Pernix Sleep, Inc. - FORM 10-Q

Attached files

file	filename
EX-10.5 - EXHIBIT 10.5 - Pernix Sleep, Inc.	c07901exv10w5.htm
EX-10.4 - EXHIBIT 10.4 - Pernix Sleep, Inc.	c07901exv10w4.htm
EX-32.1 - EXHIBIT 32.1 - Pernix Sleep, Inc.	c07901exv32w1.htm
EX-32.2 - EXHIBIT 32.2 - Pernix Sleep, Inc.	c07901exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - Pernix Sleep, Inc.	c07901exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - Pernix Sleep, Inc.	c07901exv31w1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2010


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

For the transition period from to .

Commission File Number: 000-51665

Somaxon Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		20-0161599 (I.R.S. Employer Identification No.)

3570 Carmel Mountain Road, Suite 100, San Diego CA (Address of principal executive offices)		92130 (Zip Code)

(858) 876-6500
(Registrant’s telephone number, including area code)

(Former name, former address and formal fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

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

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


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of October 29, 2010 was 35,419,990.

SOMAXON PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2010

TABLE OF CONTENTS


	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Balance Sheets		F-1

Condensed Statements of Operations		F-2

Condensed Statements of Cash Flows		F-3

Condensed Statements of Stockholders’ Equity and Comprehensive Loss		F-4

Notes to Condensed Financial Statements		F-5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1

Item 3. Quantitative and Qualitative Disclosures about Market Risk		10

Item 4. Controls and Procedures		11

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		12

Item 1A. Risk Factors		12

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		27

Item 4. (Removed and Reserved)		27

Item 5. Other Information		27

Item 6. Exhibits		28

SIGNATURES		29

Exhibit 10.4
Exhibit 10.5
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SOMAXON PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)


	September 30,			December 31,
	2010			2009
ASSETS
Current assets
Cash and cash equivalents	$	20,380		$	5,165
Short-term investments		21,117			—
Accounts receivable, net		5,152			—
Inventory		1,000			—
Other current assets		3,499			409

Total current assets		51,148			5,574
Property and equipment, net		933			777
Intangibles, net		1,092			—
Other assets		—			60

Total assets	$	53,173		$	6,411


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	2,539		$	355
Accrued liabilities		2,483			1,815
Deferred revenue		4,437			—

Total current liabilities		9,459			2,170


Commitments and contingencies (See Note 5)

Stockholders’ equity
Preferred stock, $0.0001 par value; 10,000 shares authorized, none issued and outstanding		—			—
Common stock and additional paid-in capital; $0.0001 par value; 100,000 shares authorized; 35,419 and 25,248 shares outstanding at September 30, 2010 and December 31, 2009, respectively		244,538			182,280
Accumulated deficit		(200,825	)		(178,039	)
Accumulated other comprehensive income		1			—

Total stockholders’ equity		43,714			4,241

Total liabilities and stockholders’ equity	$	53,173		$	6,411

The Accompanying Notes are an Integral Part of these Unaudited Condensed Financial Statements

F-1

SOMAXON PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)


	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenue
Net product sales	$	38		$	—		$	38		$	—

Operating expenses
Cost of sales		3			—			3			—
License fees		—			—			—			(999	)
Research and development		1,014			506			2,941			3,497
Selling, general and administrative		11,923			1,339			19,877			9,793

Net operating costs and expenses		12,940			1,845			22,821			12,291

Loss from operations		(12,902	)		(1,845	)		(22,783	)		(12,291	)
Interest and other income		2			2			10			26
Interest and other (expense)		—			—			(13	)		(259	)

Net loss	$	(12,900	)	$	(1,843	)	$	(22,786	)	$	(12,524	)


Basic and diluted net loss per share	$	(0.37	)	$	(0.08	)	$	(0.71	)	$	(0.63	)
Shares used to calculate net loss per share		35,217			23,122			31,905			19,923

The Accompanying Notes are an Integral Part of these Unaudited Condensed Financial Statements

F-2

SOMAXON PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities
Net loss	$	(22,786	)	$	(12,524	)
Adjustments to reconcile net loss to net cash used in operating activities
Share-based expense		5,294			5,605
Depreciation and amortization		315			79
Amortization of investment discount or premium		39			(36	)
Loss on disposal of equipment		13			1
Changes in operating assets and liabilities:
Accounts receivable		(5,152	)		—
Inventory		(1,000	)		—
Other current and non-current assets		(2,920	)		(123	)
Accounts payable		2,184			(893	)
Accrued liabilities		1,528			123
Deferred revenue		4,437			—

Net cash used in operating activities		(18,048	)		(7,768	)


Cash flows from investing activities
Purchases of property and equipment		(467	)		(74	)
Payments for technology rights		(1,000	)		—
Payments for technology development costs		(109	)		—
Purchases of marketable securities		(22,265	)		(2,505	)
Sales and maturities of marketable securities		1,000			3,134
Restricted cash		—			8,100

Net cash (used in) provided by investing activities		(22,841	)		8,655


Cash flows from financing activities
Issuance of common stock and warrants, net of costs		52,745			5,732
Repayment of debt		—			(15,000	)
Exercise of warrants		1,474			—
Exercise of stock options		1,929			122
Purchase of treasury stock		(44	)		—

Net cash provided by (used in) financing activities		56,104			(9,146	)

Increase (decrease) in cash and cash equivalents		15,215			(8,259	)
Cash and cash equivalents at beginning of the period		5,165			11,185

Cash and cash equivalents at end of the period	$	20,380		$	2,926


Non-cash investing and financing activities
Common stock issued to settle severance obligation	$	860		$	—
Warrants related to Loan Agreement		—			44
Supplemental cash flow information
Cash paid for interest	$	—		$	984

The Accompanying Notes are an Integral Part of these Unaudited Condensed Financial Statements

F-3

SOMAXON PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)


	Common Stock and									Accumulated
	Additional Paid-in									Other
	Capital						Deficit			Comprehensive
	Shares			Amount			Accumulated			Income		Total
Balance at December 31, 2009		25,248		$	182,280		$	(178,039	)	$	—	$	4,241
Net loss		—			—			(22,786	)		—		(22,786	)
Unrealized gains in available-for-sale securities		—			—			—			1		1

Comprehensive loss		—			—			—			—		(22,785	)
Issue common stock at $8.25 per share, net of issuance costs of $4,180		6,900			52,745			—			—		52,745
Issue common stock to settle severance obligations		111			860			—			—		860
Exercise of warrants for cash		1,278			1,474			—			—		1,474
Net share settlement of warrants		330			—			—			—		—
Exercise of stock options		1,424			1,929			—			—		1,929
Issue common stock pursuant to vesting of restricted stock units		139			—			—			—		—
Restricted stock repurchased at $3.94 per share in March		(11	)		(44	)		—			—		(44	)
Share-based compensation related to employee awards		—			5,294			—			—		5,294

Balance at September 30, 2010		35,419		$	244,538		$	(200,825	)	$	1	$	43,714

The Accompanying Notes are an Integral Part of these Unaudited Condensed Financial Statements

F-4

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Note 1. Organization and Summary of Significant Accounting Policies

Business

Somaxon Pharmaceuticals, Inc. (“Somaxon”, “the Company”, “we” or “our”), is a specialty pharmaceutical company focused on the in-licensing, development and commercialization of proprietary branded products and late-stage product candidates for the treatment of diseases and disorders in the central nervous system therapeutic area. Somaxon is a Delaware corporation founded on August 14, 2003 upon in-licensing its first product candidate, Silenor^® (doxepin) for the treatment of insomnia. On March 18, 2010, the U.S. Food and Drug Administration (the “FDA”) notified us that it had approved our New Drug Application (“NDA”) for Silenor 3 mg and 6 mg tablets for the treatment of insomnia characterized by difficulties with sleep maintenance. Silenor was commercially launched in the United States in September 2010. We operate in one reportable segment, which is the development and commercialization of pharmaceutical products.

Basis of Presentation

The accompanying condensed balance sheet as of December 31, 2009, which has been derived from our audited financial statements, and the unaudited interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. The unaudited interim condensed financial statements reflect all adjustments which, in the opinion of our management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. The operating results presented in these unaudited condensed financial statements are not necessarily indicative of the results that may be expected for any future periods.

Capital Resources

Since inception, our operations have been financed primarily through the sale of equity securities and the proceeds from the exercise of warrants and stock options. We have incurred losses from operations and negative cash flows since the inception of the Company, and we expect to continue to incur substantial losses for the foreseeable future as we continue our commercialization efforts for Silenor and potentially pursue the development of other product candidates. As a result, we may need to obtain additional funds to finance our operations in the future. We intend to obtain any additional funding we require through strategic relationships, public or private equity or debt financings, assigning receivables or royalty rights, or other arrangements and we cannot assure such funding will be available on reasonable terms, or at all. If we are unsuccessful in raising additional required funds, we may be required to delay, scale-back or eliminate plans or programs relating to our business, relinquish some or all of our rights to Silenor or renegotiate less favorable terms with respect to such rights than we would otherwise choose.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

F-5

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Revenue Recognition

We recognize product revenue from product sales when it is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) our price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) our price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid us, or the buyer is obligated to pay us and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to us would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by us, (5) we do not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated.

We sell Silenor to wholesale pharmaceutical distributors. Our returned goods policy generally permits our customers to return products up to six months before and up to twelve months after the expiration date of the product. We authorize returns for expired or damaged products in accordance with our returned goods policy and issue credit to our customers for expired or damaged returned product. We do not exchange product from inventory for returned product. As of September 30, 2010, we have not received any returns.

We are unable to reliably estimate returns at this time. Therefore, we have determined that shipment of product to wholesale distributors does not meet the criteria for revenue recognition at the time of shipment. Until we are able to reliably estimate returns, we defer revenue recognition until the right of return no longer exists, which is the earlier of Silenor being dispensed through patient prescriptions or the expiration of the right of return. We estimate patient prescriptions dispensed using an analysis of third-party information. For the three and nine months ended September 30, 2010, we recognized product revenue of $38,000, which was net of estimated product sales discounts and allowances. At September 30, 2010, we had a deferred revenue balance of $4.4 million which was also recorded net of estimated product sales discounts and allowances. We have also deferred the related cost of product sales and recorded such amount as finished goods inventory held by others, which was $0.4 million as of September 30, 2010.

Until we can reliably estimate product returns, we will continue to recognize revenue upon the earlier to occur of prescription units dispensed or the expiration of the right of return. In order to develop a methodology and provide a basis for estimating future product returns on sales to customers at the time of product shipment, we are tracking the Silenor product return history, taking into account product expiration dating at the time of shipment and levels of inventory in the wholesale channel.

Product Sales Discounts and Allowances

We record product sales discounts and allowances at the time of sale and report revenue net of such amounts in the same period that product sales are recorded. In determining the amount of product sales discounts and allowances, we must make significant judgments and estimates. If actual results vary from our estimates, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product sales discounts and allowances and the specific considerations we use in estimating these amounts include:

Prompt Pay Discounts. As an incentive for prompt payment, we offer a 2% cash discount to customers. We expect that all customers will comply with the contractual terms to earn the discount. We recorded the discount as an allowance against accounts receivable and a reduction of revenue. At September 30, 2010 and December 31, 2009, the allowance for prompt pay discounts was $105,000 and $0, respectively.

