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As filed with the Securities and Exchange Commission on September 29, 2010

File No. 333-      

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

Advanced Life Sciences Holdings, Inc.

(Exact name of registrant as specified in its charter)

1440 Davey Road
Woodridge, Illinois 60517
(630) 739-6744
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Michael T. Flavin, Ph.D.
Chairman and Chief Executive Officer
Advanced Life Sciences Holdings, Inc.
1440 Davey Road
Woodridge, Illinois 60517
(630) 739-6744

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

R. Cabell Morris, Jr., Esq.
Todd M. Bloomquist, Esq.
Winston & Strawn LLP
35 West Wacker Drive
Chicago, Illinois 60601
(312) 558-5600

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

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

(1)          Includes an indeterminable number of additional shares of common stock, pursuant to Rule 416 under the Securities Act of 1933, as amended, that may be issued to prevent dilution from stock splits, stock dividends or similar transaction that could affect the shares to be offered by selling stockholder.

(2)          Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended.  The price per share and aggregate offering price are based on the average of the high and low prices of the registrant’s common stock on September 28, 2010, as reported on the OTC Bulletin Board.

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

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

SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 2010

PROSPECTUS

54,117,201 SHARES OF COMMON STOCK

This prospectus relates to the public offering of shares of our common stock, par value $0.01 per share, by YA Global Master SPV Ltd., the selling stockholder. The selling stockholder may sell under this prospectus up to 54,117,201 shares of our common stock.  We issued 1,984,127 shares of our common stock to the selling stockholder as a commitment fee and may from time to time issue all or a portion of the $10 million worth of additional shares to the selling stockholder at 95% of the market price at the time of such issuance determined in accordance with the terms of a Standby Equity Distribution Agreement dated as of September 27, 2010, or SEDA, by and between Advanced Life Sciences Holdings, Inc. and YA Global Master SPV Ltd., and 52,133,074 of such additional shares may be sold by the selling stockholder under this prospectus.  The selling stockholder may sell shares from time to time in regular brokerage transactions, in transactions directly with market makers or in privately negotiated transactions.  None of the proceeds from the sale of stock by the selling stockholder will be placed in escrow, trust or any similar account.

For additional information on the methods of sale that may be used by the selling stockholder, see the section entitled “Plan of Distribution” on page 81. We will not receive any of the proceeds from the sale of these shares. However, we will receive proceeds from the selling stockholder from the initial sale to such stockholder of these shares. We have and will continue to bear the costs relating to the registration of these shares.

Our common stock is quoted on the OTC Bulletin Board under the symbol “ADLS.OB.” On September 28, 2010 the last reported sale price of our common stock on the OTC Bulletin Board was $0.05 per share. The shares of common stock registered hereunder are being offered for sale by the selling stockholder at prices established on the OTC Bulletin Board or other principal trading market for our common stock during the term of this offering.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS, INCLUDING THOSE SET FORTH IN THE “RISK FACTORS” SECTION OF THIS PROSPECTUS BEGINNING ON PAGE 7. YOU SHOULD PURCHASE THESE SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.

With the exception of YA Global Master SPV Ltd., which is an “underwriter” within the meaning of the Securities Act of 1933, as amended, no other underwriter or person has been engaged to facilitate the sale of shares of our stock in this offering.  The Securities and Exchange Commission may take the view that, under certain circumstances, any broker-dealers or agents that participate with the selling stockholder in the distribution of the shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended. Commissions, discounts or concessions received by any such broker-dealer or agent may be deemed to be underwriting commissions under the Securities Act.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passes upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is            , 2010.

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If it is against the law in any state to make an offer to sell these shares, or to solicit an offer from someone to buy these shares, then this prospectus does not apply to any person in that state, and no offer or solicitation is made by this prospectus to any such person.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer and sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

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PROSPECTUS SUMMARY

This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. References in this prospectus to “we,” “our” and “us” refer to Advanced Life Sciences Holdings, Inc. and its subsidiary, Advanced Life Sciences, Inc., except as otherwise indicated or as the context otherwise requires.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel drugs in the areas of infectious disease, oncology and respiratory disease. Using our internal discovery capabilities and our network of pharmaceutical and academic partners, we have assembled a promising pipeline of clinical and preclinical product candidates. The following is a summary of each of our primary programs:

·                  Infectious Disease—Respiratory Tract Infections.  We have an exclusive worldwide license (excluding Japan) from Abbott Laboratories to develop and commercialize cethromycin (Restanza™), a second generation, once-a-day antibiotic for the treatment of respiratory tract infections. We initiated our pivotal Phase III clinical program for the treatment of mild-to-moderate community acquired bacterial pneumonia (CABP), the indication for which we are seeking Food and Drug Administration (FDA) approval, in December 2005. We completed these two pivotal Phase III clinical trials in 2007.  In August 2010, we reached an agreement with the FDA under a Special Protocol Assessment (SPA) on the scope and protocol design for additional clinical data needed.

·                  Infectious Disease—Biodefense.  Along with our clinical work in the treatment of CABP, we are collaborating with several groups within the U.S. Government to evaluate cethromycin’s potential in protecting against high-priority bioterror agents. The FDA has granted cethromycin an Orphan Drug Designation for the prophylactic treatment of inhalation anthrax, plague and tularemia.

·                  Oncology.  ALS-357 is a compound that has shown evidence of anti-tumor activity against malignant melanoma in preclinical studies. We have established an open investigational new drug application for ALS-357 with the FDA and intend to seek a partner to assist in the funding and advancement of this program.

·                  Respiratory Disease.  ALS-886 is a novel therapeutic in preclinical development for the treatment of inflammation-related tissue damage, including tissue damage associated with acute respiratory distress syndrome (ARDS). We have established an open investigational new drug application

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for ALS-886 with the FDA and intend to seek a partner to assist in the funding and advancement of this program.

In addition to these compounds, we have additional product candidates in preclinical development coming from our natural products-based chemistry platform.

We have not received FDA approval for any of our product candidates. Our revenues to date have consisted solely of management fees, one-time or limited payments associated with our collaborations and government grant awards. Our cumulative net loss was $135.5 million as of June 30, 2010, and we do not anticipate generating any revenue from the sale of cethromycin in the near term. If we secure commercial partnerships, milestones received as a result of any of our commercial partnership agreements could be recognized as revenue depending on the underlying nature of the milestones. Since our inception in 1999, we have financed our operations primarily through public and private equity offerings, loans from our founder, borrowings under our bank line of credit, and proceeds from sales of our common stock under Standby Equity Distribution Agreements. We will continue to do so until we are able to generate revenues from our product candidates, if ever.

Our Lead Program

In December 2004, Abbott Laboratories granted us an exclusive worldwide license (excluding Japan) to commercialize cethromycin, our most advanced product candidate. Cethromycin is a second generation once-a-day oral antibiotic from the ketolide-class used in the treatment of respiratory tract infections. Over the last decade, the rapid rise in severe and fatal infections caused by antibiotic-resistant bacteria has posed a serious threat to public health. There is a need to discover new antibiotics that are effective against resistant bacteria. As a new class of antibiotics, ketolides have shown activity against penicillin- and macrolide-resistant Gram-positive pathogens. In December 2005, we initiated our pivotal Phase III clinical program for the treatment of mild-to-moderate CABP, which enrolled a total of 1,106 patients and were completed successfully in 2007. Cethromycin reported per protocol clinical cure rates of 94.0% in trial CL05-001 (comparator, Biaxin, was 93.8%) and 91.5% in trial CL06-001 (comparator, Biaxin, was 95.9%).

In September 2008, we submitted a New Drug Application (NDA) for the use of cethromycin in outpatient CABP. In June 2009, the FDA Anti-Infective Drugs Advisory Committee (AIDAC) reviewed the cethromycin NDA and voted that cethromycin demonstrated safety for the outpatient treatment of adults with mild-to-moderate CABP but did not demonstrate efficacy in the treatment of CABP due to release of the new FDA draft guidance for developing treatments for community acquired bacterial pneumonia in March 2009, which requires the enrollment of more severe CABP patients for approval in the outpatient CABP indication. In July 2009, we received a complete response letter from the FDA, stating that cethromycin NDA cannot be approved in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy with defined statistical methodology. In August 2010, we reached an agreement with the FDA, under the SPA process, on the design of our planned Phase III study of cethromycin to treat CABP.

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Risk Factors

We face numerous risks and uncertainties that could materially and adversely affect our business, results of operations and financial condition, including the risk that we may not be able to raise sufficient capital to continue our business operations, which could result in our inability to continue as a going concern. We will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all, and we may not have sufficient cash or other funding available to complete our anticipated business activities for the remainder of 2010. For additional discussion of the risk and uncertainties we face, see “Risk Factors.”

Corporate Information

We were incorporated in Delaware in 2004. Our operating subsidiary, Advanced Life Sciences, Inc., was incorporated in Illinois in 1999. Our principal executive offices are located at 1440 Davey Road, Woodridge, Illinois 60517. Our telephone number is (630) 739-6744. Our web site is http://www.advancedlifesciences.com. Except for the documents referred to under “Where You Can Find More Information” which are specifically incorporated by reference into this prospectus, we do not intend the information found on our web site to be part of this prospectus and our web site may not contain all of the information that is important to you.

“Advancing Discoveries For Health” and the Advanced Life Sciences logo are trademarks of Advanced Life Sciences, Inc.

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The Offering

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Summary Financial Data

The following selected financial data should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included in this prospectus.

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RISK FACTORS

An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus, before making a decision to invest in our units. If any of the following events occur, our business, financial condition, and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.

Risks Relating to Our Business and Industry

We may not be able to continue as a going concern or fund our existing capital needs.

Our independent registered public accounting firm included an explanatory paragraph in the report on our 2009 financial statements related to the uncertainty in our ability to continue as a going concern. The paragraph stated that we do not have sufficient cash on-hand or other funding available to meet our obligations and sustain our operations, which raises substantial doubt about our ability to continue as a going concern. We will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all. We may not have sufficient cash or other funding available to complete our anticipated business activities for the remainder of 2010. In order to address our working capital shortfall we intend to raise additional capital by accessing the capital markets. There can be no assurances that we will be successful in accessing the capital markets on terms acceptable to us, if at all.

In order to provide access to needed capital, we executed a Standby Equity Distribution Agreement (“SEDA”) that allows us to sell shares of our common stock to an accredited investor, YA Global Master SPV Ltd. (“YA Master”), subject to certain terms and conditions.  Although we have not yet done so, any shares of our common stock that we determine to sell pursuant to the SEDA will have a dilutive impact on our stockholders. The SEDA terms do not restrict YA Master’s ability to re-sell the shares we issue to them, and such re-sales could cause the market price of our common stock to decline significantly with advances under the SEDA. To the extent of any such decline, any subsequent advances would require us to issue a greater number of shares of common stock to YA Master in exchange for each dollar of the advance. Under these circumstances our existing stockholders would experience greater dilution. The sale of our common stock under the SEDA could encourage short sales by third parties, which could contribute to the further decline of our stock price. 

There can be no assurance that we will be able to obtain adequate capital funding in the future, under the SEDA or otherwise, to continue operations and implement our strategy.  As a result of these uncertainties, there is significant doubt about our ability to continue as a going concern.

We are a development stage company and may never attain product sales.

We have not received approval for any of our product candidates from the FDA. Any compounds that we discover or in-license will require extensive and costly development, preclinical testing and/or clinical trials prior to seeking regulatory approval for commercial sales. Our most advanced product candidate, cethromycin, and any other compounds we discover, develop or in-license, may never be approved for commercial sale. The time required to attain

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product sales and profitability is lengthy and highly uncertain, and we cannot assure you that we will be able to achieve or maintain product sales. We expect our net operating losses to continue for at least several years, and we are unable to predict the extent of future losses or when we will become profitable, if ever.

We have incurred significant net losses since our formation in 1999. For the fiscal years ended December 31, 2008 and December 31, 2009, our net losses were $22.8 million and $9.2 million, respectively, our total accumulated deficits were $122.4 million and $131.6 million, respectively, and our cash flows from operating activities were ($24.1 million) and ($11.9 million), respectively. We have incurred an accumulated deficit of $135.5 million as of June 30, 2010. Our net losses are due in large part to the significant research and development costs required to identify, validate and license potential product candidates, conduct preclinical studies and conduct clinical trials of our more advanced product candidates. To date, we have generated only limited revenues, consisting of management fees, one-time or limited payments associated with our collaborations and government grant awards, and we do not anticipate generating any significant revenues in the near term, if ever. We expect to increase our operating expenses over the next several years as we plan to:

·                  conduct additional Phase III clinical trials and prepare for the commercial launch of cethromycin;

·                  continue the preclinical development and commence the clinical development of our other product candidates, such as ALS-357 and ALS-886;

·                  expand our research and development activities;

·                  acquire or in-license new technologies and product candidates; and

·                  increase our required corporate infrastructure and overhead.

As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with our research and product development efforts, we are unable to predict the extent of any future losses or when we will become profitable, if ever. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

We will require additional funding to satisfy our future capital needs, and future financing strategies may adversely affect holders of our common stock.

Our operations will require significant additional funding due to the absence of any meaningful revenues in the near future. We do not know whether additional financing will be available to us on favorable terms or at all. At our 2010 annual meeting of stockholders, our stockholders approved a significant increase in the number of shares of common stock that we may issue under our certificate of incorporation. To the extent we are successful in raising additional capital by issuing equity securities, our stockholders are likely to experience substantial dilution. Any additional equity securities we issue may have rights, preferences or privileges senior to those of existing holders of stock. To the extent that we raise additional funds

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through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. There can be no assurance that we will be able to obtain adequate capital funding in the future to continue operations and implement our strategy. As a result of these uncertainties, there is substantial doubt about our ability to continue as a going concern.

We will not be able to commercialize our drug candidates if our clinical trials do not demonstrate safety and efficacy.

