOSCIENCE, INC.
FORM 10-K
INDEX
         
    Page
PART I
    1  
    13  
    32  
    32  
    32  
    32  
PART II
 
    33  
    35  
    36  
    47  
    47  
    47  
    47  
    49  
PART III
 
    50  
    50  
    50  
    50  
    50  
PART IV
 
    51  
    54  
 EX-10.18
 EX-10.19
 EX-10.20
 EX-10.21
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32
We own or have rights to various copyrights, trademarks and service marks used in our business, including the following: Cypress Bioscience, Inc., Avise PGSM and Avise MCVSM. SavellaTM is a trademark of Forest Laboratories, Inc. This report also includes other trademarks, service marks, and trade names of other companies.

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PART I
  Except for the historical information contained herein, the information contained herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, statements about our plans, strategies and prospects. These statements, which may include words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “anticipate,” “estimate,” “should,” or similar words, are based on our current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Although we believe that our beliefs, expectations and assumptions reflected in these statements are reasonable, our actual results and financial performance may prove to be very different from what we might have predicted on the date of this Form 10-K. Factors that could cause or contribute to differences include, but are not specifically limited to, our ability to market Savella, our ability to create a successful commercial organization, our ability to market our personalized medicine services, our ability to acquire and develop any compounds or products to treat any other indications we may pursue in a timely manner, or at all, as well as the other risks detailed in this Form 10-K and in our other SEC filings.
Item 1. Business
Company Overview
     Cypress Bioscience, Inc., which was incorporated in Delaware in 1981, provides therapeutics and personalized medicine services, facilitating improved and individualized patient care. Cypress’ goal is to address the evolving needs of specialist physicians and their patients by identifying unmet medical needs in the areas of pain, rheumatology, and physical medicine and rehabilitation, including challenging disorders such as fibromyalgia and rheumatoid arthritis. We believe our approach to improving patient care creates a unique partnership with physicians, and expect that offering personalized medicine services and therapeutic products through the same sales organization will provide Cypress a differentiated commercial strategy and sustainable competitive advantage.
     In January 2009, we received approval from the U.S. Food and Drug Administration (“FDA”) to market Savella (milnacipran HCl) for the management of fibromyalgia (“FM”). Milnacipran HCl has been approved for a non-pain condition in over 50 countries, with commercial experience outside the U.S. since 1997. We obtained an exclusive license in the U.S. and Canada to milnacipran from Pierre Fabre Medicament, or Pierre Fabre, in 2001. In January 2004, we entered into a collaboration agreement with Forest Laboratories, a leading marketer of central nervous system, or CNS, drugs with a strong franchise in the primary care and psychiatric markets. As part of this collaboration with Forest Laboratories, we sublicensed our rights to milnacipran to Forest Laboratories for the United States, with an option to extend the territory to include Canada, which was exercised in July 2007. As part of our agreements with both Forest Laboratories and Pierre Fabre, we have licensed any patents that may issue from our patent applications related to FM and milnacipran to Forest Laboratories and Pierre Fabre. Additional information on our ongoing post approval clinical development program for Savella can be found at www.clinicaltrials.gov.
     Following the January 2009 FDA approval to market Savella for the management of FM, Savella was shipped to wholesalers and became available at pharmacies at the end of April 2009. Savella is a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher potency than serotonin (in vitro). These two neurotransmitters are thought to play a central role in the symptoms for FM. We co-promote Savella for FM with our corporate partner, Forest Laboratories, Inc., or Forest Laboratories, and by the beginning of 2009, we expanded our sales force to 115 field based personnel in anticipation of the launch of Savella. At the beginning of May 2009, we began detailing Savella to rheumatologists, pain centers, and physical medicine and rehabilitation specialists in the U.S. Now that we are detailing Savella to physicians, in addition to receiving a royalty on total net sales of Savella we will be reimbursed by Forest Laboratories for the Savella sales calls that we make based on Forest Laboratories’ cost to conduct such sales calls.
     At the end of October 2008, with our initial 11 person sales force, we launched our first two novel personalized medicine services, Avise PG and Avise MCV, which are detailed to rheumatologists. Personalized medicine services are tests which are validated analytically and clinically to provide physicians with actionable information to help manage their patients’ care, including predicting the likelihood of developing disease or optimizing therapy. Avise

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PG is a test that supports dose optimization and therapeutic decision making for patients taking methotrexate (“MTX”), a widely used first-line therapy for rheumatoid arthritis (“RA”). Avise MCV is a test that aids in the diagnosis and prognosis of RA. We believe that offering integrated personalized medicine services and pharmaceutical products through the same sales organization will facilitate physician access and improve the quality of the sales call, as well as help establish Cypress as a leader targeting these specific specialists. When we began promoting Savella in May 2009 with our 115 field based personnel we called on the same rheumatologists that we began calling upon in October 2008 for our first two personalized medicine services.
     From time to time we have ongoing Proof of Concept (“POC”) stage therapeutic product opportunities in development. At the present time, we are not funding any POC stage development programs, including the two pharmaceutical candidates acquired in connection with our acquisition in March 2008 of Proprius, Inc., or Proprius, although we continue to evaluate the merit of future investment in POC stage development programs. We are also actively continuing to evaluate various other potential strategic transactions for development stage and commercial product opportunities where we can leverage our broad technical, clinical and regulatory expertise or our excess sales force capacity, and are considering a variety of potential transaction structures.
     In February 2009, we announced the closing of a transaction to acquire Cellatope Corporation’s technology platform that uses cell-bound complement activation products (“CB-CAP”) to diagnose and monitor debilitating autoimmune disorders, including systemic lupus erythematosus (“SLE/Lupus”). We acquired the CB-CAP technology in a transaction that included a $2.0 million cash payment to Cellatope for the diagnostic technology as well as an additional $3.0 million potential milestone payment associated with the commercial development of the Lupus monitoring application.
     In March 2008, we announced the closing of the acquisition of Proprius that included an upfront payment of approximately $37.5 million in cash, as well as up to an additional $37.5 million in potential milestone related payments associated with the development of Proprius’ early clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat rheumatoid arthritis. We are not currently in active development with respect to either product candidate.
     Our operations of our personalized medicine services business, which we acquired as part of the acquisition of Proprius, are heavily influenced by the amount and timing of reimbursement we receive from third party payers. While the reimbursement has continued to improve for our Avise products, collection cycles continue to be prolonged with the amount of cash collected significantly less than the gross value of the testing services performed. During the fourth quarter of 2009, the Company revised its projections for the personalized medicine services business to reflect current product demand and the cash collection profile, which resulted in a $1.1 million non-cash goodwill impairment charge in the fourth quarter of 2009.
Savella (milnacipran HCl) for the Management of Fibromyalgia
Savella
     We promote Savella for the management of FM with our partner, Forest Laboratories. Savella is a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher potency than serotonin (in vitro), two neurotransmitters thought to play a central role in the symptoms of FM. Milnacipran is approved for the treatment of a non-pain condition in over 50 countries, with commercial experience outside the U.S. since 1997. Milnacipran had not previously been approved in the United States for any indication, and we and Forest Laboratories are the first companies to develop and commercialize Savella in the United States for FM.
Ongoing Phase IV Trials
     We have ongoing Phase IV clinical studies of Savella that are routinely updated and posted on www.clinicaltrials.gov.

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Personalized Medicine Services
Avise MCV
     Avise MCV is a personalized medicine service that we launched at the American College of Rheumatology annual meeting in October 2008. Avise MCV is a specialized lab blood test that can help accurately diagnose Rheumatoid Arthritis (RA). Avise MCV measures antibodies to mutated citrullinated vimentin, or MCV, a protein found in the inflamed synovium of patients with RA. Elevated levels of anti-MCV not only indicate an increased likelihood of having RA, but also identify those who may develop more severe forms of RA. Avise MCV may be used for first-line diagnostic testing of patients who present with symptoms of RA, offering prognostic insight while improving diagnostic accuracy. We acquired this personalized medicine service as part of our acquisition of Proprius.
Avise PG
     Avise PG is a personalized medicine service that we also launched at the American College of Rheumatology annual meeting in October 2008. Avise PG is a specialized blood test that helps measure how well the body metabolizes methotrexate (MTX). MTX is a widely used medication for the treatment of RA. Avise PG offers rheumatologists insight into a patient’s metabolism of MTX by measuring levels of MTX polyglutamates, the active metabolites of MTX. Historically, physicians have depended solely on a patient’s response, as gauged by clinical signs and symptoms, to determine whether MTX therapy has been optimized. We acquired this personalized medicine service as part of our acquisition of Proprius.
Other Personalized Medicine Services
     In February 2009, we announced the closing of a transaction to acquire Cellatope Corporation’s technology platform. This technology platform uses cell-bound complement activation products (CB-CAP) to diagnose and monitor debilitating autoimmune disorders, including lupus. The earliest any services using the CB-CAP technology would be available commercially is the fourth quarter of 2010.
     We continue to explore opportunities to improve the revenue profile of the personalized medicine services through strategic alliances.
Licenses, Collaborations and Acquisitions
Milnacipran Agreements
Pierre Fabre Agreements
     In January 2004, we amended and restated our existing license agreement with Pierre Fabre. Our license agreement with Pierre Fabre provides us with an exclusive license to develop and sell any products with the compound milnacipran as an active ingredient for any indication in the United States and Canada. We paid Pierre Fabre an upfront payment of $1.5 million in connection with the execution of the original license agreement in 2001 and a $1.0 million milestone payment in September 2003. We also issued Pierre Fabre 1,000,000 shares of common stock and warrants to purchase 300,000 shares of common stock in connection with an amendment to the agreement with Pierre Fabre. In February 2008, we paid Pierre Fabre $1.0 million upon the acceptance by the FDA of the New Drug Application (“NDA”) for milnacipran. Additionally, we are obligated to pay Pierre Fabre 5% of any upfront and milestone payments received from Forest Laboratories as a sublicense fee. We have paid Pierre Fabre an aggregate of $3.6 million under our obligation to pay 5% of any upfront and milestone payments received from Forest Laboratories and after a total of $7.5 million has been paid, any additional sublicense fees are credited against any subsequent milestone and royalty payments owed by us to Pierre Fabre. If not used, these credits are carried forward to subsequent years. Additional payments of up to a total of $3.5 million (of which $3.0 million was paid in January 2009 upon NDA approval) will be due to Pierre Fabre based on meeting certain clinical and regulatory milestones. Forest Laboratories assumed our obligation to pay royalties to Pierre Fabre and the transfer price for the active ingredient supplied by Pierre Fabre. Pierre Fabre retains the right to sell products in indications developed by us outside the United States and Canada, and will pay us a royalty based on net sales for such products. The license agreement also provides Pierre Fabre with certain rights to obtain a license outside the United States and Canada for new formulations and new salts developed by us.

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     The agreement is effective until the later of the expiration of the last-to-expire of certain patents held by Pierre Fabre relating to the development of milnacipran, or ten years after the first commercial sale of a licensed product, unless terminated earlier. Each party has the right to terminate the agreement upon 90 days’ prior written notice of the bankruptcy or dissolution of the other party or a breach of any material provision of the agreement if such breach is not cured within 90 days following such written notice. Additionally, Pierre Fabre has the right to terminate the agreement upon 90 days’ written notice if (i) we terminate all development activities, unless the termination of activities is subject to cure within 12 months and we are using commercially reasonable efforts to cure the termination of activities, (ii) we challenge the Pierre Fabre patents and (iii) we effect a change in control in which a third party acquirer controls a serotonin norepinephrine reuptake inhibitor, or SNRI, product and certain provisions of the agreement would be breached as a result of such SNRI product, and the breach is not cured within a specified time period.
     In addition, in January 2004, we entered into a supply agreement with Pierre Fabre. Pierre Fabre has the exclusive right to manufacture the active ingredients used in the commercial product, and we will pay Pierre Fabre a transfer price and royalties based on net sales. Forest Laboratories has assumed both of these financial obligations. Our supply agreement with Pierre Fabre may be terminated for cause either by us or by Pierre Fabre upon 90 days’ prior written notice to the other party upon a material breach of the agreement if the breach is not cured within 90 days following the written notice. In addition, Pierre Fabre may elect to terminate the agreement if we effect a change in control under specified circumstances.
Forest Laboratories Agreement
     In January 2004, we entered into a collaboration agreement with Forest Laboratories for the development and marketing of milnacipran. We selected Forest Laboratories as our development and marketing collaborator based in part on its strong franchise in central nervous system drugs and in the primary care markets. Under our agreement with Forest Laboratories, we sublicensed our exclusive rights to develop and commercialize milnacipran to Forest Laboratories for the United States, with an option to extend the territory to include Canada, which was exercised in July 2007. Additionally, Forest Laboratories assumed responsibility for funding all continuing development of milnacipran, including the funding of clinical trials and regulatory approval, as well as a specified number of our employees. However, we agreed upon an alternative cost sharing arrangement with Forest Laboratories for the second Phase III trial only. In connection with this arrangement, the amount of funding that we receive from Forest Laboratories for certain of our employees was eliminated as of the fourth quarter in 2004 for the second Phase III trial only, and we paid for a majority of the external costs of the second Phase III trial only, which were approximately $9.7 million. Forest reimbursed us for one-third of the costs, or $3.2 million in February 2008 in connection with the NDA acceptance for Savella by the FDA and the remaining $6.5 million upon NDA approval. Forest Laboratories is funding the Phase IV clinical trials. Forest Laboratories is also responsible for sales and marketing activities related to any product developed under the agreement, subject to our option under the co-promotion provisions to deliver up to 25% of the total physician details using our own sales force, and we will be reimbursed by Forest Laboratories in an amount equal to Forest Laboratories’ cost of providing the equivalent detailing calls. In connection with exercising the option to co-promote Savella, we detail to rheumatologists, pain centers, and physical and rehabilitation medicine specialists as well as select primary care physicians. As of February 1, 2010, we had 111 field based sales personnel.
     We share decision making authority with Forest Laboratories, through the joint development committee, with respect to the research, development and marketing of milnacipran. In the event that the joint development committee is unable to resolve any dispute, other than any marketing related issue, Forest Laboratories and Cypress must jointly resolve such issue. With respect to any marketing related issue, Forest Laboratories has the final decision making authority. Under our agreement with Forest Laboratories and our agreement with Pierre Fabre, each party agreed to certain limitations on the development of products for FM and on the development of SNRI products.
     Under our agreement with Forest Laboratories, we received an upfront payment of $25.0 million in January 2004, of which $1.25 million was paid to Pierre Fabre as a sublicense fee. Additionally, we received the following payments from Forest: a $5.0 million milestone payment in June 2007 for the successful second Phase III trial for Savella, of which $250,000 was paid to Pierre Fabre as a sublicense fee; a $1.0 million license fee payment in July 2007 to extend the territory to Canada, of which $50,000 was paid to Pierre Fabre as a sublicense fee; a $5.0 million milestone payment in December 2007 upon the filing of the NDA for Savella, of which $250,000 was paid to Pierre

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Fabre as a sublicense fee; a $10.0 million milestone payment in February 2008 upon the acceptance by the FDA of the NDA for Savella, of which $500,000 was paid to Pierre Fabre as a sublicense fee; and a $25.0 million milestone payment in January 2009 for the NDA approval of Savella, of which $1.25 million was paid to Pierre Fabre as a sublicense fee. The total upfront and milestone payments to us under the agreement could total approximately $165.0 million, of which $71.0 million has been received to date, related to the development and commercialization of Savella for the treatment of FM, a large portion of which will depend upon achieving certain sales of Savella. There was an additional $40.0 million in potential milestone payments related to new formulations of milnacipran created on behalf of Cypress; however, alternative formulation technology has been selected by Forest and Cypress and therefore Forest and Cypress have decided not to move forward with any such formulations created by a third party on Cypress’ behalf and therefore, such milestone events are no longer possible. In addition we will receive royalty payments based on sales of licensed product under this agreement. We believe that milnacipran may be effective in the treatment of other indications. With Forest Laboratories, we may in the future investigate the use of milnacipran in the treatment of other disorders. Should we and Forest Laboratories choose to pursue additional indications beyond FM and obtain FDA approval for such indications, we could receive up to an additional $45.0 million in milestone payments. Since we are entitled to royalty payments based on sales of any licensed product under the agreement with Forest Laboratories, we would receive royalty payments for any additional indications. The decision regarding which, if any, additional indications are pursued, is one that we make together with Forest Laboratories, through the joint development committee. Such decisions relate to the research and development of milnacipran, so in the event the joint development committee is unable to resolve any dispute regarding potential indications, Forest Laboratories and we must jointly resolve such issue.
     Forest Laboratories assumed the royalty payments due to Pierre Fabre and the transfer price for the active ingredient used in Savella, of which we are obligated to reimburse Forest Laboratories for a portion of the active ingredient costs of samples. The agreement with Forest Laboratories extends until the later of (i) the expiration of the last to expire of the applicable patents, (ii) 10 years after the first commercial sale of a product under the agreement in the applicable country or (iii) the last commercial sale of a generic product in such country, unless terminated earlier. Each party has the right to terminate the agreement upon prior written notice in the event of the bankruptcy or dissolution of the other party, or a breach of any material provision of the agreement if the breach has not been cured within the required time period following the written notice. Forest Laboratories may also terminate our agreement upon an agreed notice period in the event Forest Laboratories reasonably determines that the development program indicates issues of safety or efficacy that are likely to prevent or significantly delay the filing or approval of an NDA or to result in labeling or indications that would have a significant adverse affect on the marketing of any product developed under the agreement.
Acquisition of Proprius
Merger Agreement
     In March 2008, we acquired Proprius in a transaction involving an upfront payment of approximately $37.5 million in cash and an additional $37.5 million in potential milestone-related payments associated with the development of Proprius’ therapeutic candidates. We are evaluating these product candidates but are not currently in active development with respect to either product candidate. The milestone payments are payable, at the sole discretion of Cypress, in cash, or subject to certain conditions, up to 50% in shares of Cypress common stock, or a combination of both. We will only issue shares of our common stock in full or partial payment of any milestone payment to accredited investors, within the meaning of Rule 501 of Regulation D of the Securities Act of 1933, as amended, and the aggregate number of such shares issued to all accredited investors will not exceed 19.9% of the issued and outstanding shares of Cypress common stock on the date of the merger agreement. If we do issue shares of our common stock in full or partial payment of any milestone payment, the shares will be valued using a trailing 10-trading day average closing price over a period ending shortly before the relevant milestone payment to the Proprius stockholders is due. We have also agreed to file a registration statement with the Securities and Exchange Commission registering those shares for resale prior to their issuance.
       Subject to the terms of the merger agreement, the milestone payments are payable as follows:
$20.0 million upon the dosing of the first subject in any human phase III clinical trial involving PRO-406 (the topical non-steroidal anti-inflammatory drug [NSAID] therapy for the symptomatic treatment of osteoarthritis), that could be used, or in the case of a Phase II/III clinical trial that is used, as one of the pivotal trials required for

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filing a NDA. In the event that Cypress determines, in its sole discretion, to engage in a transaction (other than a change of control transaction) pursuant to which a substantial portion of the intellectual property rights owned by Cypress immediately after the effective time of the Proprius acquisition and necessary for the production, development and sale of PRO-406 are sold or licensed to or acquired by a third party prior to achievement of the $20.0 million milestone for PRO-406, in lieu of the $20.0 million milestone payment, the Proprius stockholders will receive 50% of the proceeds from such disposition after subtraction of Cypress’ development costs related to PRO-406, but the amount Proprius stockholders will receive cannot exceed $20.0 million; and
$17.5 million upon the earlier of our Board of Directors formally approving the initiation of a Phase III clinical trial for PRO-515 (the oral DMARD therapy for the treatment of RA), or the dosing of the first subject in a Phase III clinical trial involving PRO-515 or certain other product candidates.
          The nearest-term commercial services we acquired are Avise MCV and the Avise PG, both of which we are currently promoting. Both Avise MCV and Avise PG are licensed from third parties. Under the terms of these agreements, we may be obligated to pay up to approximately $4.2 million in the aggregate in sales milestones and a royalty based on net sales.
          At the closing of the merger, 10% of the aggregate merger consideration otherwise payable at closing was contributed to an escrow fund which was paid to the former Proprius stockholders in June 2009, with minor deductions. In addition, in connection with the merger all four employees of Proprius, including Michael Walsh, the former CEO of Proprius, entered into retention agreements with Cypress dated February 23, 2008. Pursuant to the retention agreements, 25% of the aggregate consideration each employee would have otherwise been entitled to receive upon closing of the merger was subject to vesting restrictions until the second anniversary of the date of the retention agreements, or March 4, 2010. Such amounts, less applicable withholdings, were paid to the four former Proprius employees on March 4, 2010.
Agreement with AlphaRx
     In connection with the acquisition of Proprius, we assumed Proprius’ license agreement with AlphaRx, Inc. for the in-license of a topical NSAID therapy and other successor topical NSAID therapies. Future consideration under the agreement includes up to $116.0 million for the successful development and commercialization of a product and potential double-digit royalty payments.
Patents, Trademarks and Proprietary Technology
     We believe that patents, trademarks, copyrights and other proprietary rights are important to our business. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We seek to protect our intellectual property rights by a variety of means, including patents, maintaining trade secrets and proprietary know-how, and technological innovation to develop and maintain our competitive position. We actively seek patent protection both in the United States and internationally and have three issued patents and eight patent applications pending related to FM and milnacipran. It is possible that a patent will not issue from any of our patent applications and the breadth or scope of protection allowed under any issued patents may not provide adequate protection to protect any of our future products. We intend to enforce our patents, trademarks and brand names. We have also obtained a license from Pierre Fabre to certain patents and patent applications related to milnacipran. Under the license, which we have sublicensed to Forest Laboratories, we have rights to a method of synthesis patent for milnacipran in the United States and Canada. Both the United States patent (U.S. Patent 5,034,541) and the Canadian patent (No. 2,006,464) terminated in December 2009. The composition of matter patent for milnacipran expired in June 2002. Pursuant to the terms of the license agreement, Pierre Fabre is responsible for the prosecution and maintenance of the patents and patent applications licensed thereunder at its sole expense. In addition, Pierre Fabre has the first right to take actions with respect to the infringement or potential infringement of such patents and patent applications, except for any action in connection with an abbreviated NDA filed by a third party, and provided that we may take appropriate actions with respect to the infringement of such patents and patent applications in the United States and Canada if Pierre Fabre fails to do so within a specified period of time. Cypress or Forest Laboratories has the first right to take any action with respect to any proceeding in connection with an abbreviated NDA filed by a third party. Although we have filed use patents on milnacipran, three of which have issued (U.S. Patent 6,602,911, U.S. Patent 6,635,675, and U.S. Patent 6,992,110, all expiring in 2021), we may not be able to secure any additional patent protection and the existing

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patents may not ensure exclusivity through the patent term. As a new chemical entity in the United States, milnacipran also qualifies under the terms of the Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic Act, or Hatch-Waxman Amendments, under which it receives five years of marketing exclusivity upon marketing approval, during which time a generic milnacipran may not be approved on the basis of Cypress’ NDA filing. Even so, recent amendments to the Hatch-Waxman Amendments have been proposed and, therefore, it may not apply to us in the future.
     In connection with our acquisition of Proprius, we acquired rights to an issued patent (U.S. patent 6,921,667, which terminates in 2023) and several patents in prosecution with respect to Avise PG and Avise MCV and a number of patents in prosecution on the other development stage personalized medicine services. Although we have two issued patents covering Avise PG (in addition to U.S. Patent 6,921,667, U.S. Patent 7,582,282 issued September 1, 2009), we may not be able to secure any additional patent protection and the existing patent may not ensure exclusivity through the patent term. In addition, as part of our acquisition of Proprius we have acquired a family of pending U.S. and international patent applications directed to PRO-515 (the oral DMARD therapy for the treatment of RA). We have also acquired rights to a patent family directed to PRO-406 (the topical non-steroidal anti-inflammatory drug) NSAID therapy for the symptomatic treatment of osteoarthritis) including one issued patent (U.S. patent No. 7,138,394, which expires in 2023) and several pending U.S. and foreign patent applications. It is uncertain whether we will be able to obtain any claim with reasonable coverage for PRO-406 or PRO-515. We are not currently in active development with respect to either PRO-406 or PRO-515.
     Although patents are enforceable from the date of issuance and presumed to be valid, future litigation or reexamination proceedings regarding the enforcement or validity of our existing patents or future patents, if issued, could result in a ruling adverse to us that could invalidate such patents or substantially reduce the scope of protection afforded by such patents. Our patents may not afford commercially significant protection of our proprietary technology or have commercial application. There has been no judicial determination of the validity or scope of our proprietary rights. Moreover, the patent laws in foreign countries may differ from those of the United States, and the degree of protection afforded by foreign patents may be different.
     Others have filed applications for, or have been issued, patents and may obtain additional patents and other proprietary rights relating to products or processes competitive with us. The scope and validity of such patents are presently unknown. If existing or future patents are upheld as valid by courts, we may be required to obtain licenses to use technology covered by such patents.
Competition
     The pharmaceutical and personalized medicine services industries are highly competitive and require an ongoing, extensive search for technological innovation. They also require, among other things, the ability to effectively discover, develop, test, commercialize, market and promote products, including communicating the effectiveness, safety and value of products to actual and prospective customers, including medical professionals. Many of our competitors have greater resources than we have. This enables them, among other things, to spread their marketing and promotion costs over a broader revenue base. Other competitive factors in the pharmaceutical and personalized medicine services industries include quality and price, product technology, reputation, customer service and access to technical information.
     It is possible that developments by our competitors could make our products, personalized medicine services or technologies less competitive or obsolete. Our future growth depends, in part, on our ability to provide products and services which are more effective than those of our competitors and to keep pace with rapid medical and scientific change. Sales of services and products may decline rapidly if a new service or product is introduced by a competitor, particularly if a new service or product represents a substantial improvement over any of our existing services or products. In addition, the high level of competition in our industry could force us to reduce the price at which we sell our services or products or require us to spend more to market our services or products.
     With respect to our FM commercial product, Savella (milnacipran HCl), in June 2007, the FDA approved Pfizer Inc.’s drug pregabalin (Lyrica®) for the management of FM. In addition, in June 2008, the FDA approved Eli Lilly and Company’s drug duloxetine (Cymbalta®) for the management of FM. Duloxetine is a serotonin norepinephrine reuptake inhibitor, and as a dual reuptake inhibitor is therefore similar in pharmacology to Savella, which is a