Product Launch Discounts. For a limited time that ended September 30, 2010, we offered additional discounts to wholesale distributors for product purchased. We recorded the discount as an allowance against accounts receivable and a reduction of revenue based on orders placed. At September 30, 2010 and December 31, 2009, the allowance for product launch discounts was $294,000 and $0, respectively.

Stocking Allowances. For a limited time that ended September 30, 2010, we offered discounts on the first order made by wholesale distributors and retail pharmacies. We accrued the discount based on orders placed and recognized a reduction of revenue. At September 30, 2010 and December 31, 2009, the accrual for stocking allowances was $85,000 and $0, respectively.

F-6

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Patient Discount Programs. We offer discount card programs to patients of Silenor under which the patient receives a discount on his or her prescription. We reimburse pharmacies for this discount through a third-party vendor. We estimate the total amount that will be redeemed based on the dollar amount of the discount, the timing and quantity of distribution and historical redemption rates. We accrued the discount and recognized a reduction of revenue. At September 30, 2010 and December 31, 2009, the accrual for patient discount programs was $192,000 and $0, respectively.

Distribution Service Fees. We pay distribution services fees to each wholesaler for distribution and inventory management services. We accrued for the fees based on contractually defined terms with each wholesaler and recognized a reduction of revenue. At September 30, 2010 and December 31, 2009, the accrual for distribution service fees was $383,000 and $0, respectively.

Cost of Sales

Cost of sales includes the costs to manufacture, package, and ship Silenor as well as royalties associated with our license agreement with ProCom One, Inc. (“ProCom”).

Cash and Cash Equivalents

All highly liquid investments with maturities of three months or less at the time of purchase are considered to be cash equivalents. Investments with maturities at the date of purchase greater than three months are classified as marketable securities. At September 30, 2010, our cash and cash equivalents consisted primarily of money market funds and available-for-sale securities that have an original maturity date of three months or less. All of our cash equivalents have liquid markets and high credit ratings.

Marketable Securities

Our investments in marketable securities are classified as available-for-sale securities. Available-for-sale securities are carried at fair market value, with unrealized gains and losses reported as a component of stockholders’ equity in accumulated other comprehensive income/loss. Interest and dividend income is recorded when earned and included in interest income. Premiums and discounts on marketable securities are amortized and accreted, respectively, to maturity and included in interest income. Marketable securities with a maturity date of less than one year as of the balance sheet date are classified as short-term investments, and investments with a maturity of three months or less from date of purchase are classified as cash equivalents. Marketable securities with a maturity of more than one year as of the balance sheet date are classified as long-term investments. We assess the risk of impairment related to securities held in our investment portfolio on a regular basis and noted no impairment during the three and nine months ended September 30, 2010.

Concentration of Credit Risk, Significant Customers and Sources of Supply

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, and accounts receivable. We maintain accounts in federally insured financial institutions in excess of federally insured limits. We also maintain investments in money market funds and similar short-term investments that are not federally insured. However, management believes we are not exposed to significant credit risk due to the financial positions of the depository institutions in which these deposits are held and of the money market funds and other entities in which these investments are made. Additionally, we have established guidelines regarding the diversification of our investments and their maturities that are designed to maintain safety and liquidity.

We sell our product primarily to established wholesale distributors in the pharmaceutical industry through one wholesale distributor. All of the accounts receivable balance as of September 30, 2010 represents amounts due from this one wholesale distributor. Credit is extended based on an evaluation of the customer’s financial condition. We evaluate the collectability of our accounts receivable based on a variety of factors, including the length of time the receivables are past due and the financial health of the customer, and we will use historical experience in the future. Based upon the review of these factors, we did not record an allowance for doubtful accounts at September 30, 2010.

F-7

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

We rely on third-party manufacturers for the production of Silenor and single source third-party suppliers to manufacture key components of Silenor. If our third-party manufacturers are unable to continue manufacturing Silenor, or if we lost our single source suppliers used in the manufacturing process, we may not be able to meet market demand for our product.

Inventory

Our inventories are valued at the lower of cost or net realizable value. We analyze our inventory levels quarterly and write down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value, as well as any inventory quantities in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. We did not record a reserve for expired inventory as of September 30, 2010.

Intangible Assets

Our intangible assets consist of the costs incurred to in-license our product candidate and technology development costs relating to our websites. Prior to the FDA approval of our NDA for Silenor, we had expensed all license fees and milestone payments for acquired development and commercialization rights to operations as incurred since the underlying technology associated with these expenditures related to our research and development efforts and had no alternative future use at the time. License fees related to our intellectual property are capitalized once technological feasibility has been established. Capitalized amounts are amortized on a straight line basis over the expected life of the intellectual property, commencing with the commercial launch of the related product. Licenses fees began being amortized upon the commercial launch of Silenor in August 2010 and are being amortized over the expected life of the intellectual property, which we estimate to be approximately ten years. Costs incurred in the planning stage of a website are expensed, while costs incurred in the development stage are capitalized and will be amortized over the expected life of the product associated with the website once the asset is placed in service.

The carrying values of our intangible assets are periodically reviewed to determine if the facts and circumstances suggest that a potential impairment may have occurred. We had no impairment of our intangible assets for the three and nine months ended September 30, 2010.

Share-Based Compensation Expense

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

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

F-8

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Net Loss per Share

Basic earnings per share (“EPS”) excludes the effects of common stock equivalents and is calculated by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding for the period, reduced by the weighted average number of unvested common shares outstanding subject to repurchase. Diluted EPS is computed in the same manner as basic EPS, but includes the effects of common stock equivalents to the extent they are dilutive, using the treasury-stock method. For Somaxon, basic and dilutive net loss per share are equivalent because we have incurred a net loss in all periods presented, causing any potentially dilutive securities to be anti-dilutive.

Net loss per share was determined as follows (in thousands, except per share amounts):


	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Numerator:
Net loss	$	(12,900	)	$	(1,843	)	$	(22,786	)	$	(12,524	)


Denominator:
Weighted average common shares outstanding		35,217			23,242			31,934			20,052
Weighted average unvested common shares subject to repurchase		—			(120	)		(29	)		(129	)

Denominator		35,217			23,122			31,905			19,923

Basic and diluted net loss per share	$	(0.37	)	$	(0.08	)	$	(0.71	)	$	(0.63	)


Weighted average anti-dilutive securities not included in diluted net loss per share calculation:
Weighted average stock options outstanding		3,718			5,477			3,503			4,670
Weighted average restricted stock units outstanding		733			1,289			775			1,161
Weighted average warrants outstanding		2,619			5,318			3,232			2,131
Weighted average unvested common shares subject to repurchase		—			120			29			129

Total weighted average anti-dilutive securities not included in diluted net loss per share		7,070			12,204			7,539			8,091

Income Taxes

We are subject to taxation in each of the jurisdictions in which we operate. We are not currently under examination by the Internal Revenue Service or any other taxing authority. Our tax years from inception in 2003 and forward can be subject to examination by the tax authorities due to the carryforward of net operating losses and research and development credits. Our accounting policy is to record interest and penalties related to unrecognized tax benefits in income tax expense; however, no interest or penalties have been accrued as of September 30, 2010. We had unrecognized tax benefits of approximately $910,000 at December 31, 2009. It is expected that the amount of unrecognized tax benefits may change over the course of the year; however, because our deferred tax assets are fully reserved, we do not expect the change to have a significant impact on our results of operations, cash flows or financial position.

F-9

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Recent Accounting Pronouncements

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

Note 2. Fair Value of Financial Instruments

Cash and investment holdings, accounts receivable, accounts payable and accrued liabilities are presented in the financial statements at their carrying amounts, which are reasonable estimates of fair value due to their short maturities.

The fair value of financial assets and liabilities is measured under a framework that establishes “levels” which are defined as follows: Level 1 fair value is determined from observable, quoted prices in active markets for identical assets or liabilities. Level 2 fair value is determined from quoted prices for similar items in active markets or quoted prices for identical or similar items in markets that are not active. Level 3 fair value is determined using the entity’s own assumptions about the inputs that market participants would use in pricing an asset or liability. The fair value of our investment holdings at September 30, 2010 is summarized in the following table (in thousands):


	Total Fair		Fair Value Determined Under:
	Value		(Level 1)		(Level 2)		(Level 3)

Money market funds	$	3	$	3	$	—	$	—
Commercial paper		16,318		—		16,318		—
U.S. government agency securities		23,242		—		23,242		—

Total	$	39,563	$	3	$	39,560	$	—

Commercial paper and U.S. government agency securities are classified as part of either cash and cash equivalents or short-term investments in the condensed consolidated balance sheets. The carrying value of short-term investments consisted of the following as of September 30, 2010 (in thousands):


	Amortized		Unrealized		Unrealized		Fair Market
	Cost		Gains		Losses		Value

Commercial paper	$	16,318	$	—	$	—	$	16,318
U.S. government agency securities		23,241		1		—		23,242

Total	$	39,559	$	1	$	—	$	39,560

Available-for-sale marketable securities with maturities of three months or less from date of purchase have been classified as cash equivalents, and amounted to $18.4 million as of September 30, 2010. As of December 31, 2009, the Company did not hold any available-for-sale marketable securities.

F-10

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Note 3. Composition of Certain Balance Sheet Items

Accounts Receivable

Accounts receivable, net consisted of the following (in thousands):


	September 30,			December 31,
	2010			2009
Accounts receivable for product sales, gross	$	5,551		$	—
Allowances for discounts		(399	)		—

Total accounts receivable	$	5,152		$	—

Inventory

Inventory consisted of the following (in thousands):


	September 30,		December 31,
	2010		2009
Raw materials	$	45	$	—
Work in process		252		—
Finished goods inventory held by the Company		342		—
Finished goods inventory held by others		361		—

Total inventory	$	1,000	$	—

Other Current Assets

Other current assets consisted of the following (in thousands):


	September 30,		December 31,
	2010		2009
Deposits and other prepaid expenses	$	1,239	$	352
Prepaid sales and marketing expenses		1,714		—
Receivable due from collaboration partner for shared expenses		410		—
Interest receivable		114		—
Other current assets		22		57

Total other current assets	$	3,499	$	409

Property and Equipment

Property and equipment consisted of the following (in thousands):


	September 30,			December 31,
	2010			2009
Tooling	$	844		$	23
Computer equipment		471			147
Furniture and equipment		66			58
Construction in progress		—			749

Property and equipment, at cost		1,381			977
Less: accumulated depreciation		(448	)		(200	)

Property and equipment, net	$	933		$	777

F-11

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Depreciation expense was $199,000 and $1,000 for the three month periods ended September 30, 2010 and 2009, respectively. Depreciation expense was $298,000 and $79,000 for the nine month periods ended September 30, 2010 and 2009, respectively. Computer equipment with a carrying value of $12,000 was disposed of during the nine months ended September 30, 2010.

