Melinta Therapeutics (MLNTQ) 10-K 2012 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2012

¨ 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:  001-35405

CEMPRA, INC.

(Exact name of registrant specified in its charter)

Delaware	2834	45-4440364
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

6340 Quadrangle Drive, Suite 100

Chapel Hill, NC 27517

(Address of Principal Executive Offices)

(919) 313-6601

(Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

Title of Each Class	Name of Exchange on which Registered
Common Stock, $0.001 Par Value	Nasdaq Global Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ¨    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes ¨    No x

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 29, 2012, was approximately $81.7 million. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq Global Market on June 29, 2012. For purposes of making this calculation only, the registrant has defined affiliates as including only directors and executive officers and shareholders holding greater than 10% of the voting stock of the registrant as of June 29, 2012. The registrant became a publically reporting company on February 2, 2012 and did not meet the definition of an accelerated filer as of December 31, 2012.

As of March 1, 2013 there were 24,903,774 shares of the registrant’s common stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s definitive Proxy Statement for its 2013 Annual Meeting of Stockholders are incorporated herein by reference, as indicated in Part III.

CEMPRA, INC.

TABLE OF CONTENTS

		Page
PART I			2
Item 1.	Business		2
Item 1A.	Risk Factors		31
Item 1B.	Unresolved Staff Comments		53
Item 2.	Properties		53
Item 3.	Legal Proceedings		53
Item 4.	Mine Safety Disclosures		53
PART II			53
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		53
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		55
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		74
Item 8.	Financial Statements and Supplementary Data		74
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		74
Item 9A.	Controls and Procedures		74
Item 9B.	Other Information		75
PART III			76
Item 10.	Directors, Executive Officers and Corporate Governance		76
Item 11.	Executive Compensation		77
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		82
Item 13.	Certain Relationships and Related Transactions, and Director Independence		82
Item 14.	Principal Accounting Fees and Services		82
PART IV			83
Item 15.	Exhibits, Financial Statement Schedules		83
Financial Statements			F-1

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This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties, including those set forth under “Item 1A. Risk Factors” and “Cautionary Statement” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

PART I

Item 1. Business

Overview

We are a clinical-stage pharmaceutical company focused on developing antibiotics to meet critical medical needs in the treatment of infectious diseases, particularly respiratory tract infections and chronic staphylococcal infections. Our lead program is solithromycin (CEM-101), which we are developing in both oral and intravenous, or IV, formulations initially for the treatment of community acquired bacterial pneumonia, or CABP, one of the most serious infections of the respiratory tract. We have completed a successful Phase 2 clinical trial of the oral formulation for the treatment of CABP, demonstrating a favorable safety and tolerability profile and comparable efficacy to the current standard of care, levofloxacin, a respiratory fluoroquinolone. In December 2012, we initiated a pivotal Phase 3 trial for oral solithromycin in patients with CABP. We are also pursuing a second indication, bacterial urethritis, primarily gonorrhea, for which there is an urgent public health need. In this indication, in October 2012 we released data from a Phase 2 study in which solithromycin was demonstrated to be highly effective in treating uncomplicated gonorrhea.

Our second program is Taksta, an antibiotic known as fusidic acid, that has been used for decades outside the U.S., including western Europe. We are developing Taksta in the U.S. as an oral treatment for long term treatment of prosthetic joint infections caused by staphylococci, includingS. aureus and methicillin-resistantStaphylococcus aureus, or MRSA. Taksta successfully completed a Phase 2 clinical trial in patients with acute bacterial skin and skin structure infections, or ABSSSI, which is frequently caused by MRSA, demonstrating a favorable safety and tolerability profile and comparable efficacy to linezolid (sold under the brand name Zyvox^®), the only oral antibiotic for the treatment of MRSA approved by the U.S. Food and Drug Administration, or FDA. Having shown that Taksta is well tolerated and is active against current strains of MRSA in the U.S., in December 2012, we initiated a Phase 2 trial with Taksta in patients with prosthetic joint infections which is also primarily caused by staphylococci and for which safe, oral antibiotics for long term use are not currently available.

We have global rights (other than the Association of South East Asian Nations, or ASEAN, countries, which are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand and Vietnam) to solithromycin and are developing Taksta exclusively for the U.S. market.

Our goal is to develop differentiated antibiotics. We believe there are two main challenges that antibiotic candidates must overcome to be considered truly differentiated from currently-available antibiotics and those in development. The first is spectrum of activity. In addition to having activity against bacteria that have become resistant to generic antibiotics, one should focus on “the right spectrum” rather than broad spectrum. The right spectrum means an antibiotic that is active against most or all of the pathogens that are involved in a particular infection and could reduce the need for polytherapy. It also means that collateral damage to important bacteria such as gut flora is limited so that unintended side effects do not occur. We believe that solithromycin fits this profile as it is active against many key CABP pathogens as well as against pneumococcal strains resistant to other macrolides. The second is that there are many generic antibiotics. To compete effectively, each of our products will have to be sufficiently differentiated, based on efficacy, safety, dosing flexibility, and/or other factors, from competing products to enable it to address a meaningful market.

Solithromycin (CEM-101)

Solithromycin is a potent new macrolide that we are developing in oral and IV formulations for the treatment of respiratory tract infections, including CABP, which is one of the most common serious infectious diseases of the respiratory tract, and bacterial urethritis, including gonorrhea, the second most common infectious disease in the world. Historically, macrolides, including azithromycin, have been among the most frequently prescribed drugs for respiratory tract infections because of their combination of spectrum of antibacterial activity, safety for use in adult and pediatric patients, availability in oral and IV formulations, and strong anti-inflammatory properties. Spectrum of activity refers to the antibiotic’s ability to protect against a range of bacterial types. The effectiveness of macrolides for treating serious respiratory tract infections such as CABP, however, has declined due to resistance issues related to earlier generations of macrolides. Macrolide use for serious infections has generally been replaced by fluoroquinolones, including levofloxacin, despite this class having a less desirable safety and tolerability profile than macrolides. Solithromycin is being developed for moderate to moderately severe CABP. We are also developing solithromycin as a treatment for bacterial urethritis, including gonorrhea. As with respiratory tract pathogens,Neisseria gonorrheae,has become resistant to macrolides, including azithromycin and other classes of antibiotics. We believe solithromycin, with its unique chemical structure, retains and improves on the beneficial features of macrolides and can overcome the shortcomings of existing therapies.

Our Phase 1 and Phase 2 clinical trials and pre-clinical studies to date have shown that solithromycin has the following attributes:

• favorable safety and tolerability profile;

• comparable efficacy to the current standard of care;

• potent activity against a broad range of bacteria with excellent tissue distribution and intracellular activity;

• lower incidence of resistance development;

• potential for IV, oral and suspension formulations that may allow it to be used in broad patient populations and settings;

• potential for pediatric development; and

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• anti-inflammatory qualities to help patients feel better sooner during treatment.

In the third quarter of 2011, we completed a successful Phase 2 clinical trial in 132 CABP patients comparing the oral formulation of solithromycin to levofloxacin, a respiratory fluoroquinolone which is the current standard of care. In this trial, solithromycin demonstrated efficacy comparable to levofloxacin and a favorable safety and tolerability profile, with a lower incidence of treatment emergent adverse events than levofloxacin.

We designed our pivotal Phase 3 trial for oral solithromycin to treat CABP based on comments we received from the FDA. We believe that we will need two Phase 3 trials to support our planned NDA for solithromycin to treat CABP: one trial with oral solithromycin and another trial with IV solithromycin stepping down to oral solithromycin. These trials will be randomized, double-blinded studies conducted against a respiratory fluoroquinolone, moxifloxacin (Avelox), for which we will have to show non-inferiority for efficacy and acceptable safety and tolerability. Non-inferiority for efficacy means solithromycin will have to prove it is statistically as effective as a comparator drug within a pre-defined margin. In 2011, the FDA clarified the guidance for the clinical development of therapies for the treatment of CABP. We have designed our Phase 3 trials to meet FDA guidelines. The FDA reviewed and provided comments on our oral Phase 3 trial protocol and we began the Phase 3 trial with oral solithromycin in December 2012. In October 2012, we reported results from our Phase 1 trial for the IV formulation of solithromycin in which we demonstrated that IV solithromycin demonstrated good systemic tolerability, showed a favorable pharmacokinetic (PK) profile and achieved relevant plasma concentrations. Based on this study, we have selected a therapeutic dose of 400 mg administered once daily for up to seven days for the Phase 3 IV-to-oral step down trial. We plan to finalize the overall development program for solithromycin for CABP with the FDA at our end of Phase 2 meeting for solithromycin, which we expect will occur in the first half of 2013 and to initiate the IV to oral trial in the second half of 2013, subject to available resources.

In addition, we are studying solithromycin for the treatment of bacterial urethritis, including uncomplicated gonorrhea. The current standard of treatment for gonorrhea is a single intramuscular injection of ceftriaxone. Until recently, cefixime (Suprax) had been recommended for oral treatment of patients as well as for treatment of their potentially infected partners. However, as of August 2012, the Centers for Disease Control, or CDC, no longer recommends cefixime for the treatment of gonorrhea, which leaves no oral treatment option. In our preclinical studies, solithromycin has demonstrated in vitro activity against most drug-resistant gonococcal bacteria. In our Phase 2 open-label study begun in June 2012 and that, as of the date of this report, has enrolled 28 patients with suspected gonococcal infection, a single oral dose of solithromycin was administered. In October 2012, we reported that the primary endpoint of bacterial eradication as measured by conversion from positive baseline urethral or cervical cultures to negative at seven days was achieved in 100% of evaluable patients (22 patients with positive baseline cultures). Pharyngeal and rectal gonococcal infections were also cleared in this study. Because this is a second indication for which we intend to seek regulatory approval, we anticipate that a single Phase 3 trial in bacterial urethritis/cervicitis (primarily gonorrhea), will be sufficient for FDA approval for this indication.