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norepinephrine serotonin reuptake inhibitor. Tricyclic antidepressants, or TCAs, which are available as inexpensive generic formulations, are also used to treat FM and are less expensive than Savella, as are other generic antidepressants and pain drugs that are commonly used to treat FM. Pfizer Inc.’s drug pregabalin (Lyrica®) and Eli Lilly and Company’s duloxetine (Cymbalta®) are competitive with Savella and these products and any other future products will affect Savella’s sales and may cause sales to be lower than anticipated, as can the numerous generic antidepressants and pain products commonly used off-label to treat FM.
     The market potential for FM is considerable and a number of pharmaceutical companies focused on therapies for alleviating pain or antidepressant therapies could decide to evaluate their current product candidates for the treatment of FM at any time. Due to the high prevalence and incidence of FM, we anticipate that most, if not all, of the major pharmaceutical companies will have significant research and product development programs in FM. We expect to encounter significant competition both in the United States and in foreign markets for Savella and each of the drugs that we seek to develop.
     With respect to our personalized medicine services, while no other laboratory currently provides the services we offer, we will compete with several large, national laboratories including Quest Diagnostics Incorporated, or Quest, and Laboratory Corporation of America Holdings and also compete with regional and esoteric laboratories, to the degree they have similar offerings. The larger competitors have substantially greater existing connections to the medical community, financial and human resources, as well as a much larger infrastructure than we do. Other companies may develop and commercialize personalized laboratory services that are more sensitive, specific, easy to use, or cost-effective than our personalized medicine services, and we may therefore be unable to compete with them in the marketplace.
     Our competition for pharmaceutical products will be partially determined by the potential indications that are ultimately cleared for marketing by regulatory authorities, the timing of any clearances and market introductions and whether any currently available drugs, or drugs under development by others, are effective in the same indications. Accordingly, the relative speed with which we can develop, complete the clinical trials for, receive regulatory clearance for and supply commercial quantities of products to the market is expected to be an important competitive factor. We expect that competition among products approved for sale will be based, among other factors described above, on product efficacy, safety, reliability, availability, payer reimbursement policies and patent protection.
Manufacturing and Supply
     Pursuant to the terms of our purchase and supply agreement with Pierre Fabre, Pierre Fabre is the exclusive supplier to us and Forest Laboratories of the active pharmaceutical ingredient for Savella in exchange for a transfer price. Forest Laboratories has assumed the obligation to pay the transfer price directly to Pierre Fabre, of which we are obligated to reimburse Forest Laboratories for a portion of the active ingredient costs of samples. Currently, Pierre Fabre manufactures the active pharmaceutical ingredient for Savella in its facility located in Gaillac, France. This facility has been inspected by the FDA and is subject to continued inspections. Pierre Fabre has qualified an additional manufacturing facility. In addition, because Pierre Fabre is our sole supplier of the active pharmaceutical ingredient for Savella and is currently the only supplier of the active pharmaceutical ingredient for Savella in the world, we have the right, but not the obligation, to qualify us or Forest Laboratories as an additional manufacturing facility to manufacture the active pharmaceutical ingredient for Savella. We do not currently have this capability. In addition, we have the right to manufacture the active pharmaceutical ingredient for Savella if Pierre Fabre does not have the required buffer stock or in the event that we terminate our license agreement with Pierre Fabre under certain circumstances. Currently, Forest Laboratories is responsible for encapsulating and packaging Savella.
     We perform all our personalized medicine services in our laboratory located in San Diego, California. Despite precautions taken by us, any future natural or man-made disaster at this laboratory, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In the event of an extended shutdown of our laboratory, we may be unable to perform our personalized medicine services in a timely manner or at all and therefore would be unable to operate our business in a commercially competitive manner.
     In order to rely on a third party to perform our personalized medicine services, we could only use another facility with established state licensure and accreditation under The Clinical Laboratory Improvement Amendments of 1988, or CLIA. Additionally, any new laboratory opened by us would be subject to certification under CLIA and licensure

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by various states, which would take a significant amount of time and result in delays in our ability to begin or continue commercial operations.
Government Regulation
Therapeutic Products
     Our research, preclinical testing, clinical trials, manufacturing and marketing activities are subject to extensive regulation by numerous governmental authorities in the United States and other countries. In the United States, pharmaceutical drugs are subject to rigorous FDA regulation under the Federal Food, Drug and Cosmetic Act and other federal and state statutes and regulations. These laws and regulations govern, among other things, the preclinical and clinical testing, manufacture, quality control, safety, efficacy, labeling, storage, record keeping, approval, marketing, advertising and promotion of our drug products and drug product candidates. The product development and regulatory approval process requires the commitment of substantial time, effort and financial resources.
     The steps required before a pharmaceutical agent may be marketed in the United States generally include:
    completion of preclinical laboratory tests, animal pharmacology and toxicology studies and formulation studies performed in compliance with the FDA’s Good Laboratory Practice, or GLP regulations;
 
    the submission of an investigational new drug application, or IND, to the FDA for human clinical testing that must be accepted by the FDA before human clinical trials may commence;
 
    performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for the proposed indication of use;
 
    the submission of an NDA to the FDA; and
 
    FDA approval of the NDA prior to any commercial sale or shipment of the drug.
     Preclinical studies include the laboratory evaluation of in vitro pharmacology, product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of a product. Compounds must be formulated according to the FDA’s current good manufacturing practices, or cGMP, requirements and preclinical safety tests must be conducted by laboratories that comply with good laboratory practices, or GLP, requirements. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND application and are reviewed by the FDA before human clinical trials may begin. The IND must also contain protocols for any clinical trials that will be carried out. The IND automatically becomes effective 30 days after receipt by the FDA unless the FDA raises concerns or questions regarding the conduct of the proposed clinical trial during the 30-day waiting period. If the FDA objects to an IND application during this 30-day waiting period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials or may authorize trials only under specified terms. Such a halt, called a clinical hold, continues in effect until and unless the FDA’s concerns are adequately addressed. In some cases, clinical holds are never lifted. Imposition by the FDA of a clinical hold can delay or preclude further product development. The IND process may be extremely costly and may substantially delay product development.
     Clinical trials must be sponsored and conducted in accordance with good clinical practice, or GCP, requirements and under protocols and methodologies that, among other things:
    ensure receipt from participants of signed consents that inform them of risks;
 
    detail the protocol and objectives of the study;
 
    detail the parameters to be used to monitor safety; and
 
    detail the safety and efficacy criteria to be evaluated.

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     Furthermore, each clinical study must be conducted under the supervision of a principal investigator operating under the auspices of an institutional review board, or IRB, at the institution where the study is conducted. The IRB must review and approve the plan for any clinical trial before it commences at that institution and it must monitor the study until it is completed. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Sponsors, investigators and IRB members are obligated to avoid conflicts of interests and ensure compliance with all legal requirements. The FDA, the IRB or the sponsor may suspend or discontinue a clinical trial at any time on various grounds, including potential health risks to study subjects.
     Clinical trials are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part of the IND, and the FDA must grant permission before each clinical trial may begin. Clinical trials typically are conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the drug into a small number of healthy volunteers, the drug is evaluated for safety by assessing the adverse effects, dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. The Phase I trial must provide pharmacological data that is sufficient to devise the Phase II trials.
Phase II trials involve a limited patient population in order to:
    obtain initial indications of the efficacy of the drug for specific, targeted indications;
 
    determine dosage tolerance and optimal dosage; and
 
    identify possible adverse affects and safety risks.
     When a compound is determined preliminarily to be effective and to have an acceptable safety profile in Phase II evaluation, Phase III trials—commonly referred to as pivotal studies—can be undertaken to evaluate safety and efficacy endpoints further in expanded and diverse patient populations at geographically dispersed clinical trial sites. Positive results in Phase I or II are not necessarily predictive of positive results in Phase III.
     The results of the pharmaceutical development, preclinical studies and clinical trials, together with detailed information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA, which must be complete, accurate and in compliance with FDA regulations. The FDA may take up to 60 days after submission of an NDA to accept it for filing, indicating that the NDA is sufficiently complete to permit substantive review. Although the Prescription Drug User Fee Act (PDUFA) sets goals for FDA to complete its standard review of NDAs within 10 months, the review process is often significantly extended by FDA requests for additional information or clarification. The FDA may convene an advisory committee of scientists, physicians and patients to advise it on the approvability of a particular application. The FDA may issue a complete response decision on an NDA filed by us or our collaborators if the applicable scientific and regulatory criteria are not satisfied, or it may require additional clinical data and/or additional pivotal trial or trials. Moreover, after approval, the FDA may require additional post-approval testing, surveillance and safety reporting to monitor the products as part of a risk management program. Thus, even if approval for a drug is granted, it can be limited or revoked if evidence subsequently emerges casting doubt on the safety or efficacy of a product, as has happened recently with respect to several high profile marketed drugs, or if the manufacturing facility, processes or controls do not comply with regulatory requirements. Finally, an approval may entail limitations on the uses, labeling, dosage forms, distribution and packaging of the product.
     Among the conditions for new drug approval is the requirement that the prospective manufacturer’s quality control, record keeping, notifications and reporting and manufacturing systems conform to the FDA’s cGMP regulations. To obtain approval, the drug manufacturing facility must be registered with the FDA and must pass a pre-approval inspection demonstrating compliance with cGMP requirements. Prior to FDA approval of the Savella NDA, Pierre Fabre’s facility was inspected by the FDA for compliance with cGMP requirements. Manufacturing establishments also are subject to periodic, ongoing compliance inspections. In complying with the standards contained in these regulations, manufacturers must continue to expend time, money, resources and effort in order to ensure compliance. Failure to comply with these requirements can result in legal or regulatory action, including warning letters, suspension of manufacture, product seizure or recalls, injunctive action or civil or criminal penalties.

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     In addition, although we have received marketing approval from the FDA for Savella for the management of FM, the FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label information dissemination promotion, industry sponsored scientific and educational activities and promotional activities involving the Internet. Failure to comply with these requirements, either by us or our collaborator for Savella, Forest Laboratories, can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. In addition, the Office of the Inspector General of the Department of Health and Human Services, as well as state attorneys general, enforce healthcare fraud and abuse laws that impose harsh financial penalties for the provision of kickbacks to healthcare providers or the causation of submission of false claims for federal healthcare system payment relating to unapproved uses of drug products. We are subject to significant and burdensome regulation as we transition from a development stage company to a company with a commercialized product.
     Outside the United States, including Canada, our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authority. This foreign regulatory approval process includes many of the same steps associated with FDA approval described above.
     In addition to regulations enforced by the FDA, we are and will be subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and future federal, state or local regulations. Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that the safety procedures used by third parties for handling and disposing of these materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be liable for any damages that result.
     The approval process for any of our future products is expensive, time consuming and uncertain, and any applicable regulatory agency may not grant marketing approval. We may not have sufficient resources to complete the required testing and regulatory review processes. Furthermore, we are unable to predict the extent of adverse governmental regulation, which might arise from future United States or foreign legislative or administrative action.
Personalized Medicine Services
     Our personalized medicine services are tests that have been validated analytically and clinically, and regulated under CLIA. CLIA, which is implemented and enforced by the Centers for Medicare & Medicaid Services, or CMS, extends federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. CLIA is intended to ensure the quality and reliability of non-research laboratory testing performed on the patient samples collected in the United States and its territories by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality and inspections. We believe we meet CLIA and state requirements for our commercially available personalized medicine laboratory service offerings, as well as those in development, and we do not anticipate that they will require FDA approval.
     While CMS has had primary responsibility for regulating laboratory-developed tests, the FDA has in the past also claimed regulatory authority over laboratory-developed tests, but had stated that it was exercising enforcement discretion in not regulating laboratory-developed tests performed by high complexity, CLIA-certified laboratories. In September 2006, the FDA published a draft guidance document that described certain laboratory-developed tests that the FDA intends to regulate as in vitro diagnostic test systems (i.e., as medical devices). The FDA calls this category of laboratory-developed tests “In Vitro Diagnostic Multivariate Index Assays,” or IVDMIAs. The FDA issued a revised draft guidance pertaining to IVDMIAs in July 2007. In the revised guidance, the FDA defines an IVDMIA as a device that combines the values of multiple variables using an interpretation function to yield a single, patient-specific result that is intended for use in the diagnosis of a disease or other condition, or in the cure, mitigation, treatment, or prevention of disease, and that provides a result that cannot be independently derived or verified by the end user and whose derivation is non-transparent. The IVDMIA draft guidance, if adopted as published, would extend FDA oversight over laboratories that offer laboratory-developed tests which meet this definition. We do not believe that Avise MCV and Avise PG will be subject to the proposed FDA regulatory guidance.

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     State laws may require that laboratories and/or laboratory personnel meet certain qualifications, may specify certain quality controls or may require maintenance of certain records. For example, New York State requires us to obtain approval for any diagnostic test prior to offering it for sale or soliciting patient samples from New York. Compliance with such standards is verified by periodic inspections and requires participation in proficiency testing programs.
     In 1996, Congress passed the Health Insurance Portability and Accountability Act, or HIPAA. Among other things, HIPAA requires the U.S. Department of Heath and Human Services, or HHS, to issue regulations designed to improve the efficiency and effectiveness of the healthcare system by facilitating the transfer of health information along with protecting the confidentiality and security of health information. Specifically, Title II of HIPAA, the Administrative Simplification Act, contains four provisions that address the privacy of health data, the security of health data, the standardization of identifying numbers used in the healthcare system and the standardization of data content, codes and formats used in healthcare transactions. With the commercialization of our personalized medicine services, we are subject to the HIPAA regulations and are undertaking and implementing procedures and training to comply with such HIPAA regulations. Penalties for non-compliance with HIPAA include both civil and criminal penalties. The privacy regulations protect medical records and other personal health information by limiting its use and release, giving patients the right to access their medical records (with certain limitations on CLIA laboratory test results) and limiting most disclosures of health information to the minimum amount necessary to accomplish an intended purpose. In addition to the federal privacy regulations, there are a number of state laws regarding the confidentiality of health information that are applicable to clinical laboratories. The penalties for violation of state privacy laws vary widely. We have taken the necessary steps to comply with health information privacy and confidentiality statutes and regulations. Our failure to achieve or maintain compliance with changes in state or federal laws regarding privacy could result in civil or criminal penalties and could have a material adverse effect on our business. In addition, HHS has security regulations which establish standards for the security of electronic protected health information to be implemented by health plans, healthcare clearinghouses and certain healthcare providers. Our failure to achieve or maintain compliance with these regulations could result in civil or criminal penalties and could have a material adverse effect on our business.
     Billing and reimbursement for our personalized medicine services are subject to significant and complex federal and state regulation. Penalties for violations of laws relating to billing federal healthcare programs and for violations of federal fraud and abuse laws include:
    exclusion from participation in Medicare/Medicaid programs;
 
    asset forfeitures;
 
    civil and criminal fines and penalties; and
 
    the loss of various licenses, certifications and authorizations necessary to operate our business.
     The federal Occupational Safety and Health Administration, or OSHA, has established extensive requirements relating specifically to workplace safety for healthcare employers which also cover our laboratory. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, such as HIV and hepatitis B and C, including preventing or minimizing any exposure through sharps or needle stick injuries. There are similar state requirements with which we also must comply.
Employees
     As of February 1, 2010, we employed 150 full-time employees. None of our employees are covered by a collective bargaining agreement. We believe that our relationship with our employees is good.
Available Information
     Our website address is www.cypressbio.com. We make available free of charge through our 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

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reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission.
Item 1A.   Risk Factors
This Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements that we make or that are made on our behalf, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our product and service sales, royalties, revenue, expenses, net income or loss, and earnings or loss per share.
Risks related to our business
We may not be successful in creating a successful commercial infrastructure.
     In a period of a few months, we hired 115 field based sales employees to create a commercial infrastructure in order to launch Savella along with our corporate partner, Forest Laboratories. We initially began with an 11 person sales force which launched the first two of our personalized medicine services in October 2008 and hired the remainder of our current sales field personnel by January 2009. Our launch of Savella at the beginning of May 2009 is a result of us exercising our co-promotion right which allows us to co-promote Savella under our agreement with Forest Laboratories and be paid by Forest for the Savella portion of the sales details. While Savella was approved by the U.S. Food and Drug Administration (FDA) on January 14, 2009, Cypress and Forest did not commence product promotion until May 2009. The delay in launching Savella delayed our ability to generate royalty revenues under our collaboration with Forest and prevented us from being reimbursed for the portion of our sales force calls that would have been devoted to the promotion of Savella, which caused the net cost of our sales force to be a larger portion of our expenses for the year 2009.
          The co-promotion right is subject to our maintaining our own sales capabilities, which includes our sales force. In the event we are unable to maintain our sales force, we would lose our co-promotion right with respect to Savella. In addition, although we now have the number of required sales personnel, the performance of our sales personnel as measured by actual sales may be disappointing. Many of our competitors have significantly greater experience than we do in selling, marketing and distributing products and services, and we may not be able to compete successfully with them with the sales force we have developed. Even though we intend to offer integrated personalized medicine services and therapeutic products through the same sales organization, this may not facilitate greater physician access or improve the quality of the sales call, and it may not help establish Cypress as a leader targeting these specific specialists. In addition, because our initial personalized medicine services are targeted only to rheumatologists, the potential synergies from offering personalized medicine services and therapeutic products together exist in only a small portion of our Savella sales calls at this time.
          In the event that our agreement with Forest Laboratories is terminated, or with respect to any other product we may develop which is not covered by our collaboration with Forest Laboratories or is not sold to the specialists that we are currently calling upon, we may have to obtain the assistance of a pharmaceutical company or other entity with a large distribution system and a large direct sales force, or build a substantial marketing and sales force with appropriate technical expertise and supporting distribution capabilities. We may not be able to enter into such arrangements with third parties in a timely manner or on acceptable terms or to establish sales, marketing and distribution capabilities of our own. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and any revenues we receive will depend upon the efforts of third parties, and these efforts may not be successful.
We may encounter challenges in our personalized medicine services.
          We launched the first two of our personalized medicine services in October 2008. These services were acquired in March 2008, when we acquired Proprius, a formerly private San Diego-based personalized medicine services and specialty pharmaceutical company. We have limited experience in the personalized medicine services space. The launch of our personalized medicine services has exposed us to potential operational and financial risks, including:

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    we may be unable to drive awareness of, and to establish the clinical need for, these personalized medicine services, and therefore may be unable to successfully commercialize these products and services;
 
    higher development or commercialization costs than we anticipate for the personalized medicine services;
 
    challenges with running a service business;
 
    higher than expected licensing and integration costs;
 
    exposure to liabilities of licensed and acquired intellectual property, compounds, products and services; and
 
    disruption of our business and diversion of our management’s time and attention as part of integrating Proprius’ business with our operations.
          In addition, the launch of our personalized medicine services has exposed us to significant impairment charges related to goodwill, and we incurred a $1.1 million non-cash goodwill impairment charge related to our personalized medicine services business in the fourth quarter of 2009. We will continue to devote significant resources to our new business and we may fail to realize the anticipated benefit of this strategic transaction with Proprius and further, may decide to terminate our personalized medicine services.
If third-party payers, including managed care organizations and Medicare, do not provide reimbursement for Avise PG or Avise MCV, their commercial success could be compromised.
          We began marketing our personalized medicine services in October 2008 and the cycle time for payment is long and further, we might not ever receive payment. We have only received payment for a small number of the tests that have been performed, and the value of the cash collected has been significantly less than the gross value of the testing services performed.. Further, physicians and patients may decide not to order our tests unless third-party payers, such as managed care organizations as well as government payers such as Medicare and Medicaid, establish coverage policies for the tests or pay a substantial portion of the test price. Reimbursement by a third-party payer may depend on a number of factors, including a payer’s determination that tests using our technologies are:
    not experimental or investigational;
 
    medically necessary;
 
    appropriate for the specific patient and diagnosis;
 
    cost-effective;
 
    supported by peer-reviewed publications; and
 
    included in clinical practice guidelines.
          There is significant uncertainty concerning third-party reimbursement of any test incorporating new technology, including our Avise PG and Avise MCV tests. Several entities conduct technology assessments of new medical tests and devices and provide the results of their assessments for informational purposes to other parties. These assessments may be used by third-party payers and health care providers as grounds to deny coverage for a test or procedure.
          Since each payer makes its own decision as to whether to establish a policy to reimburse our test, seeking these approvals is a time-consuming and costly process. We do not yet have any third-party payer reimbursement agreements.
          Insurers, including managed care organizations as well as government payers such as Medicare, have increased their efforts to control the cost, utilization and delivery of health care services. From time to time, Congress has considered and implemented changes in the Medicare fee schedules in conjunction with budgetary legislation.

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Further reductions of reimbursement for Medicare services may be implemented from time to time. Reductions in the reimbursement rates of other third-party payers have occurred and may occur in the future. These measures have resulted in reduced prices and decreased test utilization for the clinical laboratory industry. If we are unable to obtain reimbursement approval from private payers and Medicare and Medicaid programs for our Avise PG and Avise MCV tests, or if the amount reimbursed is inadequate, our ability to generate revenues from these tests could be limited. Even if we are being reimbursed, insurers may withdraw their coverage policies or cancel their contracts with us at any time or stop paying for our test, which would reduce our revenue.
We have recently substantially increased the size of our organization and may need to continue to increase the size of our organization, and we may experience difficulties in managing growth.
          In a period of a few months in late 2008, we hired 115 field based sales employees and management to create a commercial infrastructure in order to launch Savella along with our corporate partner, Forest Laboratories, which contributed to an increase in our full-time employees from 37 as of September 30, 2008 to 150 as of February 1, 2010. We may need to continue to expand our managerial, operational and other resources in order to grow, manage and fund our existing business, including the development activities relating to our personalized medicine services, and in order to perform under our co-promotion arrangement for Savella we will need to manage activities relating to the commercialization of Savella. Our management and personnel, systems and facilities currently in place may not be adequate to support this recent and future growth. Our need to effectively manage our operations, growth and various projects requires that we:
    manage our internal development and commercialization efforts for our personalized medicine services and Savella 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 development and commercialization goals.
We are dependent on our collaboration with Forest Laboratories to commercialize Savella and to obtain additional regulatory approvals.
          Pursuant to the terms of our collaboration agreement with Forest Laboratories, we granted Forest Laboratories an exclusive sublicense for the development and marketing of Savella, for all indications in the United States. Forest Laboratories exercised its option to extend the territory to include Canada. Forest Laboratories is responsible for funding the further development of Savella, including further clinical trials and further regulatory approval. With the FDA approval of Savella, Forest Laboratories has primary responsibility for the marketing and sale of the approved product and will share responsibility for compliance with regulatory requirements. We have limited control over the amount and timing of resources that Forest Laboratories will dedicate to the further development and marketing of Savella . Our ability to generate milestone and royalty payments from Forest Laboratories depends on Forest Laboratories’ ability to achieve market acceptance of Savella for the management of FM.
          We are subject to a number of additional risks associated with our dependence on our collaboration with Forest Laboratories, including:
    Forest Laboratories could fail to devote sufficient resources to the commercialization, marketing and distribution of Savella or any other products developed under our collaboration agreement, including by failing to develop or expand sales forces if such sales forces appear necessary for the most effective promotion of Savella or any other approved product;

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    We and Forest Laboratories could disagree as to post approval development plans, including the number and timing of clinical trials, or as to which additional indications for Savella should be pursued, if any, and therefore Savella may never be sold for any indications other than FM;
 
    Forest Laboratories could fail to comply with applicable regulatory guidelines with respect to the marketing and manufacturing of Savella which could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production and refusal to approve any new drug applications;
 
    Forest Laboratories could independently develop, develop with third parties or acquire products that could compete with Savella, including drugs approved for other indications used by physicians off-label for the treatment of FM;
 
    Forest Laboratories could abandon or underfund the post approval development of Savella, repeat or conduct additional clinical trials or require a new formulation of milnacipran for further clinical testing, or delay the commencement of any post approval clinical trials for Savella for the management of FM; and
 
    Disputes regarding the collaboration agreement that delay or terminate the post approval development or commercialization, may delay or prevent the achievement of clinical or regulatory objectives that would result in the payment of milestone payments or result in significant litigation or arbitration.
          Furthermore, Forest Laboratories may terminate our collaboration agreement upon our material breach or our bankruptcy and may also terminate our agreement upon 120 days’ notice in the event Forest Laboratories reasonably determines that the development program indicates issues of safety or efficacy that are likely to prevent or significantly delay the filing or approval of any future NDA or to result in labeling or indications that would significantly adversely affect the marketing of any product developed under the agreement. If any of these events occur, we may not be able to find another collaborator for further development or commercialization, and even if we elected to pursue further development and continued commercialization of Savella, we might not be able to do so successfully on a stand-alone basis and would experience substantially increased capital requirements that we might not be able to fund.
All of our personalized medicine services are performed at a single laboratory and, in the event this facility was to be affected by man-made or natural disasters, our personalized medicine services operations could be severely impaired.
          We are performing all our personalized medicine testing services in our laboratory located in San Diego, California. Despite precautions taken by us, any future natural or man-made disaster at this laboratory, such as a fire, earthquake or terrorist activity, could cause substantial delays in our personalized medicine services operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In addition, we are leasing the facilities where our lab operates and anytime a lab is moved, it could also cause substantial delay in our personalized medicine services operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In the event of an extended shutdown of our laboratory, we may be unable to perform our personalized medicine testing services in a timely manner or at all and therefore would be unable to operate our personalized medicine services in a commercially competitive manner, which would also detract from our ability to offer integrated personalized medicine services and therapeutic products through the same sales organization. We cannot assure you that we could recover quickly from a serious natural or man-made disaster or that we would not permanently lose customers as a result of any such business interruption. This could harm our operating results and financial condition.
          In order to rely on a third party to perform our personalized medicine testing services, we could only use another facility with established state licensure and accreditation under Clinical Laboratory Improvement Amendments (CLIA). We may not be able to find another CLIA-certified facility and comply with applicable procedures, or find any such laboratory that would be willing to perform the tests for us on commercially reasonable terms. Additionally, any new laboratory opened by us would be subject to certification under CLIA and licensure by various states, which would take a significant amount of time and result in delays in our ability to continue our personalized medicine services operations.