Intangible Assets

Intangible assets consisted of the following (in thousands):


	September 30,			December 31,
	2010			2009
License fees	$	1,000		$	—
Technology development costs relating to websites		109			—
Less: accumulated amortization		(17	)		—

Total intangible assets, net	$	1,092		$	—

Amortization expense for license fees was $17,000 and $0 for the three and nine month periods ended September 30, 2010 and 2009, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	September 30,		December 31,
	2010		2009
Accrued severance	$	401	$	1,659
Accrued product discounts and allowances		660		—
Accrued fixed fee and royalties		412		—
Other accrued compensation and benefits		1,010		156

Total accrued liabilities	$	2,483	$	1,815

From March through May 2009, we terminated the employment of thirteen employees as part of a general cost reduction initiative resulting from ongoing delays in the Silenor NDA approval process. Each of the terminated employees entered into a separation agreement and a separate consulting arrangement with us. We paid $513,000 to these former employees during 2009 under these separation agreements, and had a remaining deferred severance obligation of $1,659,000 as of December 31, 2009. During 2010, we have settled $860,000 of this deferred severance obligation through the issuance of common stock.

Note 4. License Agreements

In August 2003 and as amended in October 2003, September 2006 and September 2010, we entered into an exclusive worldwide in-license agreement with ProCom to develop and commercialize Silenor for the treatment of insomnia. The term of the license extends until the last licensed patent expires, which is expected to occur no earlier than 2020. The license agreement is terminable by us at any time with 30 days notice if we believe that the use of the product poses an unacceptable safety risk or if it fails to achieve a satisfactory level of efficacy. Either party may terminate the agreement with 30 days notice if the other party commits a material breach of its obligations and fails to remedy the breach within 90 days, or upon the filing of bankruptcy, reorganization, liquidation, or receivership proceedings. Costs related to the licensed intellectual property made after approval of the Silenor NDA by the FDA on March 17, 2010 have been capitalized and included in intangibles in our condensed balance sheet as of September 30, 2010. Capitalized amounts are amortized on a straight line basis over the expected life of the intellectual property which we estimate to be approximately 10 years. Royalty payments due under the terms of the in-license agreement are recorded in accrued liabilities as of September 30, 2010. The royalty payments will be recognized as an expense in cost of sales when the related shipments of product are recognized as revenue.

F-12

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

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

Note 5. Commitments and Contingencies

We are a party to a manufacturing supply agreement with a third party supplier under which the supplier is obligated to manufacture commercial quantities of Silenor tablets. Under the terms of the contract, Somaxon is not obligated to purchase a minimum quantity; however, we are obligated to purchase specified percentages of our total annual commercial requirements of Silenor. The agreement has an initial five-year term beginning upon commencement of the manufacturing services, and automatically renews for additional twelve-month periods thereafter if it is not affirmatively terminated. The agreement is terminable with written notice at least 18 months prior to the end of the current term. Additionally, we may terminate the agreement with twelve months notice in connection with a partnering, collaboration, sublicensing, acquisition, or similar event. The agreement is also subject to termination in the event of material breach of contract, bankruptcy, or government action inhibiting the use of the product candidate.

We are a party to a commercial outsourcing services agreement with a third party service provider, under which the service provider is obligated to provide warehousing, inventory management, distribution, contract administration, and accounts receivable and call center management for Somaxon. Under the terms of the contract, we were required to pay a one-time start up fee, and we are required to pay a monthly management fee, in addition to transaction fees and expenses for specific services. The agreement has an initial three-year term, and automatically renews for additional one-year periods thereafter unless either party provides the other with written notice of termination. We may terminate the agreement any time after the first twelve months, but will be subject to an early termination fee equal to the monthly management fees remaining under the initial or renewal term.

In July 2010, we entered into a professional detailing services agreement with Publicis Touchpoint Solutions, Inc. (“Publicis”), under which Publicis will provide sales support to promote Silenorin the U.S. through 110 full-time sales representatives, one regional field coordinator and one national business director, all of whom will be employees of Publicis. We will recognize the revenue from Silenor product sales generated by the promotional efforts of the sales organization. Under the terms of the agreement, we were required to pay a one-time start up fee, and we are required to pay a fixed monthly fee, which is subject to certain quarterly adjustments based on actual staffing and spending levels. During the term of the agreement, a portion of Publicis’ management fee will be subject to payment by us only to the extent that specified performance targets are achieved. The performance targets relate to initial scale-up activities, turnover and vacancy rates, call attainment and specified sales goals. In addition, we are obligated to reimburse the sales organization for approved pass-through costs, which primarily include bonuses, meeting and travel costs and certain administrative expenses.

The services agreement has an initial two-year term, and may be extended by the Company by providing Publicis with written notification no later than 90 days prior to the expiration of the initial term, subject to agreement on compensation terms with Publicis. Prior to the first anniversary of the deployment of Publicis’ sales representatives, we may terminate the services agreement upon 90 days written notice and payment to Publicis of a termination fee in a specified amount. We may terminate the services agreement upon 90 days written notice after the one year anniversary of the deployment of Publicis’ sales representatives without paying a termination fee. We may also terminate the services agreement without paying a termination fee by hiring a specified number of sales representatives. In addition, either party may terminate the services agreement upon an uncured material breach by the other party, upon the bankruptcy or insolvency of the other party or if a change in law renders the performance of a material obligation of the services agreement unlawful. If termination occurs during the initial two-year term, the Company assumes financial responsibility for the remaining lease payments for the sales representatives’ vehicles which have a two-year lease term.

F-13

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

In August 2010, we entered into a co-promotion agreement with The Procter & Gamble Distributing Company LLC (“Procter & Gamble”), under which Proctor & Gamble will provide sales support to promote Silenor in the U.S. through its team of full-time sales representatives. Beginning in January 2011, Proctor & Gamble will also provide certain managed care support services. We will recognize the revenue from Silenor product sales generated by the promotional efforts of Proctor & Gamble. Under the terms of the agreement, we are required to pay Proctor & Gamble a fixed fee and a royalty fee as a percentage of U.S. net sales, in each case on a quarterly basis during the term of the agreement. The fees are recognized as a sales, general, and administrative expense and are recorded in accrued liabilities as of September 30, 2010.

The agreement also provides for financial penalties in the event that either party fails to deliver specified minimum detailing requirements under certain circumstances. Each party will be responsible for the costs of training, maintaining and operating its own sales force, and the Company is responsible for all other costs pertaining to the commercialization of Silenor.

The term of the agreement is from August 2010 through December 2012, and the Company will pay Proctor & Gamble a reduced royalty fee based on U.S. net sales of Silenor for one year after the expiration of the agreement or its earlier termination under certain circumstances. Beginning as of June 30, 2012, the parties will discuss in good faith the continuation of the collaboration upon mutually-agreed terms and conditions. The Company may terminate the agreement upon 90 days written notice if Proctor & Gamble fails to provide at least 75% of its minimum detailing obligations. Beginning October 1, 2011, Proctor & Gamble may cure such shortfall for a calendar quarter one time each calendar year during the calendar quarter immediately following such shortfall. Either party may terminate the agreement upon 90 days written notice to the other party, although no such termination may be effective prior to December 31, 2011. Proctor & Gamble may terminate the agreement if Silenor is withdrawn from the market for longer than three months as the result of a legal requirement or 30 days after the end of a calendar quarter in which the market share for Silenor is less than 75% of the Silenor market share immediately prior to the loss of Silenor’s market exclusivity in the U.S. In addition, either party may terminate the agreement upon a large scale recall or withdrawal of Silenor from the U.S. resulting from a significant safety risk that is not due to tampering, a remediable manufacturing problem or other defect that can be cured after such risk is discovered. Either party may also terminate the agreement upon an uncured material breach by the other party, upon the bankruptcy or insolvency of the other party or a force majeure event that lasts for at least six months.

We have contracted with various consultants, drug manufacturers, and other vendors to assist in clinical trial work, data analysis, and commercialization activities for Silenor. The contracts are terminable at any time, but obligate us to reimburse the providers for any time or costs incurred through the date of termination.

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

Note 6. Share-based Compensation and Equity

Share-based Compensation Expense

Somaxon has restricted stock units (“RSUs”) and stock options outstanding under its equity incentive award plans. Share-based expense for employees and directors is based on the grant-date fair value of the award, while share-based expense for consultants is based on the fair value of the award at the time the award vests. The following table summarizes non-cash compensation expense (in thousands).


	Three months ended				Nine months ended
	September 30,				September 30,
Composition of share-based compensation:	2010		2009		2010		2009
Included in research and development expense	$	288	$	96	$	1,047	$	1,430
Included in selling, general and administrative expense		1,482		481		4,247		4,175

Total share-based compensation expense	$	1,770	$	577	$	5,294	$	5,605

F-14

SOMAXON PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Included in these tables for 2009 is the effect of the termination of employment for certain individuals which created an acceleration of share-based compensation expense. Upon separation, each of the employees entered into a consulting arrangement with us which provided for continued vesting in share-based awards through the expiration of the consulting agreement. The consulting agreements were not considered substantive for accounting purposes because additional service was not required to be rendered by the consultants in order to continue vesting in their share-based awards. Also, upon separation, certain individuals received accelerated vesting of their share-based awards. As a result of such non-substantive consulting arrangements and accelerated vesting, we recognized $2,370,000 of share-based compensation expense during 2009 on the dates of termination. Included in these tables for 2010 is the effect of a further modification of the option agreements with these terminated employees as a result of an extension of the term of their consulting agreements. We recognized $233,000 of share-based compensation expense during 2010 as a result of this modification.

Certain of our share-based awards will vest upon the achievement of performance conditions. Compensation expense for share-based awards granted to employees and directors is recognized based on the grant date fair value for the portion of the awards for which performance conditions are considered probable of being achieved. Such expense is recorded over the period the performance condition is expected to be performed. No expense is recognized for awards with performance conditions that are considered improbable of being achieved. On March 18, 2010, the FDA notified us that it approved our NDA for Silenor 3 mg and 6 mg tablets. FDA approval of the Silenor NDA caused 105,000 shares of restricted stock to vest, 129,000 RSUs to vest, and 275,000 stock options to vest. The Company recognized an aggregate of $1,384,000 of share-based compensation expense during the first quarter of 2010 from the vesting of these awards.

On December 1, 2010, an additional 599,000 RSUs held by directors and executive officers will vest. A substantial portion of the shares of common stock underlying such RSUs will be sold in connection with such vesting pursuant to 10b5-1 plans.

Equity

In March 2010, we issued 6,900,000 shares of common stock in a public offering of our stock at $8.25 per share. The net proceeds from the offering, after underwriting discounts and commissions and offering costs, were approximately $52,745,000.