Taksta

Taksta is an oral therapy that we are developing in the U.S. for the treatment of prosthetic joint infections, which are frequently caused by staphylococci, includingS. aureus, MRSA, coagulase negative staphylococci and other Gram-positive bacteria. Taksta is a novel and proprietary dosing regimen of fusidic acid, which is an approved antibiotic that has been sold by Leo Laboratories, Ltd. primarily for staphylococcal infections, including skin, soft tissue and bone infections, for several decades in Europe and other countries outside the U.S. and has a long-established safety and efficacy profile. We believe Taksta has the potential to be used in hospital and community settings on both a short-term and chronic basis. Since prosthetic joint infection is primarily treated with a combination of IV and oral drugs, we believe that Taksta would enable out-patient treatment of many patients who would otherwise require hospitalization, which we also believe would provide pharmacoeconomic advantages, be well received by doctors and be more convenient for patients. We have filed a patent application for our proprietary dosing regimen which has been shown with pharmacodynamics experiments to limit resistance development. In addition, fusidic acid is eligible for market exclusivity under the Drug Price Competition and Patent Term Restoration Act, also known as the Hatch-Waxman Act. If approved for prosthetic joint infections, Taksta could be eligible for orphan drug status in the U.S., which would provide seven years of market exclusivity. Taksta would also be eligible for an additional five years of exclusivity based upon the Generating Incentives for Antibiotics Now, or GAIN Act, since MRSA is listed in the law as a qualified infectious disease pathogen. Therefore, Taksta could qualify for as much as 12 years of exclusivity in total. Taksta also could receive additional six months exclusivity if approved for pediatric indications.

According to a survey of physicians conducted by Decision Resources, MRSA is the most important pathogen of concern in patients with osteomyelitis and prosthetic joint infection. Bone infections often begin with skin infections where bacteria enter the bloodstream through breaks in the skin or mucous membrane that occur as a result of a wound or due to a surgical, medical or dental procedure.

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Our clinical trials and pre-clinical studies to date, as well as historical data from outside the U.S., have shown that Taksta has the following attributes:

• established safety profile;

• comparable efficacy to the only FDA-approved oral treatment for MRSA;

• ability to be used orally as a treatment for all types ofS. aureus, including MRSA;

• lower frequency of resistance development due to our loading dose regimen; and

• potential to be used in patient populations not well served by current treatments.

In 2010, we successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated efficacy, safety and tolerability that was comparable to linezolid. Like ABSSSI, prosthetic joint infections are often caused byS. aureus, including MRSA. In December 2012, we initiated a Phase 2 trial of Taksta in patients with prosthetic joint infections.

The Limitations Associated with Antibiotics

The widespread use of antibiotics has led to development of resistant strains of bacteria, which limits the effectiveness of existing drugs. This led the World Health Organization to state in 2010 that antibiotic resistance is one of the three greatest threats to human health. The Centers for Disease Control and Prevention estimates that more than 70% of U.S. hospital infections are resistant to at least one of the antibiotics most commonly used to treat them.

Antibiotic resistance is primarily caused by genetic mutations in bacteria selected by exposure to antibiotics where the drug does not kill all of the bacteria. In addition to mutated bacteria being resistant to the drug used for treatment, many bacterial strains can also be cross-resistant, meaning that the use of a particular treatment to address one kind of bacteria can result in resistance to other kinds of bacteria as well as to other antibiotics. As a result, the effectiveness of many antibiotics has declined, limiting physicians’ options to treat serious infections and creating a global health issue. For example, it is estimated that in the U.S. 44% of pneumococci, the primary pathogen involved in respiratory tract infections, are resistant to azithromycin and other macrolides commonly used to treat them. Antibiotic resistance has a significant impact on mortality and contributes heavily to health care system costs worldwide.

In addition to resistance issues, current antibiotic therapies also have other limitations, including serious side effects. These side effects may include: severe allergic reaction, decreased blood pressure, nausea and vomiting, suppression of platelets, pain and inflammation at the site of injection, muscle, renal and oto toxicities, optic and peripheral neuropathies and headaches. Some of these side effects may be significant enough to require that therapy be discontinued or not used. As a result, some treatments require clinicians to closely monitor patients’ blood levels and other parameters, increasing the expense and inconvenience of treatment.

Further, many of the existing antibiotics used to treat serious infections are difficult or inconvenient to administer. Many drugs are given twice daily for seven to 14 days or more and patients can be hospitalized for much or all of this period or require in-home IV therapy. While IV treatment delivers the drug more rapidly and in a larger dose than is possible orally, once a patient is stabilized, a step-down to oral treatment allows for more convenient and cost-effective out-patient treatment. We believe that there is a need for new antibiotics that have improved potency and pharmacokinetics, effectiveness against resistant bacterial strains, improved side effect profiles and more flexible administration formulations.

The FDA has issued proposed guidelines for CABP that impact the development of new antibiotics by recommending certain protocol elements, measures and endpoints for clinical trials. Recent public FDA discussions have evolved toward requiring that new drugs demonstrate non-inferiority to the current standard of care for the disease to be treated, within a predetermined non-inferiority margin. We believe the FDA guidance is helpful in clarifying the regulatory pathway for our product candidates and, given the data that we have gathered to date on our product candidates, reinforces our belief that our product candidates can establish non-inferiority while also demonstrating efficacy against susceptible and resistant bacterial strains and improved safety. Our clinical trials for solithromycin have been designed with these guidelines in mind.

Solithromycin

Overview

We are developing solithromycin, a fourth generation macrolide, to treat respiratory tract infections, including CABP and also for treating bacterial urethritis. Traditionally, macrolides have been among the most commonly prescribed drug for respiratory tract infections because of their combination of spectrum of activity, safety for use in adult and pediatric patients, tissue distribution and activity against intracellular pathogens, pharmacokinetics allowing use in oral and IV formulations, and anti-inflammatory properties. However, the effectiveness of macrolides for treating serious respiratory tract infections such as CABP has declined due to resistance issues related to earlier generations of macrolides. We believe our clinical and pre-clinical results suggest that solithromycin retains and improves on the benefits of, and overcomes the shortcomings of, earlier generation macrolides.

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Solithromycin Market Opportunity

We are developing solithromycin in both oral and IV formulations initially as a treatment for CABP, which is a respiratory tract bacterial infection acquired outside of a hospital setting. Respiratory tract infections can range from severe diseases such as pneumonia (CABP), to similar infections of the respiratory tract such as pharyngitis (which is usually referred to as strep throat), bronchitis, chronic sinusitis and middle ear infections (which are especially common in children). CABP is one of the most common serious infectious diseases of the respiratory tract and is the most frequent cause of death due to bacterial infections. There are 1.6 million fatal cases of pneumococcal disease annually worldwide which is more than the deaths caused annually by breast or prostate cancer. There are approximately five to six million cases of CABP in the U.S. every year, approximately one million of which require hospitalization. Typical bacteria that cause CABP includeStreptococcus pneumoniae,Haemophilus influenzae, andMoraxella catarrhalis. These three bacteria account for approximately 85% of CABP cases. Other organisms may be involved in CABP and includeLegionella pneumophila,S. aureus,Chlamydophila pneumoniaeandMycoplasma pneuomoniae.

Many respiratory tract infections, including CABP, involve multiple bacteria. The routine diagnostic tests available to a physician can only identify a pathogen in 10% to 25% of cases and that diagnosis can take several days. Since infections can be serious and potentially life threatening, physicians cannot delay treatment while waiting for the results of these diagnostic tests to identify the pathogens involved in the disease. As a result, physicians seek to begin treatment with the antibiotic or combination of antibiotics that has the broadest activity against the bacteria thought to be causing the infection.

CABP and other respiratory tract infections can be treated with numerous classes of antibiotics, including macrolides, tetracyclines, fluoroquinolones, penicillins and cephalosporins. Each class has a different mechanism of action and resulting spectrum of activity. Each class, however, whether used alone or in combination, has limitations that can impede the treatment of CABP infections. Historically, macrolides have been among the most commonly prescribed drug for respiratory tract infections because of their broad spectrum of activity and relative safety. Azithromycin, a second generation macrolide which is sold as Zithromax and Z-PAK and as a generic, is the most widely prescribed macrolide with total U.S. prescriptions of 52 million in 2010, according to IMS Health, and sales of $1.1 billion, according to Medical Marketing & Media.

In recent years, the effectiveness of earlier generation macrolides, including azithromycin, to treat serious infections such as CABP has declined due to resistance issues. The most recently approved macrolide, telithromycin (Ketek), has seen limited use because of serious side effects. For these reasons, fluoroquinolones, such as levofloxacin, now are commonly used for serious CABP infections. Although levofloxacin is efficacious, it has serious side effects includingC. difficile enterocolitis, tendonitis, hepatotoxicity and central nervous system effects. Beta-lactams, such as cephalosporins, which are commonly used in CABP, also have limitations, including limited coverage against several important bacteria such asLegionella andMycoplasma. In addition, the newer cephalosporins can only be administered intravenously, which is a disadvantage if the patient does not need to be hospitalized or needs step-down oral therapy to enable treatment on an out-patient basis. The American Thoracic Society, or ATS, and the Infectious Diseases Society of America, or IDSA, recommend a macrolide together with a beta-lactam (such as a cephalosporin) to treat CABP. Alternatively, ATS and IDSA recommend physicians treat CABP with fluoroquinolones. The recommended combination of a macrolide with a beta-lactam has been shown to enhance survival; when a macrolide is not used, an increase in mortality has been shown.

We believe that the initial market acceptance of Ketek, which, according to IMS Health, in 2005, its first full year after FDA approval, generated 3.4 million prescriptions and $193 million in sales in the U.S., demonstrates the potential for a new macrolide therapy. However, soon after its U.S. approval in 2004, Ketek was found to cause reversible visual disturbances, loss of consciousness, exacerbate myasthenia gravis (a neurological disorder characterized by improper muscle regulation) and cause liver toxicity resulting in liver failure. Ketek was withdrawn in 2007 for use in all infections other than CABP, and as a result, the large market predicted for Ketek has not developed. While Ketek is a macrolide, solithromycin has a different chemical structure from Ketek, and therefore we believe is not likely to have the safety issues associated with Ketek. Our research, which was published in a peer-reviewed article inAntimicrobial Agents and Chemotherapy, suggests that pyridine, a chemical component of Ketek, is the agent that causes liver toxicity and other problems associated with Ketek. solithromycin and older generation macrolides, including azithromycin and clarithromycin, do not have a pyridine component and have not been observed to cause the serious side effects associated with Ketek. We believe that solithromycin has the potential to be more successful than Ketek if our Phase 3 trials confirm the efficacy and safety profile demonstrated in our previous trials.