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Failure to timely or accurately bill for our personalized medicine services could have a material adverse effect on our personalized medicine services net revenues and bad debt expense.
          Billing for personalized medicine testing can be extremely complicated and we have very limited experience performing such billing. Depending on the billing arrangement and applicable law, we must bill various payers, such as insurance companies, Medicare, Medicaid, physicians, hospitals, employer groups and patients, all of which have different billing requirements. Additionally, compliance with applicable laws and regulations as well as internal compliance policies and procedures adds further complexity to the billing process. Changes in laws and regulations could negatively impact our ability to bill our clients or increase our costs. The Centers for Medicare and Medicaid Services (CMS) also establishes procedures and continuously evaluates and implements changes to the reimbursement process for billing government programs.
          Missing or incorrect information on test requisitions adds complexity to and slows the billing process, creates backlogs of unbilled tests, and generally increases the aging of accounts receivable and bad debt expense. Our experience to date has been that our collection cycles continue to be prolonged, with the amount of cash collected significantly less than the gross value of testing services performed. Failure to timely or correctly bill may lead to our not being reimbursed for our services or an increase in the aging of our accounts receivable, which could adversely affect our results of operations and cash flows. Failure to comply with applicable laws relating to billing federal healthcare programs could also lead to various penalties, including:
    exclusion from participation in Medicare/Medicaid programs;
 
    asset forfeitures;
 
    civil and criminal fines and penalties; and
 
    the loss of various licenses, certificates and authorizations necessary to operate our business.
          Any of these penalties or sanctions could have a material adverse effect on our results of operations or cash flows.
We have a financial risk related to collections for our personalized medicine services.
          With respect to our personalized medicine services, we bill on a fee-for-service basis. Billing for personalized medicine services is a complex process and we bill many different payers such as insurance companies, governmental payer programs and patients, each of which has different billing requirements. We have very limited experience in the collection of accounts receivable and we face risks in our collection efforts, including potential write-offs of doubtful accounts and long collection cycles for accounts receivable, including reimbursements by third party payers, such as Medicare, Medicaid and other governmental payer programs, hospitals, private insurance plans and managed care organizations. In addition, as a result of the current economic climate, we may face increased risks in our collection efforts, which could adversely affect our business. Also, large write-offs of doubtful accounts (particularly in response to a recent increase in personal bankruptcies), delays in receiving payments or potential retroactive adjustments and penalties resulting from audits by payers could adversely affect our business, results of operations and financial condition. Our experience to date has been that our collection cycles continue to be prolonged, with the amount of cash collected significantly less than the gross value of testing services performed.
We rely upon an exclusive license from Pierre Fabre in order to develop and sell Savella, and our ability to pursue the further development and commercialization of Savella for the management of FM depends upon the continuation of our license from Pierre Fabre.
          Our license agreement with Pierre Fabre provides us with an exclusive license to develop and sell any products with the compound milnacipran as an active ingredient for any indication in the United States and Canada, with a right to sublicense certain rights to Forest Laboratories under our collaboration with Forest Laboratories. Either we or Pierre Fabre may terminate the license agreement for cause upon 90 days’ prior written notice to the other party upon the bankruptcy or dissolution of the other party, or upon a breach of any material provision of the agreement if the breach is not cured within 90 days following the written notice. Furthermore, Pierre Fabre has the right to terminate the

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agreement upon 90 days’ prior notice to us if we and Forest terminate our development and marketing activities with respect to Savella, if we challenge certain patent rights of Pierre Fabre and under specified other circumstances. If our license agreement with Pierre Fabre were terminated, we would lose our rights to develop and commercialize products using the compound milnacipran as an active ingredient, as the compound is manufactured under Pierre Fabre patents and using Pierre Fabre know-how and trade secrets, and it would be unlikely that we could obtain the active ingredient in milnacipran from any other source.
We rely upon Pierre Fabre as our exclusive supplier of the active ingredient in Savella and if Pierre Fabre fails to supply us sufficient quantities of the active ingredient it may delay or prevent us from further commercializing Savella.
          Pursuant to our purchase and supply agreement with Pierre Fabre, Pierre Fabre is the exclusive supplier to us and Forest Laboratories of the active pharmaceutical ingredient in Savella. Neither we nor Forest Laboratories have facilities for the manufacture of the active pharmaceutical ingredient in Savella. Currently, Pierre Fabre manufactures milnacipran in its facility in Gaillac, France. Pierre Fabre is the only worldwide supplier of milnacipran, which is currently approved for sale for a non-pain indication outside the United States. Pierre Fabre’s facility has been initially inspected by the FDA for compliance with current good manufacturing practices, or cGMP, requirements and after this initial inspection, may be inspected from time to time. In addition, Pierre Fabre has qualified an additional manufacturing facility, and the second manufacturing site that has been identified by Pierre Fabre is also subject to inspection by the FDA for compliance with cGMP. In the event an inspection results in written deficiencies, it may result in a disruption or termination of the supply to Forest Laboratories of milnacipran. We do not have control over Pierre Fabre’s or its sublicensee’s compliance with cGMP requirements. If Pierre Fabre fails to timely and economically supply us sufficient quantities for commercial sale of Savella, our product sales and market acceptance of Savella could be adversely affected.
          Furthermore, our purchase and supply agreement may be terminated for cause either by us or by Pierre Fabre upon 90 days’ prior written notice to the other party upon a material breach of the agreement if the breach is not cured within 90 days following the written notice. We have the right to manufacture milnacipran if Pierre Fabre does not have a required buffer stock or in the event that we terminate our license agreement with Pierre Fabre under certain circumstances. If our purchase and supply agreement with Pierre Fabre is terminated, we are unlikely to be able to qualify another supplier of the active ingredient within a reasonable time period, and our ability to further develop and commercialize Savella will be significantly impaired.
Our agreements with Pierre Fabre and Forest Laboratories restrict our ability to develop specified compounds, which limits how we can expand our product candidates.
          Under our agreements with Pierre Fabre and Forest Laboratories, Forest Laboratories has agreed to pay Pierre Fabre and us a royalty, in the event that Forest Laboratories sells a product other than milnacipran for FM for a specified period of time, which shall not be less than three years. We are, in turn, obligated to pay a portion of the royalty we receive from Forest Laboratories to Pierre Fabre. In addition, each of us is subject to limitations related to each party’s development of any serotonin norephinephrine reuptake inhibitor, or SNRI, products other than milnacipran. These limitations include: (i) a prohibition on developing an SNRI product for specified indications for which milnacipran is being developed; and (ii) a prohibition on developing an SNRI product for any indication for a specified time period, and after such specified time period, a requirement that if one of the parties launches and sells an SNRI product that is prescribed off-label for any indication for which milnacipran is being developed, the selling party must reimburse the other parties for lost sales due to the off-label use.
Provisions in our collaboration agreement with Forest Laboratories and our license agreement with Pierre Fabre may prevent or delay a change in control.
          We lose our decision-making authority with respect to the development of Savella if we engage in a merger, consolidation or sale of all or substantially all of our assets, or if another person or entity acquires at least 50% of our voting capital stock. In addition, in the event there is a change of control of Cypress that is not approved by our Board or in the event the surviving entity has an FM product and does not divest such product within 12 months, Forest Laboratories may elect to terminate our co-promotion rights for Savella or any other product developed under the collaboration agreement. Our license agreement with Pierre Fabre provides that Pierre Fabre may elect to terminate the

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agreement upon a change in control transaction in which a third party acquirer of us controls an SNRI product, and the acquirer does not take certain actions (e.g., divestiture of such SNRI product) within a specified time period to cure the breach of certain restrictions in the agreement that results from such SNRI product. These provisions may have the effect of delaying or preventing a change in control or a sale of all or substantially all of our assets, or may reduce the number of companies interested in acquiring us.
We are at an early stage of commercialization and we may never generate any significant revenues.
          We are at an early stage of development as a biotechnology company and only recently launched our personalized medicine services in October 2008 and only in May 2009 launched Savella. Without a history of sales, we may not accurately predict future sales, and our sales may be much smaller than we have forecasted, especially in light of the state of the economy. In addition, given our increased costs associated with a laboratory and a sales force, and the fact that Forest only reimburses for the portion of the sales calls that are made for Savella, it is likely that our costs of running our business will exceed our sales on the personalized medicine services and the royalty we will receive for sales of Savella in the initial years following launch. Further, our current product and service candidates, as well as any future products and services that we may acquire or develop, will require significant additional development, appropriate regulatory approval, and additional investments before they can be commercialized, if ever. Our product development and product acquisition efforts may not lead to any further commercial services or drugs, either because the service and product candidates are not shown to be accurate and clinically useful in the case of personalized medicine service product candidates, or safe and effective in the case of drug product candidates, or because we have inadequate financial or other resources to pursue clinical development of the service and product candidate or because the FDA, CMS or state authorities do not grant or otherwise withdraw or revoke a regulatory approval.
          Rheumatologists do not currently use personalized medicine services to determine the level of methotrexate (MTX) polyglutamates among their patients on MTX. Therefore, Avise PG is not the current standard of care. In addition, there are other tests for the diagnosis of RA that compete with Avise MCV. We may be unable to drive awareness of, and to establish the clinical need for, these personalized medicine services, and therefore may be unable to successfully commercialize these products and services.
          It is possible that we will never be able to realize material cash inflows from sales of our personalized medicine services. Further, if we are unable to realize significant revenues in the sale of any of our current personalized medicine services or if Forest Laboratories and Cypress are unable to achieve significant sales of Savella, we will be unable to generate sufficient revenues (including revenues from royalties), may be unsuccessful in raising additional capital and may cease our operations.
Our failure to comply with the HIPAA security and privacy regulations and other state regulations may increase our operational costs.
          The HIPAA privacy and security regulations establish comprehensive federal standards with respect to the uses and disclosures of personal health information, or PHI, by health plans and healthcare providers, in addition to setting standards to protect the confidentiality, integrity and availability of electronic PHI. The regulations establish a complex regulatory framework on a variety of subjects, including:
      the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain payments for services and healthcare operations activities;
      a patient’s rights to access, amend and receive an accounting of certain disclosures of PHI;
      the content of notices of privacy practices for PHI; and
      administrative, technical and physical safeguards required of entities that use or receive PHI electronically.
     We have implemented policies and procedures related to compliance with the HIPAA privacy and security regulations, as required by law. The privacy regulations establish a uniform federal “floor” and do not supersede state

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laws that are more stringent. Therefore, we are required to comply with both federal privacy regulations and varying state privacy laws. The federal privacy regulations restrict our ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than payment, treatment or healthcare operations (as defined by HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. The privacy and security regulations provide for significant fines and other penalties for wrongful use or disclosure of PHI, including potential civil and criminal fines and penalties. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we also could incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information.
Our business presents the risk of product liability claims.
          We may be subject to legal actions asserting product liability claims relating to the use of Savella. In connection with exercising our co-promotion right, we agreed to indemnify Forest Laboratories with respect to the promotion of Savella. Although we currently maintain $10.0 million in insurance for product liability claims, litigation is inherently subject to uncertainties and we may be required to expend substantial amounts in the defense or resolution of any product liability claims made relating to the use of Savella, some or all of which may not be covered by insurance.
          We also plan to continue conducting clinical trials on humans using milnacipran and from time to time, and to conduct clinical trials on humans in Proof of Concept stage development candidates, and the use of milnacipran and these other development candidates may result in adverse effects. Although we are aware that there are side effects associated with milnacipran and other potential development candidates, we will never be able to predict all possible harm or side effects that may result from the treatment of patients with milnacipran or any of our future product candidates, and the amount of insurance coverage we currently hold may not be adequate to protect us from any liabilities. We may not have sufficient resources to pay any liability resulting from such a claim beyond our insurance coverage.
The FDA approval of any future product candidate is uncertain and will involve the commitment of substantial time and resources.
          We may never receive regulatory approval from the FDA or any other regulatory body required for the commercial sale of any future products in the United States for any number of reasons.
          The regulatory approval of a new drug typically takes many years and the outcome is uncertain. Despite the time and resources expended, regulatory approval is never guaranteed. If we fail to obtain regulatory approval for any future therapeutic product candidates, we will be unable to market and sell any future therapeutic products and therefore may never generate any revenues from product sales for future therapeutic product candidates or become profitable. In addition, our collaborators, or our third-party manufacturers’ failure to comply with the FDA and other applicable United States or foreign regulations may subject us to administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production and refusal to approve new drug approval applications.
          As part of the regulatory approval process, we must conduct, at our own expense, preclinical research and clinical trials for each product candidate sufficient to demonstrate its safety and efficacy to the satisfaction of the FDA and other regulatory agencies in the United States and other countries where the product candidate will be marketed if approved. The number of preclinical studies and clinical trials that will be required varies depending on the product, the disease or condition that the product is in development for and the regulations applicable to any particular product. The regulatory process typically also includes a review of the manufacturing process to ensure compliance with applicable regulations and standards, including the cGMP requirements. The FDA can delay, limit or decline to grant approval for many reasons, including:
    a product candidate may not be safe or effective;
 
    we may not achieve statistical significance for the primary endpoint;

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    FDA officials may interpret data from preclinical testing, clinical trials, and/or pharmacovigilance data in different ways than we interpret such data;
 
    the FDA might not approve our manufacturing processes or facilities, or the processes or facilities of any future collaborators or contract manufacturers;
 
    the FDA may change its approval policies or adopt new regulations; and
 
    the FDA may request additional data.
In light of our regulatory approval for Savella and if we ever receive regulatory approval for any other future product candidate, and secure and maintain regulatory approvals related to our personalized medicine services, we will be subject to ongoing FDA, CLIA and state regulatory obligations and continuing regulatory review by applicable regulatory authorities.
          Our regulatory approval for Savella has been and regulatory approval for any future product candidates will be limited to the indications, dosages and restrictions on the product label. The FDA has approved Savella for the management of fibromyalgia, and has imposed additional limitations on the indicated uses, has required post-marketing surveillance and the performance of potentially costly post-marketing studies. Even though we have received FDA approval for Savella, as we have seen with other products on the market, Savella or any of our other future product candidates may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those product candidates from the market. We and Forest Laboratories continue to be subject to strict FDA regulation after approval, including regulation of product labeling and packaging, adverse event reporting, manufacture, storage, advertising, promotion and recordkeeping. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market. Federal and state regulatory approvals we have received related to our current personalized medicine services and may receive related to planned or future personalized medicine services mandate specific clinical laboratory approval standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality and inspections, and our failure to meet and maintain those approvals could adversely affect our ability to offer personalized medicine products and services. In addition, the FDA has in the past and may in the future claim regulatory authority over laboratory-developed tests, in which event our personalized medicine services may directly or indirectly become subject to FDA approval.
If advances in technology allow others to perform and/or provide personalized medicine services which are similar to or better than ours or to perform such services in a more efficient or cost-effective manner than is currently possible, our personalized medicine services may not meet with demand in the marketplace or the demand for these services may decrease.
          The diagnostic industry is characterized by rapidly advancing technology that may enable clinical laboratories, hospitals, physicians or other medical providers to perform and/or provide personalized medicine services similar to or better than ours in a more efficient or cost-effective manner than is currently possible. With respect to our personalized medicine services, other advances in technology may result in a decreased demand for our personalized medicine services. In addition, in order for our business to be successful, we may need to develop new personalized medicine tests or improve existing personalized medicine tests. There is no assurance, however, that we will be able to develop or improve these personalized medicine services in the future. Even if we successfully develop such services in a timely manner, these new tests may not be utilized by our customers. If we fail to develop new services or release new or improved tests on a timely basis, or if such tests do not obtain market acceptance for any reason, our financial condition and results of operations could be harmed.
The FDA may decide to exercise enforcement discretion and require FDA approval or clearance of our personalized medicine services.
          Laboratory-developed tests, like Avise MCV and Avise PG, are regulated by CLIA, as administered by the Centers for Medicare and Medicaid Service, or CMS, as well as applicable state laws. The FDA has in the past also claimed regulatory authority over laboratory-developed tests, but has stated that it was exercising enforcement discretion in not regulating laboratory-developed tests performed by high complexity, CLIA-certified laboratories. Our

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current personalized medicine services have not been cleared or approved by the FDA. Due to the evolving regulatory environment, there is always the risk that the FDA could decide to exercise its oversight with respect to any one of our tests and determine that FDA approval or clearance is required. This would require additional time and money and could require us to cease offering our personalized medicine services, which could have a material adverse effect on our business. If we fail to properly develop our personalized medicine services or if we fail to validate them accurately or inaccurately measure the performance specifications of the personalized medicine services we develop due to human error, deficiencies in our quality control process or otherwise, we may become subject to legal action as well as damage to our reputation with customers, which could have a material adverse effect upon our business.
          Further, in September 2006, the FDA published a draft guidance document that described certain laboratory-developed tests that the FDA intends to regulate as in vitro diagnostic test systems (i.e., as medical devices). The FDA calls this category of laboratory-developed tests “In Vitro Diagnostic Multivariate Index Assays,” or IVDMIAs. The FDA issued a revised draft guidance pertaining to IVDMIAs in July 2007. In the revised guidance, the FDA defines an IVDMIA as a device that combines the values of multiple variables using an interpretation function to yield a single, patient-specific result that is intended for use in the diagnosis of a disease or other condition, or in the cure, mitigation, treatment, or prevention of disease, and that provides a result that cannot be independently derived or verified by the end user and whose derivation is non-transparent. The IVDMIA draft guidance, if adopted as published, would extend FDA oversight over laboratories that offer laboratory-developed tests which meet this definition. It is possible that Avise MCV and Avise PG will be subject to the proposed FDA regulatory guidance and even if not covered by the IVDMIA draft, that new legislation will extend FDA oversight to our laboratory-developed tests.
We rely on third parties to conduct all of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for any of our other future product candidates.
          As of February 1, 2010, we had only 150 full-time employees. Although we have more employees than we have had historically, 111 of these employees are devoted to our sales organization, and therefore, as we have in the past, we expect to continue to rely on third parties to conduct all of our clinical trials. Because we do not conduct our own clinical trials, we must rely on the efforts of others and cannot always control or predict accurately the timing of such trials, the costs associated with such trials or the procedures that are followed for such trials. We expect to continue to rely on third parties to conduct all of our future clinical trials. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, or if they fail to maintain compliance with applicable government regulations and standards, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize any of our future product candidates.
Even if our product candidates are approved, the market may not accept these products or services or our existing products and services.
          Avise PG, Avise MCV, Savella, or any future product candidates that we may develop and for which we obtain the required regulatory approvals may not gain market acceptance among physicians, patients, healthcare payers and the medical community. A number of factors may limit the market acceptance of our services and products including the following:
    timing of market entry relative to competitive services and products;
 
    extent of marketing efforts by us and with respect to Savella, the marketing efforts of Forest Laboratories;
 
    rate of adoption by healthcare practitioners;
 
    rate of a product’s acceptance by the target community;
 
    availability of alternative therapies;
 
    price of our services and products relative to alternative therapies;

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    availability of third-party reimbursement; and
 
    the prevalence or severity of side effects or unfavorable publicity concerning our products or similar products.
          If Avise PG, Avise MCV, Savella, or any future product candidates that we may develop do not achieve market acceptance, we may lose our investment in that product candidate, which may cause our stock price to decline, and our financial condition and results of operations could also be harmed.
Our competitors may develop and market products and services that are less expensive, more effective or safer, which may diminish or eliminate the commercial success of any products or services we may commercialize.
          The pharmaceutical and personalized medicine services industries are highly competitive and require an ongoing, extensive search for technological innovation. They also require, among other things, the ability to effectively discover, develop, test, commercialize, market and promote products, including communicating the effectiveness, safety and value of products to actual and prospective customers, including medical professionals. Many of our competitors have greater resources than we have. This enables them, among other things, to spread their marketing and promotion costs over a broader revenue base. Other competitive factors in the pharmaceutical and personalized medicine services industries include quality and price, product technology, reputation, customer service and access to technical information.
          It is possible that future developments by our competitors could make our products, personalized medicine services or technologies less competitive or obsolete. Our future growth depends, in part, on our ability to provide products and services which are more effective than those of our competitors and to keep pace with rapid medical and scientific change. Sales of our services and products may decline rapidly if a new service or product is introduced by a competitor, particularly if a new service or product represents a substantial improvement over any of our existing services or products. In addition, the high level of competition in our industry could force us to reduce the price at which we sell our services or products or require us to spend more to market our services or products.
          With respect to our pharmaceutical product for the management of FM, Savella (milnacipran HC1), in June 2007, the FDA approved Pfizer Inc.’s drug pregabalin (Lyrica®) for the management of FM and in June 2008 approved Eli Lilly and Company’s duloxetine (Cymbalta®) for the management of FM. Duloxetine is a serotonin norepinephrine reuptake inhibitor, and as a dual reuptake inhibitor is therefore similar in pharmacology to Savella. Tricyclic antidepressants, or TCAs, which are available as inexpensive generic formulations, are also used to treat FM and are less expensive than Savella, as are other generic antidepressants and pain products commonly used to treat FM. Pfizer Inc.’s drug pregabalin (Lyrica®) and Eli Lilly and Company’s duloxetine (Cymbalta®) are competitive with Savella and these products and any other future products will affect Savella’s sales and may cause sales to be lower than anticipated, as can the numerous generic antidepressants and pain products commonly used off-label to treat FM.
          The market potential for FM is considerable and a number of pharmaceutical companies focused on therapies for alleviating pain or antidepressant therapies could decide to evaluate their current product candidates for the treatment of FM at any time. Due to the prevalence and incidence of FM, we anticipate that most, if not all, of the major pharmaceutical companies will have significant research and product development programs in FM. We expect to encounter significant competition both in the United States and in foreign markets for Savella and each of the drugs that we seek to develop.
          With respect to our personalized medicine services, we compete with large, national laboratories including Quest Diagnostics Incorporated, or Quest, and Laboratory Corporation of America Holdings, and also compete with regional and esoteric laboratories. The larger competitors have substantially greater financial and human resources, existing access to the medical community, as well as a much larger infrastructure than we do. Other companies may develop personalized medicine services that are more sensitive, specific, easy to use, or cost-effective than our personalized medicine services, and we may therefore be unable to compete with them in the marketplace.
          Our competition for pharmaceutical products will be partially determined by the potential indications that are ultimately cleared for marketing by regulatory authorities, the timing of any clearances and market introductions and whether any currently available drugs, or drugs under development by others, are effective in the same indications.

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Accordingly, the relative speed with which we can develop, complete the clinical trials for, receive regulatory clearance for and supply commercial quantities of products to the market is expected to be an important competitive factor. We expect that competition among products approved for sale will be based, among other factors described above, on product efficacy, safety, tolerability, cost, reliability, availability, payer reimbursement policies and patent protection.
We are subject to uncertainty relating to health care reform measures and reimbursement policies which, if not favorable to our products or services or product candidates, could hinder or prevent the commercial success of our products, services or product candidates.
          The continuing efforts of the government, insurance and managed care organizations and other health care payers to contain or reduce prescription drug costs may adversely affect:
    our ability to set a price we believe is fair for our products and services;
 
    our 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.
          Successful commercialization of Savella in the United States will depend in part on the extent to which government, insurance and managed care organizations and other health care payers establish appropriate coverage for Savella and related treatments. Third-party payers are increasingly challenging the prices charged for prescription drugs. Third-party payers are also encouraging the use of generic drugs. These trends could influence health care coverage policies, as well as legislative proposals to reform health care or reduce government insurance programs and result in the exclusion of our products, services and product candidates from coverage and reimbursement programs or lower the prices of our products, services and product candidates. Our revenues from the sale of our products and services could be significantly reduced as a result of these cost containment measures and reforms.
          Market acceptance of our personalized medicine services and the majority of our anticipated sales from these services will likely depend, in large part, on the availability of adequate payment or reimbursement from insurance plans, including government plans such as Medicare, managed care organizations, private insurance plans and other third-party payers. Reimbursement by a third-party payer may depend on a number of factors, including a payer’s determination that a service is not experimental or investigational, and that it is medically necessary, appropriate for a specific patient or diagnosis, cost effective or supported by peer-reviewed publications. Because each third-party payer individually approves payment or reimbursement, obtaining these approvals can be a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of these services to each third-party payer separately with no assurance that approval will be obtained. We do not yet have any third-party payer reimbursement agreements. This individualized process or any action by the government negatively affecting payment for or reimbursement of our services can delay the market acceptance of new services and may have a negative effect on our revenues and operating results.
          We believe third-party payers are increasingly limiting coverage for personalized medicine services, and in many instances are exerting pressure on service suppliers to reduce their prices. Consequently, third-party payment or reimbursement may not be consistently available or adequate to cover the cost of our services. We do not yet have any third-party payer reimbursement agreements. Additionally, third-party payers who have previously approved a specific level of payment or reimbursement may reduce that level. Under prospective payment systems, in which healthcare providers may be paid or reimbursed a set amount based on the type of personalized medicine service procedure performed, such as those utilized by Medicare and in many private managed care systems, the cost of our personalized medicine services may not be justified and reimbursed. Any limitations on payment or reimbursement for our services could limit our ability to commercialize and sell new services or to continue to sell our existing services, or may cause the selling prices of our existing services to be reduced, which would adversely affect our revenues and operating results.