Note 7. Related Party Transaction

Somaxon has in-licensed certain intellectual property from ProCom (see Note 3, “License Agreements”). In March 2010, we paid $1.0 million to ProCom pursuant to the terms of this agreement. As part of the in-license agreement, ProCom has the right to designate one nominee for election to our board of directors (Terrell Cobb, a principal of ProCom). The in-license agreement also provided a consulting arrangement for Dr. Neil Kavey, who is the other principal of ProCom. We paid Dr. Kavey a total of $0 and $34,000 for the three month periods ended September 30, 2010 and 2009, respectively, and $45,000 and $101,000 for the nine month periods ended September 30, 2010 and 2009, respectively. Payments to Dr. Kavey under that consulting arrangement ended in April 2010.

Note 8. Subsequent Event

On November 3, 2010, Somaxon received a notice from each of Actavis Elizabeth LLC (“Actavis”) and Mylan Pharmaceuticals Inc. (“Mylan”) that each has filed with the FDA an Abbreviated New Drug Application (“ANDA”) for a generic version of Silenor 3 mg and 6 mg tablets. The notices each included a “paragraph IV certification” with respect to seven of the eight patents listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book, for Silenor. A paragraph IV certification is a certification by a generic applicant that in the opinion of that applicant, the patent(s) listed in the Orange Book for a branded product are invalid, unenforceable, and/or will not be infringed by the manufacture, use or sale of the generic product.

Somaxon is currently reviewing the details of the notices. Under the Hatch-Waxman Act, if Somaxon initiates a patent infringement suit asserting infringement of any of the patents identified in a paragraph IV notice within 45 days after its receipt of such notice, the FDA shall not approve the ANDA until the earlier of 30 months, or a decision that all of such patents are not infringed or invalid, unless either party to the action failed to cooperate reasonably to expedite the infringement action.

Somaxon intends to vigorously enforce its intellectual property rights relating to Silenor, but cannot predict the outcome of this matter. Silenor is protected by eight patents covering approved methods of use of the product and its formulation, all of which are listed in the Orange Book.

F-15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2009, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2009. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the caption “Risk Factors” in the Form 10-K for the year ended December 31, 2009 and the caption “Risk Factors” in this Form 10-Q for the three month period ended September 30, 2010.

Overview

Background

We are a specialty pharmaceutical company focused on the in-licensing, development and commercialization of proprietary branded products and late-stage product candidates for the treatment of diseases and disorders in the central nervous system therapeutic area. In March 2010, the United States Food and Drug Administration, or the FDA, approved our New Drug Application, or NDA, for Silenor 3 mg and 6 mg tablets for the treatment of insomnia characterized by difficulty with sleep maintenance. Silenor was made commercially available by prescription in the United States in September 2010.

Since approval, we have undertaken activities to commercialize Silenor. We have increased our employee team from 5 to 37 employees as of September 30, 2010, including ten sales managers. During the third quarter of 2010, we entered into a services agreement and co-promotion agreement with third parties to provide sales support to promote Silenor. Specifically, in August 2010, we entered into a co-promotion agreement with Procter & Gamble, under which its sales representatives will provide a minimum number of primary details to certain healthcare professionals and a minimum number of calls to pharmacists promoting Silenor. In addition, in July 2010, we retained Publicis Touchpoint Solutions, Inc., or Publicis, to provide 110 sales representatives to promote Silenor under the terms of a contract sales agreement. As a result, Silenor is now supported by approximately 215 field sales representatives who promote Silenor in the primary detail position. We have also entered into distribution agreements with various third party wholesale distributors.

Critical Accounting Policies and Estimates

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

Revenue Recognition

We recognize revenue from product sales when it is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) our price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) our price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid us, or the buyer is obligated to pay us and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to us would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by us, (5) we do not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated.

We are unable to reliably estimate returns at this time. Therefore, we have determined that shipment of product to wholesale distributors does not meet the criteria for revenue recognition at the time of shipment. Until we are able to reliably estimate returns, we will defer revenue recognition until the right of return no longer exists, which is the earlier of Silenor being dispensed through patient prescriptions or the expiration of the right of return. We estimate patient prescriptions dispensed using an analysis of third-party information. For the three and nine months ended September 30, 2010, we recognized product revenue of $38,000, which was net of estimated product sales discounts and allowances. At September 30, 2010, we had a deferred revenue balance of $4.4 million which was also recorded net of estimated product sales discounts and allowances. We have also deferred the related cost of product sales and recorded such amount as finished goods inventory held by others, which was $0.4 million as of September 30, 2010.

Product Sales Discounts and Allowances

Patient Discount Programs. We offer discount card programs to patients who are prescribed Silenor under which the patient receives a discount on his or her prescription. We reimburse pharmacies for this discount through a third-party vendor. We estimate the total amount that will be redeemed based on the dollar amount of the discount, the timing and quantity of distribution and historical redemption rates. We accrued the discount and recognized a reduction of revenue. At September 30, 2010 and December 31, 2009, the accrual for patient discount programs was $192,000 and $0, respectively.

Distribution Service Fees. We pay distribution service fees to each wholesaler for distribution and inventory management services. We accrued for the fees based on contractually defined terms with each wholesaler and recognized a reduction of revenue. At September 30, 2010 and December 31, 2009, the accrual for distribution service fees was $383,000 and $0, respectively.

The following table summarizes the activity for the three months ended September 30, 2010 associated with product sales discounts and allowances:


											Total
											Accrued
											Sales
	Prompt		Product				Patient				Discounts
	Pay		Launch		Stocking		Discount		Distribution		and
	Discounts		Discounts		Allowances		Fees		Service Fees		Allowances
Balance at December 31, 2009	$	—	$	—	$	—	$	—	$	—	$	—
Provision made for sales during period		105		294		85		192		383		1,059
Payments		—		—		—		—		—		—

Balance at September 30, 2010	$	105	$	294	$	85	$	192	$	383	$	1,059

Cost of Sales

Cost of sales include the costs to manufacture, package, and ship Silenor as well as royalties associated with our license agreement with ProCom One, Inc., or ProCom.

Inventory

Our inventories are valued at the lower of cost or net realizable value. We analyze our inventory levels quarterly and write down inventory that has become obsolete, or has a cost basis in excess of its expected net realizable value, as well as any inventory quantities in excess of expected requirements. Expired inventory is disposed of and the related costs are written off.

Capitalized License Fees

License fees related to our intellectual property are capitalized once technological feasibility has been established. Costs incurred to in-license our product candidates subsequent to FDA approval of our NDA for Silenor have been capitalized and recorded as an intangible asset. Capitalized amounts are amortized on a straight line basis over the expected life of the intellectual property commencing with the commercial launch of the related product. Determining when technological feasibility has been achieved, and determining the related amortization period for capitalized intellectual property, requires the use of estimates and subjective judgment.

Share-based Compensation

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

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

Determining the likelihood and timing of achieving performance conditions is a subjective judgment made by management which may affect the amount and timing of expense related to these share-based awards. Share-based compensation is adjusted to reflect the value of options which ultimately vest as such amounts become known in future periods. As a result of these subjective and forward-looking estimates, the actual value of our stock options realized upon exercise could differ significantly from those amounts recorded in our financial statements.

Results of Operations

Comparisons of the Three Months Ended September 30, 2010 and 2009

Product Sales. Product sales represent sales of Silenor for which we have recognized revenue because the right of return no longer exists as the product has been dispensed through prescriptions. Net product sales are recorded less estimated discounts and allowances as further described above under “—Critical Accounting Policies”. Net product sales for 2010 and 2009 were as follows (in thousands, except percentages):


	Three Months Ended
	September 30,					Change
	2010			2009		Dollar			Percent
Gross product sales	$	47		$	—	$	47			N/A
Discounts and allowances		(9	)		—		(9	)		N/A

Total net product sales	$	38		$	—	$	38			N/A

We recognized net product sales of $38,000 for 2010 for product sales representing product dispensed through prescriptions which we estimated using an analysis of third-party information. We had no product sales in 2009 as sales of Silenor commenced in the third quarter of 2010. Reductions from gross to net product sales, which include allowances for discounts, stocking incentives, patient discount programs and distribution service fees totaled $9,000 for 2010, compared to $0 in the same period in 2009. As a percentage of gross sales, the reductions were 19.1% for 2010.

Cost of Sales. Cost of sales include the costs to manufacture, package, and ship Silenor as well as royalties associated with our license agreement. Cost of sales for 2010 and 2009 was as follows (in thousands, except percentages):


	Three Months Ended
	September 30,				Change
	2010		2009		Dollar		Percent
Cost of sales	$	3	$	—	$	3		N/A

We recognized cost of sales of $3,000 for 2010 for product sales representing product dispensed through prescriptions which we estimated using an analysis of third-party information. We had no cost of sales in 2009 as sales of Silenor commenced in the third quarter of 2010. Gross profit was $35,000 for 2010. Expressed as a percentage of net product sales, gross margin was 92.1% in 2010.

Research and Development Expense. Our most significant research and development costs, or R&D, during 2010 were salaries, benefits, and share-based compensation expense related to our research and development personnel while our most significant external costs were associated with our development program for Silenor.

Research and development expense for 2010 and 2009 was as follows (in thousands, except percentages):


	Three Months Ended
	September 30,				Change
	2010		2009		Dollar		Percent
Personnel and other costs	$	524	$	297	$	227		76	%
Share-based compensation expense		288		96		192		200	%
Silenor development work	$	202	$	113	$	89		79	%

Total research and development expense	$	1,014	$	506	$	508		100	%

Research and development expense was $1.0 million for 2010 compared with $0.5 million for the comparable period in 2009. This increase is primarily due to an increase in share-based compensation and other personnel costs due to an increase in headcount, as well as the costs associated with process validation for the packaging of Silenor.

Selling, General and Administrative Expense. Our selling, general and administrative, or SG&A, expense consists primarily of salaries, benefits, share-based compensation expense, advertising, market research costs, insurance and facility costs, and professional fees related to our marketing, administrative, finance, human resources, legal and internal systems support functions. Our most significant selling, general and administrative expenses during 2010 were salaries, benefits, professional service fees, market preparation activities and share based compensation expense. Selling, general and administrative expense for 2010 and 2009 was as follows (in thousands, except percentages):


	Three Months Ended
	September 30,				Change
	2010		2009		Dollar		Percent
Marketing, personnel and general costs	$	10,442	$	858	$	9,584		1,117	%
Share-based compensation expense		1,481		481		1,000		208	%

Total selling, general and administrative expense	$	11,923	$	1,339	$	10,584		790	%

Selling and marketing expenses totaled $8.6 million and $0.2 million for 2010 and the comparable period in 2009, respectively. The increase of $8.4 million was due to the costs associated with the commercial launch of Silenor. Launch costs included the training and deployment of Somaxon’s sales representatives, sample and sample distribution expenses, other consulting costs, and promotional spending costs.

General and administrative expenses totaled $3.3 million and $1.1 million for 2010 and 2009, respectively. The increase of $2.2 million was due to an increase in salary and personnel-related expenses due to an increase in overall headcount and share-based compensation expense due to vesting of performance based equity awards associated with the execution of the co-promotion agreement with Procter & Gamble.