As a result of the limitations of current therapies for CABP, we believe there is an opportunity to introduce a next generation macrolide that is more potent and effective against bacteria that are resistant to older generations of macrolides, while retaining the traditional safety and anti-inflammatory properties that macrolides are known to exhibit. To date, our Phase 1 and Phase 2 clinical trials have demonstrated that solithromycin is potent and effective against resistant bacteria and is well tolerated, with no serious adverse events. We also believe that developing IV and oral formulations will provide flexibility to physicians to treat patients according to the severity of their disease and transition some patients from IV to oral, enabling them to leave the hospital sooner. If approved by the FDA, solithromycin would be the first macrolide approved with both IV and oral formulations since azithromycin was approved 20 years ago.

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In addition to CABP, there is a large public health need for a new and effective oral treatment for treating bacterial urethritis. Resistance has emerged to cefixime, which is the only remaining oral therapy for gonococci infections, such as bacterial urethritis. Our preclinical data suggests that solithromycin is active against most bacterial pathogens known to be involved in bacterial urethritis including gonococci, chlamydia and mycoplasma. The CDC and key opinion leaders have expressed the need for an oral antibiotic as a replacement for cefixime because of resistance development. The development of solithromycin for bacterial urethritis would present an additional market opportunity for solithromycin and all of the patient data gathered in any trials would also contribute to the safety data base for CABP development.

Key Attributes of Solithromycin

We believe the following key attributes of solithromycin will make it a safe and effective treatment for CABP and bacterial urethritis.

Solithromycin has demonstrated a favorable safety and tolerability profile. Solithromycin has been tested in over 490 subjects in our Phase 1 and 2 clinical trials and has been shown to be safe and well tolerated to date. There were no clinically significant laboratory abnormalities in the Phase 1 trials. In the Phase 2 trial, there were fewer adverse events compared to levofloxacin, none of which required the patient to prematurely discontinue treatment with solithromycin, and no serious adverse events determined by the investigator to be related to solithromycin. Patients in our single and multi-dose Phase 1 IV trial showed no clinically significant liver enzyme changes associated with solithromycin at the selected therapeutic doses, indicating no liver toxicity. Additionally, in this study solithromycin did not produce dose-limiting nausea or vomiting, or effect the heart, which are common side effects of other macrolides.

Solithromycin has demonstrated comparable efficacy to the current standard of care. In our Phase 2 trial in 132 CABP patients comparing the oral formulation of solithromycin to levofloxacin, solithromycin successfully demonstrated efficacy comparable to levofloxacin. In addition, solithromycin has been highly effective in a Phase 2 trial of bacterial urethritis.

Solithromycin is potent against a broad range of bacteria and has excellent tissue distribution and intracellular activity. In pre-clinical studies, solithromycin was shown to be generally eight to 16 times more potent against respiratory tract bacteriain vitro than azithromycin as well as retains activity against azithromycin resistant strains. These pre-clinical studies also showed that solithromycin is potent against many bacteria that are resistant to levofloxacin and other fluoroquinolones. In addition to respiratory tract infections, solithromycin is active against bacteria causing other types of infections such as urethritis, malaria, and tuberculosis. solithromycin has demonstrated activity against bacterial strains that are not susceptible to older generations of macrolides. In pre-clinical studies, solithromycin has demonstrated a longer post-antibiotic effect, meaning that after exposure to solithromycin, bacteria take longer to regrow than after exposure to other macrolides, supporting the potential for once-daily dosing. Solithromycin has also demonstrated excellent organ and tissue distribution and intracellular activity, addressing not only bacteria located in the blood but also in organs and cells in which they multiply. Bacteria therefore cannot escape from the action of the drug. As a result of its potency, spectrum of activity and pharmacokinetic and pharmacodynamic properties, we believe that solithromycin could eventually be used as a monotherapy for the treatment of CABP.

Solithromycin has a greater ability to fight resistant bacteria and to overcome resistance development due to its chemical structure. Solithromycin has a unique structure that binds to bacterial ribosomes in three sites while earlier generation macrolides have only one or two binding sites. Therefore, bacteria must mutate at three sites on the ribosome to become resistant to solithromycin. To date, we have seen no resistance to solithromycin in our clinical trials, and resistance was rare in our pre-clinical studies.

Solithromycin has the potential for IV, oral and suspension formulations. We are developing oral and IV formulations to allow patients with severe CABP to be treated in both hospital and out-patient settings. Providing both the IV and oral formulations will enable IV-to-oral step-down therapy. We believe this would be more convenient and cost-effective for patients and provide pharmacoeconomic advantages to health care systems. We intend to develop a suspension formulation for treating bacterial infections in the pediatric population.

Solithromycin has improved anti-inflammatory qualities. In CABP and other bacterial infections, the body’s immune response to the bacteria results in inflammation and tissue damage, which worsens symptoms. In addition to their antibacterial effects, macrolides also have anti-inflammatory properties which help patients feel better earlier. Our pre-clinical data suggest that solithromycin could have significantly greater anti-inflammatory properties than azithromycin and clarithromycin, which are used to treat patients with cystic fibrosis, or CF, and chronic obstructive pulmonary disease, or COPD, primarily for their anti-inflammatory properties.

Clinical Data

Phase 2 Oral Trial. We successfully completed a Phase 2 trial of the oral formulation of solithromycin in the third quarter of 2011. The trial was a randomized, double-blinded, multi-center study to evaluate the efficacy and safety of oral solithromycin

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compared to oral levofloxacin in 132 patients with CABP. Levofloxacin, which is a respiratory fluoroquinolone, is the current standard of care and widely prescribed for the treatment of CABP. Patients were randomized to receive solithromycin or levofloxacin for five days. solithromycin patients received once-daily dosing of 800 mg on Day 1 and 400 mg on Days 2 through 5. Patients randomized to levofloxacin treatment received the standard dosing regimen of 750 mg per day for five days. The trial compared clinical success rates and safety and tolerability parameters for solithromycin and levofloxacin. The primary outcome measure was continued improvement or complete resolution of baseline signs and symptoms in the intent to treat, or ITT, and the clinically evaluable, or CE, populations at the Test of Cure, or TOC, visit, which was completed five to 10 days after the last dose of the drug.

Outcomes were assessed for several populations within the study. The ITT population consisted of all randomized patients, among whom 85.6% were in the CE group. To be clinically evaluable, key inclusion and exclusion criteria had to be validated, confounding antibiotics for other infections could not have been administered, and key visits and assessments had to have been performed. Patients for whom a microbial pathogen, or the bacteria responsible for the pneumonia, had been identified comprised the microbial-ITT, or mITT, population. Those mITT patients who were also in the CE study group constituted the microbial-evaluable or ME group. Since pneumonia can also be caused by viruses which antibiotics cannot treat, the FDA has placed emphasis on proof of clinical success in the mITT and ME groups.

Solithromycin demonstrated comparable efficacy to levofloxacin. The clinical response rate in the ITT population was 84.6% for solithromycin and 86.6% for levofloxacin. Similarly, clinical response rates for solithromycin and levofloxacin in the mITT and ME populations were well balanced (77.8% vs. 71.4% and 80.0% vs. 76.9%, respectively). The clinical response rates at TOC for the ITT, CE, mITT and ME populations are presented in Table 1.

Table 1. Solithromycin Oral Phase 2 Results: Clinical Response at Test of Cure (Days 5 to 10 after Last Dose).

Population	Clinical Response	Solithromycin 800/400 mg once daily No. of patients (%)	Levofloxacin 750 mg once daily No. of patients (%)
ITT	Number of patients	65	67
	Success	55 (84.6)	58 (86.6)
	95% Confidence Interval	(73.5-92.4)	(76.0-93.7)
	Failure(1)	10 (15.4)	9 (13.4)
	Failure	9 (13.8)	7 (10.4)
	Indeterminate	1 (1.5)	2 (3.0)
CE	Number of patients	55	58
	Success	46 (83.6)	54 (93.1)
	95% Confidence Interval	(71.2-92.2)	(83.3-98.1)
	Failure	9 (16.4)	4 (6.9)
mITT	Number of patients	18	14
	Success	14 (77.8)	10 (71.4)
	95% Confidence Interval	(52.4-93.6)	(41.9-91.6)
	Failure(1)	4 (22.2)	4 (28.6)
	Failure	3 (16.7)	4 (28.6)
	Indeterminate	1 (5.6)	0 (0.0)
ME	Number of patients	15	13
	Success	12 (80.0)	10 (76.9)
	95% Confidence Interval	(51.9-95.7)	(46.2-95.0)
	Failure	3 (20.0)	3 (23.1)

(1) Includes clinical response of failure and indeterminate.

In the CE population, the numerical success rate was higher in the levofloxacin arm (93.1%), with broadly overlapping confidence intervals. This in large part is due to exclusion of a larger number of failure patients from the levofloxacin arm and exclusion of treatment successes from the solithromycin arm on the basis of pre-established study criteria including validation of key inclusion and exclusion criteria and the completion of key visits and assessments.

Under the proposed FDA guidance for the conduct of CABP clinical trials, drug developers will be required to assess early responses to therapy as a primary endpoint. Therefore, we assessed markers of clinical success at the Day 3 visit. A clinical response was achieved if a patient was clinically stable and had experienced an improvement in severity without worsening in any of these signs or symptoms. The early clinical response rate in the ITT population was 72.3% for solithromycin patients, and 71.6% for levofloxacin patients.

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Safety was an important focus of this Phase 2 trial. In the trial, patients receiving levofloxacin reported more adverse events and severe adverse events than solithromycin patients. There were 19 patients (29.7%) in the solithromycin group with treatment emergent adverse events, or TEAE, compared with 31 patients (45.6%) in the levofloxacin group. There were no patients in the solithromycin group that discontinued the study due to a TEAE as compared to six patients (8.8%) in the levofloxacin group. The overall incidence of TEAE was greater in the levofloxacin arm, at all degrees of severity. Notably, gastrointestinal disorders, including abdominal discomfort, nausea, and vomiting, all occurred with greater frequency among levofloxacin recipients. The results are summarized in Table 2 below.

Table 2. Solithromycin Oral Phase 2 Results: Treatment-emergent Adverse Events with 2% Incidence in Any Treatment Group.