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We rely on our employees and consultants for their scientific and technical expertise in connection with our business operations.
          We rely significantly on the scientific and technical expertise of our employees and consultants to conduct our business. As of February 1, 2010, we had only 150 full-time employees, 111 of which are sales field based and therefore, we rely heavily on each of our employees. In addition, because we have a small number of employees, we rely much more on consultants than do other companies. If any of our relationships with our employees or consultants are terminated, we may lose access to scientific knowledge and expertise necessary for the further development and commercialization of Savella, our personalized medicine services or any future product candidates. We expect to continue to rely on consultants and our current employees for scientific and technical knowledge and expertise essential to our business. Additionally, our employment agreement with our chief executive officer provides for “at will” employment, which means that he may terminate his services to us at any time.
We have a history of operating losses and we may never be profitable.
          We have incurred substantial losses during our history. For the years ended December 31, 2009 and 2008, we incurred net losses of $28.3 million and $18.2 million, respectively. As of December 31, 2009, we had an accumulated deficit of $196.5 million. We do not expect to be profitable in the near future, and our ability to become profitable will depend upon our and Forest Laboratories’ ability to further develop, market and commercialize Savella, and our ability to further develop, market and commercialize our personalized medicine services and any other products we may develop. We may not become profitable in the foreseeable future and may never achieve profitability.
We will need substantial additional funding and may be unable to raise capital when needed, which could force us to scale back or eliminate our sales efforts and the development of future product candidates and personalized medicine services or to discontinue pursuing any proposed acquisitions, or which could adversely affect our ability to realize the expected benefits of any completed acquisitions.
          We will incur certain non-reimbursable expenses in connection with the sales of Savella, and will also incur costs in the development of additional personalized medicine services, such as our CB-CAP technology. We are also incurring expenses in connection with the evaluation of potential acquisitions or other strategic transactions and will incur additional expenses in the event we close any such transactions or enter into any co-promotion, in-licensing or collaboration agreements in connection with any such transactions, or invest in any Proof of Concept studies. We may also be required to pay up to $37.5 million in potential milestone-related payments associated with the development of certain therapeutic candidates acquired in our merger with Proprius and a $3.0 million milestone payment in connection with our acquisition of Cellatope. We do not have any committed external sources of funding and although we expect to have revenues, it is likely our revenues will be less than we expect to spend in the year 2010 and that at some time in the future we will likely need to raise additional capital through the sale of equity or debt. The amount of capital we will require will depend upon many factors, including but not limited to, the amount we spend on our sales force that is not reimbursed by Forest Laboratories, how much is ultimately required to develop the products and personalized medicine services that are in development and the evaluation, pursuit and potential closing of any strategic transactions. If we are unable to raise capital when we need it, we may have to scale back or eliminate our sales force or some or all of our development of existing or future product candidates and personalized medicine services and discontinue the evaluation, pursuit or completion of any proposed acquisitions or strategic transactions, and we may be unable to realize the expected benefits of any completed acquisitions or strategic transactions.
Raising additional funds by issuing securities, or through collaboration and licensing arrangements, may cause dilution to existing stockholders, restrict our operations, or require us to relinquish propriety rights.
          We may attempt to raise additional funds through public or private equity offerings, as we did in June 2007 with a public equity offering, or through debt financings. However, the recent credit crisis and the current economic conditions may prevent us from raising money through debt or equity financings. We may also issue equity or other securities in connection with corporate collaborations and licensing arrangements, or raise funds through arrangements like these. For example, the potential milestone payments due to the stockholders of Proprius may be paid in up to 50% stock of Cypress, at our election. To the extent that we are able to raise additional capital by issuing equity securities, or otherwise issue equity securities in connection with corporate collaboration and licensing arrangements or otherwise, our existing stockholders’ ownership percentage will be diluted. Any financing or other transaction that

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involves our issuing securities that we do engage in may also include provisions that restrict our operations. In addition, if we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish potential valuable rights to our potential products on terms that are not favorable to us.
The investment of our cash balance and short-term investments are subject to risks which may cause losses and affect the liquidity of these investments.
          As of December 31, 2009, we had $38.6 million in cash and cash equivalents and $103.1 million in short-term investments. We have historically invested these amounts in United States government securities, corporate debt securities, commercial paper, certificates of deposit and money market funds. Certain of these investments are subject to general credit, liquidity, market and interest rate risks. During the quarter ended December 31, 2009, we determined that any declines in the fair value of our investments were temporary. There may be further declines in the value of these investments, which we may determine to be other-than-temporary. These market risks associated with our investment portfolio may have a negative adverse effect on our results of operations, liquidity and financial condition.
We may lose our net operating loss carryforwards, which could prevent us from offsetting future taxable income.
          We have incurred substantial losses during our history and do not expect to become profitable in 2010 and may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. All unused federal net operating losses will expire 15 or 20 years after any year in which they were generated. The carryforward period is 15 years for losses incurred prior to 1996 and 20 years for losses incurred subsequent to 1997. Our federal net operating losses wil begin to expire in 2010, and our California tax loss carryforwards will begin to expire in 2012. Additionally, the future utilization of our net operating loss carryforwards to offset future taxable income is subject to annual limitations, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that have occurred in prior years, which could prevent us from fully utilizing our net operating loss carryforwards.
Our stock price has been very volatile and will likely continue to be volatile.
          The market prices of the stock of technology companies, particularly biotechnology companies, have been highly volatile. For the period from January 1, 2007 through December 31, 2009, the low and high sales prices for our common stock ranged from $4.90 to $18.20. For the year ended December 31, 2009, our low and high sales prices were $5.24 and $10.10, respectively. As of December 31, 2009, the last reported sale price of our common stock was $5.77. Our stock price has been and will likely continue to be affected by market volatility, as well as by our own performance. We expect our stock price to be volatile in the near future. The following factors, among other risk factors, may have a significant effect on the market price of our common stock:
    the commercial sales of Savella and our personalized medicine services;
 
    development of our personalized medicine services and other product candidates;
 
    developments in our relationship with Forest Laboratories, including the termination of our agreement;
 
    developments in our relationship with Pierre Fabre, including the termination of our agreement;
 
    our entering into, or failing to enter into, an agreement for the acquisition of any products, product candidates or companies, or an agreement with any corporate collaborator;
 
    our available cash;
 
    announcements of technological innovations or new products by us or our competitors;
 
    developments in our patent or other proprietary rights;
 
    fluctuations in our operating results;

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    litigation initiated by or against us;
 
    developments in domestic and international governmental policy or regulation; and
 
    economic and other external factors or other disaster or crisis.
The concentration of ownership among our existing officers, directors and principal stockholders may result in the entrenchment of management, prevent other stockholders from influencing significant corporate decisions and depress our stock price.
          As of December 31, 2009, our executive officers, directors and stockholders who hold at least 5% of our stock beneficially owned and controlled approximately 60% of our outstanding common stock. If these officers, directors and principal stockholders act together, they will be able to help entrench management and to control matters requiring approval by our stockholders, including a financing in which we sell more than 20% of our voting stock at a discount to the market price, the removal of any directors up for election, the election of the members of our board of directors, mergers, a sale of all or substantially all of our assets, going private transactions and other fundamental transactions. This concentration of ownership could also depress our stock price.
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 second amended and restated certificate of incorporation and our third amended and restated bylaws may delay, impede or prevent an acquisition or change in control of us. 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, who are responsible for appointing the members of our management team. These provisions include, among others, a requirement that our board of directors be divided into three classes with directors serving three year terms and with only one class of directors being elected in any given year, a requirement that special meetings of our stockholders may only be called by the chairman of the board, our chief executive officer or a majority of our board of directors and a prohibition on actions by our stockholders by written consent. 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, with some exceptions, stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advance notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders.
We expect to continue incurring significant costs as a result of enacted and proposed changes in laws and regulations relating to corporate governance matters.
          Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by the NASDAQ Stock Market LLC, have resulted and we expect will continue to result in significant costs to us. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firm’s audit of internal control over financial reporting has required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant financial resources and management time related to compliance activities. Additionally, these laws and regulations could make it more difficult or 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, our board committees or as executive officers.

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If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our ability to operate our business and investors’ view of us.
          As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002, including Section 404 related to internal controls, and the related rules and regulations of the Securities and Exchange Commission, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 and other requirements will increase our costs and will continue to require additional management resources. We may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy reporting requirements. If we are unable to obtain future unqualified reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our internal control over financial reporting, which could adversely affect our ability to raise financing and operate our business as well as our stock price.
Risks related to our intellectual property
We rely primarily on method of use patents to protect our proprietary technology for the sales of Savella, and our ability to compete may decrease or be eliminated if we are not able to protect our proprietary technology.
          Our ability to realize the full sales potential for Savella (milnacipran HCl), our only therapeutic product, may decrease or be eliminated if we are not able to protect our proprietary technology. The composition of matter patent for milnacipran (U.S. Patent 4,478,836) expired in June 2002, and a method of synthesis patent (U.S. Patent 5,034,041) expired on December 27, 2009. Accordingly, we rely on the patent for the method of use of milnacipran to treat fibromyalgia (U.S. patent 6,602,911), pain (U.S. Patent 6,992,110) and the method of use of milnacipran to treat symptoms of chronic fatigue syndrome (U.S. Patent 6,635,675) issued to us, to protect our proprietary technology with respect to the development of milnacipran. The method of use patent directly relevant to our current milnacipran product candidate is the ‘911 patent; the other two method of use patents may have future applicability. We have also filed additional patent applications related to milnacipran and to the use of milnacipran for FM (and other related pain syndromes and disorders), although no patents have issued on these patent applications. Because there is no patent protection for the composition of matter of milnacipran, other companies may be able to sell milnacipran in competition with us and Forest Laboratories for indications for which we do not have use patent protection unless we and Forest Laboratories are able to obtain additional protection through milnacipran-related patents or additional use patents that may issue from our pending patent applications or from regulatory exclusivity. It may be more difficult to establish infringement of methods of synthesis, formulation or use patents as compared to a patent on a compound. If we or Forest Laboratories are not able to obtain and enforce these patents, a competitor could use milnacipran for a treatment or use not covered by any of our patents.
          In connection with our acquisition of Proprius, we acquired rights to an issued patent (U.S. patent 6,921,667, which terminates in 2023) and several patents in prosecution with respect to the Avise PG test (U.S. Patent 7,582,282 issued September 1, 2009) and a number of patents in prosecution on the Avise MCV. Although we have the right to two issued patents covering the Avise PG test, we may not be able to secure any additional patent protection and the existing patent may not ensure exclusivity through the patent term. In addition, as part of our acquisition of Proprius we acquired rights to a patent family directed to PRO-406 (the topical NSAID therapy for the symptomatic treatment of osteoarthritis) including one issued patent (U.S. patent No. 7,138,394, which expires in 2023) and several pending U.S. and foreign patent applications. It is uncertain whether we will be able to obtain any claim with reasonable coverage for PRO-406.
          The validity of a United States patent depends, in part, on the novelty of the invention it discloses. The pharmaceutical industry is characterized by constant investment in new drug discovery and development, and this results in a steady stream of publications regarding the product of this investment, any of which would act to defeat the novelty of later-discovered inventions. Issued United States patents enjoy a presumption of validity that can only be overcome by clear and convincing evidence. However, patents are nonetheless subject to challenge and can be invalidated if a court determines, retrospectively, that despite the action of the Patent and Trademark Office in issuing the patent, the corresponding patent application did not meet the statutory requirements. If a competitor or other third party were to successfully challenge our patents, and claims in these patents are narrowed or invalidated, our ability to protect the related product from competition would be compromised.

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          We also expect to rely on the United States Drug Price Competition and Patent Term Restoration Act, commonly known as the Hatch-Waxman Amendments, for protection of Savella and our other future products. The Hatch-Waxman Amendments provide data exclusivity for new molecular entities, such as that in Savella. Once a drug containing a new molecule is approved by the FDA, the FDA cannot accept an abbreviated NDA for a generic drug containing that molecule for five years, although the FDA may accept and approve a drug containing the molecule pursuant to an NDA supported by independent clinical data. Amendments have been proposed that would narrow the scope of Hatch-Waxman exclusivity and permit generic drugs to compete with our drug. After the Hatch-Waxman exclusivity period expires, assuming our patents are valid, we still expect to rely on our method of use patents to protect our proprietary technology with respect to the development of milnacipran. The patent positions of pharmaceutical companies are uncertain and may involve complex legal and factual questions. We may incur significant expense in protecting our intellectual property and defending or assessing claims with respect to intellectual property owned by others. Any patent or other infringement litigation by or against us is likely and could result in significant expense to us, including diversion of the resources of management.
          Others may file patent applications or obtain patents on similar technology or compounds that compete with Savella for the treatment of FM, for any of our personalized medicine services or any of the products that may be developed under any POC trials we conduct. We cannot predict the breadth of claims that will be allowed and issued in patent applications. Once patents have issued, we cannot predict how the claims will be construed or enforced. We may infringe on intellectual property rights of others without being aware of the infringement. If another party claims we are infringing their technology, we could have to defend an expensive and time consuming lawsuit, pay a large sum if we are found to be infringing, or be prohibited from selling or licensing our products unless we obtain a license or redesign our product, which may not be possible.
          We also rely on trade secrets and proprietary know-how to develop and maintain our competitive position. Some of our current or former employees, consultants or scientific advisors, or current or prospective corporate collaborators, may unintentionally or willfully disclose our confidential information to competitors or use our proprietary technology for their own benefit. Furthermore, enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult to prove, making the outcome uncertain. Our competitors may also independently develop similar knowledge, methods and know-how or gain access to our proprietary information through some other means.
Our ability to compete may decline if we do not adequately protect our proprietary rights.
          Our commercial success depends on obtaining and maintaining proprietary rights to our products and services and product candidates and technologies and their uses as well as successfully defending these rights against third party challenges. We will only be able to protect our products and services and product candidates, proprietary technologies and their uses from unauthorized use by third parties to the extent that valid and enforceable patents or effectively-protected trade secrets cover them.
     Our ability to obtain patent protection for our products and services and product and service candidates and technologies is uncertain due to a number of factors, including:
    we may not have been the first to make the inventions covered by our pending patent applications or issued patents;
 
    we may not have been the first to file patent applications for our products and services and product and service candidates or the technologies we rely upon;
 
    others may independently develop similar or alternative technologies or duplicate any of our technologies;
 
    our disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability;
 
    any or all of our pending patent applications may not result in issued patents;

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    we may not seek or obtain patent protection in all countries that will eventually provide a significant business opportunity;
 
    any patents issued to us or our collaborators may not provide a basis for commercially viable products, may not provide us with any competitive advantages or may be challenged by third parties;
 
    some of our technologies may not be patentable;
 
    others may design around our patent claims to produce competitive products which fall outside of the scope of our patents; or
 
    others may identify prior art which could invalidate our patents.
          Even if we obtain patents covering our product and service candidates or technologies, we may still be barred from making, using and selling our product candidates or technologies because of the patent rights of others. Others may have filed and in the future are likely to file patent applications covering compounds, assays, genes, gene products or therapeutic or personalized medicine services that are similar or identical to ours. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the area of the fields in which we have developed and are developing products and services. These could materially affect our ability to develop our product and service candidates or sell our products and services. 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 and services and product and service candidates or technologies may infringe. These patent applications may have priority over patent applications filed by us. Disputes may arise regarding the ownership or inventorship of our inventions. It is difficult to determine how such disputes will be resolved. Others may challenge the validity of our patents. If our patents are found to be invalid we will lose the ability to exclude others from making, using or selling the inventions claimed therein.
          Some of our research collaborators and scientific advisors have rights to publish data and information to which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired. In addition, in-licensed technology is important to our business. We generally will not control the patent prosecution, maintenance or enforcement of in-licensed technology.
A dispute concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and costly and an unfavorable outcome could harm our business.
          There is significant litigation in the industry regarding patent and other intellectual property rights. We may be exposed to future litigation by third parties based on claims that our products and services and product and service candidates, technologies or activities infringe the intellectual property rights of others. If our drug development or personalized medicine services activities are found to infringe any such patents, we may have to pay significant damages. There are many patents relating to chemical compounds and the uses thereof. If our compounds are found to infringe any such patents, we may have to pay significant damages. A patentee could prevent us from making, using or selling the patented compounds. We may need to resort to litigation to enforce a patent issued to us, protect our trade secrets or determine the scope and validity of third party proprietary rights. From time to time, we may hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by us. Either we or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources, whether we win or lose. We may not be able to afford the costs of litigation. Any legal action against our company or our collaborators could lead to:
    payment of damages, potentially treble damages, if we are found to have willfully infringed such parties’ patent rights;
 
    injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell products, services and product and service candidates; or

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    we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all. As a result, we could be prevented from commercializing current or future products, services and product and service candidates.
The patent applications of pharmaceutical, biotechnology and personalized medicine companies involve highly complex legal and factual questions, which could negatively impact our patent position.
          The patent positions of pharmaceutical and biotechnology and personalized medicine services companies can be highly uncertain and involve complex legal and factual questions. The United States Patent and Trademark Office’s standards are uncertain and could change in the future. Consequently, the issuance and scope of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. United States patents and patent applications may also be subject to interference proceedings and United States patents may be subject to reexamination proceedings in the United States Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Accordingly, rights under any issued patents may not provide us with sufficient protection against competitive products or processes.
          In addition, changes in or different interpretations of patent laws in the United States and foreign countries may permit others to use our discoveries or to develop and commercialize our technology and products and services without providing any compensation to us. The laws of some countries do not protect intellectual property rights to the same extent as United States laws and those countries may lack adequate rules and procedures for defending our intellectual property rights. For example, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our product, services or product and service candidates.
          If we fail to obtain and maintain patent protection and trade secret protection of our products, services and product and service candidates, proprietary technologies and their uses, we could lose our competitive advantage and competition we face would increase, reducing our potential revenues and adversely affecting our ability to attain or maintain profitability.

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Item 1B. Unresolved Staff Comments
     None.
Item 2. Properties
     We currently occupy a total of approximately 10,100 square feet of leased office space in San Diego, California under three leases. The San Diego facilities house our executive and administrative offices and laboratory space. The lease for our main corporate office occupying approximately 5,700 square feet expires in July 2012 and contains monthly rental payments ranging from $15,600 to $17,870 over the lease term. In July 2008, we leased an additional 1,900 square feet of office space for our executive and administrative offices. The lease for this additional space expires in December 2010 and contains monthly rental payments of $4,635. In May 2008, we leased approximately 2,500 square feet of laboratory space. This lease expires in June 2010 and contains monthly rental payments of $6,383.
Item 3. Legal Proceedings
     From time to time, in the normal course of business, we are involved in litigation arising out of our operations. We are not currently engaged in any legal proceedings that we expect would materially harm our business or financial condition.
Item 4. (Removed and Reserved)

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PART II
Item 5. Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
     Our common stock is traded on the NASDAQ Global Stock Market under the symbol “CYPB”. Set forth below are the high and low sales prices for our common stock for the periods indicated as reported on the NASDAQ Global Stock Market.
                 
    Price Range of Common Stock
    High   Low
Year Ended December 31, 2009:
               
First Quarter
  $ 10.10     $ 6.78  
Second Quarter
    9.68       6.70  
Third Quarter
    9.95       6.85  
Fourth Quarter
    8.37       5.24  
 
Year Ended December 31, 2008:
               
First Quarter
  $ 11.09     $ 6.66  
Second Quarter
    8.85       6.17  
Third Quarter
    9.13       5.45  
Fourth Quarter
    7.41       4.90  
     As of March 1, 2010, there were approximately 414 holders of record of our common stock. On March 1, 2010, the last reported sale price of our common stock on the NASDAQ Global Stock Market was $5.22 per share. We have never paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future as we intend to retain any earnings for use in our business.
Recent Sales of Unregistered Securities
     There were no unregistered sales of equity securities during fiscal 2009.

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Stock Performance Graph and Cumulative Total Return
          The graph below shows the cumulative total stockholder return assuming the investment of $100 on the date specified (and the reinvestment of dividends thereafter) in each of (i) Cypress Bioscience, Inc.’s common stock, (ii) the Nasdaq Composite Index and (iii) the Nasdaq Pharmaceutical Index. The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of our common stock or the indexes presented.
(PERFORMANCE GRAPH)
NOTE: Data complete through last fiscal year.
NOTE: Corporate Performance Graph with peer group uses peer group only performance (excludes only company).
NOTE: Peer group indices use beginning of period market capitalization weighting.

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Item 6. Selected Financial Data
     The following table presents our selected financial data, which is derived from our audited financial statements. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report and the financial statements and the related notes thereto included in this Form 10-K.
                                         
    Years Ended December 31,  
    2009     2008     2007     2006     2005  
Statement of Operations Data:
                                       
 
                                       
Revenues:
                                       
Revenues under collaborative agreement
  $ 10,026,307     $ 16,659,099     $ 13,440,603     $ 4,322,468     $ 8,384,636  
Commercial revenues
    16,976,200                          
Revenues from personalized medicine services
    332,372                          
 
                             
 
    27,334,879       16,659,099       13,440,603       4,322,468       8,384,636  
 
                                       
Operating expenses:
                                       
Cost of personalized medicine testing services
    1,986,722       267,361                    
Research and development
    11,996,169       9,171,076       7,210,684       9,184,404       15,839,737  
Selling, general and administrative
    42,138,458       17,602,820       10,027,358       8,379,031       5,448,160  
In-process research and development
          12,590,000                    
Goodwill impairment
    1,100,000                          
Compensation expense (benefit) — variable stock options
                            (1,749,135 )
 
                             
 
    57,221,349       39,631,257       17,238,042       17,563,435       19,538,762  
 
                                       
Other income (expense):
                                       
Interest income
    1,634,507       4,746,547       7,285,023       4,923,290       3,501,381  
Interest expense
                            (2,382 )
Gain (loss) on disposal of assets
                            4,186  
 
                             
 
    1,634,507       4,746,547       7,285,023       4,923,290       3,503,185  
 
                             
 
                                       
Net income (loss)
  $ (28,251,963 )   $ (18,225,611 )   $ 3,487,584     $ (8,317,677 )   $ (7,650,941 )
 
                             
 
                                       
Net income (loss) per share — basic
  $ (0.74 )   $ (0.48 )   $ 0.10     $ (0.26 )   $ (0.25 )
 
                             
 
                                       
Shares used in computing net income (loss) per share — basic
    38,150,054       37,733,737       35,205,783       32,094,785       31,105,271  
 
                             
 
                                       
Net income (loss) per share — diluted
  $ (0.74 )   $ (0.48 )   $ 0.10     $ (0.26 )   $ (0.25 )
 
                             
 
                                       
Shares used in computing net income (loss) per share — diluted
    38,150,054       37,733,737       36,616,091       32,094,785       31,105,271  
 
                             
 
    As of December 31,
    2009   2008   2007   2006   2005
Balance Sheet Data:
                                       
Cash, cash equivalents and short-term investments
  $ 141,673,371     $ 145,494,605     $ 181,806,574     $ 102,778,328     $ 109,613,278  
Total assets
    176,064,710       174,592,523       182,699,850       103,824,941       110,791,798  
Total stockholders’ equity
    140,584,003       159,915,208       168,014,978       87,097,297       89,975,440  
Working capital
    140,503,944       138,751,122       177,975,517       99,508,212       105,536,094  

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
overview
     Cypress Bioscience, Inc. provides therapeutics and personalized medicine services, facilitating improved and individualized patient care. Cypress’ goal is to address the evolving needs of specialist physicians and their patients by identifying unmet medical needs in the areas of pain, rheumatology, and physical medicine and rehabilitation, including challenging disorders such as fibromyalgia and rheumatoid arthritis. We believe our approach to improving patient care creates a unique partnership with physicians, and expect that offering personalized medicine services and therapeutic products through the same sales organization will provide Cypress a differentiated commercial strategy and sustainable competitive advantage.
     In January 2009, we received approval from the U.S. Food and Drug Administration (“FDA”) to market Savella (milnacipran HCl) for the management of fibromyalgia (“FM”). Milnacipran HCl has been approved for a non-pain condition in over 50 countries, with commercial experience outside the U.S. since 1997. We obtained an exclusive license in the U.S. and Canada to milnacipran from Pierre Fabre Medicament, or Pierre Fabre, in 2001. In January 2004, we entered into a collaboration agreement with Forest Laboratories, a leading marketer of central nervous system, or CNS, drugs with a strong franchise in the primary care and psychiatric markets. As part of this collaboration with Forest Laboratories, we sublicensed our rights to milnacipran to Forest Laboratories for the United States, with an option to extend the territory to include Canada, which was exercised in July 2007. As part of our agreements with both Forest Laboratories and Pierre Fabre, we have licensed any patents that may issue from our patent applications related to FM and milnacipran to Forest Laboratories and Pierre Fabre. Additional information on our ongoing post approval clinical development program for Savella can be found at www.clinicaltrials.gov.
     Following the January 2009 FDA approval to market Savella for the management of FM, Savella was shipped to wholesalers and became available at pharmacies at the end of April 2009. Savella is a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher potency than serotonin (in vitro). These two neurotransmitters are thought to play a central role in the symptoms for FM. We co-promote Savella for FM with our corporate partner, Forest Laboratories, Inc., or Forest Laboratories, and by the beginning of 2009, we expanded our sales force to 115 field based personnel in anticipation of the launch of Savella. At the beginning of May 2009, we began detailing Savella to rheumatologists, pain centers, and physical medicine and rehabilitation specialists in the U.S. Now that we are detailing Savella to physicians, in addition to receiving a royalty on total net sales of Savella we will be reimbursed by Forest Laboratories for the Savella sales calls that we make based on Forest Laboratories’ cost to conduct such sales calls.
     At the end of October 2008, with our initial 11 person sales force, we launched our first two novel personalized medicine services, Avise PG and Avise MCV, which are detailed to rheumatologists. Personalized medicine services are tests which are validated analytically and clinically to provide physicians with actionable information to help manage their patients’ care, including predicting the likelihood of developing disease or optimizing therapy. Avise PG is a test that supports dose optimization and therapeutic decision making for patients taking methotrexate (“MTX”), a widely used first-line therapy for rheumatoid arthritis (“RA”). Avise MCV is a test that aids in the diagnosis and prognosis of RA. We believe that offering integrated personalized medicine services and pharmaceutical products through the same sales organization will facilitate physician access and improve the quality of the sales call, as well as help establish Cypress as a leader targeting these specific specialists. When we began promoting Savella in May 2009 with our 115 field based personnel we called on the same rheumatologists that we began calling upon in October 2008 for our first two personalized medicine services.
     From time to time we have ongoing Proof of Concept (“POC”) stage therapeutic product opportunities in development. At the present time, we are not funding any POC stage development programs, including the two pharmaceutical candidates acquired in connection with our acquisition in March 2008 of Proprius, Inc., or Proprius, although we continue to evaluate the merit of future investment in POC stage development programs. We are also actively continuing to evaluate various other potential strategic transactions for development stage and commercial product opportunities where we can leverage our broad technical, clinical and regulatory expertise or our excess sales force capacity, and are considering a variety of potential transaction structures.