We expect our SG&A expenses to remain a significant component of our operating expenses in the future. We are unable to estimate with certainty our future SG&A expenses in part because we cannot forecast future operating results relating to Silenor, whether we will enter into future collaborations or other strategic transactions relating to Silenor or other commercial products, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our plans and capital requirements. In connection with anticipated patent litigation proceedings relating to the paragraph IV certifications we received in November 2010 related to two Abbreviated New Drug Application, or ANDA, filings, we expect that our SG&A expenses will increase.

Comparisons of the Nine Months Ended September 30, 2010 and September 30, 2009

Product Sales. Net product sales for 2010 and 2009 were as follows (in thousands, except percentages):


	Nine Months Ended
	September 30,					Change
	2010			2009		Dollar			Percent
Gross product sales	$	47		$	—	$	47			N/A
Discounts and allowances		(9	)		—		(9	)		N/A

Total net product sales	$	38		$	—	$	38			N/A

Cost of Sales. Cost of sales for 2010 and 2009 was as follows (in thousands, except percentages):


	Nine Months Ended
	September 30,				Change
	2010		2009		Dollar		Percent
Cost of sales	$	3	$	—	$	3		N/A

Total cost of sales	$	3	$	—	$	3		N/A

License fees. We had no license fees expense in 2010. In March 2009, we entered into an agreement with BioTie to mutually terminate our license for nalmefene. Pursuant to the termination agreement, BioTie paid us a $1.0 million termination fee which we included as a reduction of license fees for the nine months ended September 30, 2009. In June 2009, we terminated our license agreement with the University of Miami effective as of August 2009. No further obligations remain as of the effective date of the termination of the University of Miami license.

Research and Development Expense. Research and development expense for 2010 and 2009 was as follows (in thousands, except percentages):


	Nine Months Ended
	September 30,				Change
	2010		2009		Dollar			Percent
Silenor development work	$	368	$	583	$	(215	)		(37	)%
Personnel and other costs		1,526		1,484		42			3	%
Share-based compensation expense		1,047		1,430		(383	)		(27	)%

Total research and development expense	$	2,941	$	3,497	$	(556	)		(16	)%

Research and development expense decreased $0.6 million for 2010 compared to the same period in 2009 primarily due to lower development expenses and share-based compensation expense. Share-based compensation for 2009 included the additional cost of our one-time stock option exchange program that was completed in June 2009 and the impact of accelerated option vesting arrangements under severance-related agreements. Silenor development expenses also decreased because of the lower level of activity relating to both the NDA and non-clinical studies during 2010 as compared to the same period in 2009.

Selling, General and Administrative Expense. Selling, general and administrative expense for 2010 and 2009 was as follows (in thousands, except percentages):


	Nine Months Ended
	September 30,				Change
	2010		2009		Dollar		Percent
Marketing, personnel and general costs	$	15,630	$	5,619	$	10,011		178	%
Share-based compensation expense		4,247		4,174		73		2	%

Total selling, general and administrative expense	$	19,877	$	9,793	$	10,084		103	%

Selling and marketing expenses totaled $11.6 million and $1.3 million for the nine months ended September 30, 2010 and 2009, respectively. The increase of $10.3 million was due to the costs associated with the commercial launch of Silenor. Launch costs included the training and deployment of Somaxon’s sales representatives, sample and sample distribution, and other promotional spending and consulting costs.

General and administrative expenses totaled $8.3 million and $8.5 million for the nine months ended September 30, 2010 and 2009, respectively. The decrease of $0.2 million was due to lower share-based compensation expense, offset by an increase in salary and benefits expense due to an increase in overall headcount in 2010. Share-based compensation expense for 2009 included the additional cost of our one-time stock option exchange program that was completed in June 2009 and the impact of accelerated option vesting arrangements under severance-related agreements.

Interest and Other (Expense). Interest and other (expense) for 2010 and 2009 was as follows (in thousands, except percentages):


	Nine Months Ended
	September 30,						Change
	2010			2009			Dollar		Percent
Interest and other (expense)	$	(13	)	$	(259	)	$	246		(95	)%

The decrease in interest and other (expense) reflects the repayment of our debt obligations in March 2009.

Liquidity and Capital Resources

Since inception, our operations have been financed primarily through the sales of equity securities and the proceeds from the exercise of warrants and stock options. Through September 30, 2010, we have received net proceeds of approximately $90.0 million from the sale of shares of our preferred stock and net proceeds of $114.4 million through the sale of shares of our common stock, including the exercise of stock options and warrants.

We expect to continue to incur losses and have negative cash flows from operations in the foreseeable future as we continue our commercialization efforts for Silenor and potentially pursue the development of other product candidates. We cannot be certain if, when, or to what extent we will receive cash inflows from the commercialization of Silenor.

The report of our independent registered public accounting firm for the year ended December 31, 2009 included an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. In March 2010, we completed a public offering of 6,900,000 shares of our common stock at a public offering price of $8.25 per share for aggregate net proceeds of approximately $52.7 million, and at September 30, 2010 we had cash, cash equivalents, and short-term investments totaling $41.5 million. We may need to obtain additional funds to finance our operations in the future. We intend to obtain any additional funding we require through strategic relationships, public or private equity or debt financings, assigning receivables or royalty rights or other arrangements. We believe, based on our current operating plan, that our cash and cash equivalents as of September 30, 2010 will be sufficient to fund our operations through at least the third quarter of 2011. Actual financial results for the period of time through which our financial resources will be adequate to support our operations could vary based upon many factors, including but not limited to the rate of growth of Silenor sales and the actual cost of commercial activities.

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

•

our success in generating cash flows from the commercialization of Silenor, together with our co-promotion partner Procter & Gamble;

•

the costs of establishing or contracting for commercial programs and resources;

•

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

•

the extent to which we acquire or in-license new products, technologies or businesses;

•

the rate of progress and cost of our non-clinical studies, clinical trials and other development activities;

•

the scope, prioritization and number of development programs we pursue; and

•

the effect of competing technological and market developments.

We have invested a substantial portion of our available cash in marketable securities and money market funds. The capital markets have recently been highly volatile and there has been a lack of liquidity for certain financial instruments, especially those with exposure to mortgage-backed securities and auction rate securities. All of our investments in marketable securities and money market funds continue to be highly rated, highly liquid and have readily determinable fair values. As a result, none of our securities are considered to be impaired.

We have two effective shelf registration statements on Form S-3 filed with the SEC under which we may offer from time to time up to an aggregate of approximately $93.1 million in any combination of debt securities, common and preferred stock and warrants. These registration statements could allow us to obtain additional financing, subject to the SEC’s rules and regulations relating to eligibility to use Form S-3.

Cash Flows

Net cash used in operations was $18.0 million during the nine months ended September 30, 2010 compared to $7.8 million in the same period in 2009. The increase in net cash used in operating activities was primarily due to an increase in our net loss in 2010 as compared to the prior year.

Net cash used in investing activities was $22.8 million for the nine months ended September 30, 2010 compared to net cash provided by investing activities of $8.7 million in the same period in 2009. Results for 2010 reflect net purchases of $21.3 million of marketable securities and a $1.0 million milestone payment to ProCom under our license agreement which became due as a result of the approval by the FDA of our NDA for Silenor. Results for 2009 reflect purchases of marketable securities of $2.5 million, proceeds from the sale of marketable securities of $3.1 million, and the release of restricted cash of $8.1 million in connection with the repayment of our bank debt.

Net cash provided by financing activities was $56.1 million for the nine months ended September 30, 2010, compared to net cash used in financing activities of $9.1 million for the same period in 2009. Our 2010 results reflect cash proceeds of $52.7 million from our follow-on offering and proceeds of $3.4 million from the exercise of warrants and stock options. Results for 2009 reflect the repayment of $15.0 million of our bank debt and cash proceeds of $5.7 million from the issuance of common stock and warrants in July 2009.

Contractual Obligations

The following table describes our commitments to settle contractual obligations in cash as of September 30, 2010 (in thousands):


	Payments Due By Period
			2011		2013
	Remainder		through		through		After
	of 2010		2012		2014		2014		Total
Non-cancellable purchase orders	$	1,244	$	—	$	—	$	—	$	1,244
Other contractual obligations		2,893		5,300		100		—		8,293
Operating lease obligations		37		91		15		—		143

Total	$	4,174	$	5,391	$	115	$	—	$	9,680

We have entered into a license agreement with ProCom to acquire the rights to develop and commercialize Silenor. Pursuant to this agreement, we obtained exclusive, sub-licensable rights to the patents and know-how for certain indications. This license agreement required us to pay an upfront payment as well as additional payments upon the achievement of specific development and regulatory approval milestones. We are also obligated to pay royalties under the agreement until the expiration of the applicable patent. Royalty payments due under the terms of the in-license agreement are recorded as an accrued liability as of September 30, 2010. The royalty payments will be recognized as an expense when the related shipment is recognized as revenue. Future royalty payments are not included in the table above because we cannot reasonably estimate them at this time.

In July 2010, we entered into a professional detailing services agreement with Publicis, under which Publicis has agreed to provide sales support to promote Silenorin the U.S. through 110 full-time sales representatives, one regional field coordinator and one national business director, all of whom will be employees of Publicis. Prior to the first anniversary of the deployment of Publicis’ sales representatives, we may terminate the services agreement upon 90 days written notice and payment to Publicis of a termination fee in a specified amount. We have estimated this specified amount as of September 30, 2010 and included this amount in the table above.

In August 2010, we entered into a co-promotion agreement with Procter & Gamble, under which Procter & Gamble will provide sales support to promote Silenor in the U.S. through its team of full-time sales representatives. Beginning in January 2011, Procter & Gamble will also provide certain managed care support services. We will recognize the revenue from Silenor product sales generated by the promotional efforts of Procter & Gamble. Under the terms of the agreement, we are required to pay Procter & Gamble a fixed fee and a royalty fee as a percentage of U.S. net sales, in each case on a quarterly basis during the term of the agreement. We have included the amounts of the fixed fees in the table above. Future royalty payments are not included in the table above because we cannot reasonably estimate them at this time.