By System/Organ	Solithromycin 800/400 mg once daily (No. of patients, n=64)						Levofloxacin 750 mg once daily (No. of patients, n=68)
	Mild n (%)		Moderate n (%)		Severe n (%)		Mild n (%)		Moderate n (%)		Severe n (%)
Subjects with at least one TEAE		10 (15.6)		6 (9.4)		3 (4.7)		14 (20.6)		11 (16.2)		6 (8.8)
Gastrointestinal Disorders		5 (7.8)		4 (6.3)		0 (0.0)		11 (16.2)		5 (7.4)		0 (0.0)
Musculoskeletal and Connective Tissue Disorders		2 (3.1)		3 (4.7)		0 (0.0)		2 (2.9)		1 (1.5)		0 (0.0)
Nervous System Disorders		3 (4.7)		2 (3.1)		1 (1.6)		5 (7.4)		2 (2.9)		1 (1.5)

In addition to TEAEs, the trial also recorded serious adverse events, which are adverse events of particular severity that, among other defining criteria, might result in hospitalization or threaten overall health or survival. There were nine patients who experienced one or more serious adverse events during the study, two solithromycin recipients and seven levofloxacin recipients. The study site trial investigator determined that both of the serious adverse events reported in solithromycin recipients were unrelated to solithromycin, while one of the seven reported in levofloxacin recipients was unrelated to levofloxacin.

Patients treated with solithromycin had no drug-related clinically significant liver toxicities and reported no visual adverse events. Severe liver toxicities and visual disturbances led the FDA to require the drug label for Ketek to include a strengthened warning section regarding specific drug-related adverse events and contributed to Ketek being withdrawn for the treatment of all infections other than CABP.

Phase 1 IV Trial. The objective of our Phase 1 IV trial for solithromycin was to demonstrate safety and tolerability as well as to select the therapeutic dose after IV administration for our planned second Phase 3, IV to oral step down trial. We tested escalating IV doses of 25 mg, 50 mg, 100 mg, 200 mg, 400 mg, 800 mg and 1000 mg administered as single doses or 200, 400, 600 and 800 mg doses administered once daily for seven days. Patients were randomized into solithromycin and placebo arms. In the trial, the most common adverse events, or AEs, were general disorders and administration site conditions related to infusion discomfort or pain. Our Phase 1 trial also tested infusion solutions designed to minimize injection site pain. No AEs were reported in any of the studies that resulted from clinically significant changes in physical examinations, vital signs, or ECG data. In healthy subjects who received repeat-dose IV solithromycin (200, 400, or 800 mg QD for up to seven days) in the Phase 1 study 20% had asymptomatic and reversible ALT elevations. One subject, who received three daily doses of 800 mg, had a reversible and asymptomatic Grade 4 ALT elevation without bilirubin elevation. These ALT elevations were reversible and not associated with symptoms, bilirubin elevation or cholestasis. No loss-of-consciousness, myasthenia exacerbations, or visual disturbances were observed. Among patients receiving repeated doses of 400 mg daily for up to seven days, no clinically significant systemic adverse events were observed, except injection site pain in some subjects. In addition, the desired PK profile was achieved, with clinically relevant mean peak solithromycin concentrations of 4 micrograms/mL. Modeling of the PK data suggest that initial intravenous dosing with 400 mg once-daily, with a switch to oral administration when clinically appropriate to the same dose as in the oral program, i.e. 800 mg loading dose and 400 mg maintenance dose, will achieve concentrations of the drug that warrant its evaluation in the treatment of moderate to severe community acquired bacterial pneumonia caused by pathogens including azithromycin-resistant pneumococcus, Legionella, Mycoplasma, Moraxella, Hemophilus influenzae,and Staphylococcus aureus , including methicillin susceptible and community-acquired methicillin-resistantStaphylococcus aureus, all of which are infections that could require elevated concentrations of antibiotics. Based on this study, we have selected a therapeutic dose of 400 mg administered once daily for up to seven days for our planned Phase 3 IV-to-oral step down trial with the option of stepping down to oral treatment of solithromycin when appropriate as decided by the physician based on decreased symptoms.

Phase 1 Oral Trials. In earlier Phase 1 oral trials beginning in 2008 and continuing into 2011, 159 subjects were exposed to solithromycin. The Phase 1 trials were designed to examine the safety of solithromycin and the properties of the drug when absorbed

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into the bloodstream. There were no clinically relevant changes in patient laboratory values, including liver enzymes. There were very limited gastrointestinal adverse events and no dose-limiting nausea or vomiting, a common side effect of macrolides. Absorption of solithromycin into the bloodstream after oral administration was not affected by food, meaning solithromycin may be taken with or without food.

The results from our first Phase 1 dose escalation study demonstrated that doses of solithromycin from 200 mg to 600 mg had a favorable safety profile and were well tolerated in healthy subjects and that the compound’s pharmacokinetic profile was supportive of once-daily dosing. In this study, solithromycin was administered orally once-daily for seven days at 200 mg, 400 mg and 600 mg. The bioavailability of solithromycin was calculated to be 67% whereas azithromycin’s bioavailability is 38% as reported in its package insert. The concentration of solithromycin was measured in the plasma on Day 1 and Day 7. The compound showed moderate accumulation over the seven days of dosing, indicating that a loading dose regimen followed by a maintenance dose would be suitable, as has been noted with macrolides like azithromycin in the past. These blood levels were subjected to a sophisticated computer model based on efficacy studies in mouse models, which led to identifying a loading dose of 800 mg with a maintenance dose of 400 mg as the therapeutic dose. At these doses solithromycin is expected to be clinically effective against 99.99% of pneumococci with a minimum inhibitory concentration, or MIC, of 2 µg/ml or less, while no pneumococcal strains with an MIC of >1 mcg/ml have been identified in any of the surveillance programs. Mild, clinically insignificant gastrointestinal side effects were the most common adverse events observed in each dose group. Importantly, there were no clinically significant adverse events.

In CABP, the lung is the target organ where pathogens replicate. Therefore, in the first quarter of 2010, we conducted a Phase 1 pharmacokinetic study of solithromycin in 31 healthy human volunteers to measure the concentration of solithromycin in the epithelial lining fluid, or ELF, and in alveolar macrophages, or AM, compared to the concentration in plasma. After five days of dosing (400 mg per day, without loading), we performed bronchoalveolar lavage (BAL), a medical procedure to collect fluid and cells in the lung. BAL analysis was performed in groups of six at 3, 6, 9, 12 or 24 hours following the last solithromycin dose on Day 5, and solithromycin concentrations were measured in each of the ELF, AM, and plasma. The concentration of solithromycin in ELF was 10 times that of plasma and in AM it was 100 times that of plasma. As shown in Table 3, solithromycin’s drug levels are higher than those achieved by azithromycin and solithromycin reaches the site of infection at concentration levels several fold in excess of the levels necessary to kill the relevant bacteria according to our pre-clinical studies. Higher drug levels also inhibit bacterial regrowth and resistance development during intervals between dosages.

Table 3: Solithromycin Oral Phase 1 Results: Pulmonary Levels of Solithromycin and Azithromycin at Time of BAL.

Antibiotic	Dose	Plasma Cmax (µg/mL)		ELF Cmax (µg/mL)		AM Cmax (µg/mL)
Solithromycin	400 mg qd/5 d		0.7		7.6		102
Azithromycin(1)	500 mg qd/1 d; 250 mg qd/4 d		0.1		2.2		57

(1) Zithromax Prescribing Information with loading dose of 500 mg on Day 1 followed by 250 mg daily for four days, Foulds, et.al., 1990.

We also conducted three drug-drug interaction studies in 2010 and 2011 in which solithromycin was co-administered with rifampin, midazolam or ketoconazole to test its effects on these drugs. These studies have been successfully concluded and the data confirm that solithromycin’s interactions with CYP3A4, an enzyme in the liver that metabolizes a number of drugs, are consistent with older macrolides’ interactions with CYP3A4.

Phase 2 Trial in Gonorrhea.Emerging resistance to available therapies, including oral and injectible cephalosporins and azithromycin, has resulted in an urgent medical need for new therapies for gonorrhea. Solithromycin, a new fourth generation macrolide with three ribosomal binding sites, has greater in vitro potency against gonococci than azithromycin and is active against most azithromycin- and cephalosporin-resistant strains. We have completed a phase II study to evaluate the efficacy and safety of single-dose oral solithromycin for treatment of patients with gonorrhea. Patients with suspectedNeisseria gonorrhoeae infection were enrolled. Consenting eligible patients received a single oral dose of 1200 mg solithromycin. All patients were cultured forN. gonorrhoeae in the urethra/cervix, rectum, and pharynx at enrollment and Day 7. The primary outcome was bacterial eradication as measured by conversion from positiveN. gonorrhoeae baseline urethral or cervical culture to negative at Day 7. Secondary outcomes included eradication of rectal or pharyngeal gonorrhea. In October 2012, we reported that gonococcal eradication rates in 22 evaluable patients (of 28 patients enrolled at that time) who had culture proven gonorrhea, were 100% (22/22) for urethral/cervical infections. Eradication rates were also 100% for rectal (2/2) and pharyngeal (5/5) infections. Susceptibility data from 25 isolates show the median MIC (range) for solithromycin was 0.06 µg/mL (0.015–0.125). Solithromycin was generally well-tolerated, with mild gastrointestinal AEs common (86%; 24/28). The most common AE was mild diarrhea (61%; 17/28) followed by mild nausea (32%; 9/28). Based on these results, a single 1200 mg dose of solithromycin appears to be well tolerated and effective in eradicatingN. gonorrhoeae. Since 100% efficacy was achieved with 1200 mg, we are continuing to test 1000 mg to determine the optimum effective dose.

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Pre-Clinical Data

Our pre-clinical studies support four of the key attributes of solithromycin: potency against a broad range of bacteria, potential to have a low incidence of resistance, intracellular activity and anti-inflammatory qualities associated with macrolides.