Before obtaining regulatory approval for the sale of our drug candidates, we must conduct extensive development and clinical trials to demonstrate the safety and efficacy of our drug candidates and clinical or animal trials to demonstrate the efficacy of our drug candidates. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome.

A failure of one or more of our clinical trials or animal efficacy studies can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of clinical trials or animal efficacy studies that could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates, including:

·                  regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;

·                  we may decide, or regulators may require us, to conduct additional clinical trials, or we may abandon projects that we expect to be promising, if our clinical trials or animal efficacy studies produce negative or inconclusive results;

·                  we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks;

·                  regulators or institutional review boards may require that we hold, suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements;

·                  the cost of our clinical trials could escalate and become cost prohibitive;

·                  any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable;

·                  we may not be successful in recruiting a sufficient number of qualifying subjects for our clinical trials; and

·                  the effects of our drug candidates may not be the desired effects or may include undesirable side effects or the drug candidates may have other unexpected characteristics.

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Our business would be materially harmed if we fail to obtain FDA approval of a new drug application for cethromycin.

Our ability to generate any significant product revenues in the near future will depend solely on the successful development and commercialization of cethromycin, our most advanced product candidate. The FDA may not approve in a timely manner, or at all, any NDA that we submit. If any NDA we submit is not approved by the FDA, we will be unable to commercialize that product in the United States and our business will be materially harmed. In June 2010, as part of the testimony for a hearing of the U.S. Congress Committee on Energy and Commerce, Subcommittee on Health, our Chief Executive Officer commented on the challenges that we and other innovator companies have faced in the clinical development and regulatory approval of new antibiotics to improve public health. The FDA can and does reject NDAs, and often requires additional clinical trials, even when product candidates performed well or achieved favorable results in large-scale Phase III clinical trials. The FDA imposes substantial requirements on the introduction of pharmaceutical products through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these requirements typically takes several years and may vary substantially based upon the type and complexity of the pharmaceutical product. A number of our product candidates are novel compounds, which may further increase the period of time required for satisfactory testing procedures.

In July 2009, we received a complete response letter from the FDA regarding the NDA for cethromycin for the outpatient treatment of adults with CABP. In its letter, the FDA indicated that they cannot approve the application for cethromycin in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy.  In August 2010, we reached an agreement with the FDA, under the SPA process, on the design of our planned Phase III study of cethromycin to treat CABP.

Because we are heavily dependent on our license agreement with Abbott Laboratories and our collaborations with other third parties, our product development programs may be delayed or terminated by factors beyond our control.

In December 2004, we entered into a license agreement with Abbott Laboratories for certain patent applications, patents and proprietary technology relating to cethromycin. We have also entered into a number of license agreements for intellectual property and other rights needed to develop our product candidates that are in earlier stages of development. Our primary collaborators other than Abbott Laboratories include the University of Illinois at Chicago and Baxter International. A description of our agreements with collaborators can be found under the headings “Business—Abbott Laboratories Collaboration” and “Business—Other Collaborations and License Agreements.” Our collaborations generally present additional risks to our business, such as the risk that our collaborators encounter conflicts of interest to their arrangements with us, inadequately defend our intellectual property rights or develop other products that compete with us. Our ability to generate any significant product revenues in the near future will depend solely on the successful commercialization of cethromycin. If for any reason we are unable to realize the expected benefits of our license agreement with Abbott Laboratories, or under any of our other collaborations, then our business and financial condition may be materially harmed.

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Our collaborators and third party manufacturers may not be able to manufacture our product candidates, which would prevent us from commercializing our product candidates.

To date, each of our product candidates has been manufactured by our collaborators and third party manufacturers for preclinical and clinical trials. If any of our product candidates is approved by the FDA or other regulatory agencies for commercial sale, we will need third parties to manufacture the product in larger quantities. Due to factors beyond our control, our collaborators and third party manufacturers may not be able to increase their manufacturing capacity for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If we are unable to increase the manufacturing capacity for a product candidate successfully, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in the supply of the product candidate. Our product candidates require precise, high-quality manufacturing. The failure of our collaborators and third party manufacturers to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any products we may develop, we may be unable to generate revenues.

We do not currently have product sales and marketing capabilities.  If we receive regulatory approval to commence commercial sales of any of our product candidates, we will have to establish a sales and marketing organization with appropriate technical expertise and distribution capabilities or make arrangements with third parties to perform these services in other jurisdictions. If we receive approval to commercialize cethromycin for the treatment of CABP, we intend to engage additional pharmaceutical or health care companies with existing distribution systems and direct sales organizations to assist us in North America and abroad. We may not be able to negotiate favorable distribution partnering arrangements, if at all, and to the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and will not be under our control. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, our ability to generate product revenues, and become profitable, would be severely limited.

Our ability to generate any significant revenues in the near-term is dependent entirely on the successful commercialization and market acceptance of cethromycin. Factors that may inhibit our efforts to commercialize cethromycin or other product candidates without strategic partners or licensees include:

·                  difficulty recruiting and retaining adequate numbers of effective sales and marketing personnel;

·                  the inability of sales personnel to obtain access to, or persuade adequate numbers of, physicians to prescribe our products;

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·                  the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage against companies with broader product lines; and

·                  unforeseen costs associated with creating an independent sales and marketing organization.

Our most advanced product candidate, cethromycin, will face significant competition in the marketplace if it receives marketing approval from the FDA.

Our pivotal Phase III clinical trials for cethromycin were limited to the treatment of mild-to-moderate CABP. We also intend to pursue opportunities for cethromycin in the treatment of other types of bacterial infections. There are several classes of antibiotics that are primary competitors for the treatment of one or more of these indications, including:

·                  macrolides such as Biaxin® (clarithromycin), a product of Abbott Laboratories; and Zithromax® (azithromycin), a product of Pfizer Inc.;

·                  one other ketolide antibiotic, Ketek® (telithromycin), a product of Aventis Pharmaceuticals;

·                  semi-synthetic penicillins such as Augmentin® (amoxicillin and clavulanate potassium), a product of GlaxoSmithKline;

·                  fluoroquinolones such as Levaquin® (levofloxacin), a product of Ortho-McNeil Pharmaceutical, Inc.; Tequin® (gatifloxacin), a product of Bristol-Myers Squibb Company; FACTIVE® (gemifloxacin mesylate) tablets, a product of Oscient Pharmaceuticals; and Cipro® (ciprofloxacin) and Avelox® (moxifloxacin), both products of Bayer Corporation;

·                  tetracyclines such as Tygacil® (tigecycline), a product of Pfizer to treat in-patient CABP; and

·                  an oxazolidinone, Zyvox® (linezolid), a product of Pfizer, to treat nosocomial pneumonia.

Cethromycin may show evidence of side effects that could diminish its prospects for commercialization and wide market acceptance. If cethromycin is approved by the FDA, it will not be the first ketolide antibiotic introduced to the marketplace. Ketek® has been available for sale in Europe since 2002 and in the United States since August 2004. There are additional ketolide product candidates in preclinical development or in clinical development. If ultimately approved by the FDA, these product candidates may have improved efficacy, ease of administration or more favorable side effect profiles when compared to cethromycin. The availability of additional ketolide antibiotics may have an adverse affect on our ability to generate product revenues and achieve profitability.

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Our inability to expand cethromycin into other indications would harm our ability to generate additional revenues in the future.

Abbott Laboratories conducted four pivotal Phase III comparator trials for cethromycin in treating bronchitis and pharyngitis at a dosing level of 150 mg once-daily. Each of these trials failed to establish non-inferiority against comparator antibiotics. While we believe that the negative outcomes of the Abbott Laboratories comparator trials were related to dosing levels, we may be incorrect. The failure to meet primary endpoints in the Abbott Laboratories trials may not have been dose related, but rather a result of the compound’s lack of sufficient clinical efficacy. Clinical trials using a 300 mg once-daily regimen are also likely to increase the occurrence of adverse side effects. Even if we receive FDA approval to market cethromycin for the treatment of CABP, our failure to expand cethromycin into other indications would harm our ability to generate additional revenues in the future.

The availability of generic equivalents may adversely affect our ability to generate product revenues from cethromycin.

Many generic antibiotics are currently prescribed to treat respiratory tract infections. As competitive products lose patent protection, makers of generic drugs will likely begin to market additional competing products. Companies that produce generic equivalents are generally able to offer their products at lower prices. Ketek® may lose patent protection as early as 2015, which would enable generic drug manufacturers to sell generic ketolide antibiotics at a lower cost than cethromycin. Generic equivalents of Biaxin® and Zithromax®, two macrolide antibiotic products, are currently available. Cethromycin, if approved for commercial sale, may be at a competitive disadvantage because of its higher cost relative to generic products. This may have an adverse effect on our ability to generate product revenues from cethromycin.

Even if we successfully develop and obtain approval for cethromycin or any of our other product candidates, our business will not be profitable if those products do not achieve and maintain market acceptance.

Even if any of our product candidates are approved for commercial sale by the FDA or other regulatory authorities, the degree of market acceptance of any approved product candidate by physicians, healthcare professionals, patients and third-party payors, and our resulting profitability and growth, will depend on a number of factors, including:

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

·                  relative convenience and ease of administration;

·                  the prevalence and severity of any adverse side effects;

·                  the availability of alternative treatments;

·                  the details of FDA labeling requirements, including the scope of approved indications and any safety warnings;

·                  pricing and cost effectiveness;

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·                  the effectiveness of our or our collaborators’ sales and marketing strategy;

·                  our ability to obtain sufficient third-party insurance coverage or reimbursement; and

·                  our ability to have the product listed on insurance company formularies.

If any of our product candidates achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are received more favorably or are more cost effective. Complications may also arise, such as antibiotic or viral resistance, that render our products obsolete. We rely on the favorable resistance profile of cethromycin observed to be a potential competitive distinction from currently marketed compounds. Even if we receive FDA approval to market cethromycin, resistance may emerge that will substantially harm our ability to generate revenues from its sale.

We are initially seeking FDA approval for cethromycin as a seven-day treatment regimen. There are currently a number of antibiotic products that are marketed as five-day therapies. In the event that the marketplace considers this to be a significant competitive distinction, it is uncertain whether we will be able to make cethromycin available for a lower dosing period. In addition, we expect that cethromycin, if approved for sale, would be used primarily in the outpatient setting.

Because the results of preclinical studies for our preclinical product candidates are not necessarily predictive of future results, our product candidates may not have favorable results in later clinical trials or ultimately receive regulatory approval.

Only one product candidate in our development pipeline, cethromycin, has been tested in clinical trials. Our other product candidates have only been through preclinical studies. Positive results from preclinical studies, particularly in vitro studies, are no assurance that later clinical trials will succeed. Preclinical trials are not designed to establish the clinical efficacy of our preclinical product candidates. We will be required to demonstrate through clinical trials that these product candidates are safe and effective for use before we can seek regulatory approvals for their commercial sale. There is typically an extremely high rate of failure as product candidates proceed through clinical trials. If our product candidates fail to demonstrate sufficient safety and efficacy in any clinical trial, we would experience potentially significant delays in, or be required to abandon, development of that product candidate. This would adversely affect our ability to generate revenues and may damage our reputation in the industry and in the investment community.

The future clinical testing of our product candidates could be delayed, resulting in increased costs to us and a delay in our ability to generate revenues.

Our product candidates will require preclinical testing and extensive clinical trials prior to submitting a regulatory application for commercial sales. We do not know whether clinical trials will begin on time, if at all. Delays in the commencement of clinical testing could significantly increase our product development costs and delay product commercialization. In addition, many

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of the factors that may cause, or lead to, a delay in the commencement of clinical trials may also ultimately lead to denial of regulatory approval of a product candidate. Each of these results would adversely affect our ability to generate revenues.

The commencement of clinical trials can be delayed for a variety of reasons, including delays in:

·                  demonstrating sufficient safety to obtain regulatory approval to commence a clinical trial;

·                  reaching agreement on acceptable terms with prospective contract research organizations and trial sites;

·                  manufacturing sufficient quantities of a product candidate; and

·                  obtaining institutional review board approvals to conduct clinical trials at prospective sites.

In addition, the commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease, and the eligibility criteria for the clinical trial. If we are unable to enroll a sufficient number of microbiologically evaluable patients, the clinical trials for our product candidates could be delayed until sufficient numbers are achieved.

If we fail to obtain regulatory approvals in other countries for our product candidates under development, we will not be able to generate revenues in such countries.

In order to market our products outside of the United States, we must comply with numerous and varying regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval in the United States. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. The risks involved in the non-U.S. regulatory approval process, as well as the consequences for failing to comply with applicable regulatory requirements, generally include the same considerations as in the United States. A description of U.S. regulatory considerations can be found under the section entitled “—Our business would be materially harmed if we fail to obtain FDA approval of a new drug application for cethromycin.”

We will face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.

We are a development stage company with 19 employees. Most of our competitors, such as Pfizer, GlaxoSmithKline and Bayer, are large pharmaceutical companies with substantially greater financial, technical and human resources than we have. The biotechnology and

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pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Many of the drugs that we are attempting to discover or develop will compete with existing therapies if we receive marketing approval. Because of their significant resources, our competitors may be able to use discovery technologies and techniques, or partnerships with collaborators, in order to develop competing products that are more effective or less costly than the product candidates we develop. This may render our technology or product candidates obsolete and noncompetitive. Academic institutions, government agencies, and other public and private research organizations may seek patent protection with respect to potentially competitive products or technologies and may establish exclusive collaborative or licensing relationships with our competitors.

As a company, our only experience in conducting Phase III clinical trials is for our cethromycin development program. Our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates more rapidly than us. Companies that complete clinical trials, obtain required regulatory agency approvals and commence commercial sale of their drugs before we do may achieve a significant competitive advantage, including certain FDA marketing exclusivity rights that would delay or prevent our ability to market certain products. Any approved drugs resulting from our research and development efforts, or from our joint efforts with our existing or future collaborative partners, might not be able to compete successfully with our competitors’ existing or future products.