We have contracted with various consultants, drug manufacturers, and other vendors to assist in clinical trial work, pre-clinical studies, data analysis, and preparation for the commercial launch of Silenor. The contracts are terminable at any time, but obligate us to reimburse the providers for any time or costs incurred through the date of termination. We also have employment agreements with each of our current executive officers that provide for severance payments and accelerated vesting for certain share-based awards if their employment with us is terminated under specified circumstances.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

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

Caution on Forward-Looking Statements

Any statements in this report about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should” or “would.” Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation: our ability to successfully commercialize Silenor; our ability to ensure adequate and continued supply of Silenor to successfully launch commercial sales or meet anticipated market demand; our ability to achieve market acceptance of Silenor; our reliance on third parties for certain services; our ability to raise sufficient capital to fund our operations, and to meet our obligations to parties under financing agreements, and the impact of any such financing activity on the level of our stock price; the impact of any inability to raise sufficient capital to fund ongoing operations, including any patent infringement litigation; changes in healthcare regulation and reimbursement policies; our ability to successfully enforce our intellectual property rights and defend our patents; the scope, validity and duration of patent protection and other intellectual property rights for Silenor; whether the approved label for Silenor is sufficiently consistent with such patent protection to provide exclusivity for Silenor; the possible introduction of generic competition of Silenor; our ability to operate our business without infringing the intellectual property rights of others; estimates of the potential markets for Silenor and our ability to compete in these markets; inadequate therapeutic efficacy or unexpected adverse side effects relating to Silenor that could delay or prevent commercialization, or that could result in recalls or product liability claims; other difficulties or delays in development, testing, manufacturing and marketing of Silenor; the timing and results of post-approval regulatory requirements for Silenor, and the FDA’s agreement with our interpretation of such results; and other risks detailed in this report under Part II — Item 1A — Risk Factors below and previously disclosed in our Annual Report on Form 10-K.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our cash and cash equivalents at September 30, 2010 consist of money market funds and marketable securities. The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. Historically, our primary exposure to market risk has been interest rate sensitivity. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment will probably decline. Currently, our holdings are in money market funds and marketable securities, and therefore this interest rate risk is minimal. To minimize our interest rate risk going forward, we intend to continue to maintain our portfolio of cash, cash equivalents and marketable securities in a variety of securities consisting of money market funds and United States government debt securities, all with various maturities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. We also generally time the maturities of our investments to correspond with our expected cash needs, allowing us to avoid realizing any potential losses from having to sell securities prior to their maturities.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2010.

Changes in Internal Control Over Financial Reporting

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

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 31, 2009 includes a detailed discussion of our risk factors under the heading “Part I, Item 1A—Risk Factors.” Set forth below are certain changes from the risk factors previously disclosed in our Annual Report on Form 10-K. You should carefully consider the risk factors discussed in our Annual Report on Form 10-K and in this report, as well as the other information in this report, before deciding whether to invest in shares of our common stock. The occurrence of any of the risks discussed in the Annual Report on Form 10-K or this report could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Except with respect to our trademarks, the trademarks, trade names and service marks appearing in this report are the property of their respective owners.

Risks Related to Our Business

We are likely to require substantial additional funding and may be unable to raise capital when needed, which could force us to delay, reduce or eliminate planned activities.

We began generating revenues from the commercialization of Silenor late in the third quarter of 2010, and our operations to date have generated substantial needs for cash. We expect our negative cash flows from operations to continue until we are able to generate significant cash flows from the commercialization of Silenor.

The report of our independent registered public accounting firm for the year ended December 31, 2009 included an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. In March 2010, we completed a public offering of 6,900,000 shares of our common stock at a public offering price of $8.25 per share for aggregate net proceeds of approximately $52.7 million, and at September 30, 2010 we had cash, cash equivalents, and short-term investments totaling $41.5 million. We believe, based on our current operating plan, that our cash and cash equivalents as of September 30, 2010 will be sufficient to fund our operations through at least the third quarter of 2011; however, our financial resources may not be adequate through such period due to many factors, including but not limited to the rate of growth of Silenor sales and the actual cost of commercial activities.

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

•

our success in generating cash flows from the commercialization of Silenor, together with our co-promotion partner Procter & Gamble;

•

the costs of establishing or contracting for commercial programs and resources;

•

the terms and timing of any future collaborative, licensing and other arrangements that we may establish;

•

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

•

the extent to which we acquire or in-license new products, technologies or businesses;

•

the rate of progress and cost of our non-clinical studies, clinical trials and other development activities;

	•		the scope, prioritization and number of development programs we pursue; and

	•		the effect of competing technological and market developments.

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

If we are unsuccessful in raising additional required funds, we may be required to delay, scale-back or eliminate plans or programs relating to our business, relinquish some or all rights to Silenor, or renegotiate less favorable terms with respect to such rights than we would otherwise choose. In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management, and may result in unfavorable results that could further adversely impact our financial condition. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

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

To date, the majority of our resources have been focused on the development of Silenor, and substantially all of our resources are now focused on the commercial launch of Silenor. Our ability to generate product revenue in the near term will depend solely on the success of this product. Accordingly, any disruption in our ability to generate revenues from the sale of Silenor or lack of success in its commercialization will have a substantial adverse impact on our business.

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

Even though U.S. regulatory approval has been obtained for Silenor, the FDA has imposed restrictions on its indicated uses or marketing and imposed ongoing requirements for post-approval studies or other activities. For example, the approved use of Silenor is limited to the treatment of insomnia characterized by sleep maintenance difficulty. In addition, the FDA has required us to implement a risk evaluation and mitigation strategy, or REMS, consisting of a medication guide and a timetable for assessment of its effectiveness. We are also required to complete a standard clinical trial assessing the safety and efficacy of Silenor in children aged 6 to 16 pursuant to the Pediatric Research Equity Act of 2003, and to submit final results of this trial by March 2015. Any issues relating to these restrictions or requirements could have an adverse impact on our ability to achieve market acceptance of Silenor and generate revenues from its sale.

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

Silenor is also subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information. For example, the FDA may require modifications to our REMS for Silenor at a later date if warranted by new safety information. Any future requirements imposed by the FDA may require substantial expenditures.

In addition, all marketing activities associated with Silenor, as well as marketing activities related to any other products that we promote, are subject to numerous federal and state laws governing the marketing and promotion of pharmaceutical products. The FDA regulates post-approval promotional labeling and advertising to ensure that such activities conform to statutory and regulatory requirements. Such regulation and FDA review could require us to alter our marketing materials or strategy, incur additional costs or delay certain of our promotional activities.

In addition to FDA restrictions, the marketing of prescription drugs is subject to laws and regulations prohibiting fraud and abuse under government healthcare programs. For example, the federal health care program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid or other federally financed health care programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other health care companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, which apply regardless of the payor. If we fail to comply with applicable FDA regulations or other laws or regulations relating to the marketing of Silenor or any other product, we could be subject to criminal prosecution, civil penalties, seizure of products, injunction, or exclusion of such products from reimbursement under government programs, as well as other regulatory actions.

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

The distribution of pharmaceuticals is also regulated by state regulatory agencies, including the requirement to obtain and maintain distribution permits or licenses in many states. Compliance with these requirements may require the expenditure of substantial resources and could impact the manner and scope of our distribution operations. If we fail to comply with applicable state regulations relating to the distribution of Silenor or any other product we market, we could be subject to criminal prosecution, civil penalties, seizure of products, injunctions, or other regulatory actions.

We have implemented a comprehensive compliance program and related infrastructure, but we cannot provide absolute assurance that we are or will be in compliance with all potentially applicable laws and regulations. If our operations relating to Silenor fail to comply with applicable regulatory requirements, a regulatory agency may:

	•		issue warning letters or untitled letters;

	•		impose civil or criminal penalties, including fines;

	•		suspend regulatory approval;

	•		impose requirements to conduct additional clinical, non-clinical or other studies;

	•		suspend any ongoing clinical trials;

	•		refuse to approve pending applications or supplements to approved applications filed by us;

	•		impose restrictions on operations, including costly new manufacturing requirements; or

	•		seize or detain products or require a product recall.

We, our co-promotion partner, Procter & Gamble, and our contract sales provider, Publicis, will need to retain qualified sales and marketing personnel and collaborate in order to successfully commercialize Silenor.

In August 2010, we entered into a co-promotion agreement with Procter & Gamble, under which its sales representatives will provide a minimum number of primary details to certain healthcare professionals and a minimum number of calls to pharmacists promoting Silenor. In addition, in July 2010, we retained Publicis to provide 110 sales representatives to promote Silenor under the terms of a contract sales agreement. These representatives are employees of Publicis but will be hired to our specifications and will be managed by our team of Somaxon sales management personnel. As a result, Silenor is now supported by 215 field sales representatives who promote Silenor in the primary detail position. To the extent we, Procter & Gamble and Publicis are not successful in retaining qualified sales and marketing personnel, we may not be able to effectively market Silenor.

We and Procter & Gamble each have the right to terminate the co-promotion agreement at any time following December 31, 2011 by providing at least 90 days prior written notice, as well as other more limited termination rights. While our agreement with Procter & Gamble requires its field sales representatives to promote our products in a minimum number of primary details to target physicians and a minimum number of pharmacy calls, we cannot be sure that Procter & Gamble’s efforts will be successful.

Our agreement with Publicis will cause us to incur significant costs, and we cannot be sure that the efforts of the contract sales force, together with any efforts made by Procter & Gamble to promote our products, will generate sufficient awareness or demand for our products. If we determine that the contract sales force is not successful and we decide to terminate our agreement with Publicis prior to the one-year anniversary of the deployment of the contract sales force, we will incur termination fees.

Any revenues we receive from sales of our products will largely depend upon the efforts Procter & Gamble and Publicis, which in many instances will not be within our control. If we are unable to maintain our co-promotion agreement with Procter & Gamble, to maintain our services agreement with Publicis or to effectively establish alternative arrangements to market our products, our business could be adversely affected. In addition, despite our arrangements with Procter & Gamble and Publicis, we still may not be able to cover all of the prescribing physicians for insomnia at the same level of reach and frequency as our competitors, and we ultimately may need to further expand our selling efforts in order to effectively compete.

In addition to Procter & Gamble and Publicis, we rely on other third parties to perform many other necessary services for our commercial products, including services related to the storage and distribution of our products.

We have retained third-party service providers to perform a variety of functions related to the sale and distribution of our products, key aspects of which are out of our direct control. For example, we rely on one third-party service provider to provide key services related to warehousing and inventory management, distribution, contract administration and chargeback processing, accounts receivable management and call center management, and, as a result, most of our inventory is stored at a single warehouse maintained by the service provider. We also utilize third parties to perform various other services for us relating to e-detailing, sample processing, and regulatory monitoring, including adverse event reporting, safety database management and other product maintenance services.

We place substantial reliance on the third-party providers that perform services for us. If these third-party service providers fail to effectively provide services to us, fail to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do not carry out their contractual duties to us, or encounter physical or natural damage at their facilities, our ability to successfully commercialize Silenor would be significantly impaired, or we could be subject to regulatory sanctions. We do not currently have the internal capacity to perform these important commercial functions, and we may not be able to maintain commercial arrangements for these services on reasonable terms.

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

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

	•		the scope and effectiveness of our sales, marketing and distribution resources and strategies, or those of our collaborators, if any;

	•		our ability to provide acceptable evidence of safety and efficacy and physician and patient understanding of differential indications for use, such as sleep maintenance;

	•		prevalence and severity of any adverse side effects;

	•		limitations or warnings contained in the FDA-approved labeling of Silenor or any other product that we commercialize;

	•		pricing and cost effectiveness;

	•		relative convenience and ease of administration;

	•		availability of alternative treatments, including, in the case of Silenor, a number of competitive products already approved for the treatment of insomnia or expected to be commercially launched in the future;

	•		off-label substitution by chemically similar or equivalent products; and

	•		our ability to obtain sufficient third-party coverage or reimbursement.

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

Generic pricing plans, such as those implemented by Wal-Mart, CVS, Rite Aid and Walgreens, may affect the market for our products.