Potency. We have extensively studied solithromycin’sin vitro activity and potency against a variety of respiratory and non-respiratory bacteria. solithromycin was tested against clinical isolates including pneumococci,Hemophilus, Legionella, Moraxella, Chlamydia, Neisseria, beta-hemolytic streptococci, Mycoplasma, S. aureus (including MRSA), coagulase negative staphylococci, enterococci and many other bacteria. These studies found that solithromycin exhibited two to four times greater potency compared to Ketek, and superior potency compared to other macrolides against most bacteria causing CABP. In another study, solithromycin demonstrated superior activity against several serotypes ofLegionella pneumophila compared to other macrolides, particularly erythromycin and azithromycin, which are commonly used to treat Legionellosis.Legionella are atypical bacteria and are not susceptible to penicillins and cephalosporins commonly used to treat CABP, but are susceptible to fluoroquinolones such as levofloxacin. The results of these studies are presented in Table 4 below. Potency against a panel of bacterial strains is measured by MIC₉₀, which refers to the concentration needed to inhibit the growth of 90% of a panel of bacterial strains isolated from patients. A lower MIC₉₀ indicates greater potency against a particular bacterium.

Table 4. Solithromycin Pre-Clinical Data: Solithromycinin vitro Activity Against CABP Bacteria.

Organism (# strains tested)	Solithromycin MIC90  (µg/ml)		Azithromycin MIC90  (µg/ml)		Levofloxacin MIC90 (µg/ml)		Amox/Clav     MIC90 (µg/ml)
Streptococcus pneumoniae (150)		0.25		>16		1.0		>8
Streptococcus pyogenes (100)		0.03		>16		1.0		0.25
Hemophilus influenzae (100)		2		2		0.12		2.0
Legionella pneumophila (30)		0.015		2		0.5		NE
Mycoplasma pneumoniae (36)		0.000125		0.0005		0.5		NE
Chlamydophila pneumoniae (10)		0.25		0.125		NT		NE

NE = Not effective, as the target of these antibiotics do not exist in these pathogens.

NT = Not tested.

Resistance. Solithromycin was tested against pneumococcal strains that have become resistant to older macrolides as a result of mutations callederm(B), mef(A), a combination oferm(B)with mef(A), and L4 mutations. As shown by thein vitro potency data in Table 5 below, solithromycin was active against all tested pneumococcal strains that are resistant to older macrolides.

Table 5. Solithromycin Pre-Clinical Data: MIC₅₀ and MIC₉₀ Values (µg/ml) of Pneumococci with Defined Macrolide-Resistant Mechanism.

Drug	erm(B) (54)				mef(A) (51)				erm(B) + mef(A) (31)				L4 mutations (27)
	MIC50		MIC90		MIC50		MIC90		MIC50		MIC90		MIC50		MIC90
Solithromycin		0.03		0.5		0.03		0.125		0.125		0.25		0.06		0.125
azithromycin		>64		>64		4		8		>64		>64		>64		>64
telithromycin		0.06		1		0.125		0.25		0.5		1		0.125		0.25
clindamycin		>64		>64		0.06		0.06		0.06		>64		0.06		0.125
amox/clav		0.5		8		0.125		2		2		8		4		8
levofloxacin		1		2		1		2		1		16		1		2
penicillin G		1		4		0.125		4		2		4		4		16

The ability to become resistant to solithromycin was analyzed by exposing eight pneumococcal bacterial strains from the above study to solithromycin. Only one strain which was already resistant to the older macrolides and wereerm andmef strains developed a high-level resistance to solithromycin and only after 18 passes. This suggests that selection of resistant strains would be infrequent and additional mutations are necessary for resistance to develop to solithromycin.

We also tested a number of Group A beta-hemolytic streptococci that have become resistant to older macrolides. The data indicate that solithromycin is active against these organisms, which have different mechanisms of resistance, including erm(B), mef(A) and erm(A). The frequency of resistance was low at <10-10, but importantly there was no cross-resistance with these organisms once they had become resistant to older macrolides. Solithromycin is active against all these resistant strains. While the strains are resistant to older generations of macrolides, no strains resistant to solithromycin could be isolated after 50 transfers in a growth medium containing solithromycin.

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We have continued to study global susceptibility and resistance patterns against relevant pathogens in CABP and tested solithromycin against pathogens collected in 2011 from respiratory tract infections. Solithromycin displayed coverage against 100.0% ofS. pneumoniaestrains (2,418 strains collected from the U.S. and Europe) at£1 µg/mL (a level which is achievable in the plasma and tissues). The MIC₉₀ againstS. pneumoniaewas 0.12 µg/mL in these studies. Resistance rates in the U.S. to macrolides have been noted to increase from previous results to 44% in 2012. The activity of solithromycin against other respiratory tract associated pathogens, such asH. influenzae andM. catarrhalis, was stable during four consecutive surveillance years (2008-2011). We believe this confirms that solithromycin could be a promising antibiotic for treatment of bacterial pathogens causing respiratory tract and other infections.

Intracellular Activity. Bacteria that cause infections can be inside cells or in tissue. During treatment if the antibiotic does not penetrate into tissues and cells, the bacteria can escape the effect of the antibiotic. Consequently, it is important that antibiotics be distributed from the blood to the tissues and intracellularly. Macrolides have been known to be effective against intracellular bacteria, which is one of their advantages. solithromycin accumulates to concentrations that are several times higher than azithromycin, as shown below in Figure 1a, and the intracellular drug is potent against intracellular bacteria and is more active than azithromycin in killing intracellular pathogens such as Legionella pneumophila as shown in Figure 1b.

Figure 1a: Concentration after Exposure of Macrophages to Azithromycin and Solithromycin in Macrophages Figure 1b: Killing of Legionella Located Intracellularly by Azithromycin and Solithromycin

Anti-Inflammatory Properties. We conducted studies comparing solithromycin’s anti-inflammatory properties to older macrolides. solithromycin was more effective than the older macrolides in decreasing the production of cytokines, which are cell-signaling molecules involved in the process of inflammation. Reduction of cytokine activity would be expected to reduce inflammation and resulting tissue damage. Thus, solithromycin is expected to be effective in eradicating the infecting bacteria and reducing the inflammation resulting from the infection, which should result in a faster recovery. Older generation macrolides have also been used in the treatment of diseases like late-stage COPD and CF because of their anti-inflammatory properties. Our pre-clinical data suggest solithromycin could also be used in the treatment of these diseases.

In addition, investigators at the University of North Carolina, Chapel Hill, through funding from the National Institute of Allergy and Infectious Diseases, or NIAID are for studying solithromycin’s mucin inhibitory properties and ability to restore lung physiology in cystic fibrosis model systems.

Planned Clinical Trials

We have initiated our pivotal trial program, which we believe will require two Phase 3 trials, including one trial with oral solithromycin and one trial with IV solithromycin stepping down to oral solithromycin for the approval of both IV and oral products under one NDA. The FDA’s Anti-Infective Drugs Advisory Committee (AIDAC) convened in November 2011 to review anticipated

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changes in guidance to the industry for conducting clinical trials for CABP. The proposed guidance follows several FDA advisory meetings as well as recommendations of an independent advisory body called the FNIH that involved industry and academic infectious disease physicians. According to the newly proposed guidelines, the primary endpoint for Phase 3 CABP trials will be clinical success at an early timepoint (Day 3-5 post study drug initiation). Clinical success is defined as improvement in at least two of the following symptoms: cough, shortness of breath, chest pain, and sputum production, without worsening in any other symptom. The proposed guidelines also clarify the patient population required for these trials by specifying the percent of patients to be enrolled based on the severity of their disease. For example, the new guidelines specify that up to 50% of patients in oral CABP trials can have moderate CABP, with the remainder having more severe disease. IV CABP trials can have up to 25% of patients with moderate CABP while the rest must have more severe CABP. For those seeking FDA approval by establishing non-inferiority, the guidance specifies that companies conduct adequate and well controlledPhase 3 CABP trials, with a requirement to demonstrate non-inferiority in early clinical response rate (in comparison to the comparator drug) in the Intent-to-Treat population of each study, using a 10% non-inferiority margin. In addition, non-inferiority must be demonstrated in the pooled (across both studies) microbiological-Intent-to-Treat population. We have designed our Phase 3 trial program to meet these FDA guidelines. For our Phase 3 trial for oral solithromycin, we requested and were allowed to includeMycoplasma pneumoniae, a CABP pathogen, within the mITT and ME scores. We also requested and were allowed to use PCR based rapid diagnostics for CABP pathogens (Curetis) to support our mITT and ME data. The study was initiated in the fourth quarter of 2012.

The Phase 3 trials will be randomized, double-blinded studies conducted against a comparator drug agreed upon with the FDA, for which we will have to show non-inferiority from an efficacy perspective and acceptable safety and tolerability. Using feedback received from the FDA, we began the Phase 3 trial with oral solithromycin in December 2012. We expect to receive top line data for that trial in the first half of 2014.

In October 2012, we reported results from our Phase 1 trial for the IV formulation of solithromycin in which we demonstrated that IV solithromycin was well tolerated, showed a favorable pharmacokinetic (PK) profile and achieved relevant plasma concentrations. Based on this study, we have selected a therapeutic dose of 400 mg administered once daily for up to seven days for the Phase 3 IV-to-oral step down trial. We are planning the second pivotal study, a Phase 3 IV-to-oral step down study for the treatment of moderate to moderately severe CABP. We plan to request, in the first quarter of 2013 an end of Phase 2 meeting with the FDA. This is a key meeting that should define the expectations for the NDA for the IV and oral formulations of solithromycin. The FDA can take up to 60 days to conduct this meeting. We plan to finalize the overall development program for solithromycin for CABP with the FDA at this meeting, which we expect will occur in the first half of 2013. We plan to initiate the trial in the second half of 2013, subject to available resources.

In addition, we intend to conduct a number of studies to support FDA approval, including a thorough QT, or TQT, study to look at cardiac effects, and studies in patients with hepatic insufficiency and renal impairment.

We are exploring the possibility for funding pediatric studies for solithromycin in a range of indications for CABP through the Biomedical Advanced Research and Development Authority, or BARDA, an agency of U.S. Department of Health and Human Services.

Solithromycin as a Treatment for Bacterial Urethritis. We have demonstrated that solithromycin has in vitro activity against a broad spectrum of pathogens that cause bacterial urethritis, includingN. gonorrhoeae, Chlamydia trachomatis, Mycoplasma genitalium, Ureaplasma urealyticum etc. In our Phase 2 study, we have demonstrated to date that solithromycin is effective in treating gonococcal urethritis/cervicitis, and pharyngeal and rectal gonococcal infections. The CDC no longer recommends oral cefixime to be used in the treatment of gonorrohea and the recommended treatment is intramuscular injection of ceftriaxone. Resistance to ceftriaxone has been reported. There is no oral antibiotic currently recommended for treating gonorrhea as well as for treatment of sexual partners of infected patients. This need has become a public health crisis and the WHO and U.S. government are looking for alternative treatments. We are discussing possible grant funding opportunities with the NIAID to pursue solithromycin in a pivotal Phase 3 trial for the treatment of bacterial urethritis, primarily gonnorhea.