Off-label promotion of our products could result in substantial penalties.

If any of our product candidates receive marketing approval, we will only be permitted to promote the product for the uses indicated on the label cleared by the FDA. Our pivotal Phase III clinical trials of cethromycin are for the treatment of CABP, although we believe that cethromycin may have other applications in bronchitis, pharyngitis, sinusitis, inhalation anthrax, plague and tularemia, and skin and skin structure infections. If we request additional label indications for cethromycin or our other product candidates, the FDA may deny those requests outright, require extensive clinical data to support any additional indications or impose limitations on the intended use of any approved products as a condition of approval. U.S. Attorneys’ offices and other regulators, in addition to the FDA, have recently focused substantial attention on off-label promotional activities and have initiated civil and criminal investigations related to such practices. If it is determined by these or other regulators that we have promoted our products for off-label use, we could be subject to fines, legal proceedings, injunctions or other penalties.

If our efforts to obtain rights to new products or product candidates from third parties are not successful, we may not generate product revenues or achieve profitability.

Our long-term ability to earn product revenues depends on our ability to identify, through internal research programs, potential product candidates that may be developed into new pharmaceutical products and/or obtain new products or product candidates through licenses from third parties. If our internal research programs do not generate sufficient product candidates, we will need to obtain rights to new products or product candidates from third parties. We may be unable to obtain suitable products or product candidates from third parties for a number of reasons, including:

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·                  we may be unable to purchase or license products or product candidates on terms that would allow us to make an appropriate return from resulting products;

·                  competitors may be unwilling to assign or license product or product candidate rights to us;

·                  we may not have access to the capital necessary to purchase or license products or product candidates; or

·                  we may be unable to locate suitable products or product candidates within, or complementary to, our areas of interest.

If we are unable to obtain rights to new products or product candidates from third parties, our ability to generate product revenues and achieve profitability may suffer.

Because our product candidates and development and collaboration efforts depend on our intellectual property rights, adverse events affecting our intellectual property rights will harm our ability to commercialize products.

Our success will depend to a large degree on our own, our licensees’ and our licensors’ ability to obtain and defend patents for each party’s respective technologies and the compounds and other products, if any, resulting from the application of such technologies. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the breadth of claims that will be allowed or maintained, after challenge, in our or other companies’ patents.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

·                  we were the first to make the inventions covered by each of our pending patent applications;

·                  we were the first to file patent applications for these inventions;

·                  others will not independently develop similar or alternative technologies or duplicate any of our technologies;

·                  any of our pending patent applications will result in issued patents;

·                  any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

·                  we will develop additional proprietary technologies that are patentable; or

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·                  the patents of others will not have a negative effect on our ability to do business.

We are a party to certain in-license agreements that are important to our business, and we generally do not control the prosecution of in-licensed technology. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we exercise over our internally developed technology. Moreover, some of our academic institution licensors, research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired. In addition, some of the technology we have licensed relies on patented inventions developed using U.S. government resources. Under applicable law, the U.S. government has the right to require us to grant a nonexclusive, partially exclusive or exclusive license for such technology to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, if the government determines that such action is necessary.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information and may not adequately protect our intellectual property.

We rely on trade secrets to protect our technology, particularly when we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. In order to protect our proprietary technology and processes, we rely in part on confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information nor result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover our trade secrets and proprietary information, and in such case we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Market acceptance and sales of our product candidates will be severely limited if we cannot arrange for favorable reimbursement policies.

Our ability to commercialize any product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish reimbursement levels for the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed healthcare in the United States, as well as legislative proposals to reform healthcare, control pharmaceutical prices or reduce government insurance programs, may also result in exclusion of our product candidates from reimbursement programs. Because many

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generic antibiotics are available for the treatment of respiratory tract infections, our ability to list cethromycin on insurance company formularies will depend on its effectiveness compared to lower-cost products. The cost containment measures that health care payors and providers are instituting, and the effect of any health care reform, could materially and adversely affect our ability to earn revenues from the sales of cethromycin and our other product candidates.

Prescription drug coverage legislation and future legislative or regulatory reform of healthcare systems in the United States and overseas could limit future revenues from our product candidates.

In the United States, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to market and sell our product candidates profitably. In particular, the Medicare Prescription Drug Improvement and Modernization Act of 2003 and Medicare Part D, which was established pursuant thereto in January of 2006, grant responsibility to reimburse the cost of drugs and broad discretion on which drugs should be covered and to what extent to the Centers for Medicare and Medicaid Services, or CMS, the agency within the Department of Health and Human Services that administers Medicare. Additionally there is some likelihood of further reform of the United States health care system, and changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our revenues to decline.

In addition, in some foreign countries, particularly countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. This may affect our revenues both overseas and domestically, as the Medicare Prescription Drug Improvement and Modernization Act of 2003 requires the Secretary of the U.S. Department of Health and Human Services to promulgate regulations allowing drug reimportation from Canada into the United States under certain circumstances. These provisions will become effective only if the Secretary certifies that such imports will pose no additional risk to the public’s health and safety and result in significant cost savings to consumers. To date, the Secretary has made no such finding, but he could do so in the future. Proponents of drug reimportation may also attempt to pass legislation that would remove the requirement for the Secretary’s certification or allow reimportation under circumstances beyond those anticipated under current law. If legislation is enacted, or regulations issued, allowing the reimportation of drugs, it could decrease the reimbursement we receive for any products that we may commercialize, negatively affecting our anticipated revenues and prospects for profitability.

We will need to increase the size of our organization, and we may encounter difficulties managing our growth, which could adversely affect our results of operations.

We are currently a development stage company with 19 employees. We will need to expand and effectively manage our managerial, operational, financial and other resources in order to successfully pursue our research, development and commercialization effort. To manage any growth, we will be required to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. We may be unable to successfully manage the expansion of our

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operations or operate on a larger scale and, accordingly, may not achieve our research, development and commercialization goals.

If we are unable to attract and retain qualified scientific, technical and key management personnel, or if any of our key executives, Michael T. Flavin, Ph.D., Ze-Qi Xu, Ph.D., David A. Eiznhamer, Ph.D. or John L. Flavin, discontinues their employment with us, it may delay our research and development efforts.

We are highly dependent upon the efforts of our senior management team and scientific staff. The loss of the services of one or more members of the senior management team might impede the achievement of our development objectives. In particular, we are highly dependent upon and our business would be significantly harmed if we lost the services of Michael T. Flavin, Ph.D., our founder and Chairman and Chief Executive Officer, Ze-Qi Xu, Ph.D., our Executive Vice President and Chief Scientific Officer, David A. Eiznhamer, Ph.D., our Executive Vice President of Clinical Development or John L. Flavin, our President and Chief Financial Officer. We do not currently have any key man life insurance policies. We have entered into employment agreements with members of our senior management team, but this does not ensure that we will retain their services for any period of time in the future. Our research and drug discovery programs also depend on our ability to attract and retain highly skilled chemists, biologists and preclinical and clinical personnel. We may not be able to attract or retain qualified scientific personnel in the future due to intense competition among biotechnology and pharmaceutical businesses, particularly in the Chicago area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our research and development objectives and our ability to meet the demands of our collaborators in a timely fashion.

Our business will expose us to potential product liability risks and there can be no assurance that we will be able to acquire and maintain sufficient insurance to provide adequate coverage against potential liabilities.

Our business will expose us to potential product liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. The use of our product candidates in clinical trials also exposes us to the possibility of product liability claims and possible adverse publicity. These risks will increase to the extent our product candidates receive regulatory approval and are commercialized. We do not currently have any product liability insurance, although we plan to obtain product liability insurance in connection with future clinical trials of our product candidates. There can be no assurance that we will be able to obtain or maintain any such insurance on acceptable terms. Moreover, our product liability insurance may not provide adequate coverage against potential liabilities. On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall significantly.

We face regulation and risks related to hazardous materials and environmental laws, violations of which may subject us to claims for damages or fines that could materially affect our business, cash flows, financial condition and results of operations.

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Our research and development activities involve the controlled use of hazardous materials and chemicals. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages or fines that result, and the liability could have a material adverse effect on our business, financial condition and results of operations. We are also subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with these laws and regulations or with the conditions attached to our operating licenses, the licenses could be revoked, and we could be subjected to criminal sanctions and substantial liability or be required to suspend or modify our operations. In addition, we may have to incur significant costs to comply with future environmental laws and regulations. We do not currently have a pollution and remediation insurance policy.

Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, telecommunication and electrical failures. Our drug discovery and preclinical testing systems are highly technical and proprietary. Any system failure, accident or security breach that causes interruptions in our operations could result in a material disruption of our drug discovery programs. To the extent that any disruption or security breach results in a loss or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we may incur liability as a result, our drug discovery programs may be adversely affected and the further development of our product candidates may be delayed. In addition, we may incur additional costs to remedy the damages caused by these disruptions or security breaches.

Risks Related to Our Common Stock

Our common stock price has been highly volatile, and your investment could suffer a decline in value.

The market price of our common stock has been highly volatile since we completed our initial public offering in August 2005. The market price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to various factors and events, including but not limited to:

·                  the progress of our cethromycin development program and the timing and results from our other clinical trial programs, including the initiation and completion of Phase I clinical trials for ALS-886 and ALS-357;

·                  the in-licensing or acquisition of additional product candidates;

·                  the loss of licenses or proprietary rights to technologies and products;

·                  FDA or international regulatory actions;

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·                  failure of any of our product candidates, if approved, to achieve commercial success;

·                  announcements of new products by our competitors;

·                  market conditions in the pharmaceutical and biotechnology sectors;

·                  litigation or public concern about the safety of our potential products;

·                  comments by securities analysts;

·                  actual and anticipated fluctuations in our quarterly operating results;

·                  deviations in our operating results from the estimates of securities analysts;

·                  rumors relating to us or our competitors;

·                  public concern as to the efficacy or safety of new technologies;

·                  third party reimbursement policies;

·                  developments concerning current or future collaborations, including disputes or termination events and the achievement, timing and accounting treatment of milestone payments; and

·                  the addition or termination of research programs or funding support.

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit and the time and attention of our management may be diverted.

There are substantial risks associated with the Standby Equity Distribution Agreement with YA Global Master SPV Ltd., which could contribute to the decline of our stock price and have a dilutive impact on our existing stockholders.

In order to obtain needed capital, we entered into a Standby Equity Distribution Agreement with YA Global Mater SPV Ltd. dated as of September 27, 2010. The terms of the SEDA are described under “Selling Stockholder.”

The sale of shares of our common stock pursuant to the SEDA will have a dilutive impact on our stockholders. YA Master is not restricted in its ability to re-sell the shares we issue to them, and any such re-sales could cause the market price of our common stock to decline. To the extent of any such decline, any subsequent advances would require us to issue a greater number of shares of common stock to YA Master in exchange for each dollar of the advance. Under

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these circumstances our existing stockholders would experience greater dilution. The sale of our common stock under the SEDA could encourage short sales by third parties, which could contribute to the further decline of our stock price.

Because our common stock is not listed on a securities exchange, you may have difficulty trading our securities and our securities may trade at a lower market price than they otherwise would.

Since being delisted from Nasdaq, trading in our common stock is conducted on the OTC Bulletin Board and in the over-the-counter market in the so-called “pink sheets.” Because of this, you may not be able to sell as many securities as you desire, you may experience delays in the execution of your transactions and our securities may trade at a lower market price than they otherwise would. In addition, our securities could become subject to the SEC’s “penny stock rules.” These rules would impose additional requirements on broker-dealers who effect trades in our securities, other than trades with their established customers and accredited investors. Consequently, the delisting of our securities and the applicability of the penny stock rules may adversely affect the ability of broker-dealers to sell our securities, which may adversely affect your ability to resell our securities. The delisting of our securities from Nasdaq could also have other negative results, including the potential loss of confidence by employees and others, the loss of institutional investor interest and fewer business development and commercial partnership opportunities.

We have a significant number of outstanding warrants, and future sales of the underlying shares could adversely affect the market price of our common stock.

As of September 28, 2010, we had outstanding warrants exercisable for an aggregate of approximately 86.4 million shares of common stock, including outstanding warrants to purchase approximately 74.1 million shares that have an exercise price of $0.042 per share.  The holders may sell shares of common stock underlying the warrants in the public markets from time to time, without limitations on the timing, amount or method of sale.  The sale of a significant number of shares of our common stock, or the perception that these sales could occur, could cause the market price of our common stock to decline and impair our ability to raise capital through the issuance of additional equity securities.

Our Chairman and Chief Executive Officer has significant voting control over our company which may delay, prevent or deter corporate actions that may be in the best interest of our stockholders.

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As of September 28, 2010, Flavin Ventures, LLC controlled approximately 4.3% of our outstanding common stock. Dr. Michael Flavin, our founder and Chairman and Chief Executive Officer, has effective voting control for all shares of our common stock held by Flavin Ventures. On July 22, 2010, Dr. Flavin was issued 47,619,047 additional shares of common stock, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Transactions.” As a result, Dr. Flavin holds beneficial ownership of approximately 25.9% of our outstanding common stock and will be able to exert significant influence for all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, prevent or deter a change in control of our company even when such a change may be in the best interest of all the stockholders, could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or assets and might affect the prevailing market price of our common stock.

Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

Provisions of our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our current management or members of our board of directors.

These provisions include:

·                  a classified board of directors under which approximately one third of the directors will be elected each year;

·                  a requirement that the authorized number of directors to be changed only by a resolution of the board of directors;

·                  authorized and unissued additional shares of our common stock and preferred stock;

·                  advance notice requirements for proposals that can be acted upon at stockholder meetings; and

·                  a requirement that only our Chairman or our board of directors, acting by resolution, may call stockholder meetings.