In September 2006, Wal-Mart began offering certain generic drugs at $4 per prescription, and various other retailers including CVS, Rite Aid and Walgreens currently offer generic drugs at similar prices. Some retailers have also offered certain generic drugs for free on a limited basis. These and many other retailers have significant market presence, and any decision by them to make generic analogs of our products available at substantially lower prices may have a material adverse effect on the market for our products and our ability to generate revenues from their sale.

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

Our ability to successfully commercialize Silenor and any other product to which we obtain rights will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish appropriate coverage and reimbursement levels for the cost of our products and related treatments. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

	•		the ability to obtain a price we believe is fair for our products;

	•		the ability to generate revenues and achieve or maintain profitability;

	•		the future revenues and profitability of our potential customers, suppliers and collaborators; and

	•		the availability of capital.

The U.S. Congress recently enacted legislation to reform the healthcare system. A major goal of the new healthcare reform law was to provide greater access to healthcare coverage for more Americans. Accordingly, the new healthcare reform law requires individual U.S. citizens and legal residents to maintain qualifying health coverage, imposes certain requirements on employers with respect to offering health coverage to employees, amends insurance regulations regarding when coverage can be provided and denied to individuals, and expands existing government healthcare coverage programs to more individuals in more situations. Among other things, the new healthcare reform law specifically:

	•		establishes annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs, beginning in 2011;

	•		increases minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program, retroactive to January 1, 2010;

	•		redefines a number of terms used to determine Medicaid drug rebate liability, including average manufacturer price and retail community pharmacy, effective October 2010;

	•		extends manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, effective March 2010;

	•		expands eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133 percent of the Federal Poverty Level beginning 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability;

	•		establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;

	•		requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50 percent point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D, beginning 2011; and

	•		increases the number of entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective January 2010.

While this legislation will, over time, increase the number of patients who have insurance coverage for our products, it also is likely to adversely affect our results of operations. Some states are also considering legislation that would control the prices of drugs, and state Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and/or requiring prior authorization by the state program. It is likely that federal and state legislatures and health agencies will continue to focus on additional healthcare reform in the future.

As a result of the new reform measures, we may determine to change our current manner of operation or change our contract arrangements, any of which could harm our ability to operate our business efficiently or on the scale we would like and our ability to raise capital. In addition, in certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may in some cases be unavailable or insufficient.

Current healthcare reform measures and any future legislative proposals to reform healthcare or reduce government insurance programs may result in lower prices for Silenor and any other product that we commercialize or exclusion of Silenor or any such other product from coverage and reimbursement programs. Either of those could harm our ability to market our products and significantly reduce our revenues from the sale of our products.

Managed care organizations are increasingly challenging the prices charged for medical products and services and, in some cases, imposing restrictions on the coverage of particular drugs. Many managed care organizations negotiate the price of medical services and products and develop formularies which establish pricing and reimbursement levels. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization’s patient population. The process for obtaining coverage can be lengthy and costly, and we expect that it could take several months before a particular payor initially reviews our product and makes a decision with respect to coverage. For example, third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness of any product we might bring to market. For any individual third-party payor, we may not be able to provide data sufficient to gain reimbursement on a similar or preferred basis to competitive products, or at all.

In addition, many insurers and other healthcare payment organizations encourage the use of less expensive alternative generic brands and over-the-counter, or OTC, products through their prescription benefits coverage and reimbursement policies. The availability of generic prescription and OTC products for the treatment of insomnia has created, and will continue to create, a competitive reimbursement environment. Insurers and other healthcare payment organizations frequently make the generic or OTC alternatives more attractive to the patient by providing different amounts of reimbursement so that the net cost of the generic or OTC product to the patient is less than the net cost of a prescription branded product to the patient. Aggressive pricing policies by our generic or OTC product competitors and the prescription benefit policies of insurers could have a negative effect on our product revenues and profitability.

The competition among pharmaceutical companies to have their products approved for reimbursement also results in downward pricing pressure in the industry and in the markets where our products compete. In some cases, we may discount our products in order to obtain reimbursement coverage, and we may not be successful in any efforts we take to mitigate the effect of a decline in average selling prices for our products. Declines in our average selling prices would also reduce our gross margins.

In addition, once reimbursement at an agreed level is approved by a third-party payor, we may lose that reimbursement entirely. As reimbursement is often approved for a period of time, this risk is greater at the end of the time period, if any, for which the reimbursement was approved.

We may face additional challenges with regard to reimbursement which could affect our ability to successfully commercialize Silenor or any other product candidate that we commercialize, including:

•

the variability of reimbursement rates likely to be caused by the use of miscellaneous drug codes and procedure codes may discourage physicians from providing Silenor or any other product candidate that we commercialize to certain or all patients depending on their insurance coverage;

•

the initial use of “miscellaneous drug codes” for billing Silenor or any other product candidate that we commercialize until such time as specific drug codes are approved could result in slow and/or inaccurate reimbursement and thereby discourage product use;

•

an increase in insurance plans that place more cost liability onto patients may limit patients willingness to pay for Silenor or any other product candidate that we commercialize and thereby discourage uptake; and

•

unforeseen changes in federal health care policy guidelines may negatively impact a physician practice’s willingness to provide novel treatments.

If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic or OTC products, our overall business and financial condition would be adversely affected.

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

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

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

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

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

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

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

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

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

On November 3, 2010, we received a notice from each of Actavis Elizabeth LLC, or Actavis, and Mylan Pharmaceuticals Inc., or Mylan, that each has filed with the FDA an ANDA for a generic version of Silenor 3 mg and 6 mg tablets. The notices each included a paragraph IV certification with respect to seven of the eight patents listed in the Orange Book for Silenor. The patent not subject to a paragraph IV certification expires in March 2013.

We are currently reviewing the details of the notices. Under the Hatch-Waxman Act, if we initiate a patent infringement suit asserting infringement of any of the patents identified in a paragraph IV notice within 45 days after we receive the notice, the FDA will not approve the ANDA until the earlier of 30 months from the receipt of the notices, or a decision that all of the patents in the litigation are not infringed or invalid, unless either party to the action failed to cooperate reasonably to expedite the infringement action.

We intend to vigorously enforce our intellectual property rights relating to Silenor, but we cannot predict the outcome of this matter. Silenor is protected by eight patents covering approved methods of use of the product and its formulation, all of which are listed in the Orange Book.

Certain pharmaceutical companies patent settlement agreements with generic pharmaceutical companies have been challenged by the U.S. Federal Trade Commission alleging a violation of Section 5(a) of the Federal Trade Commission Act, and any patent settlement agreement that we may enter into with any generic pharmaceutical companies may be subject to similar challenges, which will be both expensive and time consuming and may render such settlement agreements unenforceable.

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

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

Our future reporting and payment obligations under governmental purchasing and rebate programs will be complex and may involve subjective decisions, and any failure to comply with those obligations could subject us to penalties and sanctions, which in turn could have a material adverse effect on our business and financial condition.

As a condition of reimbursement by various federal and state healthcare programs, we will need to calculate and report certain pricing information to federal and state healthcare agencies. The regulations regarding the reporting of such pricing information are complex. Our calculations and methodologies will be subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could result in material changes to our calculations. In addition, because our calculations and the judgments involved in making these calculations will involve subjective decisions and complex methodologies, these calculations are subject to the risk of errors. Any failure to comply with governmental reporting and payment obligations could result in civil and/or criminal sanctions.

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

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

A number of companies are marketing reformulated versions of previously approved GABA-receptor agonists, for example, Meda AB and Orexo AB launched Edluar, formerly known as Sublinox, a sublingual tablet formulation of zopidem in the third quarter of 2009. ECR Pharmaceuticals Company, Inc., a wholly owned subsidiary of Hi-Tech Pharmacal Co., Inc., has announced that it planned to launch NovaDel Pharma, Inc.’s ZolpiMist, an oral mist formulation of zolpidem, in the United States in the first half of 2010, but has not yet launched the product.

In addition to the currently approved products for the treatment of insomnia, a number of new products are expected to enter the insomnia market over the next several years. Transcept Pharmaceuticals, Inc. submitted an NDA for Intermezzo, a low-dose sublingual tablet formulation of zolpidem in 2008, and in October 2009, Transcept announced that it received a complete response letter from the FDA relating to such NDA. Transcept held a meeting with the FDA in January 2010 to discuss the implications of the complete response letter. In October 2010, Transcept announced the results of a driving study to assess next day residual effects for Intermezzo. Transcept and Purdue Pharmaceutical Products L.P. have entered into an exclusive license and collaboration agreement to commercialize Intermezzo in the United States.

Alexza Pharmaceuticals, Inc. has announced positive results from a Phase 1 clinical trial of an inhaled formulation of zaleplon, the active pharmaceutical ingredient in Sonata. In July 2010, Alexza announced that it was advancing this product candidate into Phase 2 clinical trials during the first half of 2011 for the treatment of insomnia in patients who have difficulty falling asleep, including those patients who awake in the middle of the night and have difficulty falling back asleep. Somnus Therapeutics, Inc. has announced positive results from two Phase 1 clinical trials of a delayed-release formulation of zaleplon and has initiated Phase 2 clinical trials of that product candidate.

Vanda Pharmaceuticals Inc. has completed two Phase 3 clinical trials of tasimelteon, a melatonin receptor agonist. Tasimelteon received orphan drug designation status for non-24 hour sleep/wake disorder in blind individuals with no light perception. Vanda has initiated a Phase 3 clinical trial for tasimelteon to treat this disorder. Vanda has announced that it plans to conduct additional clinical trials and plans to file an NDA with the FDA by the first quarter of 2013.

Merck & Co., Inc. has MK-4305, an orexin antagonist, in Phase 3 clinical trials for the treatment of insomnia and MK-6096 in Phase 2 clinical trials for the treatment of insomnia. Merck has announced that it plans to file regulatory applications for MK-4305 in 2012.

Actelion Pharmaceuticals Ltd. completed a Phase 3 clinical trial of almorexant, an orexin antagonist, in December 2009, and subsequently expanded the clinical trial during the first half of 2010. Actelion and GlaxoSmithKline have entered into a collaboration relating to almorexant under which GlaxoSmithKline received exclusive, worldwide rights to co-develop and co-commercialize almorexant together with Actelion.

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

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

Upon the expiration of, or successful challenge to, our patents covering Silenor, generic competitors may introduce a generic version of Silenor at a lower price. Some generic manufacturers have also demonstrated a willingness to launch generic versions of branded products before the final resolution of related patent litigation (known as an “at-risk launch”). A launch of a generic version of Silenor could have a material adverse effect on our business and we could suffer a significant loss of sales and market share in a short period of time.

On November 3, 2010, we received a notice from each of Actavis and Mylan that each has filed with the FDA an ANDA for a generic version of Silenor 3 mg and 6 mg tablets. The notices each included a paragraph IV certification with respect to seven of the eight patents listed in the Orange Book for Silenor. The patent not subject to a paragraph IV certification expires in March 2013.