Potential Biodefense Application for Solithromycin. Solithromycin is active against bioterror threat pathogens such asB. anthracis, Yersinia pestisand Francisella tularensis. In order to explore the potential for its use to provide broad protection in a bioterror threat, we are exploring the possibility for funding studies on solithromycin through BARDA.

Taksta (Fusidic Acid)

Overview

Taksta, our fusidic acid product candidate, is an oral antibiotic that we are developing in the U.S. for the treatment of prosthetic joint infections, which are frequently caused bystaphylococci, including coagulase-negative and coagulase-positive staphlycocci and MRSA. Fusidic acid is the only member of a unique class of antibiotics, called fusidanes, and has a mechanism of action that differs from any other antibiotic. Fusidic acid has been approved and sold for several decades in Europe and other countries outside the U.S. and has a long-established safety and efficacy profile, but has never been approved in the U.S. We have conductedin vitrotests of

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Taksta’s activity against thousands of strains ofS. aureus found in the U.S. and our data show that virtually all of those strains tested (99.6%) are susceptible to Taksta. In addition, we believe Taksta has the potential to be used in hospital and community settings on both a short-term and chronic basis. Our completed Phase 2 clinical study has shown Taksta to be comparably effective to linezolid, a treatment for the common skin infectionS. aureus and the only oral antibiotic approved by the FDA to treat MRSA.

Taksta Market Opportunity

According to a survey of physicians conducted by Decision Resources,Staphylococcus aureus, including MRSA, is the most important pathogen of concern in patients with osteomyelitis and prosthetic joint infection. The other major pathogen involved in PJI is coagulase-negative staphlycocci. Bone infections generally begin with bacteria that reside on the skin and enter the bloodstream through breaks in the skin or mucous membrane that occur as a result of a wound or due to a surgical, medical or dental procedures. According to the IDSA, MRSA infections account for approximately 60% of skin infections seen in U.S. emergency rooms. The most common treatments for prosthetic joint infection with MRSA currently are vancomycin (available as a generic) and sometimes daptomycin (sold under the brand name Cubicin^®), both of which are available only as IV formulations for systemic infections. Linezolid, which is also prescribed for prosthetic joint infections, is available in both IV and oral formulations and is the only oral antibiotic approved by the FDA for MRSA. Linezolid, however, has significant side effects, which include irreversible peripheral neuritis, or the inflammation of nerves and thrombocytopenia, or a relative decrease of platelets in blood. It is recommended that linezolid not be taken for more than 14 days without additional monitoring because of the increased possibility of these side effects. In addition, on July 26, 2011, the FDA published a drug safety communication letter regarding the use of linezolid in patients on serotonergic drugs such as SSRIs (including Prozac, Paxil and Zoloft), which are taken for depression, bipolar disease, schizophrenia and other psychiatric disorders. Given the widespread use of SSRIs and some of the other side effects associated with linezolid, we do not believe that linezolid is an option for many patients. We believe there is an opportunity to develop an oral drug that is effective against MRSA and has a safety profile that supports out-patient use, use for chronic indications and use in children.

In 2006, nearly 800,000 total knee or hip arthroplasty procedures were performed in the U.S., with an overall infection rate of approximately 1.0%. It has been predicted that the demand for knee revision surgery will double by 2015, and increase by 673% by the year 2030 as the population ages. With steadily increasing numbers of patients in the U.S. undergoing prosthetic joint surgery, we expect there will be a corresponding increase in the overall incidence of prosthetic joint infections. Prosthetic joint infections usually occur when bacteria enter the area of the prosthesis during implantation. However, they may also occur through other surgical, medical or dental procedures or by accident when the skin or mucous membrane is broken, enabling surface-level bacteria to travel to the prosthesis.S. aureus species, including MRSA, are the most commonly identified bacterial pathogens involved in prosthetic joint infections.

The methods for the treatment for PJI are variable depending on the severity of the infection and the patient’s condition. The infected prosthesis could be saved or could be replaced. The antibiotics used to treat these infections depend on the pathogens involved. Staphylococci are the most frequently identified pathogen in PJI. IDSA has recently issued guidelines for the treatment of PJI (Osmon, et al., 2013). In almost all cases intravenous vancomycin is administered for two to eight weeks, in combination with oral antibiotics such as rifampin, ciprofloxacin, levofloxacin, cefazolin, clindamycin or Bactrim. The choice of the oral antibiotic is dependent on whether the staphylococcus is MRSA. Rifampin is commonly used as its use has been noted to have better outcome. Two-stage revision replacement of an infected prosthesis is most commonly practiced in the U.S. It has been noted that greater than 85% success could be achieved by two-stage revision versus 45% success rate if the prosthesis is retained. These results are in the U.S. where fusidic acid is not available for use. In the two-stage method of treatment, the infected prosthesis is removed, an antibiotic impregnated spacer is installed and the patient is then treated with IV vancomycin for four to six weeks. After that time, the antibiotic is stopped and after six weeks, the joint is cultured to determine if the infection is cleared and a new prosthesis is introduced. Thus, in the U.S., patients undergo at least two surgeries, several weeks of intravenous therapy, as well as oral antibiotics. In Europe and Australia, two-stage revision is less common and the strategy is to debride and treat with intravenous vancomycin and oral rifampin for one to four weeks followed by oral rifampin plus fusidic acid for three months to one to two years. Other oral antibiotics have been used with less success. In the U.S., the debride and retention method is less often used in PJI patients, but when used in these patients, chronic suppression is used for years with a combination of intravenous and oral antibiotics and the treatment is often a failure. According to Data Monitor, physicians indicate that safety is a significant factor for them in choosing antibiotic therapy for osteomyelitis and prosthetic joint infections because the population of patients receiving prosthetic joints tends to be older and the treatment duration is longer. As a result, we believe there is a significant opportunity for a treatment for prosthetic joint infection that is effective against staphylococci, including MRSA, and can be used safely on a long-term basis. Outside of the U.S., fusidic acid has been used successfully in combination with rifampin to achieve high cure rates in selected patients with prosthetic joint infections, without requiring replacement of the prosthesis. In a recent review of clinical experience at an Australian teaching hospital, as well as in the Swiss teaching hospital, treatment of staphylococcal prosthetic joint infection with debridement, prosthesis retention, and oral fusidic acid and rifampin therapy achieved an approximately 88% treatment success rate at one year.

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Key Attributes of Taksta

We believe Taksta can be an effective treatment for prosthetic joint infections because of the following key attributes.

Taksta has an established safety profile outside the U.S. Fusidic acid has been approved and used in certain countries in Europe and in Australia for many years, in some countries as many as 40 years, both for short-term use in complicated skin infections as well as for long-term use in other types of infections requiring long-term therapy, including osteomyelitis and prosthetic joint infections. Further, fusidic acid has been used in pediatric populations outside the U.S. and has been safe and well tolerated. As fusidic acid has been in clinical use outside the U.S. for several decades, a substantial body of safety data is in the public domain. Safety data from over 100 published clinical study results involving the oral administration of fusidic acid to over an aggregate of 4,000 patients demonstrated a safety profile consistent with non-U.S. approved product labeling. These data indicate significant worldwide use of fusidic acid, capture clinical experience in the public domain and characterize the safety profile of fusidic acid. The safety data from our Phase 1 and Phase 2 clinical trials are consistent with available historical data and establish that Taksta has a favorable safety and tolerability profile.

Taksta has demonstrated comparable efficacy to the only FDA-approved oral treatment for MRSA. In a Phase 2 trial in 155 ABSSSI patients comparing Taksta to linezolid, Taksta successfully demonstrated efficacy comparable to linezolid and confirmed its effectiveness againstS. aureus and MRSA. Furthermore,in vitro data have demonstrated that Taksta has potent activity against more than 7,300 strains ofS. aureus, including MRSA strains that are community-acquired MRSA, or CA-MRSA, hospital-acquired MRSA, or HA-MRSA, and other known types of MRSA. We have also conducted tests of Taksta’s activity against strains ofS. aureusthat are found in the U.S. and our data show that virtually all of those strains (99.6%) are susceptible to Taksta. As a result of Taksta’s broad range of activity againstS. aureus, physicians could use Taksta to treat a patient with an infected wound or cellulitis without identifying the particular type ofS. aureuscausing the infection. Since fusidic acid has a unique structure and target, there is no known cross-resistance with other antibiotics.

Taksta is an oral therapy for all types of S. aureus, including MRSA. The leading treatments for prosthetic joint infections and ABSSSI caused by MRSA are available only in IV formulations. Linezolid is the only drug currently approved for use against MRSA with an oral formulation. However, its use is associated with serious side effects and cannot be used in certain patient populations without additional monitoring. We believe our clinical studies and historical data on fusidic acid demonstrate that Taksta has the potential to be a safe and effective oral treatment for prosthetic joint infections and ABSSSI caused by MRSA. We believe Taksta would enable physicians to treat patients not otherwise needing hospitalization on an outpatient basis, thereby reducing hospitalization costs and avoiding the unnecessary introduction of resistant bacteria into the hospital setting.

Taksta has a lower incidence of resistance due to our proprietary loading dose regimen. Ourin vitro studies have shown that the reason for resistance to fusidic acid that was reported to occur during oral treatment outside the U.S. is that it was not dosed optimally. In addition, published studies of resistance during oral treatment with fusidic acid outside the U.S. conclude that the frequency of resistance is related to the lack of initial potency, which has been addressed in the past by combination therapy. Our innovative loading dose regimen minimizes the development of resistance by increasing the amount of drug initially delivered to the bacteria.