As a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

We have never paid cash dividends on our capital stock and we do not anticipate paying dividends in the foreseeable future.

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We have paid no cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. Capital appreciation of our common stock, if any, will be your sole source of potential gain for the foreseeable future. Consequently, in the foreseeable future, you will only experience a gain from your investment in our common stock if the price of our common stock increases.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus and the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of Advanced Life Sciences Holdings, Inc. to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact could be deemed forward-looking statements, including any projections of revenue, expenses, earnings or losses from operations, or other financial items; any statements of the plans, strategies and objectives of management for future operations and future financing (including debt, equity or capital financing transactions); any statements concerning product research, development and commercialization timelines; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include risks that are described under the heading “Risk Factors” in this prospectus.

The forward-looking statements included in this prospectus and the documents incorporated herein by reference represent our estimates as of the date of this prospectus or such document, as the case may be. We specifically disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this prospectus or such document incorporated herein by reference, as the case may be.

USE OF PROCEEDS

We will not receive any proceeds from the sale of shares by the selling stockholder. All net proceeds from the sale of the common stock covered by this prospectus will go to the selling stockholder. However, we may receive up to $10 million in proceeds from the sale of shares of common stock to YA Master pursuant to the SEDA.  In light of current prevailing trading prices of our common stock as reported by the OTC Bulletin Board and the formula for pricing for the issuance of shares under the SEDA described below, the shares of common stock covered by the registration statement of which this prospectus is a part are not likely to be sufficient to raise the full $10 million maximum amount available under the SEDA.  See “Selling Stockholder” and “Plan of Distribution” described below.

For each share of common stock purchased under the SEDA, YA Master will pay ninety-five percent (95%) of the lowest daily volume weighted average price (“VWAP”) during the five (5) consecutive trading days after the date that we request the advance.  Each such advance may be for an amount not to exceed the greater of $300,000 or the daily value traded of our common stock for the five (5) consecutive trading days prior to the date we request the advance, where daily value traded is the product obtained by multiplying the daily trading volume of our common stock on a given day by the VWAP on such day.

We anticipate that the net proceeds received under the SEDA will be used for working capital and general corporate purposes.

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DILUTION

Our net tangible book value as of June 30, 2010 was ($10.2) million or ($0.10) per share of common stock. Net tangible book value per share is determined by dividing our tangible book value (total tangible assets less total liabilities) by the number of outstanding shares of our common stock. Because this offering is being made solely by the selling stockholder and none of the proceeds will be paid to us, our net tangible book value will be unaffected by this offering. Our net tangible book value and our net tangible book value per share, however, will be impacted by the common stock to be issued under the SEDA. The amount of dilution will depend on the offering price and number of shares to be issued under the SEDA. The following example shows the dilution to new investors at an assumed offering price of $0.05 per share (the last reported sale price of our common stock on September 28, 2010).

Although we are registering only 54,117,201 shares of common stock, if we assume that such shares were sold at an assumed offering price of $0.05 per share, less an underwriting discount equal to five percent (5%), less offering expenses of $85,000, our net tangible book value as of June 30, 2010 would have been ($7.8) million or ($0.05) per share. Such an offering would represent an immediate increase in net tangible book value to existing stockholders of $0.05 per share and an immediate dilution to new stockholders of $0.10 per share. The following table illustrates the per share dilution:

The offering price of our common stock is based on the then-existing market price. In order to give prospective investors an idea of the dilution per share they may experience, we have prepared the following table showing the dilution per share at various assumed offering prices:

(1)           This represents the maximum number of shares of common stock that are being registered pursuant to the SEDA at this time.

The issuance of the 54,117,201 shares pursuant to the SEDA will have a dilutive impact on our existing stockholders. Please see “Risk Factors — There are Substantial Risks Associated with the Standby Equity Distribution Agreement” on page 22 of this prospectus.

The above discussion and tables do not include the following:

·   6,279,303 options to purchase common stock outstanding under our equity incentive plans, with a weighted average exercise price of $0.83 per share.

·   10,277,274 shares of common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $2.97 per share.

·   37,918,800 shares of common stock issued at a price of $0.042 per share sold as part of the public equity offering completed on July 7, 2010.

·   37,918,800 shares of common stock issuable upon the exercise of stock warrants at an exercise price of $0.042 per share sold as part of the public equity offering completed on July 7, 2010.

·   36,196,800 shares of common stock issued upon the exercise of unit warrants at an exercise price of $4.20 per unit sold as part of the public equity offering completed on July 7, 2010.

·   36,196,800 shares of common stock issuable upon the exercise of stock warrants at an exercise price of $0.042 per share, issued upon the exercise of unit warrants at an exercise price of $4.20 per unit sold as part of the public equity offering completed on July 7, 2010.

·   500,000 shares of common stock issuable upon the exercise of warrants issued to the lender under our line of credit.

·   47,619,047 shares of common stock issued to Dr. Flavin, on July 22, 2010 in exchange for the cancellation and retirement of $2.0 million of our outstanding indebtedness.

·   1,516,752 shares of common stock issuable upon the exercise of warrants issued to the placement agent in connection with the public equity offering completed on July 7, 2010.

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PRICE RANGE OF OUR COMMON STOCK

Market Information

Our common stock trades on the OTC Bulletin Board under the symbol “ADLS.OB.” The following table sets forth the high and low sales prices of our common stock for the periods indicated.

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Holders

As of September 28, 2010, there were approximately 27 registered shareholders of record of our common stock.

DIVIDEND POLICY

We have neither declared nor paid dividends on our common stock or the preferred stock of our subsidiary, Advanced Life Sciences, Inc., since our inception and do not plan to pay dividends in the foreseeable future. Any determination in the future to pay cash dividends will depend on our financial condition, capital requirements, result of operations, contractual limitations and other factors deemed relevant by our Board of Directors. As of June 30, 2010, cumulative accrued undeclared dividends on our subsidiary’s preferred stock totaled approximately $1.9 million.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

(1)          Amount for 2006 results from sale of ALS Inc.’s 50% interest in Sarawak MediChem Pharmaceuticals. See Note 1 to the consolidated financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, including those set forth under the section entitled “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel drugs in the areas of infectious disease, oncology and respiratory disease. Using our internal discovery capabilities and our network of pharmaceutical and academic partners, we have assembled a promising pipeline of clinical and preclinical product candidates. Our most advanced product candidate, cethromycin, is a novel once-a-day oral antibiotic that completed two pivotal Phase III clinical trials in community acquired bacterial pneumonia (“CABP”).  We have an exclusive worldwide license (excluding Japan) from Abbott Laboratories to develop and commercialize cethromycin. Cethromycin is also being developed as a biodefense agent for use in the treatment of anthrax, plague and tularemia. We also have product candidates in earlier stages of development for the treatment of indications including malignant melanoma and respiratory distress caused by inflammation-related tissue damage.

None of our product candidates have been approved by the U.S. Food and Drug Administration (“FDA”) or any comparable foreign agencies, and we have not generated any significant revenues to date. Our ability to generate revenues in the future will depend on our ability to meet development or regulatory milestones under any license agreements that trigger payments to us, to enter into new license agreements for other products or territories and to receive regulatory approvals for, and successfully commercialize, our product candidates either directly or through commercial partners.

Cethromycin CABP Program

In late June 2010 we submitted a final Special Protocol Assessment (“SPA”) with the FDA for the proposed Phase III clinical program of cethromycin in the treatment of patients with CABP. We have been engaged in the SPA process with the FDA over the last year in order to establish the clinical trial design needed to gain approval in CABP.  As filed, the SPA incorporates written and oral comments from the FDA’s Division of Anti-Infective and Ophthalmology Products.

An SPA is a written agreement between the FDA and a drug sponsor concerning the clinical trial design, clinical endpoints and other clinical trial issues that can be used to support regulatory approval of a drug candidate. The process is intended to provide assurance that if the agreed upon clinical trial protocols are followed, the clinical trial endpoints are achieved and there is a favorable risk benefit profile, the data may serve as the primary basis of an efficacy claim in support of a New Drug Application (“NDA”).

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In August 2010 we reached an agreement with the FDA, under the SPA process, on the design of our planned Phase III study of cethromycin to treat CABP.  The trial is the first prospectively designed superiority study to be conducted in CABP.

The double-blind pivotal superiority study will compare the efficacy and safety of once-daily oral administration of 300 milligrams of cethromycin over seven days of treatment to azithromycin. The primary efficacy endpoint will be the clinical cure rate in a macrolide-resistant Streptococcus pneumoniae population. The protocol also includes several unique features, such as the inclusion of patient-reported outcome measures, which have the potential to generate a more robust demonstration of effectiveness and establish cethromycin as a new standard of care in treating pneumonia.

With reported resistance rates as high as 40 percent to standard-of-care macrolide antibiotics in the United States, there is a pressing medical need for new drugs to treat CABP. Based on the data we have accumulated in our extensive pre-clinical and clinical program to date, coupled with a thorough review of published literature on the clinical relevance of macrolide resistance, we believe that cethromycin has the potential to show a superior efficacy advantage in patients who are resistant to marketed macrolide drugs.

Background

We submitted the cethromycin NDA in September 2008 based on the results of 53 clinical studies, including two pivotal Phase III studies wherein cethromycin demonstrated non-inferiority to Biaxin ®  in mild-to-moderate CABP.

On June 2, 2009, the FDA Anti-Infective Drugs Advisory Committee (“AIDAC”) reviewed the cethromycin NDA. The FDA AIDAC voted that cethromycin demonstrated safety for the outpatient treatment of adults with mild-to-moderate CABP, but voted that cethromycin did not demonstrate efficacy in the treatment of CABP in light of the new FDA draft CABP guidance which was published in March of 2009.

On July 31, 2009 the FDA provided a complete response letter to us indicating that further clinical work would be required for the approval of cethromycin in CABP. Our pivotal Phase III program was designed and conducted under prior FDA guidance and before the new draft guidance document was released.

Over the past two years, the FDA has been conducting public workshops and advisory panels to discuss clinical trial design issues in CABP culminating in a draft guidance document published in March of 2009. Public comments were received in response to the draft guidance and an AIDAC meeting was held in December of 2009 to further discuss and resolve the CABP clinical design issues.

In March 2010, we met with officials from the FDA’s Anti-Infectives Division to gain clarity on the registration pathway for cethromycin. This meeting followed the December 9, 2009 FDA AIDAC meeting which discussed clinical trial design issues for CABP relative to the earlier, March 2009, FDA CABP guidance document. In the meeting, the FDA guided that, to assess the approvability for cethromycin to treat CABP, we should establish a SPA using a superiority clinical trial design comparing cethromycin to a marketed macrolide antibiotic in two clinical trials. In light of this guidance, we

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continued to work with the FDA to finalize a SPA using a superiority design for the outpatient CABP indication.

If cethromycin is approved for marketing by the FDA, we plan to sell cethromycin using commercial partners to access the primary care physician market and to build and utilize a focused internal sales force that will market directly to early adopters such as, but not limited to, pulmonary medicine and infectious disease physicians. Discussions with potential commercial partners focused on geographical markets such as the European Union and the United States are ongoing.

Cethromycin Biodefense Program

In April 2010, we announced positive results from an in vitro study assessing the efficacy of cethromycin against 30 strains of Burkholderia pseudomallei  (melioidosis), a serious, life-threatening bacterial pathogen. Cethromycin showed significant in vitro activity against clinical and environmental strains of B. pseudomallei as measured by minimal inhibitory concentration (“MIC”), the lowest concentration of an antimicrobial that will inhibit the visible growth of a microorganism after 24 hours of incubation. Cethromycin demonstrated antibacterial activity with MIC values ranging from 0.5—8 ug/ml and MIC90 of 4 ug/ml. Most notably, cethromycin also demonstrated positive activity against strains that were resistant to a commonly used antibiotic, azithromycin, for which MIC values were all greater than 64 ug/ml. In a separate study, cethromycin also demonstrated in vitro activity against 30 strains of Burkholderia mallei with MIC values ranging from 0.06—1 ug/ml and MIC90 of 0.5 ug/ml, which are comparable to azithromycin.

In March 2010, we announced that we received notice from the Biomedical Advanced Research and Development Authority (“BARDA”) of the U.S. Department of Health and Human Services that it completed its initial technical evaluation of our funding proposal for advanced development of cethromycin as a biodefense countermeasure and identified it as a scientifically and technically sound proposal important to program goals and objectives that may require further development and may be recommended for acceptance subject to funds availability. We were invited to submit additional information to allow BARDA to make a final determination on the appropriateness of the proposal to enter into contract negotiations.  We are engaged in ongoing discussions with BARDA in light of recent amendments to the Broad Agency Announcement that would fund the development of cethromycin, if awarded.

Related to this development, we also gained clarity from the FDA on the biodefense regulatory package required for submission in light of recent AIDAC meetings discussing the use of the FDA’s Animal Rule for approval of biodefense therapeutics. As anticipated, the FDA recommended that, in parallel with pivotal animal studies demonstrating efficacy under the FDA’s Animal Rule, we should complete the CABP clinical program and submit a complete response to the CABP NDA prior to submitting an amended NDA for the biodefense indications.

In December 2009, we announced positive top-line results from a pivotal, non-human primate study involving cethromycin against an inhaled lethal dose of tularemia. A 14-day course of cethromycin achieved a 100% survival rate at the doses tested. All of the ten animals in the study that received 16 mg/kg once-a-day of cethromycin (approximate to a human dose of

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300 mg) within 24 hours after exposure to a lethal dose of inhaled tularemia survived while only one of the ten animals that received placebo survived.