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     In February 2009, we announced the closing of a transaction to acquire Cellatope Corporation’s technology platform that uses cell-bound complement activation products (“CB-CAP”) to diagnose and monitor debilitating autoimmune disorders, including systemic lupus erythematosus (“SLE/Lupus”). We acquired the CB-CAP technology in a transaction that included a $2.0 million cash payment to Cellatope for the diagnostic technology as well as an additional $3.0 million potential milestone payment associated with the commercial development of the Lupus monitoring application.
     In March 2008, we announced the closing of the acquisition of Proprius that included an upfront payment of approximately $37.5 million in cash, as well as up to an additional $37.5 million in potential milestone related payments associated with the development of Proprius’ early clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat rheumatoid arthritis. We are not currently in active development with respect to either product candidate.
Results of Operations
Comparison of Years Ended December 31, 2009 and 2008
Revenues Under Collaborative Agreement
     We recognized revenues under our collaborative agreement with Forest Laboratories of $10.0 million for the year ended December 31, 2009 compared to $16.7 million for year ended December 31, 2008. Revenues during the year ended December 31, 2009 included a $6.5 million reimbursement for the remaining two-thirds of the costs paid in advance by us in connection with the second Phase III trial for Savella received from Forest Laboratories in January 2009 upon approval of our New Drug Application (“NDA”). This compares to a $10.0 million milestone payment, net of a $0.5 million sublicense fee to Pierre Fabre, and $3.2 million reimbursement for one-third of the costs paid in connection with the second Phase III trial for Savella received from Forest Laboratories in February 2008 upon acceptance of our NDA. The revenues under collaborative agreements recorded during 2009 and 2008 consist entirely of amounts earned or reimbursed to us pursuant to our collaboration agreement with Forest Laboratories, entered into in January 2004, for the development and marketing of Savella. Such revenues include the recognition of the $25.0 million upfront payment received in January 2004 from Forest Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million license payment received from Forest Laboratories in July 2007 to extend the territory to include Canada recognized on a straight-line basis over the remainder of the 8 year amortization period, sponsored development reimbursements and funding received from Forest Laboratories for certain of our employees devoted to the development of Savella. The amount of sponsored development reimbursements from Forest Laboratories and funding received from Forest Laboratories for certain of our employees devoted to the development of Savella changes periodically and may be eliminated based on the level of development activity.
Commercial Revenues
     We recognized commercial revenues of $17.0 million for the year ended December 31, 2009 in connection with the launch of Savella during 2009.
     The following table summarizes the components of commercial revenues for the years ended December 31, 2009 and 2008:
                 
    Year Ended  
    December 31,  
    2009     2008  
Royalty revenue
  $ 4,850,687     $  
Revenue from milestones
    1,254,640        
Co-promotion reimbursement
    10,870,873        
 
           
 
  $ 16,976,200     $  
 
           

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     We recognized royalty revenue of $4.9 million for the year ended December 31, 2009 based on net sales of Savella during the period as reported by Forest Laboratories, subject to an adjustment by Forest Laboratories based on their total payment obligations to Cypress and Pierre Fabre.
     Revenue from milestones for the year ended December 31, 2009 consists of the recognition of $1.9 million related to the $25.0 million milestone payment, net of the $1.25 million sublicense payment to Pierre Fabre, received in January 2009 upon NDA approval, and net of sampling obligations of $0.6 million. The milestone will be recognized on a straight-line basis, net of sampling obligations, over the ongoing commercial obligation period, which is estimated to be 13 years.
     Co-promotion reimbursement revenue of $10.9 million for the year ended December 31, 2009 consists of reimbursement from Forest Laboratories for detail calls provided by our sales force during the period, as well as reimbursement for certain marketing costs incurred by us.
     The co-promotion reimbursement for detail calls is determined based on the number of detailing calls made by our sales force (measured on a per physician call basis) during the period, each of which is reimbursed at a rate equal to the cost of such effort to Forest Laboratories had it been accomplished by the Forest Laboratories sales force. The corresponding costs associated with our co-promotion reimbursement are included as a component of selling, general and administrative expense on the Consolidated Statement of Operations.
Revenues From Personalized Medicine Services
     Revenues from our personalized medicine services are recognized as cash payments for the services are received. We recognized revenue of approximately $0.3 million during 2009 in connection with personalized medicine services, which were launched during the fourth quarter of 2008.
Cost of Personalized Medicine Services
     Cost of personalized medicine testing services primarily consists of the compensation and benefits (including bonuses, if any, and stock-based compensation) of laboratory personnel, laboratory supplies, outside laboratory costs, shipping and distribution costs and facility-related expenses. We incurred costs of $2.0 million during the year ended December 31, 2009 compared to $0.3 million during the year ended December 31, 2008 in connection with our personalized medicine services. Our personalized medicine services were launched during the fourth quarter of 2008, resulting in a full year of activity during 2009.
Research and Development
     Research and development expenses for the year ended December 31, 2009 were $12.0 million compared to $9.2 million for the year ended December 31, 2008. The increase in research and development expenses is primarily attributable to a $3.0 million milestone payment owed to Pierre Fabre upon NDA approval in connection with our collaboration agreement with Forest Laboratories and a $2.0 million payment recognized as research and development expense during the first quarter of 2009 in connection with our asset purchase agreement with Cellatope. This increase in research and development expenses was partially offset by a $1.0 million milestone payment owed to Pierre Fabre upon NDA acceptance in the first quarter of 2008, as well as one-time costs owed to Forest Laboratories during 2008 as agreed upon in the amendment to our agreement with Forest Laboratories.
     Effective January 9, 2004, pursuant to our collaboration agreement with Forest Laboratories, Forest Laboratories assumed responsibility for funding all continuing development of Savella, including the funding of clinical trials and regulatory approvals. This funding received from Forest Laboratories for sponsored development reimbursements is included as a component of our revenue under collaborative agreement on the consolidated statement of operations. We agreed upon an alternative cost sharing arrangement with Forest Laboratories for the second Phase III trial only. In connection with this arrangement, we paid for a majority of the external costs of the second Phase III trial only, which were $9.7 million. Forest repaid us $3.2 million in 2008 and repaid the remaining $6.5 million in January 2009 upon NDA approval.

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Selling, General and Administrative
     Selling, general and administrative expenses for the year ended December 31, 2009 and 2008 is comprised of the following:
                 
    Year Ended  
    December 31,  
    2009     2008  
Sales and marketing
  $ 25,139,875     $ 4,921,301  
General and administrative
    16,998,583       12,681,519  
 
           
 
  $ 42,138,458     $ 17,602,820  
 
           
     Sales and marketing expenses increased to $25.1 million for the year ended December 31, 2009 from $4.9 million for the year ended December 31, 2008. The increase is primarily due to the costs associated with supporting our commercial organization, which expanded from 11 people for most of 2008 to 115 in 2009, including salary, commission and benefits, travel expenses, training costs and automobile fleet costs, as well as marketing expenses incurred during 2009.
     General and administrative expenses increased to $17.0 million for the year ended December 31, 2009 from $12.7 million for the year ended December 31, 2008. The increase is primarily due to increased consulting costs incurred during 2009 in connection with business development activities, increased legal fees incurred during 2009 in connection with patent filing activities and compensation expense recognized for contingent payments in connection with our acquisition of Proprius.
In-Process Research and Development
     We incurred in-process research and development in 2008 but not in 2009. In-process research and development represents the fair value of acquired, to-be-completed research projects, including those related to personalized medicine services and therapeutic candidates, obtained in connection with the Proprius acquisition in March 2008 that had not reached technological feasibility at the acquisition date and are not expected to have an alternative future use. Accordingly, the $12.6 million of in-process research and development, consisting of $10.2 million related to personalized medicine services and $2.4 million related to therapeutic candidates, was charged to our consolidated statement of operations during the first quarter of 2008. The total estimated value of approximately $12.6 million of the research projects was determined by estimating the costs to develop the acquired technology into a commercially viable product, estimating the future net cash flows from the project once commercially viable, and discounting the net cash flows to their present value using a discount rate of 30%.
     The personalized medicine services required certain validation work prior to the anticipated launch in late 2008. The validation work was completed and our laboratory was certified prior to the October 2008 launch. The personalized medicine services are being marketed to rheumatologists.
     The therapeutic products acquired from Proprius consisted of early clinical-stage candidates, which include a product to treat pain and a product to treat rheumatoid arthritis. Substantial additional research and development will be required prior to any of our acquired therapeutic programs reaching technological feasibility. In addition, once proof of concept studies are completed, each product candidate acquired will need to complete a series of clinical trials and receive FDA or other regulatory approvals prior to commercialization. Due to the early stage of development for these therapeutic products, we are unable to estimate with certainty the time and investment required to develop these products. These programs may never reach technological feasibility or develop into products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indications. The successful development of Proprius’ therapeutic products could result in potential milestone payments of up to $37.5 million. At the present time, we are not funding the development of these two products.

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Goodwill Impairment
     We assess our goodwill for impairment as of December 1 of each year, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For 2009, our annual impairment review coincided with a series of facts and circumstances indicating that our goodwill might be impaired, including revised projections for our personalized medicine services business reflecting current product demand and our cash collection profile.
     We measure for potential impairment of goodwill associated with each of our reporting units based on a projected discounted cash flow method using a discount rate that we believe is commensurate with the risk inherent in our current business model and a market approach method using market multiples of similar companies. The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed or estimated amounts.
     Upon completion of our analysis, we concluded that the goodwill related to our personal medicine services reporting unit was fully impaired, resulting in a $1.1 million impairment charge. We also concluded that the goodwill related to our therapeutics reporting unit in the amount of $21.9 million was not impaired. There were no such charges in 2008.
Interest Income
     Interest income for the year ended December 31, 2009 was $1.6 million compared to $4.7 million for the year ended December 31, 2008. The decrease in interest income for the year ended December 31, 2009 compared to the corresponding period in 2008 is primarily due to a general decrease in interest rates and related yields experienced during 2009 compared to 2008, as well as maturing securities being reinvested at lower rates.
Comparison of Years Ended December 31, 2008 and 2007
Revenues Under Collaborative Agreement
     We recognized revenues under our collaborative agreement with Forest Laboratories of $16.7 million for the year ended December 31, 2008 compared to $13.4 million for the year ended December 31, 2007. The increase in revenues under our collaborative agreement is due to a $10.0 million milestone payment, net of a $0.5 million sublicense fee to Pierre Fabre, and $3.2 million reimbursement for one-third of the costs paid in connection with the second Phase III trial for Savella received from Forest Laboratories in February 2008 upon acceptance of our NDA. This compares to $10.0 million in milestone payments, net of $0.5 million in sublicense fees to Pierre Fabre, received from Forest Laboratories during 2007. The revenues recorded during 2008 and 2007 consist solely of amounts earned or reimbursed to us pursuant to our collaboration agreement with Forest Laboratories, entered into in January 2004, for the development and marketing of Savella. Such revenues include the recognition of the upfront payment of $25.0 million from Forest Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million license payment received from Forest Laboratories in July 2007 to extend the territory to include Canada recognized on a straight-line basis over the remainder of the 8 year amortization period, sponsored development reimbursements, funding received from Forest Laboratories for certain of our employees devoted to the development of Savella and the milestone payments and reimbursement payment described above. The amount of sponsored development reimbursements from Forest Laboratories and funding received from Forest Laboratories for certain of our employees devoted to the development of Savella changes periodically and may be eliminated based on the level of development activity.
     Revenue from our personalized medicine services will be recognized as cash payments for the services are received. While we began offering these services in October 2008, no cash payments were received and accordingly, no revenue was recognized during 2008.

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Cost of Personalized Medicine Testing Services
     Cost of personalized medicine testing services primarily consists of the compensation and benefits (including bonuses and stock-based compensation) of laboratory personnel, laboratory supplies, outside laboratory costs, shipping and distribution costs and facility-related expenses. Our costs of personalized medicine services of $0.3 million during 2008 are attributable to the launch of our personalized medicine services during the fourth quarter of 2008.
Research and Development
     Research and development expenses for the year ended December 31, 2008 were $9.2 million compared to $7.2 million for the year ended December 31, 2007. The increase in research and development expenses is primarily attributable to a $1.0 million milestone payment upon NDA acceptance in connection with our collaboration agreement with Forest Laboratories, as well as costs incurred during 2008 in connection with our proof of concept studies for new compounds, development costs incurred during 2008 in connection with validation activities for our personalized medicine services and increased stock-based compensation expense related to options granted in 2008. This increase in research and development costs during 2008 was partially offset by costs incurred during 2007 in connection with the second Phase III Savella trial, which was completed during the second quarter of 2007. During the year ended December 31, 2008, we incurred total costs of $1.1 million, excluding milestone payments, in connection with our Phase III Savella programs compared to a total of $2.7 million during the year ended December 31, 2007.
Selling, General and Administrative
     Selling, general and administrative expenses for the year ended December 31, 2008 were $17.6 million compared to $10.0 million for the year ended December 31, 2007. The increase in selling, general and administrative expenses is primarily due to hiring and recruitment costs in connection with the hiring of our sales force, including salary expense for the newly-hired sales team, marketing expenses incurred in connection with the launch of our personalized medicine services, higher legal fees due to increased patent filing activity and increased stock-based compensation expense related to options granted during 2008.
In-Process Research and Development
     In-process research and development represents the fair value of acquired, to-be-completed research projects, including those related to personalized medicine services and therapeutic candidates, obtained in connection with the Proprius acquisition in March 2008 that had not reached technological feasibility at the acquisition date and are not expected to have an alternative future use. Accordingly, the $12.6 million of in-process research and development, consisting of $10.2 million related to personalized medicine services and $2.4 million related to therapeutic candidates, was charged to our consolidated statement of operations during the first quarter of 2008.
Interest Income
     Interest income for the year ended December 31, 2008 was $4.7 million compared to $7.3 million for the year ended December 31, 2007. The decrease in interest income for the year ended December 31, 2008 compared to the corresponding period in 2007 is primarily due to a general decrease in interest rates and related yields experienced during 2008 compared to 2007.
Liquidity and Capital Resources
     At December 31, 2009, we had cash, cash equivalents and short-term investments of $141.7 million compared to cash, cash equivalents and short-term investments of $145.5 million at December 31, 2008. Working capital at December 31, 2009 totaled $140.5 million compared to $138.8 million at December 31, 2008. We have invested a substantial portion of our available cash in AAA-rated marketable debt instruments of governmental agencies and corporate debt securities. We have established guidelines relating to our investments with a goal to preserve principal and maintain liquidity.

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     Net cash used in operating activities as disclosed in our Statement of Cash Flows was $2.4 million for the year ended December 31, 2009 compared to net cash provided by operating activities of $0.2 million and $2.8 million for the years ended December 31, 2008 and 2007, respectively. The primary source of cash from operations during the year ended December 31, 2009 was the $25.0 million milestone payment and the $6.5 million reimbursement of expenses received from Forest Laboratories, offset by cash used in operations including $9.2 million for changes in operating assets and liabilities (excluding impact of initial deferred revenue amount from commercial milestone payment) and non-cash charges of $11.3 million. The primary source of cash from operations during the year ended December 31, 2008 was the $10.0 million milestone payment and the $3.2 million reimbursement of expenses received from Forest Laboratories, offset by cash used in operations including $0.7 million for changes in operating assets and liabilities and non-cash charges of $19.2 million that includes $12.6 million of the write-off of in-process research and development related to the acquisition of Proprius. The primary source of cash from operations during the year ended December 31, 2007 was the $10.0 million in aggregate milestone payments received from Forest Laboratories and the $1.0 million license payment received from Forest Laboratories to extend the territory to include Canada, offset by cash used in operations including $1.9 million for changes in operating assets and liabilities and non-cash charges of $1.2 million.
     Net cash used in investing activities as disclosed in our Statement of Cash Flows was $12.3 million for the year ended December 31, 2009 compared to $19.8 million and $37.4 million for the years ended December 31, 2008 and 2007, respectively. These fluctuations resulted primarily from timing differences in investment purchases, sales and maturities and the fluctuations in our portfolio mix between cash equivalents and short-term investment holdings. We expect similar fluctuations to continue in future periods. Additionally, the fluctuation during 2008 is impacted by $39.1 million in cash paid for the acquisition of Proprius, which amount includes transaction costs.
     Net cash provided by financing activities as disclosed in our Statement of Cash Flows was $0.9 million for the year ended December 31, 2009 compared to $2.0 million and $72.0 million for the years ended December 31, 2008 and 2007, respectively. The decrease in net cash provided by financing activities during 2009 compared to 2008 and 2007 was primarily the result of proceeds of approximately $0.9 million from the exercise of stock options during 2009 compared to proceeds of approximately $2.0 million from the exercise of stock options and warrants during 2008 and net proceeds of approximately $69.9 million from the completion of our secondary offering of common stock during June 2007 and proceeds of approximately $2.1 million from the exercise of stock options during 2007.
     The following table summarizes our long-term contractual obligations at December 31, 2009:
                                         
            Less than            
            1 year   1 – 3 years   4 – 5 years   More than 5
    Total   (2010)   (2011 – 2013)   (2014 – 2015)   years (2016 +)
Operating leases
  $ 2,370,594     $ 903,062     $ 1,460,308     $ 7,224     $  
Purchase obligations (1)
                             
     
Total
  $ 2,370,594     $ 903,062     $ 1,460,308     $ 7,224     $  
     
 
(1)   Purchase obligations include agreements to purchase goods or services, including consulting services, that are enforceable and legally binding on us and that specify all significant terms. This includes contracts that are cancelable with notice and the payment of an early termination penalty. Purchase obligations exclude agreements that are cancelable without penalty and also exclude accrued liabilities to the extent presented on the balance sheet as of December 31, 2009.
     Other commercial and contractual commitments include potential milestone payments of up to $0.5 million to Pierre Fabre and sublicense payments to Pierre Fabre based on 5% of any upfront and milestone payments received from Forest Laboratories, milestone payments up to $37.5 million associated with the development of Proprius’ therapeutic candidates, which are not currently in active development, milestone payments of up to $116.0 million to AlphaRx in connection with the successful development and commercialization of a product associated with the in-license of a topical NSAID therapy, which is not currently in active development, milestone payments up to approximately $37.0 million in connection with license agreements related to our POC programs that are not currently in active development, milestone payments up to $3.0 million to Cellatope in connection with the commercial development of a Lupus monitoring application and milestone payments up to $3.9 million in connection with license agreements related to certain personalized medicine services. Additionally, the Company is obligated to reimburse Forest Laboratories for a portion of the active ingredient costs for sampling. The amount of such obligation will vary depending on Forest’s annual marketing plan. In the event we move forward with

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development of a product or service under any of these arrangements, in most instances, we would also be obligated to make royalty payments.
     Unless and until we can consistently generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities, from revenue under our collaboration agreement with Forest and, if available to us, cash from financings.
     Our current expected primary cash needs on both a short term and long-term basis are for supporting a commercial infrastructure, the development of candidates under our POC trials, if any, our personalized medicine services, and general research, working capital and other general corporate purposes and the identification, acquisition or license, and development of, potential future products and services. Excluding the amounts payable under our merger agreement with Proprius and our agreements with Pierre Fabre, AlphaRx, Cellatope and various licensors under our POC trials and personalized medicine services, and the costs of in-licensing or acquiring additional compounds or companies and funding clinical development for any product (other than our ongoing POC trials) that we may in-license or acquire, we estimate that based on our current business plan, net cash required to fund operating expenses will approximate $15.0 million to $20.0 million for the year 2010. In addition, one of our ongoing goals is to continue to identify and in-license new products and product candidates. In the event we acquire, license or develop any new products or product candidates, or begin any new POC, the amount to fund our operations for 2010 would increase, possibly materially. We expect that our net losses will continue for at least the next several years as we seek to acquire, license or develop additional products, product candidates and services. Such losses may fluctuate, the fluctuations may be substantial, and we may never become profitable.
     Based on our current business plan, we believe our cash and cash equivalents and short-term investments balances at December 31, 2009 are sufficient to fund operations through at least 2011. However, we are actively continuing to evaluate various potential strategic transactions, including the potential acquisitions of products, product candidates and companies, and other alternatives. In order to acquire or develop additional products and product candidates, we will likely require additional capital. The amount of capital we require is dependent upon many forward-looking factors that could significantly increase our capital requirements, including the following:
    the costs of establishing a commercial infrastructure;
 
    the costs and timing of development and regulatory approvals for all our products and services;
 
    the costs associated with operating a clinical laboratory;
 
    the extent to which we acquire or invest in other products, product candidates and businesses;
 
    the costs of in-licensing drug candidates;
 
    the ability of Forest Laboratories and us to reach sales milestones and other events under our collaboration agreement; and
 
    the costs of commercialization of any future products and services.
     Because we are unable to predict the outcome of the foregoing factors, some of which are beyond our control, we are unable to estimate with certainty our mid to long-term capital needs. Unless and until we can generate a sufficient amount of product and service revenue, if ever, we expect to finance future capital needs through public or private equity or debt offerings or collaboration and licensing arrangements, as well as interest income earned on cash balances. We do not currently have any commitments or specific plans for future external funding. We may not be able to raise additional capital and the funds we raise, if any, may not allow us to maintain our current and planned operations. If we are unable to obtain additional capital, we may be required to delay, scale back or eliminate our sales force or some or all of our development of existing or future product candidates and personalized medicine services and discontinue the evaluation or completion of any proposed acquisitions or strategic transactions.