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

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

	•		capital resources;

	•		manufacturing, distribution and sales and marketing resources and experience;

	•		research and development resources, including personnel and technology;

	•		regulatory experience;

	•		experience conducting non-clinical studies and clinical trials, and related resources; and

	•		expertise in prosecution of intellectual property rights.

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

In addition, manufacturing efficiency and selling and marketing capabilities are likely to be significant competitive factors. We currently have no commercial manufacturing capability and more limited sales and marketing infrastructure than many of our competitors and potential competitors.

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

Since the beginning of the year, we have increased our employee team from 5 to 37 full-time employees as of September 30, 2010. Our management and personnel, systems and facilities currently in place may not be adequate to support the growth required to support our commercialization efforts. Our need to effectively manage our operations, growth and various projects requires that we:

•

manage our commercialization efforts effectively while carrying out our contractual obligations to collaborators and other third parties and complying with all applicable laws, rules and regulations;

•

continue to improve our operational, financial and management controls, reporting systems and procedures; and

•

attract, train and retain sufficient numbers of talented employees.

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

We depend on a limited number of wholesaler customers for the retail distribution of Silenor, and if we lose significant wholesaler customers, our business could be harmed.

Our customers for our Silenor product include some of the nation’s leading wholesale pharmaceutical distributors, such as Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, and major drug chains. The loss of any of these as a wholesaler customer or a material reduction in their purchases could harm our business, financial condition or results of operations. In addition, we may face pricing pressure from our wholesaler customers.

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

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

	•		decreased demand for our products;

	•		impairment of our business reputation;

	•		withdrawal of clinical trial participants;

	•		costs of related litigation;

	•		substantial monetary awards to patients or other claimants;

	•		loss of revenues; and

	•		the inability or lack of commercial rationale to continue development or commercialization of Silenor or any other product candidate.

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

Risks Related to Our Finances and Capital Requirements

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

Based on our recurring losses, negative cash flows from operations and working capital levels, we may need to raise substantial additional funds. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial condition and results of operations will be materially and adversely affected.

Because we may need to raise additional capital to fund our business, among other things, we may conduct substantial equity offerings. For example, in March 2010, we completed a public offering of 6,900,000 shares of our common stock at a public offering price of $8.25 per share for aggregate net proceeds of approximately $52.7 million. In July 2009, we completed a private placement of 5.1 million shares of our common stock at a price of $1.05 per share and seven-year warrants to purchase up to 5.1 million additional shares of our common stock, exercisable in cash or by net exercise at a price of $1.155 per share, for aggregate net proceeds of $5.7 million. We also have two effective shelf registration statements on Form S-3 filed with the SEC under which we may offer from time to time up to an aggregate of approximately $93.1 million in any combination of debt securities, common and preferred stock and warrants.

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

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

Debt financing, receivables assignments, royalty interest assignments and other types of financing are often coupled with an equity component, such as warrants to purchase stock. For example, in connection with our July 2009 private placement of equity securities, we issued to the investors warrants to purchase 5.1 million shares of our common stock, 2.3 million of which have not been exercised as of September 30, 2010. To the extent that any of these warrants, or any additional warrants that are outstanding or that we issue in the future, are exercised by their holders, dilution of our existing stockholders’ ownership interests will result.

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

In addition, rules and regulations of the SEC or other regulatory agencies may restrict our ability to conduct certain types of financing activities, or may affect the timing of and the amounts we can raise by undertaking such activities. For example, under current SEC regulations, if the aggregate market value of our common stock held by non-affiliates, or our public float, is less than $75 million, the amount that we can raise through primary public offerings of securities in any twelve-month period using one or more registration statements on Form S-3 may be limited to an aggregate of one-third of our public float. As of September 30, 2010, our public float was greater than $75 million.

We have never been profitable and we may not be able to generate revenues sufficient to achieve profitability.

We began generating revenues from the commercialization of Silenor late in the third quarter of 2010, we have not been profitable since inception, and it is possible that we will not achieve profitability. We incurred net losses of $22.8 million for the nine months ended September 30, 2010, and have accumulated losses totaling $200.8 million since inception. In addition, the report of our independent registered public accounting firm for the year ended December 31, 2009 included an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. We expect to continue to incur significant operating losses and capital expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve significant revenues, if any, or that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and adversely affected.

Our quarterly operating results may fluctuate significantly.

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

	•		the scope and effectiveness of commercialization activities relating to Silenor or any other product that we may commercialize, alone or with a collaborator;

	•		commercialization activities of our competitors;

	•		our entering into collaborations;

	•		any intellectual property infringement lawsuit in which we may become involved;

	•		our addition or termination of development programs or funding support;

	•		variations in the level of expenses related to development of any product candidate that we develop;

	•		non-cash charges which we incur, including relating to share-based compensation; and

	•		regulatory developments.

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

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

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

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of our net operating loss and credit carryforwards will be limited in the event a cumulative change in ownership of more than 50 percent occurs within a three-year period. We determined that such an ownership change occurred as of March 31, 2010 as a result of various stock issuances used to finance our development activities. This ownership change resulted in limitations on the utilization of our tax attributes, including our net operating loss carryforwards and tax credits. A portion of the remaining net operating losses limited by Section 382 becomes available for use each year.

If additional changes in ownership occur as a result of future financing events, then additional net operating loss carryforwards and research and development credit carryovers could be eliminated or restricted.

Risks Relating to Securities Markets and Investment in Our Stock

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

Our common stock had not been publicly traded prior to our initial public offering, which was completed in December 2005, and an active trading market may not develop or be sustained. We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Therefore, investors will have to rely on appreciation in our stock price and a liquid trading market in order to achieve a gain on their investment. The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Since our initial public offering on December 15, 2005 through September 30, 2010, the trading prices for our common stock have ranged from a high of $21.24 to a low of $0.18.

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

	•		variations in our quarterly operating results;

	•		events affecting our existing in-license agreements, our co-promotion agreement with Procter & Gamble and any future collaborations or other strategic transactions, commercial agreements and grants;

	•		announcements of new products or technologies, commercial relationships or other events by us or our competitors;

	•		regulatory approval or other changes in the regulatory status of our products or product candidates;

	•		decreased coverage and changes in securities analysts’ estimates of our financial performance;

	•		developments regarding challenges to our patents and other intellectual property rights;

	•		regulatory developments in the United States and foreign countries;

	•		fluctuations in stock market prices and trading volumes of similar companies;

	•		sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

	•		announcements concerning other financing activities;

	•		additions or departures of key personnel; and

	•		discussion of us or our stock price by the financial and scientific press and in online investor communities.

The realization of any of the risks described in the risk factors disclosed in our Annual Report on Form 10-K or in these “Risk Factors” could have a dramatic and material adverse impact on the market price of our common stock. In addition, class action litigation has often been instituted against companies whose securities have experienced periods of volatility or declines in market price. Any such litigation brought against us could result in substantial costs and a diversion of management’s attention and resources, which could hurt our business, operating results and financial condition.

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

As of October 29, 2010, our executive officers, directors and holders of 5% or more of our outstanding common stock beneficially owned approximately 41.0% of our common stock. As a result, these stockholders, acting together, would likely be able to control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

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

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

We are also subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the Nasdaq Stock Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

In addition, as a result of the workforce reductions we undertook in 2009 in order to reduce expenses, the efforts required to comply with Section 404 and the other corporate governance laws and regulations applicable to us have been undertaken by a smaller number of people. If we, or the third-party service providers on which we rely, fail to comply with any of these laws or regulations, or if our independent registered public accounting firm cannot complete any required attestation of our evaluation of our internal controls in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our corporate governance or internal controls, which could have an adverse effect on our business and our stock price.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In September 2010, we issued 219,431 shares of our common stock to two of our warrant holders in connection with the net exercise of their outstanding warrants. We did not receive any proceeds from the exercise of these warrants. The issuance of shares of our common stock upon exercise of these warrants were not registered under the Securities Act of 1933, as amended, in reliance upon Section 4(2) of such Act.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. (Removed and Reserved)

Item 5. Other Information

Not applicable.

Item 6. Exhibits

EXHIBIT INDEX


Exhibit
Number			Description
	3.1	(1)	Amended and Restated Certificate of Incorporation of the Registrant
	3.2	(2)	Amended and Restated Bylaws of the Registrant
	4.1	(3)	Form of the Registrant’s Common Stock Certificate
	4.2	(4)	Amended and Restated Investor Rights Agreement dated June 2, 2005
	4.3	(5)	Warrant dated May 21, 2008 issued to Silicon Valley Bank
	4.4	(5)	Warrant dated May 21, 2008 issued to Oxford Finance Corporation
	4.5	(5)	Warrant dated May 21, 2008 issued to Kingsbridge Capital Limited
	4.6	(6)	Form of Warrant dated July 2, 2009 issued to certain Purchasers under the Securities Purchase Agreement dated July 2, 2009
	10.1	†(7)	Professional Detailing Services Agreement between the Company and Publicis Touchpoint Solutions, Inc. dated July 14, 2010
	10.2	†(7)	Supplement No. 1 to the Professional Detailing Services Agreement between the Company and Publicis Touchpoint Solutions, Inc. dated July 14, 2010
	10.3	†(8)	Co-Promotion Agreement between the Company and The Procter & Gamble Distributing Company, LLC dated August 24, 2010
	10.4	#	Amendment to Employment Agreement dated September 15, 2010 between the Company and Tran B. Nguyen
	10.5		Amended and Restated License Agreement dated September 15, 2010 between the Company and ProCom One, Inc.
	31.1		Certification of chief executive officer pursuant to Rule 13a-14 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended
	31.2		Certification of chief financial officer pursuant to Rule 13a-14 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended
	32.1	*	Certification of chief executive officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	*	Certification of chief financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Filed with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 on November 30, 2005.

(2)		Filed with Registrant’s Current Report on Form 8-K on December 6, 2007

(3)		Filed with Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 on December 13, 2005.

(4)		Filed with the Registrant’s Registration Statement on Form S-1 on October 7, 2005.

(5)		Filed with Registrant’s Current Report on Form 8-K on May 22, 2008.

(6)		Filed with Registrant’s Current Report on Form 8-K on July 8, 2009.

(7)		Filed with Registrant’s Current Report on Form 8-K/A on July 21, 2010

(8)		Filed with Registrant’s Current Report on Form 8-K on August 25, 2010

†		Confidential treatment has been granted by the Securities and Exchange Commission with respect to certain portions of this agreement.

#		Indicates management contract or compensatory plan.

*		These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not subject to the liability of that section. These certifications are not to be incorporated by reference into any filing of Somaxon Pharmaceuticals, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SOMAXON PHARMACEUTICALS, INC.
Dated: November 10, 2010

	/s/ Richard W. Pascoe
	Richard W. Pascoe
	President and Chief Executive Officer (Principal Executive Officer)

Dated: November 10, 2010

	/s/ Tran B. Nguyen
	Tran B. Nguyen
	Vice President and Chief Financial Officer (Principal Financial Officer)

Pernix Sleep, Inc. - FORM 10-Q - November 9, 2010

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