In September 2009, we announced positive top-line results from a pivotal, non-human primate study involving cethromycin demonstrating statistical significance at a 90% survival rate against an inhaled lethal dose of plague. The study tested cethromycin’s protective efficacy at various doses up to 64 mg/kg, where nine out of ten animals in the study that received a 14-day course of cethromycin initiated within 24 hours after exposure to a lethal dose of plague survived while only one out of ten of the animals that received placebo survived. In weaponized form, plague could be engineered to resist antibiotic intervention and to be widely spread through human transmission. Yersinia pestis, the causative agent of plague, is classified by the Centers for Disease Control as a Category A Bioterrorism Agent and is prioritized by the Department of Defense and Department of Health and Human Services as one of the most serious biological weapons, along with anthrax and tularemia. Unlike anthrax, there is no FDA-approved vaccine available to protect against plague, and the only antibiotic treatments currently available for improving survival in the event of a plague outbreak are older agents, such as tetracycline and doxycycline.

In September 2009, the FDA granted Orphan Drug Designation to cethromycin for the prophylactic treatment of plague and tularemia. Both tularemia and plague are classified by the Centers for Disease Control as Category A Bioterrorism Agents, which is the highest priority classification. High-priority agents include organisms that pose a risk to national security because they can be easily disseminated or transmitted, result in high mortality rates and have the potential for major public health impact, might cause public panic and social disruption, and require special action for public health preparedness.

In August 2009, we announced positive results from an animal study involving cethromycin that was conducted to measure cethromycin’s therapeutic efficacy in treating inhalation anthrax after symptoms of infection had developed. The results of the placebo-controlled non-human primate study showed that a 14-day course of cethromycin achieved up to a 60% survival rate when administered after animals demonstrated clinical symptoms of anthrax infection as a result of an inhaled dose of aerosolized anthrax spores that was 200 times the median lethal dose of anthrax. None of the animals that received placebo survived. Due to the extreme lethality of anthrax infection once symptoms appear, cethromycin’s ability to achieve a 60% survival rate is clinically and statistically significant. The study was supported by the National Institute of Allergy and Infectious Diseases, an institute of the National Institutes of Health, which is a component of the Department of Health and Human Services. The results of this pivotal study complement previously reported (see below) efficacy results from two non-human primate studies showing that cethromycin is highly effective in protecting animals from death after being infected with inhalation anthrax (post-exposure prophylaxis before the onset of symptoms).

We are developing cethromycin for the post-exposure prophylactic treatment of inhalation anthrax to help protect against human infection from anthrax. In June 2009, we announced that a second non-human primate study involving cethromycin, showed that a 14-day course of cethromycin achieved a 100% survival rate against an inhaled lethal dose of anthrax. All of the animals in the study that received 16 mg/kg once-a-day (the human equivalent dose of

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300 mg) of cethromycin within 24 hours after exposure to anthrax survived while none of the animals that received placebo survived. The study was also supported by the National Institute of Allergy and Infectious Diseases.

In studies conducted by the U.S. Army Medical Research Institute of Infectious Diseases, cethromycin was shown to be highly active in vitro  against 30 strains of anthrax. In May 2007, a non-human primate study showed that a 30-day course of oral cethromycin was 100% protective against a lethal dose of inhaled anthrax as compared to the standard of care, Cipro® (ciprofloxacin), which demonstrated 90% protection. The FDA has designated cethromycin as an orphan drug for the post-exposure prophylactic treatment of inhalation anthrax, but the FDA has not yet approved the drug for marketing in this or any other indication.

In August 2008, we announced that the Defense Threat Reduction Agency of the Department of Defense awarded us a two-year contract worth up to $3.8 million to further study cethromycin as a potential broad-spectrum medical countermeasure. The contract, part of the agency’s Transformational Medical Technologies Initiative, will fund NDA-enabling studies evaluating cethromycin’s efficacy in combating Category A and B bioterror agents such as Fransicella tularensis  (tularemia), Yersinia pestis  (plague) and Burkholderia pseudomallei  (melioidosis).

IV Formulation Program

In July 2010 we announced positive results from preclinical toxicology and pharmacokinetic studies of an intravenous (“IV”) formulation for cethromycin that support its use in a hospital setting. Cethromycin IV was administered as a single dose up to 60 mg/kg/day, the highest dose tested. Results demonstrated cethromycin IV was well tolerated and generated 10-fold greater plasma exposure compared to oral administration. The studies were conducted in rats in accordance with good laboratory practices. The increased bioavailability of cethromycin IV may allow for the treatment of serious hospital infections as well as the treatment of bioterror pathogens, such as anthrax, plague and tularemia after signs and symptoms are present.

Financial Transactions

Since our inception, we have incurred net losses each year. Our net loss for the six months ended June 30, 2010 was $3.9 million.  As of June 30, 2010, we had an accumulated deficit of $135.5 million. We have funded operations to date primarily from debt financings and capital contributions from our founder and Chief Executive Officer, proceeds from our initial public offering and subsequent private placements, including issuances of common stock under two Standby Equity Distribution Agreements.

On September 27, 2010, we entered into a SEDA with YA Master for the sale of up to $10 million of shares of our common stock over a two-year commitment period. Under the terms of the SEDA, we will sell, from time to time, in our discretion, newly-issued shares of our common stock to YA Master at a discount to the current market price of 5%. Additionally, we paid to YA Master a commitment fee of $100,000 by issuing 1,984,127 shares of our common stock.

On July 7, 2010, we closed a registered public offering of units.  As part of the closing, we issued 379,188 units at a public offering price of $4.20 per unit, raising approximately $1.6 million in gross offering proceeds and approximately $1.0 million in net proceeds after deducting placement agent fees and offering expenses payable by us.

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Each unit sold in the offering consists of (i) 100 shares of our common stock, (ii) 100 stock warrants to purchase shares of common stock at an exercise price of $0.042 per share and (iii) one warrant to purchase an additional unit, consisting of 100 shares of common stock and 100 stock warrants, at an exercise price of $4.20 per additional unit.  The stock warrants may be exercised at any time during the period commencing six months after the closing date and ending on the fifth anniversary of the closing date.  The exercise period for the unit warrants has expired.  Prior to expiration, we issued 36,196,800 shares of common stock and 36,196,800 additional stock warrants through the exercise of unit warrants and received an additional $1.5 million in gross proceeds as a result of these exercises.

Dawson James Securities, Inc. (“Dawson James”) acted as the placement agent for the offering.  In addition to cash placement agent fees, we issued to Dawson James a compensation warrant to purchase 1,516,752 shares of common stock at an exercise price of $0.0672 per share.

On September 9, 2010 we entered into a Second Amended and Restated Business Loan Agreement and related loan documents with our lender, amending our existing loan facility to give effect to letter agreements we entered in May and June 2010. Among other things, the amendment extends the loan maturity of our line of credit by one year to January 1, 2012.  We repaid $1.5 million of the outstanding loan balance in May 2010 and are required to reduce the balance by an additional $1.5 million by October 1, 2010 and $1.0 million by April 1, 2011.  Our Chief Executive Officer, Michael T. Flavin, Ph.D., will provide a personal guarantee to the loan facility until the principal balance is reduced to $7.0 million.  As a result of the amended loan agreement, $2.5 million of the outstanding loan balance is classified as a current liability and $6.0 million a long-term liability on the June 30, 2010 balance sheet.  The interest rate on the outstanding loan balance increased from 8.5% to 10.0% under the terms of the amended loan agreement. In connection with the amendment, we also issued to our lender 500,000 warrants, which are exercisable at $0.042 per share, and will issue an additional 500,000 warrants on September 9, 2011.  We have also agreed that the line of credit is secured by substantially all of our assets including, subject to Abbott Laboratories’ consent, our rights under our license agreement for cethromycin with Abbott Laboratories.  All other terms of the loan remained unchanged.

In July 2010,  the Company, acting through the independent audit committee of our board of directors, entered into an agreement with Dr. Flavin, providing that our $2.0 million promissory note with Dr. Flavin would be exchanged for 47,619,047 shares of our common stock.  The price of $0.042 per share used in the exchange was the same price per share used in our public equity offering.  As a result of the exchange, the promissory note was cancelled and retired.

In April 2010, our shareholders approved an amendment to our articles of incorporation to increase the number of authorized shares from 125,000,000 to 625,000,000 including an increase in the number of authorized shares of common stock from 120,000,000 to 620,000,000.

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In March 2010, the Company and YA Global Master SPV Ltd. (“YA SPV”), an affiliate of Yorkville Advisors, agreed to terminate the Standby Equity Distribution Agreement dated as of June 19, 2009 (the “2009 SEDA”).  We sold to YA SPV 49,549,200 shares of our common stock and raised approximately $11.7 million under the 2009 SEDA prior to its termination.  Shares of common stock sold under the 2009 SEDA in excess of $9.0 million were sold with the consent of our lender under our credit facility.

In June 2009, the Company and YA Global Investments, L.P. (“YA Global”), an affiliate of Yorkville Advisors,  terminated a prior Standby Equity Distribution Agreement dated as of September 29, 2008 (“2008 SEDA”).  For the period of January 1, 2009 through the end of the 2008 SEDA, we issued 9,883,994 shares to YA Global and received approximately $3.9 million.  In addition, in September 2008, we paid YA Global a commitment fee of $300,000 by issuing 393,339 shares of our common stock.

A discussion of our ability to continue as a going concern can be found in Note 1 to the consolidated financial statements and in the liquidity and capital resources section of this management discussion and analysis.

Results of Operations

Three months ended June 30, 2010 compared to three months ended June 30, 2009

Revenue. We reported revenue of $273,000 for the three months ended June 30, 2010 compared to $707,000 for the three months ended June 30, 2009.  Revenue was derived from a grant awarded by the Defense Threat Reduction Agency of the U.S. Department of Defense. The contract award of $3.8 million is over a two year period which began in August 2008.  The revenue from this grant has been fully recognized through the six months ended June 30, 2010.

Research and development expense. Research and development expense decreased $0.6 million to $0.8 million for the three months ended June 30, 2010.  In conjunction with work performed under the grant awarded by the Defense Threat Reduction Agency, costs incurred decreased $0.4 million in the quarter ended June 30, 2010 and was partially offset by $0.1 million of expenses for IV formulation studies in the three months ended June 30, 2010. In 2009, expenses related to the June 2, 2009 AIDAC meeting were $0.3 million in the second quarter.

General and administrative expense. General and administrative expenses were $1.2 million for the three months ended June 30, 2010, a decrease of $0.5 million compared to the second quarter last year.  This result reflects a decrease in legal and other professional services of $0.2 million and facility and other administrative expenses of $0.2 million for the three months ended June 30, 2010 compared to the same period last year.  In addition, salary, benefit and incentive compensation costs were lower by $0.1 million in the second quarter of 2010 compared to the same quarter last year.

Interest income. Interest income decreased $1,000 to $1,000 for the three months ended June 30, 2010 as compared to the same period last year.

Interest expense. Interest expense of $253,000 decreased $5,000 in the three months ended June 30, 2010 as compared to the same period last year.

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Other (income) expense, net. For the three months ended June 30, 2009 we recorded a $20,000 currency transaction loss related to the procurement of commercial launch materials.

Six months ended June 30, 2010 compared to six months ended June 30, 2009

Revenue. We reported revenue of $753,000 for the six months ended June 30, 2010 compared to $1.1 million for the six months ended June 30, 2009.  Revenue was derived from a grant awarded by the Defense Threat Reduction Agency of the U.S. Department of Defense.  The contract award of $3.8 million is over a two year period which began in August 2008.  The revenue from this grant has been fully recognized through the three months ended June 30, 2010.

Research and development expense. Research and development expense decreased $0.6 million to $1.6 million for the six months ended June 30, 2010.  In conjunction with work performed under the grant awarded by the Defense Threat Reduction Agency, costs incurred decreased $0.3 million in the six months ended June 30, 2010. Expenses incurred for IV formulation studies of $0.2 million were offset by lower salary, benefit and incentive compensation costs of approximately $0.2 million in the six months ended June 30, 2010.  Research and development expenses related to the FDA review of cethromycin including the June 2, 2009 AIDAC meeting, were $0.3 million for the six months ended June 30, 2009.

General and administrative expense. General and administrative expenses were $2.6 million for the six months ended June 30, 2010, a decrease of $0.6 million compared to the same period last year.  This result reflects lower salary, benefit and incentive compensation costs of $0.3 million and decreased facility expenses of $0.1 million as a result of renewing our lease agreement at a lower rate per square foot and reduced amount of space.  In addition, legal services and other administrative costs were approximately $0.2 million lower for the six months ended June 30, 2010 compared to the same period previous year.

Interest income. Interest income increased $3,000 to $7,000 for the six months ended June 30, 2010 as compared to the same period last year.

Interest expense. Interest expense of $509,000 decreased $2,000 for the six months ended June 30, 2010 as compared to the same period last year.

Other (income) expense, net. For the six months ended June 30, 2009 we recorded a $20,000 currency transaction loss related to the procurement of commercial launch materials.

Fiscal year ended December 31, 2009 compared to the fiscal year ended December 31, 2008

Revenue.  We reported revenue of $2.8 million for the year ended December 31, 2009 compared to $241,000 for the year ended December 31, 2008. Revenue was derived from a grant awarded by the Defense Threat Reduction Agency of the U.S. Department of Defense. The contract award of $3.8 million is over a two year period which began in August 2008.

Research and development expense  Research and development expense decreased $11.2 million to $4.5 million for the year ended December 31, 2009. Included in the prior year amount is a $10.0 million milestone expense incurred under our license agreement for cethromycin with Abbott Laboratories. The milestone was triggered upon submission of the cethromycin NDA to

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the FDA, which occurred on September 30, 2008. In addition, for the year ended December 31, 2008, we incurred cethromycin clinical trial related expenses of $0.4 million and manufacturing expenses in relation to process optimization activities of $0.7 million. Expenses related to the compilation and FDA review of cethromycin totaled $0.2 million for the year ended December 31, 2009 compared to $2.1 million for the same period last year. In conjunction with work performed under the grant awarded by Defense Threat Reduction Agency, costs incurred increased $2.1 million in the year ended December 31, 2009. Lower salary and benefit costs of $0.6 million for the year ended December 31, 2009 were partially offset by expenses related to the FDA’s June 2, 2009 AIDAC meeting which were approximately $0.3 million.