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Off-Balance Sheet Arrangements
     To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
     Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, research and development expenses, stock-based compensation and goodwill. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following are the critical accounting policies that affect the significant judgments and estimates used in the preparation of our financial statements (see also the notes to our financial statements).
Revenue Recognition
     Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Some of our agreements contain multiple elements and in accordance with these agreements, we may be eligible for upfront license fees, sponsored development reimbursements, funding for certain of our employees, co-promotion reimbursement, development and commercial milestones and royalties. Consideration received for research and development milestones will be recognized at the date of achievement if the milestone is non-refundable, substantive in nature, and the achievement was not reasonably assured at the inception of the agreement. Milestone payments are not considered substantive if any portion of the associated milestone payment is determined to not relate solely to past performance or if a portion of the consideration earned from achieving the milestone may be refunded.
     Revenues under our collaborative agreement include upfront license fees, sponsored development reimbursements, funding for certain of our employees, and development milestones. Amounts received for upfront license fees under multiple-element arrangements are deferred and recognized over the period such arrangements require on-going services or performance. Amounts received for sponsored development activities, including funding received for certain of our employees, are recognized as research costs are incurred over the period specified in the related agreement or as the services are performed. Amounts received for development milestones are recognized upon achievement if they meet the research and development milestone recognition policy. Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue.
     Commercial revenues include royalties on product sales of Savella, revenue from the New Drug Application (“NDA”) approval milestone, sales-based milestones, and reimbursement for co-promotion of Savella. Royalty revenue is recognized based on royalties reported by Forest Laboratories during the quarter with such payment due within 45 days after quarter end. The royalty rate as stated in the agreement with Forest Laboratories is subject to prospective adjustment based on Forest’s total payment obligations to Cypress and Pierre Fabre; however, the royalty rate cannot be reduced below the stipulated floor. Revenue from the NDA approval milestone achieved in January 2009, net of sublicense fees, is being recognized ratably over the period of 13 years from the date the milestone was achieved, which corresponds with the obligation period and patent life. As we have an obligation to reimburse Forest for a portion of the cost for samples of Savella, this milestone was not considered substantive and therefore, we determined that the consideration received from Forest was inseparable from the on-going obligation. We regularly review the period of time that we expect to be satisfying these obligations, and if there are changes in facts and circumstances, we reassess the period of time that revenue is being recognized and adjust the period accordingly. Revenue related to sales-based milestones, net of sublicense fees, is recognized upon the achievement of the specified milestones, which is substantive, was not readily assured at the inception of the agreement and is non-refundable. Co-promotion

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reimbursement revenue is recognized in the period in which the detailing calls (measured on a per physician call basis) are performed using an estimated reimbursement rate based on historical cost information provided to us by Forest. We recognize this revenue as services have been rendered, the reimbursement rate is determinable and collectability is reasonably assured. The corresponding costs associated with the co-promotion reimbursement are included as a component of selling, general and administrative expense on the Consolidated Statement of Operations.
     In connection with our personalized medicine services, such services are performed based on a written test requisition form. We generally bill third-party payers for these services upon generation and delivery of a report to the ordering physician. As such, we take assignment of benefits and the risk of collection with the third-party payer. We currently do not have any contracts with third-party payers. We usually bill the patient directly for amounts owed after multiple requests for payment have been denied or only partially paid by the insurance carrier as allowed by law. As relatively new tests, the personalized medicine services offered by us may not be covered under their reimbursement policies. Consequently, we pursue case-by-case reimbursement where policies are not in place or payment history has not been established. As a result, at the time of delivery of the report to the ordering physician, and in the absence of a reimbursement contract or sufficient payment history, collectibility cannot reasonably be assured and revenues are therefore only recognized at the time cash is collected.
Research and Development Expenses
     Research and development expenses consist primarily of salaries and related personnel expenses for our research and development activities, fees paid to external service providers to conduct clinical trials, patient enrollment costs, fees and milestone payments under our license and development agreements and costs for facilities, supplies, materials and equipment. All such costs are charged to research and development expenses as incurred. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We accrue clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on completion of patient studies and other events. Actual clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known. Historically, adjustments have not resulted in material changes to research and development expenses; however, a modification in the protocol of a clinical trial or cancellation of a trial could result in a charge to our results of operations.
Stock-Based Compensation
     We grant options to purchase our common stock to our employees and directors under our equity incentive plan. The exercise price of stock options granted under our equity incentive plan shall not be less than the fair market value of our common stock on the date of grant. Options granted under our equity incentive plan have a term of up to ten years and generally vest over four years. Stock-based compensation expense recognized for the years ended December 31, 2009, 2008 and 2007 was $7.2 million, $7.4 million and $4.9 million, respectively.
     We estimate the fair value of options granted using the Black-Scholes option valuation model. This estimate is affected by our stock price as well as assumptions regarding a number of complex inputs that require us to make significant estimates and judgments. These inputs include the expected term of employee stock options, the expected volatility of our stock price, the risk-free interest rate and expected dividends.
     We estimate the expected term of options granted based on the output derived under the simplified method as given the level of outstanding stock options and as a result of stock price volatility, we do not have sufficient historical exercise data to provide a more reasonable basis upon which to estimate expected term. We estimate the volatility of our common stock at the date of grant using our historical price volatility based on our assessment that this approach is the most representative of future stock price trends. We base the risk-free interest rate that we use in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with equivalent remaining terms. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.
     Stock-based compensation accounting requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Given the standard vesting provisions of our stock options and minimal historical turnover, we have not estimated forfeitures and instead adjust

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our stock-based compensation expense as forfeitures occur. We believe that the impact on stock-based compensation between estimating forfeitures and recording the impact as the forfeitures occur would not be material.
     As noted above, in order to calculate the compensation expense that we must recognize, we must make a variety of assumptions, all of which are based on our beliefs, expectations and assumptions at the time the assumptions are made. These beliefs, expectations and assumptions may vary over time and we may elect to use different assumptions under the Black-Scholes option valuation model in the future, which could materially affect our net income or loss and net income or loss per share.
Goodwill
     On March 4, 2008, we acquired all of the outstanding stock of Proprius, a privately-held specialty pharmaceutical company. The acquisition of Proprius resulted in the recording of goodwill, which represented the excess of the purchase price over the fair value of the net assets acquired. We review goodwill for impairment on an annual basis as of December 1, as well as when events or changes in circumstances indicate that the carrying value may not be recoverable. The accounting guidance requires that we perform a two-step impairment test on goodwill. In the first step of the impairment analysis, we compare the fair value of our reporting units to which goodwill is assigned to their carrying value. In calculating fair value, we use a combination of an income approach using a discounted cash flow method and a market approach using comparable publicly traded companies. The income approach is a valuation technique under which we estimate future cash flows using the reporting units’ financial forecasts. Future estimated cash flows are discounted to their present value to calculate fair value. The market approach utilizes market multiples of similar companies as the basis for the valuation. If the carrying value of the long-term assets exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test, whereby the carrying value of the reporting unit’s goodwill is compared to its implied fair value. If the carrying value of the goodwill exceeds the implied fair value, an impairment loss equal to the difference would be recorded.
     For 2009, our annual impairment review during the fourth quarter coincided with a series of facts and circumstances indicating that our goodwill might be impaired, including revised projections for the personalized medicine services business reflecting current product demand and our cash collection profile. No events or circumstances occurred indicating the potential for impairment in prior quarters.
     Based on the first step of the analysis, it was determined that the fair value of the therapeutics business was in excess of its carrying value, including the goodwill assigned to this reporting unit. However, the first step of the analysis with respect to the personalized medicine services business indicated that its carrying value, including goodwill assigned to this reporting unit, was in excess of its respective fair value. Therefore, the second step of the impairment analysis was performed for the personalized medicine services reporting unit. As the implied fair value of the personalized medicine services business was negative, we concluded that all of the goodwill recorded at this reporting unit was impaired. As a result, we recorded a non-cash goodwill impairment charge to operations during the fourth quarter of 2009 in the amount of $1.1 million. Our remaining goodwill at December 31, 2009 in the amount of $21.9 million relates to our therapeutics reporting unit. Our recent analyses indicate that this goodwill is not impaired. However, our conclusion could change in the future, if our assumptions about future economic conditions, revenue growth or earnings change. Any resulting impairment charge could have a material effect on our financial position and results of operations in the future.
New Accounting Pronouncements
     In October 2009, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance regarding multiple-deliverable revenue arrangements. This guidance addresses how to separate deliverables and how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. We will be required to adopt this amended guidance effective for the fiscal year beginning January 1, 2011, although earlier adoption is permitted. We are currently evaluating the effect that this guidance will have on our consolidated financial position and results of operations.

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Item 7A. Quantitative and Qualitative Disclosure about Market Risk
     We have invested our excess cash in United States government securities, corporate debt securities and money market funds with strong credit ratings. As a result, our interest income is most sensitive to changes in the general level of United States interest rates. We do not use derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve over a three month period would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.
Item 8. Financial Statements and Supplementary Data
     Our consolidated financial statements and the reports of our independent registered public accounting firm are included in this report on pages F-1 through F-22.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
     None.
Item 9A. Controls and Procedures
Conclusions Regarding the Effectiveness 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 timelines 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 and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
     As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief 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 and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2009 at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. Ernst & Young, LLP, our independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting, which is included herein.
     There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cypress Bioscience, Inc.
     We have audited Cypress Bioscience, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cypress Bioscience, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
     A company’s internal control over financial reporting is a process designed 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. A company’s 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 the assets of the company; (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 receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; 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.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     In our opinion, Cypress Bioscience, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009 of Cypress Bioscience, Inc. and our report dated March 30, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
March 30, 2010

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Item 9B. Other Information
     None.

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PART III
Item 10. Directors, Executive Officers and Corporate Governance
     Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders under the headings “Election of Directors” and “Executive Officers.” Such information is incorporated herein by reference.
     We have adopted a Code of Business Conduct and Ethics, which covers all employees, including our principal executive, financial and accounting officers. A copy of our Code of Business Conduct and Ethics is posted on our website, www.cypressbio.com. We also will post on our website any waiver or amendment (other than technical, administrative and other non-substantive amendments) to our Code of Business Conduct and Ethics that is granted to or affects the duties of any of our directors or our principal executive, financial and accounting officers. Such posting will be made within five business days after the date of the waiver or amendment and will remain on the website for at least twelve months.
Item 11. Executive Compensation
     Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders under the heading “Executive Compensation” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated herein by reference.
Item 13. Certain Relationships, Related Transactions and Director Independence
     Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders under the headings “Certain Transactions” and “Independence of the Board of Directors” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
     Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders under the heading “Principal Accountant Fees and Services” and is incorporated herein by reference.

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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements
Our financial statements are included herein as required under Item 8 of this Annual Report on Form 10-K. See Index on page F-1.
Financial statement schedules have been omitted since they are either not required, not applicable or the information is otherwise included.
(b) Exhibits
         
Exhibit        
No.   Description   Incorporated by Reference to
 
       
2.1
  Agreement and Plan of Merger dated February 23, 2008 by among the Registrant, Propel Acquisition Sub, Inc., Proprius, Inc. and Michael J. Walsh, as the Stockholders’ Representative(*)   Exhibit 2.1 to Form 8-K filed on March 5, 2008, File No. 000-12943
 
       
3.1
  Second Amended and Restated Certificate of Incorporation   Appendix C to Definitive Proxy Statement filed with the Securities and Exchange Commission on August 11, 2003, File No. 000-12943
 
       
3.2
  Certificate of Amendment of Second Amended and Restated Certificate of Incorporation   Exhibit 3.2 to Form 10-Q for the quarter ended September 30, 2009, File No. 000-12943
 
       
3.3
  Fourth Amended and Restated Bylaws   Exhibit 3.1 to Form 8-K filed on May 6, 2009, File No. 000-12943
 
       
4.1
  Form of Stock Certificate   Exhibit 4.1 to Form S-1 Registration Statement No. 33-41225
 
       
10.1
  2000 Equity Incentive Plan(†)   Exhibit 10.25 to Form 10-K for the year ended December 31, 2000, File No. 000-12943
 
       
10.2
  Form of Stock Option Agreement for use with the 2000 Equity Incentive Plan(†)   Exhibit 10.26 to Form 10-K for the year ended December 31, 2000, File No. 000-12943
 
       
10.3
  2009 Equity Incentive Plan(†)   Exhibit 99.1 to Form 8-K filed on June 17, 2009, File No. 000-12943
 
       
10.4
  Equity Investment Agreement dated June 6, 2003 between the Registrant and Pierre Fabre Medicament   Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2003, File No. 000-12943
 
       
10.5
  Warrant to purchase Common Stock of the Registrant issued to Pierre Fabre Medicament on June 6, 2003   Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2003, File No. 000-12943
 
       
10.6
  Third Restated License Agreement dated January 9, 2004 between the Registrant and Pierre Fabre Medicament(*)   Exhibit 10.23 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943
 
       
10.7
  First Restated Trademark Agreement dated January 9, 2004 between the Registrant and Pierre Fabre Medicament(*)   Exhibit 10.24 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943
 
       
10.8
  Purchase and Supply Agreement dated January 9, 2004 between the Registrant and Pierre Fabre Medicament(*)   Exhibit 10.25 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943

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Exhibit        
No.   Description   Incorporated by Reference to
 
       
10.9
  License and Collaboration Agreement dated January 9, 2004 between the Registrant and Forest Laboratories Ireland Limited(*)   Exhibit 10.26 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943
 
       
10.10
  Side Letter dated January 9, 2004 among the Registrant, Forest Laboratories Ireland Limited and Pierre Fabre Medicament(*)   Exhibit 10.27 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943
 
       
10.11
  Letter Agreement dated January 9, 2004 among the Registrant, Forest Laboratories Ireland Limited and Pierre Fabre Medicament(*)   Exhibit 10.28 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943
 
       
10.12
  License and Collaboration Agreement dated June 29, 2005 between the Registrant and Organon (Ireland) Ltd. (*)   Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2005, File No. 000-12943
 
       
10.13
  First Amendment to Office Lease dated September 6, 2006 between the Registrant and CA-Park Plaza Limited Partnership   Exhibit 10.28 to Form 10-Q for the quarter ended September 30, 2006, File No. 000-12943
 
       
10.14
  2009 Bonus Plan(†)   Exhibit 10.1 to the Form 8-K filed on April 14, 2009, File No. 000-12943
 
       
10.15
  Non-Competition Agreement dated February 23, 2008 among the Registrant, Proprius, Inc. and Michael J. Walsh   Exhibit 10.3 to the Form 8-K filed on February 25, 2008, File No. 000-12943
 
       
10.16
  Amended and Restated Employment Agreement dated December 31, 2008 between the Registrant and Dr. Jay Kranzler(†)   Exhibit 10.19 to the Form 10-K for the year ended December 31, 2008, File No. 000-12943
 
       
10.17
  Amended and Restated Severance Benefits Plan adopted on December 31, 2008(†)   Exhibit 10.20 to the Form 10-K for the year ended December 31, 2008, File No. 000-12943
 
       
10.18
  Form of Restricted Stock Unit Agreement for use with 2009 Equity Incentive Plan(†)    
 
       
10.19
  Amendment to Amended and Restated Employment Agreement dated December 24, 2009 between Dr. Jay Kranzler and the Registrant(†)    
 
       
10.20
  Second Amendment to Lease dated December 21, 2009, by and between ARE-SD REGION NO. 20, LLC and the Registrant    
 
       
10.21
  Fourth Amendment to Lease dated December 29, 2009 between by and between UTC PROPERTIES LLC and the Registrant    
 
       
21.1
  Subsidiaries of the registrant    
 
       
23.1
  Consent of Independent Registered Public Accounting Firm    
 
       
24.1
  Power of Attorney   Reference is made to the signature page of this report
 
       
31.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)    
 
       
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)    

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Exhibit        
No.   Description   Incorporated by Reference to
32
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)    
 
*   Confidential Treatment has been granted to certain portions of this agreement.
 
  Indicates management contract or compensatory plan or arrangement.

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SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  Cypress Bioscience, Inc.
 
 
Date: March 30, 2010  By:   /s/ Jay D. Kranzler    
    Chief Executive Officer   
     
Date: March 30, 2010  By:   /s/ Sabrina Martucci Johnson    
    Chief Financial Officer, Chief   
    Operating Officer and Executive Vice President   
 
POWER OF ATTORNEY
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jay D. Kranzler, M.D., Ph.D. and Sabrina Martucci Johnson, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their substitute or resubstitute, may lawfully do or cause to be done by virtue hereof.
     Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated.
         
Signature   Title   Date
 
       
/s/ Jay D. Kranzler
  Chief Executive Officer and Chairman of the Board   March 30, 2010
 
       
Jay D. Kranzler, M.D., Ph.D.
  (Principal Executive Officer)    
 
       
/s/ Sabrina Martucci Johnson
  Chief Financial Officer,    
 
       
Sabrina Martucci Johnson
  Chief Operating Officer and Executive Vice President   March 30, 2010
 
  (Principal Financial and Accounting Officer)    
 
       
/s/ Roger Hawley
  Director   March 30, 2010
 
       
Roger Hawley
       
 
       
/s/ Amir H. Kalali
  Director   March 30, 2010
 
       
Amir H. Kalali
       
 
       
/s/ Jon W. McGarity
  Director   March 30, 2010
 
       
Jon W. McGarity
       
 
       
/s/ Jean-Pierre Millon
  Director   March 30, 2010
 
       
Jean-Pierre Millon
       
 
       
/s/ Perry B. Molinoff
  Director   March 30, 2010
 
       
Perry B. Molinoff
       
 
       
/s/ Tina S. Nova
  Director   March 30, 2010
 
       
Tina S. Nova
       
 
       
/s/ Daniel H. Petree
  Director   March 30, 2010
 
       
Daniel H. Petree
       

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cypress Bioscience, Inc.
We have audited the accompanying consolidated balance sheets of Cypress Bioscience, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cypress Bioscience, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cypress Bioscience, Inc.’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 30, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
March 30, 2010

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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
                 
    As of December 31,  
    2009     2008  
 
           
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 38,617,954     $ 52,490,414  
Short-term investments
    103,055,417       93,004,191  
Receivable from Forest Laboratories
    5,611,476       165,880  
Prepaid expenses and other current assets
    4,792,134       1,048,668  
 
           
Total current assets
    152,076,981       146,709,153  
 
Property and equipment, net
    1,273,026       1,088,749  
Goodwill
    21,928,598       26,465,627  
Restricted cash
    487,111        
Other assets
    298,994       328,994  
 
           
Total assets
  $ 176,064,710     $ 174,592,523  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,172,916     $ 2,055,567  
Accrued compensation
    4,640,265       1,055,056  
Accrued liabilities
    221,487       377,992  
Payable to Forest Laboratories
    336,313       1,118,000  
Current portion of deferred revenue
    5,202,056       3,351,416  
 
           
Total current liabilities
    11,573,037       7,958,031  
 
               
Deferred rent
    20,423       16,452  
Deferred revenue, net of current portion
    23,400,136       6,702,832  
Other liabilities
    487,111        
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Preferred stock, $.001 par value; 15,000,000 shares authorized; no shares issued and outstanding
           
Common stock, $.001 par value; 90,000,000 shares authorized; 38,375,206 and 37,906,994 shares issued and outstanding at December 31, 2009 and 2008, respectively
    38,375       37,907  
Additional paid-in capital
    336,825,601       327,595,174  
Accumulated other comprehensive income
    171,017       481,154  
Accumulated deficit
    (196,450,990 )     (168,199,027 )
 
           
Total stockholders’ equity
    140,584,003       159,915,208  
 
           
 
  $ 176,064,710     $ 174,592,523  
 
           
See accompanying notes to the consolidated financial statements.

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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
                         
    Years Ended December 31,  
    2009     2008     2007  
 
                 
Revenues:
                       
Revenues under collaborative agreement
  $ 10,026,307     $ 16,659,099     $ 13,440,603  
Commercial revenues
    16,976,200              
Revenues from personalized medicine services
    332,372              
 
                 
Total revenues
    27,334,879       16,659,099       13,440,603  
 
                       
Operating expenses:
                       
Cost of personalized medicine services
    1,986,722       267,361        
Research and development
    11,996,169       9,171,076       7,210,684  
Selling, general and administrative
    42,138,458       17,602,820       10,027,358  
In-process research and development
          12,590,000        
Goodwill impairment
    1,100,000              
 
                 
Total operating expenses
    57,221,349       39,631,257       17,238,042  
 
                 
Loss from operations
    (29,886,470 )     (22,972,158 )     (3,797,439 )
 
                       
Interest income
    1,634,507       4,746,547       7,285,023  
 
                 
 
                       
Net income (loss)
  $ (28,251,963 )   $ (18,225,611 )   $ 3,487,584  
 
                 
 
                       
Net income (loss) per share— basic
  $ (0.74 )   $ (0.48 )   $ 0.10  
 
                 
 
                       
Shares used in computing net income (loss) per share — basic
    38,150,054       37,733,737       35,205,783  
 
                 
 
                       
Net income (loss) per share— diluted
  $ (0.74 )   $ (0.48 )   $ 0.10  
 
                 
 
                       
Shares used in computing net income (loss) per share — diluted
    38,150,054       37,733,737       36,616,091  
 
                 
See accompanying notes to the consolidated financial statements.

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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
                                                 
                            Accumulated              
                            Other              
    Common Stock     Additional     Comprehensive     Accumulated        
    Shares     Par Value     Paid-in Capital     Income (Loss)     Deficit     Total  
     
Balance at December 31, 2006
    32,169,380       32,169       240,594,665       (68,537 )     (153,461,000 )     87,097,297  
Issuance of stock in secondary offering, net of offering costs
    4,700,000       4,700       69,871,454                   69,876,154  
Issuance of stock upon options exercised
    535,736       536       2,126,480                   2,127,016  
Issuance of stock upon warrants exercised
    3,729       4                           4  
Stock-based compensation for options issued to non-employees
                184,567                   184,567  
Stock-based compensation for options issued to employees
                4,935,160                   4,935,160  
Issuance of stock to match 401(k) contributions
    14,739       15       178,811                   178,826  
Comprehensive income:
                                               
Net income
                            3,487,584       3,487,584  
Unrealized gain on short-term investments
                      128,370             128,370  
 
                                             
Comprehensive income
                                  3,615,954  
     
Balance at December 31, 2007
    37,423,584       37,424       317,891,137       59,833       (149,973,416 )     168,014,978  
     
Issuance of stock upon options exercised
    133,742       134       499,698                   499,832  
Issuance of stock upon warrants exercised
    300,000       300       1,472,400                   1,472,700  
Stock-based compensation for options issued to non-employees
                20,245                   20,245  
Stock-based compensation for options issued to employees
                7,356,623                   7,356,623  
Issuance of stock to match 401(k) contributions
    49,668       49       355,071                   355,120  
Comprehensive loss:
                                               
Net loss
                            (18,225,611 )     (18,225,611 )
Unrealized gain on short-term investments
                      421,321             421,321  
 
                                             
Comprehensive loss
                                  (17,804,290 )
     
Balance at December 31, 2008
    37,906,994     $ 37,907     $ 327,595,174     $ 481,154     $ (168,199,027 )   $ 159,915,208  
     
Issuance of stock upon options exercised
    316,580       316       850,823                   851,139  
Stock-based compensation for options issued to employees
                7,242,946                   7,242,946  
Issuance of stock to match 401(k) contributions
    151,632       152       1,136,658                   1,136,810  
Comprehensive loss:
                                               
Net loss
                            (28,251,963 )     (28,251,963 )
Unrealized loss on short-term investments
                      (310,137 )           (310,137 )
 
                                             
Comprehensive loss
                                  (28,562,100 )
     
Balance at December 31, 2009
    38,375,206     $ 38,375     $ 336,825,601     $ 171,017     $ (196,450,990 )   $ 140,584,003  
 
                                   
See accompanying notes to the consolidated financial statements.

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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
    Years Ended December 31,  
    2009     2008     2007  
 
                 
Operating Activities
                       
Net income (loss)
  $ (28,251,963 )   $ (18,225,611 )   $ 3,487,584  
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
                       
Depreciation and amortization
    497,897       99,895       37,990  
In-process research and development
          12,590,000        
Amortization of premium/discount on short-term investments
    847,386       (1,236,996 )     (4,134,496 )
Stock-based compensation for options issued to non-employees
          20,245       184,567  
Stock-based compensation for stock and options issued to employees
    8,379,756       7,711,743       5,113,986  
Non-cash portion of asset acquisition
    487,111              
Goodwill impairment
    1,100,000              
Changes in operating assets and liabilities, net of effects from purchase of Proprius:
                       
Prepaid expenses and other assets
    (306,437 )     (697,518 )     (40,683 )
Receivable from Forest Laboratories
    (5,445,596 )     (23,130 )     207,622  
Accounts payable and other accrued liabilities
    2,546,053       2,215,080       709,048  
Payable to Forest Laboratories
    (781,687 )     1,118,000       (530,000 )
Deferred rent
    3,971       10,779       (2,484 )
Deferred revenue
    18,547,944       (3,351,416 )     (2,219,336 )
 
                 
Net cash (used in) provided by operating activities
    (2,375,565 )     231,071       2,813,798  
 
                       
Investing Activities
                       
Cash paid to acquire Proprius, net of cash acquired
          (39,084,627 )      
Purchases of short-term investments
    (88,869,501 )     (124,117,596 )     (162,574,366 )
Proceeds from sale of short-term investments
    77,660,752       144,484,871       125,210,000  
Purchase of property and equipment
    (652,174 )     (1,089,262 )     (51,592 )
Deposit of restricted cash
    (487,111 )            
 
                 
Net cash used in investing activities
    (12,348,034 )     (19,806,614 )     (37,415,958 )
 
                       
Financing Activities
                       
Proceeds from exercise of stock options and warrants
    851,139       1,972,532       2,127,020  
Proceeds from secondary offering of common stock, net
                69,876,154  
 
                 
Net cash provided by financing activities
    851,139       1,972,532       72,003,174  
 
                       
(Decrease) increase in cash and cash equivalents
    (13,872,460 )     (17,603,011 )     37,401,014  
Cash and cash equivalents at beginning of the year
    52,490,414       70,093,425       32,692,411  
 
                 
Cash and cash equivalents at end of the year
  $ 38,617,954     $ 52,490,414     $ 70,093,425  
 
                 
See accompanying notes to the consolidated financial statements.