Taksta can be used in patient populations not well served by current treatments. We believe Taksta could also be used for patients that are anemic, as well as patients on serotonergic drugs such as SSRIs who could be treated with an oral antibiotic, but for whom linezolid may not be a viable or convenient treatment option due to side effects and/or increased monitoring requirements. In addition, none of the antibiotics currently on the market can be used for prolonged periods of time to treat chronic staphylococcal infections due to safety concerns. We believe Taksta could fulfill the need for a safe, long-term oral therapy to treat chronic infections such as prosthetic joint infections and osteomyelitis. Furthermore, there are few treatment options for children infected withS. aureus, especially MRSA, because in children, IV antibiotics have unpredictable blood levels and are inconvenient to dose. Fusidic acid is available in an oral formulation and has been used in pediatric populations outside the U.S. We intend to develop a pediatric formulation of Taksta to address the need for a safe and effective oral treatment of staphylococci and streptococci in children.

Clinical Data

Fusidic acid has been used outside the U.S. for approximately four decades. However, fusidic acid has never been approved in the U.S. As a result, we must demonstrate that Taksta is active against current strains of staph, including MRSA, that are responsible for infections in the U.S., as well as to show that it is well tolerated at the dosing regimen that we are developing.

Phase 2 Clinical Trial. We have successfully completed a Phase 2 clinical trial in ABSSSI, comparing Taksta to linezolid, which is the only oral antibiotic approved by the FDA for treating MRSA infections. The trial demonstrated that our Taksta loading dose regimen has a favorable safety and tolerability profile with efficacy comparable to linezolid. In this study, patients were stratified by the type of infection, such as wounds and cellulitis, and, through the first 127 patients, were randomized in a 1:1:1 ratio to receive a

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Taksta non-loading regimen (Taksta 600 mg twice per day which is similar to the dose practically used in the E.U.), a Taksta loading dose regimen (Taksta 1500 mg twice per day on Day 1, followed by 600 mg twice per day), or linezolid (600 mg twice per day, which is the standard approved dose), each administered for 10-14 days. After interim analysis of the initial 127 patients demonstrated comparable safety and tolerability of the two Taksta regimens, the Taksta non-loading dose regimen was dropped in favor of the Taksta loading dose regimen, which was shown to have a lower resistance profile inin vitro models, and the remaining patients were randomized in a 1:1 ratio to receive the Taksta loading dose regimen or the linezolid regimen. A total of 155 patients received either the Taksta loading dose regimen or linezolid. The loading dose followed by maintenance dose strategy was designed to ensure a higher concentration of Taksta in the bloodstream at the beginning of the treatment period to rapidly reduce the bacterial population load in an infection, thus limiting resistance development, and to then allow a reduced dose to maintain steady state levels of Taksta in the bloodstream, which increases tolerability.

The results from the Phase 2 trial demonstrated a clinical cure rate comparable to linezolid as described in Table 6 below. The clinical success rates for the Taksta loading dose regimen were comparable to those for the linezolid regimen in the ITT, mITT, CE and ME populations. Respective clinical success rates at the TOC in Taksta loading dose and linezolid treatment groups in the ITT population were 85.9% and 94.8%; in the mITT population, they were 88.1%, and 93.1%; in the CE population, they were 92.3% and 98.5%; and in the ME population, they were 96.0% and 98.0%. Importantly, in patients with documentedS. aureus infection at baseline, clinical success rates were 95.8% and 97.9%, and with MRSA 96.8% and 100.0%, in the ME population in the Taksta loading dose and linezolid groups, respectively.

Table 6. Taksta Phase 2 Results: Clinical Response at the TOC.

	Treatment Group
	Taksta		Linezolid
Population	No. of patients	Success rate, % (95% CI)	No. of patients	Success rate, % (95% CI)
Intent-to-treat (ITT)	67/78	85.9 (76.2-92.7)	73/77	94.8 (87.2-98.6)
Microbiological intent-to-treat (mITT)	52/59	88.1 (79.9-95.1)	54/58	93.1 (83.3-98.1)
Clinically evaluable (CE)	60/65	92.3 (83.0-97.5)	67/68	98.5 (92.1-100)
Microbiologically evaluable (ME)	48/50	96.0 (86.3-99.5)	48/49	98.0 (89.2-100)
S. aureus (ME)	46/48	95.8 (85.8-99.5)	47/48	97.9 (88.9-100)
MRSA (ME)	30/31	96.8 (83.3-99.9)	37/37	100.0 (90.5-100)
S. pyogenes (ME)*	1/1	100.0	2/2	100.0
Streptococcus agalactaie (ME)*	1/2	50.0	0	N/A
Beta-hemolytic streptococcus, other (ME)*	1/1	100.0	0	N/A

(*) Types of beta-hemolytic steptococci.

In August 2010, the FDA published new guidance regarding assessment of outcomes for ABSSSI clinical trials, with an emphasis on assessment of the early response to therapy in the ITT population. Following this guidance, 87.2% of study subjects randomized to the Taksta loading dose arm achieved an early response (defined as both cessation of spread of lesion and absence of fever on treatment Day 3, in patients not otherwise considered a treatment failure) compared to 90.9% of the linezolid subjects, as shown in Table 7 below.

Table 7. Taksta Phase 2 Results: Early Clinical Response (Day 3 Visit) in the ITT Population.

	Taksta Loading Dose (No. of patients, N=78) n (%)	Linezolid (No. of patients, N=77) n (%)
Success	68 (87.2)	70 (90.9)
95% Confidence Interval	77.7-93.7	82.2-96.3
Failure	10 (12.8)	7 (9.1)
Reason for Failure
Increase in lesion length or width only	6 (7.7)	7 (9.1)
Febrile only	0 (0.0)	0 (0.0)
Both increase in lesion length or width and febrile	0 (0.0)	0 (0.0 )
Missing lesion data only	0 (0.0)	0 (0.0)
Missing temperature data only	0 (0.0)	0 (0.0)
Missing both lesion size and temperature data	2 (2.6)	0 (0.0)
Clinical failure on or prior to Day 3 Visit	2 (2.6)	0 (0.0)

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The results of the trial demonstrated Taksta has a favorable safety and tolerability profile with data comparable to linezolid as shown in Table 8 below. Since the study was blinded, we were required to exclude any patient taking SSRIs, who would have required additional monitoring if administered linezolid. Adverse events were reported in 61.5% of patients in the Taksta loading dose group and in 63.6% of patients in the linezolid group. There were no clinically relevant differences between treatment groups in the types or frequency of adverse events, including gastrointestinal events. Notably, the frequency and intensity of nausea and/or vomiting were similar in the Taksta loading dose and the linezolid treatment groups. There were more nervous system adverse events reported for linezolid (16.9% vs. 10.3%) than for Taksta, the majority of which were headaches.

Table 8. Taksta Phase 2 Results: Adverse Events.

Event	Taksta Loading Dose (No. of patients, N=78) n (%)	Linezolid (No. of patients, N=77) n (%)
Any adverse event	48 (61.5)	49 (63.6)
Serious adverse event	3 (3.8)	0 (0.0)
Discontinued treatment due to adverse event	3 (3.8)	0 (0.0)
Adverse event
Gastrointestinal disorders	31 (39.7)	32 (41.6)
General disorders and administration site condition	5 (6.4)	4 (5.2)
Infections and infestations	8 (10.3)	10 (13.0)
Injury, poisonings, and procedural complications	5 (6.4)	0 (0.0)
Metabolism and nutrition disorders	5 (6.4)	5 (6.5)
Nervous system disorders	8 (10.3)	13 (16.9)
Respiratory, thoracic, and mediastinal disorders	5 (6.4)	2 (2.6)
Skin and subcutaneous tissue disorders	7 (9.0)	13 (16.9)

Three patients in the Taksta loading dose group had at least one serious adverse event (Herpes simplex, a serious kidney infection, and head injury and back pain) none of which were considered by the investigator to be related to the study medication. Three patients in the Taksta group discontinued the study medication due to adverse events (nausea and chills; blister and maculopapular rash; and nausea, vomiting and anorexia).

Phase 1 Results. We previously completed Phase 1 single dose, multi-dose and loading dose trials with Taksta between 2007 and 2009. These trials were randomized, double-blinded, placebo-controlled, dose-escalation studies to determine the pharmacokinetics and tolerability of single and multiple doses of Taksta. The effect of food on oral bioavailability was measured and food did not have a significant effect on the oral bioavailability, meaning Taksta can be taken with or without food. There were few adverse events and all were mild in severity. No serious adverse events were seen at the 1650 mg dose. Based on these data, loading dose regimens followed by maintenance dose regimens were considered safe and well tolerated up to a combination of 1650 mg/825 mg of Taksta.

The pharmacokinetics, or PK, of Taksta were investigated in three Phase 1 trials. The first trial of 28 subjects evaluated the relative bioavailability of Taksta 250 mg tablets compared to Fucidin^® tablets, the marketed product in Europe, which contains the same API as Taksta but is a different sized tablet, manufactured with different components and dosed differently. This trial also compared the PK of a single oral dose of Taksta 500 mg in the fed versus fasted states. The second trial assessed the PK of multiple oral doses of Taksta 500 mg (2 × 250 mg) administered three times a day for 4.5 consecutive days in 24 healthy subjects. The third trial evaluated the PK of single, multiple, and loading dose regimens of Taksta administered to healthy subjects.

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In each trial, Taksta was shown to be generally safe and well tolerated. These trials showed that Taksta had a long plasma half-life and therefore the drug accumulates in the blood over time when administered at the same high dose daily, as evidenced by Taksta showing higher PK after the dose in the second and subsequent periods as compared to the first period. The results of the trial led to the design of the loading dose which would provide high drug levels on Day 1 followed by a steady concentration of Taksta of approximately 80 mcg/ml, which is well over 10 times the MIC₉₀ , or the concentration level needed to inhibit 90% of staphylococci and streptococci, the two organisms most frequently found in skin infections.