General and administrative expense.  General and administrative expenses decreased $0.8 million to $6.3 million for the year ended December 31, 2009. This result reflects $0.8 million of costs incurred in the prior year related to a various marketing programs, decreased facilities and other administrative costs of $0.4 million and lower salary, benefit and other compensation expense of $0.3 million. These decreases were partially offset by increased legal and other professional services of $0.5 million and a non-cash charge of $0.2 million to expense capitalized leasehold improvements which will no longer be used in our operations.

Interest income.  Interest income declined $295,000 to $12,000 for the year ended December 31, 2009, resulting from a decrease of cash, which was used for the continued development and funding of cethromycin.

Interest expense.  Interest expense increased $511,000 in the year ended December 31, 2009 as compared to the same period last year. The increase is the result of borrowing an additional $6.0 million on our line of credit in October 2008 for the continued development and funding of cethromycin and a higher interest rate.

Other (income) expense, net.  For the year ended December 31, 2009 we recorded a $146,000 currency transaction loss related to the procurement of commercial launch materials.

Fiscal year ended December 31, 2008 compared to the fiscal year ended December 31, 2007

Revenue.  Revenue for the year ended December 31, 2008 was $241,000 compared to $0 for the year ended December 31, 2007. Revenue in 2008 was derived from a grant awarded by the Defense Threat Reduction Agency of the U.S. Department of Defense. The contract award of $3.8 million is over a two year period which began in August 2008.

Research and development expense.  Research and development expense decreased $10.0 million to $15.7 million for the year ended December 31, 2008 as compared to 2007. Included in the 2008 amount is a $10.0 million milestone expense incurred under our license agreement for cethromycin with Abbott Laboratories. The largest component of the total decline was cethromycin clinical trial expenses which were $14.5 million lower than in 2007. Data from the second of two pivotal Phase III clinical trials was released in November of 2007 effectively bringing the trials to their natural conclusion. Expenses incurred to compile our NDA totaled $2.1 million for the year ended December 31, 2008 and represented a decline of $5.0 million when compared to 2007. The majority of this decrease is attributable to our cethromycin bulk-scale manufacturing program that was successfully concluded during the third quarter of 2007.

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Manufacturing expenses incurred in relation to process optimization activities of cethromycin totaled $0.7 million for the year ended December 31, 2008 and $0.5 million higher than the same period in 2007. Expenses related to our study testing cethromycin’s efficacy in treating inhalation anthrax post-exposure for the prophylaxis in non-human primates declined $1.1 million to $0 for the year ended December 31, 2008 as compared to the same period in 2007. This study was completed during the third quarter of 2007.

General and administrative expense.  General and administrative expense increased $0.3 million to $7.1 million for the year ended December 31, 2008 as compared to the same period in 2007. Increases in patent, facilities and marketing expenses were partially offset by minor decreases in salary and benefit, and investor relations expenses.

Interest income.  Interest income declined $0.4 million to $0.3 million for the year ended December 31, 2008, the result of a lower average cash balance and associated interest rates in the first half of 2008 as compared to the same period in 2007.

Interest expense.  Interest expense increased $59,000 to $526,000 for the year ended December 31, 2008 compared to $467,000 for the year ended December 31, 2007. The increase is the result of increased borrowings under our line of credit and a higher interest rate.

Liquidity and Capital Resources

We have devoted substantially all of our cash resources to research and development and general and administrative expenses.  To date, we have not generated any revenues from the sale of products, and we do not expect to generate any such revenues in the near term, if at all.  As a result, we have incurred an accumulated deficit of $135.5 million as of June 30, 2010 and we expect to incur significant operating losses for the foreseeable future.  As of June 30, 2010 we had negative working capital of $5.0 million and cash and cash equivalents were $0.1 million.  Since our inception in 1999 to August 2005, we financed our operations primarily through debt and capital contributions from our founder and controlling stockholder and borrowings under our bank line of credit.  In August 2005 we completed our initial public offering in which we raised $28.7 million, net of underwriters discount and offering costs.  Since that time, we have completed three private placements in which we raised $52.8 million, net of underwriters’ discounts and offering costs and raised additional debt financing through our $10.0 million bank line of credit.  Between January 2009 and March 2010 we raised $15.6 million under two Standby Equity Distribution Agreements.  And in July 2010 we completed a public equity offering and raised approximately $1.0 million, net of placement agent fees and offering expenses payable by us.

In September 2001, we incurred indebtedness under a $2.0 million promissory note with the Chief Executive Officer of the Company, which bears interest at 7.75%.  On January 4, 2010, the note was extended to January 5, 2012, all other terms remained unchanged and in effect.  In July 2010,  the Company, acting through the independent audit committee of our board of directors, entered into an agreement with Dr. Flavin,

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providing that our $2.0 million promissory note with Dr. Flavin would be exchanged for 47,619,047 shares of our common stock.  The price of $0.042 per share used in the exchange was the same price per share used in our public equity offering.  As a result of the exchange, the promissory note was cancelled and retired.

We have a revolving line of credit with a financial institution under which we had $8.5 million and $10.0 million outstanding as of June 30, 2010 and December 31, 2009, respectively.  On September 9, 2010, we entered into a Second Amended and Restated Business Loan Agreement and related loan documents with our lender to give effect to letter agreements we entered in May and June 2010. Among other things, the amendment extends the loan maturity by one year to January 1, 2012. We repaid $1.5 million of the outstanding loan balance in May 2010 and are required to reduce the balance by an additional $1.5 million by October 1, 2010 and $1.0 million by April 1, 2011.  Our Chief Executive Officer, Michael T. Flavin, Ph.D., will provide a personal guarantee to the loan facility until the principal balance is reduced to $7.0 million.  As a result of the amended loan agreement, $2.5 million of the outstanding loan balance is classified as a current liability and $6.0 million a long-term liability on the June 30, 2010 balance sheet.  The interest rate on the outstanding loan balance increased from 8.5% to 10.0% under the terms of the amended loan agreement. In connection with the amendment, we also issued to our lender 500,000 warrants, which are exercisable at $0.042 per share, and will issue an additional 500,000 warrants on September 9, 2011.  We have also agreed that the line of credit is secured by substantially all of our assets including, subject to Abbott Laboratories’ consent, our rights under the license agreement for cethromycin with Abbott Laboratories.  All other terms of the loan remained unchanged.

Cash Flows

Net cash used in operating activities was $3.4 million for the six months ended June 30, 2010 compared to $4.4 million for the six months ended June 30, 2009.  Approximately $0.8 million of cash was used in our cethromycin programs in the six months ended June 30, 2010, compared to $1.6 million in the same period last year.  These amounts are net of Defense Threat Reduction Agency grant award funds, which reimburse us for certain research and development expenses associated with the grant.  Cash used for general corporate purposes was $2.7 million in the six months ended June 30, 2010 compared to $2.8 million for the six months ended June 30, 2009.

Cash provided from financing activities was $0.7 million for six months ended June 30, 2010 compared to $3.8 million in 2009.  For the six months ended June 30, 2010, we received approximately $2.2 million, net of offering expenses, for the sale of 15,447,057 shares under the SEDA facility compared to $3.8 million for the sale of 9,883,994 shares for the six months ended June 30, 2009.  Additionally, under the terms of the new loan agreement, we repaid $1.5 million of our outstanding loan balance in the second quarter of 2010.

Net cash used in operating activities was $11.9 million in 2009 compared to $24.1 million in 2008. Approximately $6.1 million of cash was used for in our cethromycin programs in 2009, compared to $18.7 million in 2008. These amounts are net of Defense Threat Reduction Agency grant award funds, which reimburse us for certain research and development expenses associated with the grant. The decrease in net cash used is primarily the result of a $10.0 million milestone payment to Abbott Laboratories in 2008. Cash used for general corporate purposes was $5.8 million in 2009 compared to $5.4 million in 2008. This reflects an increase in interest

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paid in 2009 as a result of borrowing an additional $6.0 million on our line of credit in October 2008 to partially fund the $10.0 million milestone payment to Abbott Laboratories.

Cash provided from financing activities was $13.3 million in 2009 compared to $7.6 million in 2008. In 2009, we received approximately $13.2 million net of offering expenses, for the sale of 43,986,137 shares to YA Global and YA SPV through the 2008 and 2009 SEDA facilities. In 2008, we borrowed $6.0 million on our line of credit to partially fund the $10.0 million Abbott Laboratories milestone payment and raised $1.7 million, net of offering expenses, through a stock purchase agreement in connection with our entry into a development and commercialization agreement with Pfizer.

Contractual Obligations

As of June 30, 2010, the annual amounts of future minimum payments under debt obligations, interest, lease obligations and other long term liabilities consisting of executed research and development, and license agreements are as follows:

The above table does not include the potential $30.0 million product based milestone payment under our license agreement with Abbott Laboratories which we will owe Abbott Laboratories if cethromycin is approved for marketing by the FDA. Under the terms of the amended license agreement, $20.0 million is payable within 20 business days after receipt of U.S. regulatory approval, $5.0 million is payable within 6 months of U.S. regulatory approval and $5.0 million is payable within 12 months of U.S. regulatory approval. Thereafter, we would owe Abbott Laboratories an additional $2.5 million upon reaching $200.0 million in aggregate net sales of cethromycin and $5.0 million upon reaching $400.0 million in aggregate net sales. The periods in which milestone obligations become payable, if at all, are only estimates due to uncertainties associated with the completion or achievement of the milestone.

In the third quarter of 2008, we signed a letter of intent with DSM Pharma Chemicals North America, Inc. to procure raw materials to be used to produce commercial quantities of

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cethromycin. The lead times for acquiring these raw materials needed to be used to complete production are lengthy. As of June 30, 2010 the cost of raw materials actually purchased was approximately $2.8 million. The agreement allows for us to purchase additional raw materials at a later time.

In August 2008, the Defense Threat Reduction Agency of the Department of Defense awarded us a two-year contract worth up to $3.8 million to further study cethromycin as a potential broad-spectrum medical countermeasure. In conjunction with the grant awarded by the Defense Threat Reduction Agency, we entered into subcontractor arrangements to further study cethromycin as a potential broad-spectrum medical countermeasure.  The subcontractors’ costs are expected to be approximately $2.8 million over a two-year period which began in August 2008.

Our commitments under operating leases consist of payments made to a related party relating to our facilities lease in Woodridge, Illinois, which expires on October 1, 2012.  Additionally, we rent certain office equipment under operating leases.

We will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all.  We may not have sufficient cash or other funding available to complete our anticipated business activities for the remainder of 2010.  In order to continue our business activities during 2010, we intend to raise additional capital through the issuance of equity securities, continuing our efforts in applying for grant awards through various agencies and by licensing our lead compound, cethromycin, to commercial partners.  We believe, based upon current market conditions, commercial partnership agreements would include a series of milestone payments, including up-front milestones that would fund our continued operations.  Although management believes we could secure commercial partnerships, there can be no assurances that such partnerships will be available at terms acceptable to us, if at all. On July 7, 2010, we closed our previously announced registered public offering of units.  The unit offering was structured such that in addition to common stock, the investor received warrants and unit warrants that if exercised allow for the investor to purchase additional shares of common stock within a specified period (see Note 2 to the consolidated financial statements).  If we raise additional capital by issuing equity securities, our shareholders could experience substantial dilution.  As a result of the uncertainty in our ability to obtain needed financing through equity offerings, commercial partnerships and grant awards or other means, there is substantial doubt about our ability to continue as a going concern.

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

·      progress in our clinical development programs, as well as the magnitude of these programs;

·      the timing, receipt and amount of milestone and other payments, if any, from present and future collaborators;

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·      our ability to raise additional debt or equity financing or the receipt of milestone payments that would be paid to us as a result of our entering into a commercial partnership for cethromycin, or a combination of both;

·      our ability to establish and maintain additional collaborative arrangements;

·      the resources, time and costs required to successfully initiate and complete our preclinical and clinical trials, obtain regulatory approvals, protect our intellectual property and obtain and maintain licenses to third-party intellectual property;

·      the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims; and

·      the timing, receipt and amount of sales and royalties, if any, from our potential products.

Off-Balance Sheet Arrangements

We do not have any “off-balance sheet arrangements” as that term is defined by the regulations of the SEC.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements attached hereto, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

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Stock-based Compensation

We account for stock-based awards to employees and non-employees using the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. We use a Black-Scholes-Merton options-pricing model to determine the fair value of each option grant as of the date of grant for expense incurred. The Black-Scholes-Merton model requires inputs for risk-free interest rate, dividend yield, volatility and expected lives of the options. Expected volatility is based on historical volatility of our stock since August 5, 2005, the date our stock began to trade publicly. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected lives for options granted represents the period of time that options granted are expected to be outstanding and is derived from the contractual terms of the options granted. We estimate future forfeitures of options based upon historical forfeiture rates.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is currently confined to our cash, cash equivalents, line of credit and certain contract manufacturing agreements. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an increase in market rates would have any significant impact on their realized value.

We are subject to foreign currency exchange rate risk on certain contract manufacturing agreements. For the six months ended June 30, 2010, we did not incur any exchange losses and have no outstanding obligations or commitments denominated in foreign currencies. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of fluctuations in foreign currency exchange rates.