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CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
     Cypress Bioscience, Inc. (the “Company”) provides therapeutics and personalized medicine services, facilitating improved and individualized patient care. The Company’s goal is to address the evolving needs of specialist physicians and their patients by identifying unmet medical needs in the areas of pain, rheumatology, and physical medicine and rehabilitation, including challenging disorders such as fibromyalgia and rheumatoid arthritis. The Company believes this approach to improving patient care creates a unique partnership with physicians, and expects that offering personalized medicine services and therapeutic products through the same sales organization will provide the Company a differentiated commercial strategy and sustainable competitive advantage.
Principles of Consolidation
     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Proprius Pharmaceuticals, Inc. (“Proprius”). All intercompany accounts and transactions have been eliminated.
Accounting Estimates in the Preparation of Financial Statements
     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Subsequent Events
     In accordance with the applicable accounting standards for the disclosure of events that occur after the balance sheet date but before the financial statements are issued, the Company evaluated all events or transactions that occurred after December 31, 2009 and through the date and time of filing. Material subsequent events that would require recognition or additional disclosure in these financial statements are disclosed in Note 15.
Cash and Cash Equivalents
     The Company considers cash equivalents to be those investments which are highly liquid, readily convertible into cash and which mature within three months from the date of purchase.
Short-Term Investments
     The Company’s short-term investments are classified as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity and included in other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available-for-sale is included in interest income.
Concentrations of Credit Risk
     Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. The Company has established guidelines to limit its exposure to credit risk by placing its investments in securities with ratings of AAA, diversifying its investment portfolio and placing investments with maturities that maintain safety and liquidity.

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Property and Equipment
     Property and equipment are recorded at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method.
Goodwill
     Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill has an indefinite useful life and is not amortized, but instead tested for impairment annually, or more frequently if an event occurs indicating the potential for impairment. Goodwill is tested by comparing the fair value of each reporting unit to the carrying value of each reporting unit. As described in Note 4, the Company recorded an adjustment to goodwill during the second quarter of 2009. As described in Note 5, the Company recorded an impairment charge during the fourth quarter of 2009.
Long-Lived Assets
     The Company evaluates the carrying value of its long-lived assets when events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. An impairment loss is recognized when the sum of the expected future undiscounted net cash flows is less than the carrying value of the asset. The Company periodically assesses the potential impairment of its intangible and other long-lived assets based on anticipated undiscounted cash flows.
Fair Value of Financial Instruments
     The carrying amounts of financial instruments, including cash and cash equivalents, prepaid expenses, receivables, accounts payable, accrued compensation and accrued liabilities, approximate fair value due to the nature of their short-term maturities. The fair value of short-term investments is based upon market prices quoted on the last day of the fiscal period.
Revenue Recognition
     Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Some of the Company’s agreements contain multiple elements and in accordance with these agreements, the Company may be eligible for upfront license fees, sponsored development reimbursements, funding for certain of its employees, co-promotion reimbursement, development and commercial milestones and royalties. Consideration received for research and development milestones will be recognized at the date of achievement if the milestone is non-refundable, substantive in nature, and the achievement was not reasonably assured at the inception of the agreement. Milestone payments are not considered substantive if any portion of the associated milestone payment is determined to not relate solely to past performance or if a portion of the consideration earned from achieving the milestone may be refunded.
     Revenues under the Company’s collaborative agreement include upfront license fees, sponsored development reimbursements, funding for certain of its employees, and development milestones. Amounts received for upfront license fees under multiple-element arrangements are deferred and recognized over the period such arrangements require on-going services or performance. Amounts received for sponsored development activities, including funding received for certain of its employees, are recognized as research costs are incurred over the period specified in the related agreement or as the services are performed. Amounts received for development milestones are recognized upon achievement if they meet the research and development milestone recognition policy. Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue.
     Commercial revenues include royalties on product sales of Savella, revenue from the New Drug Application (“NDA”) approval milestone, sales-based milestones, and reimbursement for co-promotion of Savella. Royalty revenue is recognized based on royalties reported by Forest Laboratories during the quarter with such payment due within 45 days after quarter end. The royalty rate as stated in the agreement with Forest Laboratories is subject to prospective adjustment based on Forest’s total payment obligations to Cypress and Pierre Fabre; however, the royalty rate

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cannot be reduced below the stipulated floor. Revenue from the NDA approval milestone achieved in January 2009, net of sublicense fees, is being recognized ratably over the period of 13 years from the date the milestone was achieved, which corresponds with the obligation period and patent life. As the Company has an obligation to reimburse Forest for a portion of the cost for samples of Savella, this milestone was not considered substantive and therefore, the Company determined that the consideration received from Forest was inseparable from the on-going obligation. The Company regularly reviews the period of time that they expect to be satisfying these obligations, and if there are changes in facts and circumstances, the Company reassesses the period of time that revenue is being recognized and adjusts the period accordingly. Revenue related to sales-based milestones, net of sublicense fees, is recognized upon the achievement of the specified milestones, which is substantive, was not readily assured at the inception of the agreement and is non-refundable. Co-promotion reimbursement revenue is recognized in the period in which the detailing calls (measured on a per physician call basis) are performed using an estimated reimbursement rate based on historical cost information provided to the Company by Forest. The Company recognizes this revenue as services have been rendered, the reimbursement rate is determinable and collectability is reasonably assured. The corresponding costs associated with the co-promotion reimbursement are included as a component of selling, general and administrative expense on the Consolidated Statement of Operations.
     In connection with the Company’s personalized medicine services, such services are performed based on a written test requisition form. The Company generally bills third-party payers for these services upon generation and delivery of a report to the ordering physician. As such, the Company takes assignment of benefits and the risk of collection with the third-party payer. The Company currently does not have any contracts with third-party payers. The Company usually bills the patient directly for amounts owed after multiple requests for payment have been denied or only partially paid by the insurance carrier as allowed by law. As relatively new tests, the personalized medicine services offered by the Company may not be covered under their reimbursement policies. Consequently, the Company pursues case-by-case reimbursement where policies are not in place or payment history has not been established. As a result, at the time of delivery of the report to the ordering physician, and in the absence of a reimbursement contract or sufficient payment history, collectibility cannot reasonably be assured and revenues are therefore only recognized at the time cash is collected.
Cost of Personalized Medicine Services
     Cost of personalized medicine testing services primarily consists of the compensation and benefits (including bonuses and stock-based compensation) of laboratory personnel, laboratory supplies, outside laboratory costs, shipping and distribution costs and facility-related expenses.
Shipping and Handling Expenses
     Shipping and handling expenses related to revenue from personalized medicine services are included in costs of personalized medicine services.
Segment Reporting
     The Financial Accounting Standards Board (“FASB”) guidance for Segment Reporting defines the requirements for public enterprises to report financial and descriptive information about their reportable operating segments. Operating segments, as defined, are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance.
     The Company has two reportable business segments: therapeutic products and personalized medicine services. As both therapeutic products and personalized medicine services are sold through the same sales force and managed by the same personnel, the Company reports, manages and evaluates its business segment performance on net revenues, cost of personalized medicine services and research and development expenses. The Company does not allocate selling, general and administrative expenses to its business segments for performance assessment.

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Comprehensive Income (Loss)
     Comprehensive income (loss) of the Company includes net income (loss) adjusted for the change in net unrealized gain or loss on short-term investments. Comprehensive income (loss) for the years ended December 31, 2009, 2008, and 2007 have been included in the Consolidated Statements of Stockholders’ Equity.
Research and Development
     Research and development expenses consist primarily of salaries and related personnel expenses for the Company’s research and development personnel, fees paid to external service providers to conduct clinical trials, patient enrollment costs, fees and milestone payments under the Company’s license and development agreements, validation activities for the Company’s personalized medicine services and costs for facilities, supplies, materials and equipment. All such costs are charged to research and development expenses as incurred. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company accrues clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events. Actual clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known. There were no material adjustments in any of the three years ended December 31, 2009 for a change in estimate.
Stock-Based Compensation
     The Company recognizes stock-based compensation expense for grants of stock option awards to employees and members of the Company’s board of directors under our equity incentive plans based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period.
     The Company uses the Black-Scholes model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of our common stock price, (ii) the periods of time over which employees and members of our board of directors are expected to hold their options prior to exercise (expected lives), (iii) expected dividend yield on our common stock, and (iv) risk-free interest rates.
Net Income (Loss) Per Share
     Net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and is presented for basic and diluted net income (loss) per share. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding if the potential common shares had been issued. The dilutive effect of outstanding stock options and warrants is reflected in diluted income (loss) per share by application of the treasury stock method. For the year ended December 31, 2007, the dilutive common share equivalents for outstanding options and warrants included in diluted net income per share was 1,410,308. The Company has excluded all outstanding stock options and warrants from the calculation of diluted loss per share for the years ended December 31, 2009 and 2008 because such securities are antidilutive for these periods. The total number of potential common shares excluded from the calculation of diluted loss per common share for the years ended December 31, 2009 and 2008 was 661,637 and 687,817, respectively.
Income Taxes
     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The Company measures tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences. The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

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     Uncertain tax positions are accounted for in accordance with FASB authoritative guidance, which the Company adopted on January 1, 2007. Under this guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Reclassification
     Certain amounts in prior year’s financial statements have been reclassified to conform to the current period presentation.
Impact of Recently Issued Accounting Standards
     In October 2009, the FASB amended it authoritative guidance regarding multiple-deliverable revenue arrangements. This guidance addresses how to separate deliverables and how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. The Company will be required to adopt this amended guidance effective for the fiscal year beginning January 1, 2011, although earlier adoption is permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial position and results of operations.
2. SHORT-TERM INVESTMENTS
     At December 31, 2009 and 2008, short-term investments consisted of the following:
                                 
    December 31, 2009  
    Amortized     Unrealized     Unrealized        
    Cost     Gains     Losses     Fair Value  
U.S. government and agency debt
  $ 93,037,626     $ 159,185     $ (28,944 )   $ 93,167,867  
Corporate debt securities
    9,846,774       45,410       (4,634 )     9,887,550  
 
                       
 
  $ 102,884,400     $ 204,595     $ (33,578 )   $ 103,055,417  
 
                       
                                 
    December 31, 2008  
    Amortized     Unrealized     Unrealized        
    Cost     Gains     Losses     Fair Value  
U.S. government and agency debt
  $ 87,637,614     $ 468,401     $ (11,312 )   $ 88,094,703  
Corporate debt securities
    600,000       2,208             602,208  
Commercial paper
    1,985,423       8,763             1,994,186  
Certificates of deposit
    2,300,000       13,094             2,313,094  
 
                       
 
  $ 92,523,037     $ 492,466     $ (11,312 )   $ 93,004,191  
 
                       
     The unrealized losses on investments were primarily caused by changes in interest rates. Based on an evaluation of the credit standing of each issuer, management believes it is probable that the Company will be able to collect all amounts due according to the contractual terms.
     Realized gains or losses on available-for-sale securities were immaterial during the years ended December 31, 2009, 2008 and 2007.
     Contractual maturities for short-term investments at December 31, 2009 were as follows:
         
    Fair Value  
Due within 1 year
  $ 90,257,632  
After 1 year but within 2 years
    12,797,785  
 
     
Total
  $ 103,055,417  
 
     

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3. FAIR VALUE DISCLOSURES
     Effective January 1, 2008, the Company adopted the provisions for the guidance related to fair value measurements for the Company’s financial instruments. The guidance defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value and requires expanded disclosures about fair value measurements.
     The following table presents information about the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. The Company classifies money market funds and certificates of deposits as Level 1 assets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company classifies U. S. government and agency debt, corporate debt securities and commercial paper holdings as Level 2 assets. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. At December 31, 2009, the Company did not hold any Level 3-classified financial assets. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
                                        
            Fair Value Measurements at December 31, 2009  
            Quoted Prices in     Significant Other     Significant  
    Balance as of     Active Markets     Observable Inputs     Unobservable  
Description   December 31, 2009     (Level 1)     (Level 2)     Inputs (Level 3)  
                   
Financial instruments owned:
                               
Money market funds
  $ 38,430,110     $ 38,430,110     $     $  
U.S. government and agency debt
    93,167,867             93,167,867        
Corporate debt securities
    9,887,550             9,887,550        
 
                       
Total financial instruments owned
  $ 141,485,527     $ 38,430,110     $ 103,055,417     $  
 
                       
4. ACQUISITION OF PROPRIUS
     On March 4, 2008, the Company acquired all of the outstanding stock of Proprius, a privately-held specialty pharmaceutical company. The Company acquired Proprius to expand its strategy to include providing personalized medicine services to rheumatologists, as well as to expand its product pipeline with the addition of two early clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat rheumatoid arthritis. The Company is not currently in active development with respect to either early clinical-stage therapeutic candidate.
     Pursuant to the terms of the agreement, the Company acquired all of Proprius’ outstanding capital stock for $37.6 million in cash (including the payment and assumption of net indebtedness), funded with existing cash resources, as well as up to an additional $37.5 million in potential milestone-related payments associated with the development of Proprius’ therapeutic candidates. The Company is not currently in active development with respect to Proprius’ therapeutic candidates. Such payments, if any, would be paid in cash and, subject to the satisfaction of certain conditions, up to 50% of such payments in shares of the Company’s common stock or a combination of both, as determined at the Company’s sole discretion. In addition, in connection with the acquisition of Proprius, the Company assumed certain agreements entered into by Proprius. The Company assumed Proprius’ license agreement with AlphaRx, Inc. for the in-license of a topical non-steroidal anti-inflammatory drug therapy and other successor topical non-steroidal anti-inflammatory drug therapies. Future consideration under the AlphaRx agreement includes

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up to $116.0 million potentially payable by the Company for the successful development and commercialization of a product (which is not currently in active development) and potential royalty payments. In addition, the Company assumed the licenses obtained from third parties for certain personalized medicine services. Under the terms of these agreements, as of December 31, 2009, the Company will be obligated to pay up to approximately $3.9 million in the aggregate in sales milestones and a royalty based on net sales, if any.
     The total purchase price of the acquisition was as follows:
         
Cash paid for Proprius business
  $ 37,633,247  
Estimated transaction costs
    1,451,380  
 
     
Total estimated purchase price
  $ 39,084,627  
 
     
     The total purchase price was allocated as follows:
                         
    As Originally           Adjusted
    Reported   Adjustments   Allocation
Other assets
  $ 29,000     $     $ 29,000  
In-process research and development
    12,590,000             12,590,000  
Contingent compensation
          3,437,029       3,437,029  
Goodwill
    26,465,627       (3,437,029 )     23,028,598  
     
Total purchase price
  $ 39,084,627     $     $ 39,084,627  
     
     The amount allocated to in-process technology represents the fair value of acquired, to-be-completed research projects, including $10.2 million related to personalized medicine services and $2.4 million related to therapeutic candidates. The total estimated value of approximately $12.6 million of the research projects was determined by estimating the costs to develop the acquired technology into a commercially viable product, estimating the future net cash flows from the project once commercially viable, and discounting the net cash flows to their present value. As of the acquisition date, these projects were not expected to have reached technological feasibility and will have no alternative future use. The personalized medicine services required certain re-validation efforts, as well as The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certification of the new lab space, in order to establish technological feasibility. Accordingly, the testing and planning activities necessary to establish technological feasibility and ensure that the personalized medicine services met their required functions, features and technical performance requirements had not been reached as of the acquisition date. Therefore, the amount allocated to in-process technology was charged to the Company’s consolidated statement of operations during the first quarter of 2008.
     During the second quarter of 2009, the Company determined that its accounting for contingent payments made in conjunction with its March 2008 acquisition of Proprius to certain former Proprius employees that were originally accounted for as additional purchase price of the acquired business should have been accounted for as employee compensation for post-combination services provided to the Company. The contingent payments, which totaled $3.4 million, were maintained in an escrow account and were distributed to such employees in March 2010 upon fulfillment of their service commitment to the Company.
     The Company has performed an evaluation to determine if the financial statement impacts resulting from this error in accounting were material, considering both quantitative and qualitative factors. Based on this materiality analysis, the Company concluded that correcting the cumulative error would be immaterial to the current year financial statements and a correction of the error would not have a material impact to any individual prior period financial statements. Accordingly, the Company has recorded an adjustment during the second quarter of 2009 to reduce goodwill associated with the Proprius acquisition by $3.4 million and has recognized the related entire cumulative compensation expense in the amount of $2.3 million ($0.5 million classified as research and development expense and $1.8 million classified as selling, general and administrative expense), including $1.4 million ($0.3 million classified as research and development expense and $1.1 million classified as selling general and administrative expense) related to the year ended December 31, 2008. During the year ended December 31,

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2009, the Company recognized compensation expense in the amount of $3.1 million ($0.6 million classified as research and development expense and $2.5 million classified as selling, general and administrative expense) related to such contingent payments. The remaining $0.3 million of unearned compensation at December 31, 2009 will be recognized ratably through March 2010.
     Additionally, as discussed in Note 5, the Company recorded a non-cash goodwill impairment charge during the fourth quarter of 2009 in the amount of $1.1 million. At December 31, 2009, the goodwill balance was $21.9 million.
5. GOODWILL
     During the third quarter of 2009, the Company made the determination that its two product lines, consisting of the personalized medicine services (Avise products) and therapeutic products (Savella), met the criteria to be reported as separate operating segments. As required by the accounting guidance for goodwill, when an entity has a change in its reporting structure in a manner that changes the composition of one or more of its reporting units, goodwill is reassigned to the affected reporting units using a relative fair value allocation approach. The fair value of each segment (reporting unit) is compared to the fair value of the business immediately prior to the change in reporting units. The fair value for the Company’s reporting units was determined based on a combination of an income approach, which estimates the fair value based on future discounted cash flows (“DCF”), and a market approach, which estimates the fair value based on market price prices of comparable companies. Fair values were established based on management’s assessment and is based in part by independent third party appraisals.
     Using the relative fair value approach described above, as well as taking into account the synergies in the time utilized by the Company’s single sales force to promote the therapeutic product and the personalized medicine services for each reporting unit, goodwill in the amount of $21.9 million was assigned to the therapeutics business and $1.1 million to the personalized medicine services business.
     The Company assesses its goodwill for impairment as of December 1 of each year, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For 2009, the Company’s annual impairment review coincided with a series of facts and circumstances indicating that its goodwill might be impaired, including revised projections for the personalized medicine services business reflecting current product demand and our cash collection profile.
     In evaluating whether goodwill at each of the reporting units was impaired, the Company engaged independent valuation specialists to assist with this review. In the first step of the impairment analysis, the Company compared the fair value of its two reporting units to which goodwill is assigned to their carrying value. In calculating fair value, the Company used an income approach using a DCF method and a market approach using comparable publicly traded companies. The income approach is a valuation technique under which the Company estimates future cash flows using the reporting units’ financial forecasts. Future estimated cash flows are discounted to their present value to calculate fair value. The market approach utilizes similar companies as the basis for the valuation.
     Based on the first step of the analysis, it was determined that the fair value of the therapeutics business was in excess of its carrying value, including the goodwill assigned to this reporting unit. However, the first step of the analysis with respect to the personalized medicine services business indicated that its carrying value, including goodwill assigned to this reporting unit, was in excess of its respective fair value. Therefore, the second step of the impairment analysis was performed for the personalized medicine services reporting unit. The measurement of impairment for the second step is calculated by determining the implied fair value of the reporting unit’s goodwill. As the implied fair value of the personalized medicine services business was negative, the Company concluded that all of the goodwill recorded at this reporting unit was impaired. As a result, the Company recorded a non-cash goodwill impairment charge to operations during the fourth quarter of 2009 in the amount of $1.1 million. Our remaining goodwill at December 31, 2009 in the amount of $21.9 million relates to our therapeutics reporting unit. Our recent analyses indicate that this goodwill is not impaired. However, our conclusion could change in the future, if our assumptions about future economic conditions, revenue growth or earnings change. Any resulting impairment charge could have a material effect on our financial position and results of operations in the future.
     The Company did not record any impairment charges in 2008 and did not have any goodwill in 2007.

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     Changes to our goodwill balance include the following:
                                 
            Personalized        
            Medicine   Corporate/    
    Therapeutics   Services   Unallocated   Total
Goodwill, December 31, 2008 (1)
  $     $     $ 26,465,627     $ 26,465,627  
Adjustment
                (3,437,029 )     (3,437,029 )
Assigned to reporting units
    21,928,598       1,100,000       (23,028,598 )      
Impairment
          (1,100,000 )           (1,100,000 )
     
Goodwill, December 31, 2009
  $ 21,928,598     $     $     $ 21,928,598  
     
 
(1)   As of December 31, 2008, the Company operated as one segment with one reporting unit. During the third quarter of 2009, the Company made the determination that its two product lines, consisting of therapeutic products (Savella) and the personalized medicine services (Avise products), met the criteria to be reported as separate operating segments and separate reporting units. Goodwill was assigned to each of the reporting units as reflected in the table above.
6. STOCKHOLDERS’ EQUITY
Public Offering of Shares of Common Stock
     On June 5, 2007, the Company completed a public offering of 4,700,000 shares of common stock at $15.50 per share resulting in proceeds of approximately $69.9 million, net of underwriting and offering costs.
Warrants
     In June 2005, upon execution of a license agreement, the Company issued warrants to a licensor to purchase 62,656 shares of common stock as a license fee. These warrants, which have an exercise price of $15.96 per share, expire in June 2010. As of December 31, 2009, all of these warrants remain outstanding.
7. STOCK-BASED COMPENSATION
Stock-Based Compensation Plans
     2009 EQUITY INCENTIVE PLAN
     In June 2009, the Company adopted the 2009 Equity Incentive Plan (the “2009 Plan”) providing for the grant to employees, directors and consultants of the Company of incentive and non-qualified options to purchase the Company’s common stock, as well as the granting of stock appreciation rights, restricted stock awards, performance stock awards and other stock awards. The exercise price of stock options granted under the 2009 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. Options granted under the 2009 Plan have a term of up to ten years and generally vest over four years. The total number of shares reserved for issuance under the 2009 Plan is 8,000,000 shares. As of December 31, 2009, 7,780,593 shares of the Company’s common stock are available for future grant under the 2009 Plan.
     2000 EQUITY INCENTIVE PLAN
     In May 2000, the Company adopted the 2000 Equity Incentive Plan (the “2000 Plan”) providing for the grant to employees, directors and consultants of the Company of incentive and non-qualified stock options to purchase the Company’s common stock, as well as the granting of stock bonuses and rights to purchase restricted stock. The exercise price of all incentive stock options granted under the 2000 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The exercise price of non-qualified stock options granted under the 2000 Plan shall not be less than 85% of the fair market value of the Company’s common stock on the date of grant. Options granted under the 2000 Plan have a term of up to ten years and generally vest over four years. Although options that were previously granted under the 2000 Plan remain outstanding at December 31, 2009, the 2000 Plan was superseded by the 2009 Plan and accordingly, no shares are available for future grant under this plan.