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BUSINESS

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel drugs in the areas of infectious disease, oncology and respiratory disease. Using our internal discovery capabilities and our network of pharmaceutical and academic partners, we have assembled a promising pipeline of clinical and preclinical product candidates. The following is a summary of each of our primary programs:

·      Infectious Disease—Respiratory Tract Infections.  We have an exclusive worldwide license (excluding Japan) from Abbott Laboratories to develop and commercialize cethromycin, a second generation, once-a-day antibiotic for the treatment of respiratory tract infections. In December 2005, we initiated our pivotal Phase III clinical program for the treatment of mild-to-moderate CABP, the indication for which we are seeking FDA approval. In 2007, we successfully completed these two pivotal Phase III clinical trials. Cethromycin has been tested in approximately 5,600 human subjects in clinical trials to date. In September 2008, we submitted an NDA for the use of cethromycin in CABP. In July 2009, we received a complete response letter from the FDA regarding cethromycin NDA for the outpatient treatment of adults with CABP. In its letter, the FDA indicated that they cannot approve the application for cethromycin in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy with defined statistical methodology. In August 2010, we reached an agreement with the FDA under the SPA process, on the design of our planned Phase III study of cethromycin to treat CABP.

·      Infectious Disease—Biodefense.  Along with our clinical work in the treatment of CABP, we are collaborating with several groups within the U.S. Government to evaluate cethromycin’s potential in preventing inhalation anthrax and other high-priority bioterror agents. In March 2007, the FDA designated cethromycin an Orphan Drug for the prophylactic treatment of patients exposed to inhalation anthrax and in May 2007, cethromycin was shown to be 100% protective against a lethal dose of inhaled anthrax in non-human primates. In August 2008, we announced that the Defense Threat Reduction Agency of the U.S. Department of Defense awarded us a two-year contract worth up to $3.8 million to fund NDA-enabling studies evaluating cethromycin’s efficacy in combating Category A and B bioterror agents such as Fransicella tularensis (tularemia), Yersinia pestis (plague) and Burkholderia pseudomallei (melioidosis). In June 2009, we announced that a second non-human primate study involving cethromycin showed that a 14-day course of cethromycin achieved a 100% survival rate against an inhaled lethal dose of anthrax. In August 2009, we announced positive results from an animal study that was conducted to measure cethromycin’s therapeutic efficacy in treating inhalation anthrax after symptoms of infection had developed. In September 2009, the FDA granted Orphan Drug Designation to cethromycin for the

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prophylactic treatment of plague and tularemia. Also in September 2009, we announced positive top-line results from a pivotal, non-human primate study involving cethromycin demonstrating statistical significance at a 90% survival rate against an inhaled lethal dose of plague. In December 2009, we announced positive top-line results from a pivotal, non-human primate study involving cethromycin against an inhaled lethal dose of tularemia. A 14-day course of cethromycin achieved a 100% survival rate at the doses tested.

·      Oncology.  ALS-357 is a compound that has shown evidence of anti-tumor activity against malignant melanoma in preclinical studies. Currently available therapies have not had significant success at prolonging survival for patients with melanoma that has spread beyond the primary growth site. We believe that ALS-357 has the potential for either a topical or systemic formulation. We have established an open investigational new drug application (IND) for ALS-357 with the FDA. In August 2007, the FDA designated ALS-357 an Orphan Drug for the topical treatment of metastatic melanoma. In addition to the lead compound, we also have a preclinical analogue program underway and are generating new compounds under our medicinal chemistry platform. We intend to seek a partner to assist in the funding and advancement of this program.

·      Respiratory Disease.  ALS-886 is a novel therapeutic in preclinical development for the treatment of inflammation-related tissue damage, including tissue damage associated with ARDS. Patients suffering from ARDS have a high fatality rate, and there are currently only limited treatment options available. We have established an IND application for ALS-886 with the FDA. We expect that the first clinical study will involve approximately 40 patients to determine the safety profile of the compound in human subjects. In July 2008, we began a collaboration with the United Kingdom’s Defence Science and Technology Laboratory to evaluate ALS-886 as a treatment for chemically induced lung injury. We intend to seek a partner to assist in the funding and advancement of this program.

In addition to the compounds summarized above, we have additional product candidates in preclinical development coming from our natural products-based chemistry platform. We have not received FDA approval for any of our product candidates. Our revenues to date have consisted solely of management fees, one-time or limited payments associated with our collaborations and government grant awards. Our cumulative net loss was $135.5 million as of June 30, 2010, and we do not anticipate generating any revenue from the sale of cethromycin in the near term. If we secure commercial partnerships, milestones received as a result of any of our commercial partnership agreements could be recognized as revenue depending on the underlying nature of the milestones. Since our inception in 1999, we have financed our operations primarily through public and private equity offerings, loans from our founder, borrowings under our bank line of credit, and use of our SEDA facilities. We will continue to do so until we are able to generate revenues from our product candidates, if ever.

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Our Background

In June 1999, MediChem Life Sciences (“MediChem”), our former parent, exchanged its investment in 100% of the outstanding common stock of Advanced Life Sciences, Inc. (“ALS Inc.”) for nonvoting preferred stock issued by ALS Inc. affecting a spin-off of ALS Inc. Prior to the spin-off, Dr. Michael Flavin, the sole stockholder, owned 100% of MediChem and ALS Inc., then a wholly-owned subsidiary of MediChem. As a result of the spin-off, Dr. Flavin became the sole common stockholder of ALS Inc. MediChem holds 100% of the preferred stock of ALS Inc., which was issued in exchange for common stock held at the June 1999 spin-off. In 2004, Advanced Life Sciences Holdings, Inc. (ADLS) was created as part of a recapitalization, and ALS, Inc. became a subsidiary of ADLS. ADLS has no preferred shares outstanding as of June 30, 2010.

In August 2005, we completed the initial public offering of common stock in which we sold 6,400,000 shares of common stock to the public at $5.00 per share, resulting in gross proceeds of $32.0 million. We also completed a concurrent offering of 600,000 shares to Abbott Laboratories in exchange for a $3.0 million reduction of a milestone payment obligation under our license agreement with Abbott Laboratories. In September 2005, our underwriters exercised their option to purchase 100,000 shares to cover over-allotments resulting in additional gross proceeds of $500,000. In connection with these offerings, we paid approximately $2.3 million in underwriting discounts and incurred other offering expenses of approximately $1.5 million. The net cash proceeds from the offerings were approximately $28.7 million.

In March 2006, we raised approximately $33.4 million, net of underwriting discounts and offering expenses, in connection with the issuance of 10,233,464 shares of our common stock and warrants to purchase an additional 5,116,732 shares of its common stock at an exercise price of $3.81 per share.

In December 2006, we completed the sale of ALS Inc’s 50% equity interest in Sarawak MediChem Pharmaceuticals to the Sarawak Government for $1.0 million. Upon the closing of the Stock Purchase Agreement, the Sarawak Government became the sole owner of Sarawak MediChem Pharmaceuticals and its HIV-therapeutic candidate, Calanolide A. The net cash proceeds from the sale were approximately $940,000. In connection with the sale, we made customary representations and warranties and provided indemnification for losses not to exceed the purchase price of $1.0 million. The parties mutually agreed to waive any future legal claims otherwise arising out of the Sarawak MediChem Pharmaceuticals joint venture.

In December 2007, we raised approximately $17.9 million, net of underwriting discounts and offering expenses, in connection with the issuance of 10,191,083 shares of our common stock and warrants to purchase an additional 5,095,542 shares of our common stock at an exercise price of $2.15 per share.

In September 2008, in connection with our entry into a development and commercialization agreement, we entered into a stock purchase agreement with Wyeth (Wyeth was subsequently acquired by Pfizer and as a result will be referred to as “Pfizer” throughout this report). Under the terms of agreement, Pfizer made an up-front investment in ADLS by purchasing 1,888,606 shares of its common stock at a price of $0.908 per share for

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approximately $1.7 million, net of offering expenses, representing approximately 4.9% of our total then outstanding shares.  In August 2010 the development and commercialization agreement was terminated by mutual agreement among the parties.

On September 29, 2008, the Company and YA Global Investments, L.P., an affiliate of Yorkville Advisors, entered into a former SEDA, which we refer to as the 2008 SEDA. For the period of January 1, 2009 through the end of the 2008 SEDA, we issued 9,883,994 shares to YA Global and received approximately $3.9 million. In addition, in September 2008, we paid YA Global a commitment fee of $300,000 by issuing 393,339 shares of our common stock.  The Company and YA Global agreed to terminate the 2008 SEDA in June 2009.

In June 2009, after terminating the 2008 SEDA, the Company and YA SPV, an affiliate of Yorkville Advisors, agreed to enter into another former SEDA, which we refer to as the 2009 SEDA.  For the period from June 2009 through March 10, 2010, we issued 49,549,200 shares to YA SPV and received proceeds of approximately $11.7 million. Shares of common stock sold under the 2009 SEDA in excess of $9.0 million were sold with the consent of our lender under our credit facility.  On March 10, 2010, the Company and YA SPV agreed to terminate the 2009 SEDA.

On July 7, 2010, we completed a public offering of 379,188 units at a price of $4.20 per unit, raising approximately $1.6 million in gross offering proceeds and approximately $1.0 million in net proceeds after deducting placement agent fees and estimated offering expenses payable by us.  Each unit sold in the offering consisted of (i) 100 shares of our common stock, (ii) 100 stock warrants to purchase shares of common stock at an exercise price of $0.042 per share and (iii) one warrant to purchase an additional unit, consisting of 100 shares of common stock and 100 stock warrants, at an exercise price of $4.20 per additional unit.

On September 27, 2010, the Company entered into a SEDA with YA Master for the sale of up to $10.0 million of shares of our common stock over a two-year commitment period.  Under the terms of the SEDA, we will sell from time to time, in our discretion, newly-issued shares of our common stock to YA Master at a discount to the current market price of 5%.  Additionally, we paid to YA Master a commitment fee of $100,000 by issuing 1,984,127 shares of our common stock.

Our Strategy

Our objective is to become a fully integrated pharmaceutical company that discovers and develops small molecule therapeutics to treat life-threatening diseases in the areas of infectious disease, oncology and respiratory disease, and then market these products directly to healthcare providers including, but not limited to, physicians and hospitals. We plan to sustain our drug development pipeline through our internal drug discovery capabilities and by opportunistically in-licensing promising compounds that fit into our areas of focus. Specific key aspects of our strategy include the following:

Maximize the Commercial Potential of Cethromycin

We currently intend to focus a significant portion of our business efforts on the regulatory approval and commercialization of cethromycin for the treatment of

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CABP. Human clinical trials have been performed to determine the safety and efficacy of cethromycin in approximately 5,600 human subjects. In November 2007, we completed our pivotal Phase III clinical trials for the treatment of mild-to-moderate CABP using a 300 mg once-daily dosing regimen. In September 2008 we submitted an NDA for the use of cethromycin in mild-to-moderate CABP. In June 2009, the FDA AIDAC reviewed the cethromycin NDA. The AIDAC voted that cethromycin demonstrated safety for the outpatient treatment of adults with mild-to-moderate CABP, but voted that cethromycin did not demonstrate efficacy in the treatment of CABP. The committee’s negative vote on the drug candidate’s efficacy followed a discussion that the cethromycin NDA included data on patients with mild-to-moderate disease and that the new draft guidance for developing treatments for CABP, released in March 2009, requires the enrollment of more severe CABP patients for approval in the outpatient CABP indication. Our pivotal Phase III program included in the NDA was designed and conducted under prior FDA guidance and before the new draft guidance was released. In July 2009, we received a complete response letter from the FDA regarding cethromycin NDA for the outpatient treatment of adults with CABP. In its letter, the FDA indicated that they cannot approve the application for cethromycin in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy with defined statistical methodology. In August 2010, we reached an agreement with the FDA under the SPA process on the design of our planned Phase III study of cethromycin to treat CABP.

In addition to pursuing regulatory approval and commercialization of cethromycin for the treatment of CABP, we intend to evaluate opportunities for cethromycin in the treatment of other respiratory tract infections.

Advance the Development of our Oncology and Respiratory Disease Product Candidates as Funds are Available or Through a Partnership

While the development of cethromycin remains our highest priority, we intend to leverage our existing clinical trial experience to advance product candidates in our oncology and respiratory disease programs through clinical trials. For instance, to develop ALS-357 for the treatment of malignant melanoma, we plan to begin a Phase I/II clinical trial with a topical formulation to test safety and provide preliminary data regarding efficacy. We also plan to develop a systemic formulation of ALS-357 and initiate related clinical trials. To advance ALS-886 for the treatment of inflammation-related tissue damage, we plan to conduct Phase I clinical trials that test safety and provide preliminary data regarding efficacy in preventing lung tissue damage in ARDS patients.

Leverage our Drug Discovery and Development Capabilities

We intend to expand our product portfolio by exploiting and enhancing our internal drug discovery and development capabilities using our integrated chemistry and biology skills. We plan to continue utilizing our integrated chemistry and biology drug discovery platform to design, optimize and evaluate high-potential product candidates.

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Continue to Develop Strategic Collaborations

We plan to continue developing relationships with key pharmaceutical and biotechnology companies, governmental institutions and academic laboratories in order to in-license promising compounds that are not core to their strategy but fit closely with our corporate strengths. We also intend to identify co-development partners for the out-licensing of certain product candidates. Further, we may choose to establish collaborative partnerships through which certain of our clinical candidates can be marketed and commercialized.

Advance Commercial Strategy and Marketing Efforts

For situations in which a large sales force is required to access the market, and for markets outside the United States, we generally plan to commercialize our product candidates through a variety of collaboration arrangements with leading pharmaceutical companies and contract sales organizations. We will consider retaining U.S. marketing and sales rights or co-promotion rights for certain of our products that we believe can be marketed through a focused sales force targeting specialists and high patient volume physicians.

Our Lead Program

In December 2004, Abbott Laboratories granted us an exclusive worldwide license, except in Japan, to commercialize cethromycin, our most advanced product candidate. Cethromycin is a second generation once-a-day oral antibiotic from the ketolide-class used in the treatment of respiratory tract infections. Over the last decade, the rapid rise in severe and fatal infections caused by antibiotic-resistant bacteria has posed a serious threat to public health. There is a need to discover new antibiotics that are effective against resistant bacteria. As a new class of antibiotics, ketolides have shown activity against penicillin- and macrolide-resistant Gram-positive pathogens. Cethromycin has demonstrated activity toward drug-resistant Streptococcus pneumoniae and Haemophilus influenzae, two of the pathogens commonly found in CABP, when compared to the published data on antibiotics currently on the market. Cethromycin has also shown in vitro evidence of an extended post-antibiotic effect, meaning that the suppression of bacterial growth persists in the absence of measurable antibiotic concentration.

In December 2005, we initiated our pivotal Phase III clinical program for the treatment of mild-to-moderate CABP, which enrolled a total of 1,106 patients and were successfully completed in 2007. Cethromycin reported per protocol clinical cure rates of 94.0% in trial CL05-001 (comparator, Biaxin, was 93.8%) and 91.5% in trial CL06-001 (comparator, Biaxin, was 95.9%). In February 2008, we announced that both the therapeutic and supratherapeutic doses of cethromycin showed no signal of any electrocardiographic effects and hence supported its favorable cardiac safety profile, the results from a thorough QT study of cethromycin (trial CL07-001). In September 2008, we submitted a NDA for the use of cethromycin in outpatient CABP. In June 2009, the FDA AIDAC reviewed the cethromycin NDA and voted that cethromycin demonstrated safety for the outpatient treatment of adults with mild-to-moderate CABP but did not demonstrate efficacy in the treatment of CABP due to release of the new FDA draft guidance for developing treatments for CABP in March 2009, which requires the enrollment of more severe CABP patients for approval in the outpatient CABP indication. In July 

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2009, we received a complete response letter from the FDA, stating that cethromycin NDA can not be approved in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy.  In August 2010, we reached an agreement with the FDA under the SPA process on the design of our planned Phase III study of cethromycin to treat CABP.

Market Overview

Bacterial infections occur when bacteria that naturally exist in the body, or that are acquired through inhalation, ingestion or direct penetration, are not controlled by the normal immune defense system. These uncontrolled bacteria can multiply and either excrete toxins or provoke the immune system to mount a response, in either case damaging tissue. Antibiotics work by binding to specific targets in a bacterial pathogen, thereby inhibiting a function that is essential to the pathogen’s survival. Many antibiotics were developed and introduced into the market during the 1970s and 1980s and have proven to be effective in treating most bacterial infections. We believe this historic efficacy prompted pharmaceutical companies to shift their resources to other areas of drug discovery and development. As a result, very few antibiotics from new chemical classes have been introduced in the last several years.

Antibiotic resistance is widely considered a significant threat to public health, and the problem continues to worsen. The Centers for Disease Control continues to report on new strains of bacteria that are resistant to one or more antibiotics currently on the market. The increasing prevalence of drug-resistant bacteria has led to prolonged illnesses and hospitalizations, increased healthcare costs and significantly higher mortality rates. As a result, there is a strong demand for new treatments that are more effective against resistant strains and do not show potential for inducing the rapid development of additional resistant strains. We do not believe that this demand for new antibiotic therapies is being met by large pharmaceutical companies because of a shift in research and development focus in these companies toward chronic conditions that require sustained medication over long periods of time.

Respiratory tract infections arise when bacterial infections develop in the inhalation passageway, including the nose, throat, sinuses and lungs. The four main types of respiratory tract infections are pneumonia, bronchitis, pharyngitis and sinusitis. Many of these bacterial infections can be life threatening if not treated quickly. Bacterial pneumonia, which involves an infection of the lung itself, is the most severe of the common respiratory tract infections. Pneumonia is often classified as CABP or hospital acquired pneumonia, depending upon the setting in which contraction of the bacterial infection occurred. The Textbook of Primary and Acute Care Medicine estimates that, in the United States alone, there are approximately 5-6 million cases of mild-to-moderate CABP each year.

Current Treatment Options and Limitations

Until recently, there have been three main classes of antibiotics prescribed for respiratory tract infections such as CABP. These are semi-synthetic penicillins (also known as beta-lactams), such as Augmentin® (amoxicillin and clavulanate potassium) sold by GlaxoSmithKline; macrolides, such as erythromycin or Zithromax® (azithromycin) sold by Pfizer; and fluoroquinolones, such as Cipro® (ciprofloxacin) sold by Bayer. Penicillins, macrolides and fluoroquinolones have all been shown to have certain shortcomings with respect to the treatment

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of respiratory tract infections. Studies have shown that, in the United States, approximately 26% of Streptococcus pneumoniae isolates, the most common pathogens that cause respiratory tract infections such as CABP, are resistant to macrolides. In addition, numerous reports in the medical literature have noted the emergence of penicillin-resistant pneumococci. The wide use of fluoroquinolones increases the potential for development of bacterial resistance, cross-resistance to the same or other classes of antibiotics as well as promotes Clostridium difficile associated disease (CDAD). Further, in July 2008, the FDA requested manufacturers of fluoroquinolones to include a black box warning for tendon damage. In March 2009, Tygacil® (tigecycline), a tetracycline derivative sold by Pfizer, was approved by the FDA for the in-patient treatment of community-acquired bacterial pneumonia. In addition, Zyvox® (linezolid), an oxazolidinone analogue sold by Pfizer, is marked to treat nosocomial pneumonia.

Increased bacterial resistance to many of the currently available antibiotics has been caused by certain common medical practices and sociological factors. By necessity, a wide variety of antibiotics are often administered before the specific disease-causing pathogen has been identified. Bacterial resistance is fostered through the erroneous prescription of antibiotics for non-bacterial infections. The lack of full patient compliance with prescribed courses of therapies has further contributed to bacterial resistance against currently marketed antibiotics. Patients will frequently discontinue a prescribed dosing regimen after symptoms subside, but bacteria that are not entirely eradicated may re-emerge in resistant forms.

ALS Solution

We are developing cethromycin, a second generation once-a-day oral antibiotic from the ketolide class, in response to the emerging antibiotic resistance observed in the treatment of CABP. Prior to the initiation of our clinical trials, cethromycin had been tested by Abbott Laboratories in approximately 4,400 human subjects during clinical trials. As of November 2007, we successfully completed two pivotal Phase III clinical trials of cethromycin for the treatment of mild-to-moderate CABP. We also intend to evaluate opportunities for cethromycin in the treatment of other types of bacterial infections.

Based on publicly available data regarding current antibiotic compounds, we believe that there is a potential opportunity for further development of cethromycin in the treatment of respiratory tract infections for a number of reasons:

·      cethromycin has shown higher in vitro potency and a broader range of activity than macrolides against Gram-positive bacteria associated with respiratory tract infections;

·      cethromycin appears to be effective against penicillin-, macrolide- and fluoroquinolone-resistant bacteria;

·      cethromycin has a mechanism of action, unique to ketolides, that may slow the onset of future resistance;

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·      cethromycin has shown specific activity against Gram-positive pathogens, unlike fluoroquinolones, while leaving normally-present Gram-negative bacteria undisturbed;

·      cethromycin has shown in vitro evidence of extended post-antibiotic effects against the pathogens commonly seen in respiratory tract infections;

·      cethromycin, unlike Ketek®, has not demonstrated visual disturbance side effects in clinical trials;

·      cethromycin exhibits promising activity against the USA300 strain of community-associated methicillin-resistant Staphylococcus aureus (CA-MRSA), which has been implicated in recent outbreaks in the USA and is resistant to many currently marketed antimicrobial agents;

·      cethromycin has demonstrated potent activity against serotype 19A of S. pneumoniae strains, which has recently emerged, due to widespread use of the 7-valent protein-conjugated pneumococcal vaccine (PCV-7), to cause invasive pneumococcal disease and are resistant to many antibiotics; and

·      cethromycin has shown in vitro activities against multiple CDC Category A and B bioterror agents such as Bacillus anthracis, Fransicella tularensis, Yersinia pestis and Burkholderia pseudomallei and has demonstrated 100% protection of anthrax assault in the post-exposure prophylactic monkey model.

We believe that cethromycin, if approved, would address a growing need in the marketplace to overcome bacterial resistance.

Abbott Laboratories Collaboration

In December 2004, we entered into an agreement with Abbott Laboratories under which we acquired from Abbott Laboratories a license to certain patent applications, patents and proprietary technology relating to cethromycin. The term of the agreement commenced on December 13, 2004 and continues until the expiration of the last patent licensed under the agreement, unless the agreement is otherwise terminated. The primary patent licensed under the agreement, used by us in connection with cethromycin, expires in the U.S. on September 4, 2016, and in most foreign countries or jurisdictions on September 2, 2017, all subject to any term restoration that may be granted for the time necessary for regulatory approval in each respective jurisdiction. Upon the expiration of the license agreement, we maintain a non-exclusive, perpetual and irrevocable license to use Abbott Laboratories’ proprietary technology and other types of information directly related or used in connection with cethromycin and its manufacture into pharmaceutical products without any further payment obligations to Abbott Laboratories, except for those payment obligations accruing prior to such expiration. The agreement may be terminated by either party on 30 days notice if the other party ceases its business operations or if the other party passes a resolution or a court of competent jurisdiction makes an order for winding up its business. Either party may also terminate the agreement for material breach if not cured within 90 days of notice or if not cured within 30 days of notice if the breach relates to a

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payment provision. Finally, we have the right to sublicense our rights under the agreement at our discretion. Under the terms of the agreement we paid $23.0 million to date in license fees and milestones and issued 1,722,569 shares of our common stock to Abbott Laboratories.

As previously disclosed in a Form 8-K filed with the SEC on March 30, 2009, we alleged in a notice of dispute delivered to Abbott Laboratories that Abbott Laboratories had breached its obligations under the license agreement for cethromycin entered into between ADLS and Abbott Laboratories on December 13, 2004. Subsequent to delivering the notice of dispute, we initiated arbitration proceedings against Abbott Laboratories under the alternative dispute resolution provisions of the license agreement. On September 30, 2009, prior to the completion of arbitration proceedings, ADLS and Abbott Laboratories entered into a binding term sheet in settlement of the dispute. The binding term sheet provides for certain amendments to the license agreement. The license agreement was amended to restructure the $30.0 million lump sum milestone payment due from ADLS to Abbott Laboratories upon U.S. regulatory approval of cethromycin, such that $20.0 million is payable within twenty days of U.S. regulatory approval, $5.0 million is payable within 6 months of U.S. regulatory approval and $5.0 million is payable within 12 months of U.S. regulatory approval. In addition, the license agreement was amended to reduce the royalty due from ADLS to Abbott Laboratories by two percentage points per tier such that we will owe Abbott Laboratories royalty payments of 17% on the first $100.0 million of aggregate net sales of cethromycin, 16% on net sales once aggregate net sales exceed $100.0 million but are less than $200.0 million, and 15% on all net sales once aggregate net sales exceed $200.0 million. Finally, the terms to pay to Abbott Laboratories $2.5 million upon cethromycin reaching $200.0 million in aggregate net sales and $5.0 million upon the drug reaching $400.0 million in aggregate net sales was unchanged.

Other Collaborations and License Agreements

In addition to our collaborations with Abbott Laboratories, we have entered into a number of license agreements for intellectual property and other rights needed to develop our products.

University of Illinois at Chicago.  In 1999, we acquired an exclusive worldwide license, under patent rights and know-how controlled by the university, to develop, make, use and sell ALS-357 and related compounds to treat melanoma and other forms of cancer. In consideration for this license, we paid an upfront license fee of $15,000 upon the execution of the agreement. We are also obligated to make up to $135,000 in aggregate milestone payments upon the achievement of various development and commercialization milestones for each of ALS-357 and any other compound developed by us under the licensed technology. To date, we have paid $10,000 in milestone payments which resulted from an IND for ALS-357 filed with the FDA in December 2004. Under the terms of the agreement, we are obligated to reimburse the university for past patent preparation, filing and prosecution expenses, and have agreed to reimburse the university for similar expenses related to foreign patents throughout the term of the agreement. Through June 30, 2010, we have paid the university approximately $534,000 for patent reimbursement. In addition, we agreed to pay royalties equal to 6% of net sales to the university based on sales of licensed products by us, our affiliates and sublicensees, as well as a percentage of all other income we receive from sublicensees, but in any event, a minimum royalty of $5,000 annually once commercial sales commence.

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Baxter International.  As part of our spin-off from MediChem Life Sciences in 1999, we obtained the entire right, title and interest to certain patented inventions relating to ALS-886 that were assigned by Baxter International, Inc. to Dr. Michael T. Flavin. We have assumed the obligation of Dr. Flavin to pay Baxter International, Inc., as a payment for the assignment, 3% of net sales of ALS-886. Further, we are also obliged to share with Baxter International, Inc. 50% of the sublicensing fees we collect, other than royalties. In addition, if we sell the ongoing business of making, using or selling ALS-886, we are obligated to pay Baxter International, Inc. 50% of the fair market value of the right or license to manufacture, use or sell ALS-886 that is conveyed as part of the sale.

Intellectual Property

Patents and Trade Secrets

We have assembled a broad intellectual property portfolio encompassing the use, methods of preparation and methods of manufacture for our product candidates in the areas of infectious disease, oncology and respiratory disease. We currently have exclusive access to 42 issued U.S. and international patents. In addition, 10 U.S. and international patent applications have been filed and are in various stages of processing.

Key U.S. Patents and Expiration Dates

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications that we license will result in the issuance of any patents. Our issued patents and those that we may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may have for our products. In addition, there can be no assurance that this patent coverage will be broad enough to prevent third parties from developing or commercializing similar or identical technologies and thus the rights granted under any issued patents may not provide us with any meaningful competitive advantages against our competitors. Furthermore, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent. There can also be no assurance that our technologies will not be deemed to infringe the intellectual property rights of third parties or that we will be able to acquire licenses to the intellectual property rights of third parties under satisfactory terms or at all.

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