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     1996 EQUITY INCENTIVE PLAN
     In January 1996, the Company adopted the 1996 Equity Incentive Plan (the “1996 Plan”) providing for the grant to employees, directors and consultants of the Company of incentive and non-qualified stock options to purchase the Company’s common stock, as well as the granting of stock bonuses and rights to purchase restricted stock. Options granted under the 1996 Plan have a term of up to ten years and vest as determined by the Board but in no event less than twenty percent per year. Although options that were previously granted under the 1996 Plan remain outstanding at December 31, 2009, the 1996 Plan expired in 2006 and accordingly, no shares are available for future grant under this plan.
Stock Options
     The exercise price of all options granted during the years ended December 31, 2009, 2008 and 2007 was equal to the market value on the date of grant. The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for option grants during the years ended December 31, 2009, 2008 and 2007:
                         
    Years Ended December 31,
    2009   2008   2007
Risk-free interest rate
    2.1 %     2.5 %     4.5 %
Expected volatility
    70 %     73 %     76 %
Expected option term (in years)
    5.9       6.0       5.9  
Dividend yield
    0.0 %     0.0 %     0.0 %
     The risk-free interest rate assumption is based on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with terms commensurate with the expected term of the Company’s employee stock options. The expected volatility is estimated at the date of grant using the historical volatility of the Company’s stock based on the assessment that this approach is most representative of future stock price trends. The expected term of the Company’s options is based on the output derived under the simplified method. The simplified method was used as given the level of outstanding options and as a result of stock price volatility, the Company does not have sufficient historical exercise data to provide a more reasonable basis upon which to estimate expected term. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model. Stock-based compensation accounting requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Given the standard vesting provisions for stock options and minimal historical turnover, the Company has not estimated forfeitures and instead adjusts its stock-based compensation expense as forfeitures occur. The impact on stock-based compensation between estimating forfeitures and recording the impact as the forfeitures occur would not be material.
     The Company amortizes the fair value of options granted on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. The weighted average fair values of options granted were $4.45, $5.26, and $6.04 for the years ended December 31, 2009, 2008 and 2007, respectively.
     The following table summarizes the activity of the Company’s stock options for the periods presented:
                                         
    2009     2000     1996             Weighted  
    Equity     Equity     Equity     Number of     Average  
    Incentive     Incentive     Incentive     Options Under     Exercise  
    Plan Options     Plan Options     Plan Options     All Plans     Prices  
Balance December 31, 2006
          3,715,436       71,887       3,787,323     $ 7.19  
Granted
          1,187,249             1,187,249       8.78  
Exercised
          (550,136 )     (19,585 )     (569,721 )     4.23  
Canceled/Expired
          (73,363 )     (3,333 )     (76,696 )     13.69  
 
                               
Balance December 31, 2007
          4,279,186       48,969       4,328,155       7.91  
Granted
          2,924,174             2,924,174       8.00  
Exercised
          (109,251 )     (24,491 )     (133,742 )     3.74  
Canceled/Expired
          (144,064 )     (312 )     (144,376 )     11.24  
 
                               
Balance December 31, 2008
          6,950,045       24,166       6,974,211       7.96  
Granted
    222,407       1,009,411             1,231,818       7.02  
Exercised
          (299,914 )     (16,666 )     (316,580 )     2.69  
Canceled/Expired
    (3,000 )     (176,499 )           (179,499 )     6.41  
 
                               
Balance December 31, 2009
    219,407       7,483,043       7,500       7,709,950     $ 8.06  
 
                               

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     Options outstanding at December 31, 2009 have a weighted average remaining contractual term of 7.0 years.
     For the years ended December 31, 2009, 2008 and 2007, total stock-based compensation expense related to employee stock options was $7,242,946, $7,356,623 and $4,935,160, respectively. The breakdown of total employee stock-based compensation expense by operating statement classification is presented below:
                         
    Year Ended December 31,  
    2009     2008     2007  
 
                 
Cost of personalized medicine services
  $ 187,927     $ 34,525     $  
Research and development expenses
    1,327,068       1,357,558       817,430  
Selling, general and administrative expenses
    5,727,951       5,964,540       4,117,730  
 
                 
 
  $ 7,242,946     $ 7,356,623     $ 4,935,160  
 
                 
     Stock-based compensation expense includes $0.4 million and $0.5 million during the years ended December 31, 2009 and 2008, respectively, related to performance-based stock options. In 2008, the Company granted 250,000 performance-based stock options to certain employees related to the achievement of certain revenue milestones for the personalized medicine services business that were deemed probable and therefore, the Company is recording stock-based compensation expense over the estimated time to achieve the revenue milestones.
     As of December 31, 2009, there was $13.2 million of unamortized compensation cost related to unvested stock option awards, which is expected to be recognized over a remaining weighted average vesting period of 2.4 years. As of December 31, 2009, there were 4,899,151 options exercisable with a weighted average exercise price of $8.31 and a weighted average remaining contractual term of 6.1 years. The total intrinsic value of stock option exercises during the years ended December 31, 2009, 2008 and 2007 was $1.9 million, $0.8 million and $4.9 million, respectively. As of December 31, 2009, the total intrinsic value of options outstanding and exercisable was $1.8 million and $1.6 million, respectively. As of December 31, 2009 and 2008, the weighted average fair value of unvested options was $5.01 and $5.18, respectively.
     For the years ended December 31, 2009, 2008 and 2007, stock-based compensation related to options granted to non-employees was $0, $20,245 and $184,567, respectively.
8. SIGNIFICANT LICENSING AND COLLABORATION AGREEMENTS AND ASSET PURCHASE AGREEMENT
License and Collaboration Agreement with Forest Laboratories
     In January 2004, the Company entered into a collaboration agreement with Forest Laboratories for the development and marketing of milnacipran. Under the agreement with Forest Laboratories, the Company sublicensed its exclusive rights to develop and commercialize milnacipran to Forest Laboratories for the United States. In addition, Forest Laboratories exercised its option to extend the territory to include Canada. In conjunction with the option exercise, Forest Laboratories paid the Company a non-refundable $1.0 million license payment in July 2007. Forest Laboratories assumed responsibility for funding all continuing development of milnacipran, including the funding of clinical trials and regulatory approvals, as well as a certain number of the Company’s employees. However, the Company agreed upon an alternative cost sharing arrangement with Forest Laboratories for the second Phase III trial only. In connection with this arrangement, the Company paid for a majority of the external costs of the second Phase III trial only, which were $9.7 million. Forest Laboratories reimbursed the Company for one-third of the costs, or $3.2 million, in February 2008 in connection with the NDA acceptance for Savella by the Food and Drug Administration (“FDA”) and the remaining $6.5 million in January 2009 upon NDA approval. Forest Laboratories is funding Phase IV clinical trials for Savella. Forest Laboratories is also responsible for sales and marketing activities related to any product developed under the agreement, subject to our option to co-

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promote up to 25% of the total physician details using our own sales force and the Company will be reimbursed by Forest Laboratories in an amount equal to Forest Laboratories’ cost of providing the equivalent detailing calls. In connection with the Company’s exercising its option to co-promote Savella, the Company will detail to rheumatologists, pain centers, and physical and rehabilitation medicine specialists in the U.S.
     Under the agreement with Forest Laboratories, the Company received an upfront, non-refundable payment of $25.0 million, of which $1.25 million was paid to Pierre Fabre as a sublicense fee. Additionally, the Company received a $5.0 million milestone payment in June 2007 from Forest Laboratories for the successful second Phase III trial for Savella, of which $250,000 was paid to Pierre Fabre as a sublicense fee, a $1.0 million license payment in July 2007 to extend the territory to include Canada, of which $50,000 was paid to Pierre Fabre as a sublicense fee, a $5.0 million milestone payment in December 2007 upon NDA filing, of which $250,000 was paid to Pierre Fabre as a sublicense fee, a $10.0 million milestone payment in February 2008 upon NDA acceptance, of which $500,000 was paid to Pierre Fabre as a sublicense fee, and a $25.0 million milestone payment from Forest Laboratories upon NDA approval, of which $1.25 million was paid to Pierre Fabre as a sublicense fee. The total upfront and milestone payments to the Company under the agreement could total approximately $165.0 million, of which $71.0 million has been received to date, related to the development and commercialization of Savella for the treatment of fibromyalgia, a large portion of which will depend upon achieving certain sales of Savella and up to an additional $45.0 million in the event that the Company and Forest Laboratories develop milnacipran for other indications. There was an additional $40.0 million in potential milestone payments related to new formulations of milnacipran created on behalf of the Company; however, alternative formulation technology has been selected by the Company and Forest Laboratories and therefore, the Company and Forest Laboratories have decided not to move forward with any such formulations created by a third party on behalf of the Company. Accordingly, such milestone events are no longer possible. In addition, the Company will receive royalty payments based on sales of licensed product under this agreement. Forest Laboratories also assumed the future royalty payments due to Pierre Fabre and the transfer price for the active ingredient used in Savella, of which the Company is obligated to reimburse Forest Laboratories for a portion of the active ingredient costs of the samples. The amount of such obligation will vary depending on Forest Laboratories’ annual marketing plan. The agreement with Forest Laboratories extends until the later of (i) the expiration of the last to expire of the applicable patents, (ii) 10 years after the first commercial sale of a product under the agreement in an applicable country or (iii) the last commercial sale of a generic product in such country, unless terminated earlier. Each party has the right to terminate the agreement upon prior written notice of the bankruptcy or dissolution of the other party, or a breach of any material provision of the agreement if such breach has not been cured within the required time period following such written notice. Forest Laboratories may also terminate the agreement upon an agreed notice period in the event Forest Laboratories reasonably determines that the development program indicates issues of safety or efficacy that are likely to prevent or significantly delay the filing or approval of a new drug application or to result in labeling or indications that would have a significant adverse affect on the marketing of any product developed under the agreement.
     For the years ended December 31, 2009, 2008 and 2007, the Company recognized revenues of $10.0 million, $16.7 million and $13.4 million, respectively, under its collaboration agreement with Forest Laboratories, consisting of the recognition of the upfront payment of $25.0 million from Forest Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million license payment received from Forest Laboratories in July 2007 to extend the territory to include Canada recognized on a straight-line basis over the remainder of the 8 year amortization period, sponsored development reimbursements, funding received from Forest Laboratories for certain of the Company’s employees devoted to the development of Savella and milestone payments received from Forest Laboratories. The NDA approval milestone payment received in connection with the collaboration agreement with Forest Laboratories was recorded as deferred revenue, net of the sublicense fee to Pierre Fabre, at the time of achievement and will be recognized as commercial revenue ratably over the period of on-going obligations and reduced by amounts reimbursed to Forest Laboratories for active pharmaceutical ingredient costs for samples.
Licensing Agreement with Pierre Fabre
     In August 2001, the Company entered into a license agreement and a trademark agreement with Pierre Fabre. Pursuant to the terms of the license agreement, the Company paid Pierre Fabre $1.5 million upon execution of the agreement and a $1.0 million milestone payment in September 2003. In February 2008, the Company paid Pierre Fabre a $1.0 million milestone payment upon acceptance by the FDA of the NDA for milnacipran, and in January 2009, the Company paid Pierre Fabre a $3.0 million milestone payment upon the approval of the NDA. As of December 31, 2009, additional payments of up to $0.5 million will be due to Pierre Fabre based on meeting certain regulatory milestones.

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     The license agreement was amended and restated in November 2001 and subsequently in May 2003. In connection with the second amended and restated agreement in May 2003, the Company issued Pierre Fabre 1,000,000 shares of common stock and warrants to purchase 300,000 shares of common stock, all of which were exercised during 2008 resulting in proceeds to the Company of $1.5 million.
     In January 2004, in connection with the Company’s transaction with Forest Laboratories, the Company’s license agreement and trademark agreement with Pierre Fabre were further amended. The third amended and restated license agreement with Pierre Fabre provides the Company with an exclusive license to develop and sell any products with the compound milnacipran as an active ingredient for any indication in the United States and Canada. Simultaneous to the third amended and restated license agreement, the Company also entered into a purchase and supply agreement with Pierre Fabre for the active pharmaceutical ingredient in milnacipran. Pierre Fabre has the exclusive right to manufacture the active ingredients used in the commercial product for a specified time period (subject to compliance with certain provisions in the agreement), and Pierre Fabre will be paid a transfer price for each product manufactured and royalties based on net sales, both of which obligations have been assumed by Forest Laboratories. Additionally, the Company is obligated to pay Pierre Fabre a 5% sublicense fee on upfront and milestone payments received from Forest Laboratories, of which $3.6 million has been paid to date. Once a total of $7.5 million has been paid to Pierre Fabre, such additional sublicense payments due to Pierre Fabre shall be credited against any royalties or milestones owed by the Company to Pierre Fabre, which shall be carried forward to any subsequent years as applicable. Pierre Fabre also retains the right to sell products in indications developed by the Company outside the United States and Canada and will pay the Company a royalty based on net sales for such products. The license agreement also provides Pierre Fabre with certain rights to obtain a license outside the United States and Canada for new formulations and new salts developed by the Company or Forest Laboratories. The agreement is effective until the later of the expiration of the last-to-expire of certain patents held by Pierre Fabre relating to the development of milnacipran or ten years after the first commercial sale of a licensed product, unless terminated earlier. Each party has the right to terminate the agreement upon 90 days’ prior written notice of the bankruptcy or dissolution of the other party or a breach of any material provision of the agreement if the breach is not cured within 90 days following the written notice. Additionally, Pierre Fabre has the right to terminate the agreement upon 90 days’ prior notice to the Company if the Company takes certain actions.
Cellatope Asset Purchase Agreement
     In February 2009, the Company entered into an asset purchase agreement with Cellatope Corporation (“Cellatope”) whereby the Company acquired Cellatope’s technology platform that uses cell-bound complement activation products (“CB-CAP”) to diagnose and monitor debilitating autoimmune disorders, including systemic lupus erythematosus (“SLE/Lupus”). The Company acquired the CB-CAP technology in a transaction that included a $2.0 million cash payment to Cellatope for the diagnostic technology, as well as an additional $3.0 million potential milestone payment associated with the commercial development of the Lupus monitoring application.
     The acquisition price included $0.2 million which is held in an escrow account and will be available to satisfy any claims for indemnification the Company may have until the escrow is released, which will be 18 months following the closing of the transaction. In addition to the escrow funds, $0.5 million was withheld from the closing consideration to be paid by July 2012, subject to conditions in the asset purchase agreement, and is classified as restricted cash.
     Pursuant to the accounting treatment prescribed for business combinations, the Company determined that the assets acquired from Cellatope do not constitute a business and accordingly, the transaction has been accounted for as an asset acquisition. The $2.0 million upfront payment was charged to research and development expenses during the first quarter of 2009 as the ultimate commercialization of the related product is uncertain and the technology has no alternative uses.
9. INCOME TAXES
     In July 2006, the FASB issued authoritative guidance on accounting for uncertain tax positions, which the Company adopted on January 1, 2007. Under this guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The total amount of unrecognized tax benefits as of January 1, 2009 was $1.0 million.

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     A rollforward of changes in the Company’s unrecognized tax benefits is as follows:
                         
    December 31,  
    2009     2008     2007  
Unrecognized tax benefits as of the beginning of the year
  $ 1,039,000     $ 913,000     $ 913,000  
(Decreases) increases related to prior year tax positions
    (21,000 )     17,000        
Decreases related to expirations of prior year tax positions
    (47,000 )     (5,000 )      
Increases related to current year tax positions
                 
Settlements
                 
Other
          114,000        
 
                 
Unrecognized tax benefits as of the end of the year
  $ 971,000     $ 1,039,000     $ 913,000  
 
                 
     Due to the existence of the valuation allowance, future changes in unrecognized tax benefits will not impact the Company’s effective tax rate.
     The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1994 to 2009 are subject to examination by the United States and California tax authorities due to the carry forward of unutilized net operating losses and research and development credits.
     The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company’s balance sheets at December 31, 2009 or December 31, 2008, and has not recognized interest and/or penalties in the statement of operations for the year ended December 31, 2009.
     At December 31, 2009, the Company had net deferred tax assets of $58.8 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset.
     Additionally, pursuant to Internal Revenue Code Section 382 and 383, the annual use of the net operating loss carryforwards and research and development tax credits could be limited by any greater than 50% ownership change during any three-year testing period. As a result of any such ownership change, portions of the Company’s net operating loss carryforwards and research and development tax credits are subject to annual limitations. The Company completed a Section 382/383 analysis regarding the limitation of the net operating losses and research and development credits. Based upon the analysis, the Company determined that ownership changes occurred in prior years. However, the annual limitations on net operating loss and research and development tax credit carryforwards will not have a material impact on the future utilization of such carryforwards.
     Significant components of the Company’s deferred tax assets as of December 31, 2009 and 2008 are shown below. A valuation allowance has been established to offset the net deferred tax assets as of December 31, 2009 and 2008 as realization of such assets is uncertain.
                 
    2009     2008  
Net operating loss carryforwards
  $ 22,719,000     $ 25,423,000  
Deferred revenue
    11,654,000       4,097,000  
Capitalized research and development
    9,310,000       9,022,000  
Capitalized intangibles
    5,137,000       3,785,000  
Tax credits
    1,331,000       1,290,000  
Stock-based compensation expense
    7,174,000       5,473,000  
Other
    1,442,000       16,000  
 
           
 
    58,767,000       49,106,000  
Valuation allowance
    (58,767,000 )     (49,106,000 )
 
           
 
  $     $  
 
           

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     The provision (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows:
                         
    2009     2008     2007  
Tax at federal statutory rate
  $ (9,875,029 )   $ (6,378,964 )   $ 1,220,654  
State income tax, net of federal benefits
    (1,621,198 )     (1,047,243 )     200,397  
In-process research and development
          5,129,921        
Stock-based compensation
    918,073       729,670       420,707  
Other
    651,504       (44,282 )     156,252  
Change in valuation allowance
    9,926,650       1,610,898       (1,998,010 )
 
                 
 
  $     $     $  
 
                 
     At December 31, 2009, the Company had federal and California net operating loss carryforwards of approximately $85.1 million and $38.2 million, respectively. The federal tax loss carryforwards will begin to expire in 2010. The California tax loss carryforwards will begin to expire in 2012. Additionally, the Company has federal and California research and development tax credit carryforwards of approximately $1.7 million and $0.6 million, respectively. Approximately $15,000 of federal research and development tax credit carryforwards expired unused in 2009 and will continue to expire in 2010. The California research and development credit carryforwards carry forward indefinitely.
     The Company recognizes excess tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting from excess tax benefits. At December 31, 2009 and 2008, deferred tax assets do not include $9.3 million and $8.6 million, respectively, of excess tax benefits from employee stock option exercises that are a component of the Company’s net operating loss carryovers. Stockholders’ equity will be increased by $9.3 million when such excess tax benefits are realized.
10. RELATED PARTY TRANSACTIONS
     The Company utilizes the services of a management consulting firm, in which one of the members of the Company’s board of directors was a consultant during 2009. During the year ended December 31, 2009, such consulting firm provided services to the Company in the amount of approximately $263,000.
     The Company employed the services of a consultant, whose husband is an officer of the Company. Such consultant provided consulting services to the Company in the amount of approximately $177,000 and $225,000 for the years ended December 31, 2008 and 2007, respectively. In December 2008, this consultant accepted a position with the Company.
11. RETIREMENT PLAN
     The Company has a savings plan under Section 401(k) of the Internal Revenue Code under which all employees over the age of twenty-one are eligible to participate on the first entry date (January 1 and July 1) following their hire date. The plan allows for a matching contribution in the Company’s common stock (valued as of the contribution date) equal to 100% of the amount of the salary contributed for the preceding six- month period. Employees vest in the matching contribution made on the last day of June of the plan year provided they are employed on the last day of December of the plan year and vest in the matching contribution made on the last day of December of the plan year provided that they are employed on the last day of June of the following plan year. After three years of vesting service, the matching contribution is 100% vested immediately. During the years ended December 31, 2009, 2008 and 2007, the charge to operations for the matching contribution was $1,136,810, $355,120, and $178,826, respectively. The increase in headcount associated with the hiring of the Company’s sales force in connection with the launch of Savella contributed to the increased charge to operations during 2009. The matching contribution in common stock to the 401(k) Plan is included as a component of stock-based compensation to employees.
12. COMMITMENTS AND CONTINGENCIES
Leases
     The Company currently occupies a total of approximately 10,100 square feet of leased office space in San Diego, California under three separate leases. The San Diego facilities house the Company’s executive and administrative offices and laboratory space. The lease for the main corporate office expires in July 2012 with the lease for

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additional office space expiring in December 2010 and the lease for laboratory space expiring in June 2010. Additionally, the Company has entered into an operating lease agreement for an automobile fleet for the Company’s sales representatives.
     Future annual minimum lease payments due under noncancelable operating leases consists of the following at December 31, 2009:
         
    Operating  
Years Ending December 31,   Leases  
 
     
2010
  $ 903,062  
2011
    815,951  
2012
    615,459  
2013
    28,898  
2014
    7,224  
 
     
Total minimum lease payments
  $ 2,370,594  
 
     
     Total rent expense was approximately $403,000, $334,000 and $202,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Licensing Agreements
     The Company has entered into licensing agreements with various organizations. Under the terms of these agreements, the Company has received licenses to know-how and technology claimed in certain patents or patent applications. The Company is required to pay fees, milestones and/or royalties on future sales of products employing the technology or falling under claims of a patent. Some of the agreements also require the Company to pay expenses arising from the prosecution and maintenance of the patents covering the licensed technology. If all of the licensed candidates are successfully developed (excluding Savella), the Company may be required to pay milestone payments up to approximately $37.0 million over the lives of these agreements, in addition to royalties on sales of the affected products at various rates. Due to the uncertainties of the development process, the timing and probability of the milestone and royalty payments cannot be accurately estimated.
13. SEGMENT INFORMATION
     During the third quarter of 2009, the Company made the determination that its two product lines, consisting of therapeutic products (Savella) and the personalized medicine services (Avise products), met the criteria to be reported as separate operating segments. Prior to 2009, the Company operated in a single operating segment with revenues generated from its collaboration agreement with Forest Laboratories and financial results prepared and reviewed by management as a single operating segment.
     As noted above, the Company has two reportable business segments: therapeutic products and personalized medicine services. The therapeutic products segment includes Savella for the management of fibromyalgia. The personalized medicine services segment includes specialized diagnostic tests to provide physicians with actionable information to help manage their patients’ care, including predicting the likelihood of developing disease or optimizing therapy.
     The Company manages the commercial organization and related support organizations through a centralized management team. The Company’s business segment performance is managed and evaluated on net revenues, cost of personalized medicine services and research and development expenses. The Company does not allocate selling, general and administrative expenses to its business segments for performance assessment.
     The Company does not have international revenues. Therefore, the Company has determined it is not useful to disclose revenues and the related segment expenses by geographic region. The Company has no inter-segment revenues.

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     The following table reports net revenues, cost of personalized medicine services and research and development expenses for the Company’s reportable segments for the years ended December 31, 2009 and 2008:
                         
            Personalized        
    Therapeutic     Medicine        
    Products     Services     Total  
Year ended December 31, 2009:
                       
Revenues
  $ 27,002,507     $ 332,372     $ 27,334,879  
Cost of personalized medicine services
          1,986,722       1,986,722  
Research and development
    8,981,337       3,014,832       11,996,169  
     
Segment operating income (loss)
    18,021,170       (4,669,182 )     13,351,988  
             
Operating expenses:
                       
Selling, general and administrative
                    42,138,458  
Goodwill impairment
                    1,100,000  
 
                     
Loss from operations
                  $ (29,886,470 )
 
                     
Year ended December 31, 2008(1):
                       
Revenues
  $ 16,659,099     $     $ 16,659,099  
Cost of personalized medicine services
          267,361       267,361  
Research and development
    8,335,403       835,673       9,171,076  
     
Segment operating income (loss)
    8,323,696       (1,103,034 )     7,220,662  
             
Operating expenses:
                       
Selling, general and administrative
                    17,602,820  
In-process research and development
                    12,590,000  
 
                     
Loss from operations
                  $ (22,972,158 )
 
                     
     The following table reports assets that are identifiable to the Company’s therapeutic products and personalized medicine services segments as of December 31, 2009 and 2008:
                                 
            Personalized        
    Therapeutic   Medicine   Corporate and    
    Products   Services   Unallocated   Total
As of December 31, 2009:
                               
Receivable from Forest Laboratories
  $ 5,611,476     $     $     $ 5,611,476  
Prepaid expenses and other current assets
          7,242       4,784,892       4,792,134  
Property and equipment, net
          471,602       801,424       1,273,026  
Goodwill
                21,928,598       21,928,598  
Other assets
          278,994       20,000       298,994  
As of December 31, 2008(1):
                               
Receivable from Forest Laboratories
  $ 165,880     $     $     $ 165,880  
Prepaid expenses and other current assets
          6,997       1,041,671       1,048,668  
Property and equipment, net
          247,135       841,614       1,088,749  
Goodwill
                26,465,627       26,465,627  
Other assets
          308,994       20,000       328,994  
 
(1)   The Company determined in 2009 that they were no longer a single reportable segment. The Company became two reportable segments with the launch of Savella, receipt of Savella sales reports from Forest Laboratories and changes to the management structure for personalized medicine services. The Company has presented the 2008 reportable segment information consistent with its 2009 reportable segment disclosure.

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14. QUARTERLY INFORMATION (UNAUDITED)
     The following quarterly information includes all adjustments which management considers necessary for a fair statement of such information.
                                 
    2009
    First   Second   Third   Fourth
    Quarter   Quarter   Quarter   Quarter
Revenues
  $ 7,858,394     $ 5,805,436     $ 5,612,329     $ 8,058,720  
Total operating expenses
  $ 17,654,035     $ 14,904,347     $ 11,336,031     $ 13,326,936  
Other income
  $ 635,137     $ 490,008     $ 254,335     $ 255,027  
Net loss (1)
  $ (9,160,504 )   $ (8,608,903 )   $ (5,469,367 )   $ (5,013,189 )
Net loss per share — basic and diluted (2)
  $ (0.24 )   $ (0.23 )   $ (0.14 )   $ (0.13 )
 
                               
Shares used in calculating per share amounts — basic and diluted
    37,981,814       38,059,838       38,257,303       38,296,625  
 
    2008  
    First     Second     Third     Fourth  
    Quarter     Quarter     Quarter     Quarter  
Revenues (3)
  $ 13,715,700     $ 1,014,794     $ 979,310     $ 949,295  
Total operating expenses (3)
  $ 18,297,686     $ 6,175,141     $ 6,110,123     $ 9,048,307  
Other income
  $ 1,701,005     $ 1,169,137     $ 1,018,590     $ 857,815  
Net loss (4)
  $ (2,880,981 )   $ (3,991,210 )   $ (4,112,223 )   $ (7,241,197 )
Net loss per share — basic and diluted (2)
  $ (0.08 )   $ (0.11 )   $ (0.11 )   $ (0.19 )
 
                               
Shares used in calculating per share amounts — basic and diluted
    37,523,645       37,641,610       37,883,074       37,883,334  
 
(1)   During the first quarter of 2009, the Company paid a $3.0 million milestone payment to Pierre Fabre upon NDA approval and a $2.0 million payment recognized as research and development expense in connection with its asset purchase agreement with Cellatope. Additionally, during the fourth quarter of 2009, the Company recorded a $1.1 million impairment charge for goodwill related to its personalized medicine services business.
 
(2)   Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly net loss per share may not necessarily equal the total for the year.
 
(3)   The Company reclassified a $0.5 million sublicense fee paid to Pierre Fabre during the first quarter of 2008 to revenue (recognized on a net basis with the milestone payment received upon NDA acceptance) from research and development expenses.
 
(4)   During the first quarter of 2008, the Company recognized a milestone payment of $10.0 million upon NDA acceptance, net of a $0.5 million sublicense fee, and $3.2 million also upon NDA acceptance as reimbursement for one-third of the costs paid in connection with the second Phase III trial for Savella. Additionally, the Company recognized a charge in the amount of $12.6 million during the first quarter of 2008 for in-process research and development in connection with the Proprius acquisition.
15. SUBSEQUENT EVENT
     During March 2010, certain employees who were granted performance-based options resigned from the Company and accordingly, such performance conditions will no longer be achieved. In accordance with the accounting treatment for stock-based compensation, the stock-based compensation expense previously recognized will be reversed in the period of change by recording a cumulative adjustment. The Company will recognize an adjustment in the amount of $0.6 million during the first quarter of 2010 related to such performance-based options.

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