Pre-Clinical Data

We evaluated thein vitro activity of Taksta against prevalent community-acquired, hospital-acquired, and epidemic clones including strains non-susceptible to anti-MRSA agents. We have conducted tests of Taksta’s activity against strains ofS. aureus that are found in the U.S. and our data show that virtually all of those strains (99.6%) are susceptible to Taksta. A collection of 56 MRSA strains from the Network on Antimicrobial Resistance inStaphylococcus aureus, or NARSA, and Eurofins Medinet repositories were tested for susceptibility to Taksta and comparators by broth microdilution, a method of testing susceptibility using a semi-solid or liquid growth medium to conduct dilutions in small volumes, in accordance with current Clinical and Laboratory Standards Institute, or CLSI, guidelines. Isolates included those with rare resistance phenotypes, linezolid and daptomycin non-susceptible isolates and isolates from prevalent community, hospital, and epidemic clones. Against the selected resistant MRSA, Taksta had an MIC range of 0.06-8 µg/mL with an MIC₅₀ and MIC₉₀ of 0.12 µg/mL. With the exception of one vancomycin intermediateStaphylococcus aureus, or VISA, isolate (with an MIC of 1 µg/mL), two daptomycin non-susceptible isolates (with MICs of 4 µg/mL), and one linezolid non-susceptible isolate (with an MIC of 8 µg/mL), Taksta’s MICs were 0.06-0.12 µg/mL against MRSA with rare but emerging resistance phenotypes. Against a subset of 10 community, 10 hospital, and five epidemic clones, Taksta’s MICs were 0.06-0.12 µg/mL. Taksta had potentin vitroactivity against MRSA non-susceptible to currently approved antibiotics vancomycin, linezolid, and daptomycin. Taksta was also active against USA100 and USA300 MRSA clones of MRSA most likely to be encountered clinically in the U.S. today. Based on its potency and activity, these results highlight the potential of Taksta for the treatment of MRSA in the U.S.

We have continued to determine in vitro activity of Taksta against recent strains S. aureus including MRSA collected in the U.S. The activity of Taksta againstS. aureus was stable over the four surveyed years (2008-2011). Taksta showed excellent activity againstS. aureus 3,539 strains collected in the U.S. in 2011, including MRSA strains, with 100% of MRSA from the U.S. susceptible to Taksta. Only eight (0.2%)S. aureusstrains displaying elevated Taksta MIC values (>1 µg/mL) were detected in the U.S., which likely carried acquired genesfusB andfusC that confer low level resistance (MIC, 2-8 µg/mL). These genes are usually part of plasmids that can be co-selected by other antimicrobial agents due to the presence of additional resistance genes. These results continue to demonstrate that Taksta could be a valuable alternative for the treatment of staphylococcal infections in the U.S. since the population has not been previously exposed to fusidic acid and resistance is rarely observed among endemicS. aureus. Furthermore, lowS. aureus resistance rates of fusidic acid in Europe are encouraging and suggest that after many years of clinical use, fusidic acid is still a reliable option for the treatment of serious staphylococcal infections.

As required by FDA regulations, we conducted pre-clinical animal studies of Taksta to determine its absorption. The studies indicated that Taksta was not very well absorbed and has a short half-life in animals, resulting in minimum exposure levels which limited the ability to test Taksta in animal models. All pre-clinical tests were benign and indicated no safety or tolerability issues. However, because fusidic acid has been used for several decades in humans outside the U.S. and there is sufficient human clinical trial data for Taksta, we believe that this animal absorption data will not adversely impact our development efforts for Taksta at the FDA.

Compassionate Use Data. We have treated one patient with severe chronic osteomyelitis under our FDA-approved compassionate use program with Taksta. This patient had been treated unsuccessfully with many known antibiotics over a period of two years and was scheduled for a leg amputation. After being treated with Taksta, the patient recovered, the large leg lesion has healed and the patient has been on Taksta for more than 16 months to date. In Canada, where fusidic acid tablets are available, a single patient withS. aureus infected prosthetic joints in both elbows following severe rheumatoid arthritis had failed on all possible oral medications and was scheduled for amputation of one arm. After treatment with higher doses than recommended in Canada and similar to our loading dose regimen, the arm was saved from amputation and the patient has continued on fusidic acid therapy for over three years to date. These results, while encouraging, are preliminary, from a small number of patients and of limited value because they were not obtained in a controlled clinical trial. Furthermore, these results may not be predictive of our future trial results, including the result of our planned Phase 2 trial regarding prosthetic joint infections.

Published Ex-U.S. studies of Sodium Fusidate in the Treatment of Bone and Joint Infections.Fusidic acid has been used for more than three decades for treatment of bone and joint infections in Europe and Australia. Atkins and Gottlieb [Atkins 1999] reviewed published experience with fusidic acid in the treatment of bone and joint infections, citing its utility in the treatment of acute and chronic osteomyelitis, vertebral infection, septic arthritis, and prosthetic and other device related infections. The authors considered achievement of effective bone and joint fusidic acid concentrations a key factor in its historical efficacy in the treatment of these conditions.

We plan to use several European and Australian studies as the basis for our Phase 2 study design for Taksta for the treatment of prosthetic joint infections. The study was published in 2007 by the European Society of Clinical Microbiology and Infectious

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Diseases. Between 1998 and 2003, 20 patients in St. Vincent’s Hospital, a teaching hospital in Melbourne, Australia, were treated for staphylococcal prosthetic joint infection with debridement, prosthesis retention, and IV antibiotic followed by oral fusidic acid and rifampin. Of the patients, 13 had hip joint replacements and seven had knee joint replacements. The median duration of IV treatment was 12 days, the median duration of hospitalization was 20 days and the median duration of oral treatment was 12 months. Two patients reported nausea that was severe enough to require a change of treatment. Two patients reported transient nausea, but continued treatment. No hepatotoxicity was reported. There was no evidence of treatment failure for 18 patients and 16 patients retained their original prosthesis without any evidence of infection after 26 months of follow-up. The cumulative success of treatment after one year was approximately 88%. In a retrospective study of patients with MRSA orthopedic device-related infection in Geneva University Hospitals between 2000-2008, of 41 patients with a median follow up of 391 days, 18 patients experienced treatment failure, involving MRSA persistence or recurrence (Ferry et al., 2010) while none of the 12 patients who received a rifampin-fusidic acid combination therapy followed by intravenous vancomycin and oral rifampin therapy experienced treatment failure.

Lautenbach et al. [1975] measured serum and bone fusidic acid concentrations (by agar plate diffusion methods using a susceptible bacterial strain) in 36 patients with chronic osteomyelitis during the course of therapy; bone concentrations of active drug ranged from 1 to 15 µg/g, measured at approximately nine hours after last oral dose (in most cases, 20 to 40 mg/kg/day, divided TID). Hierholzer et al. [1966, 1974] measured bone and soft tissue concentrations at three to six hours after last oral dose (500 mg TID dosing for at least five days) in a series of patients with osteomyelitis and found fusidic acid concentrations of 2 to 15 µg/g in bone and 4 to 17 µg/g in soft tissue. A second group of patients studied by the same group were administered fusidic acid (500 mg TID, orally) for five to thirteen days prior to surgery for non-infected bone disease; concentrations of fusidic acid in bone were on average up to two times higher than those observed in patients with osteomyelitis, and mean concentrations ranged from 46% to 94% of those observed in serum. Chater, et al. [1972] reported fusidic acid concentrations in bone and serum from seven adult patients treated with 500 mg TID oral fusidic acid for osteomyelitis; concentrations of fusidic acid in bone were similar to those described above, and ranged from 4% to 72% of serum concentrations, with consistently higher soft tissue concentrations (ranging from 20% to >100% of serum concentrations). In summary, oral Oral fusidic acid dosing was found to achieve drug concentrations at the infected bone and joint site that were associated with effective treatment of osteomyelitis across a number of studies.

Rifampin has emerged as a critical antibiotic in the treatment of prosthetic joint infection, attributed to its unique ability to penetrate and disperse biofilms. In a landmark study, Zimmerli and colleagues [Zimmerli 1998] demonstrated the important role of rifampin in the effective treatment of prosthetic joint infection when used in combination with initial IV therapy (vancomycin or flucloxacillin) and follow-on oral antibiotic therapy (ciprofloxacin). In that trial, patients with stable implants and a short duration of infection were effectively treated with the debride and retain strategy, with success in 100% of evaluable patients who received a three to six month course of ciprofloxacin/rifampin therapy. There were no MRSA infections in the study population. Drancourt et al. [1997] demonstrated equivalent efficacy of oral fusidic acid/rifampin to oral ofloxacin/rifampin in a randomized trial of therapy in prosthetic joint infection cases treated with the debride and retain strategy. In a third report of clinical experience with fusidic acid plus rifampin for orthopedic device related infection (comprised principally of joint prostheses and internal fixation devices), Ferry et al. [2010] reported clinical success in 12 of 12 patients. In our proposed development plan for treatment of prosthetic joint infection, Taksta will be co-administered with rifampin, which we believe will further decrease resistance development.

Planned Clinical Trials

We began an open-label Phase 2 trial of Taksta in patients with prosthetic joint infections in December 2012.

We are testing Taksta in two-stage revision treatment of PJI, as this is the standard of care in the U.S. In our study, the infected joint will be removed , a spacer inserted and intravenous vancomycin only will be used for three to four days, followed by oral rifampin and Taksta for six weeks in the study arm, while in the comparator arm, an intravenous standard of care will be continued for six weeks. After this duration, the joint will be operated on again, in which the spacer taken out and cultured to determine if the joint tissue is uninfected; the patient is left without a joint for another six to eight weeks. After that time, a new prosthesis is introduced. The primary end-point is bacteriologic cure at 12 weeks, at the time the second prosthesis is introduced. The secondary end points are retention of the joint for three to six months and safety. Long-term monitoring for infection relapse or recurrence will continue for the subsequent two years. This study is expected to be conducted in 50 patients with hip or knee PJIs, and the intent is to show non-inferiority to the standard of care for efficacy and to show that two oral drugs can replace an intravenous drug for four to six weeks of treatment. Success in this study could demonstrate a pharmacoeconomic advantage to patients, payers and hospitals, while improving the quality of life. In the future, we might perform a study in PJI patients where two-stage revision is not possible or necessary. Such a study would replicate the use of fusidic acid overseas and could provide even greater pharmacoeconomic advantages. Being an open label study, we expect to announce top line results from treated patients during the fourth quarter of 2013 and results from all treated patients in the first half of 2014.

There is no guidance document from the FDA for developing antibiotics for treating prosthetic joint infections. Therefore, while our Phase 2 study is underway, we plan to request a Type C meeting with the FDA to determine the future studies or data needed to submit an NDA and to explore if we can obtain orphan drug status for Taksta for this indication. We have completed a successful end of Phase 2 meeting with the FDA for Taksta in ABSSSI; however at this time, we do not intend to pursue Taksta as a treatment for ABSSI.

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Earlier Stage Pipeline Programs

Our earlier stage programs include developing other uses for solithromycin and Taksta, as well as the development of newly discovered compounds as antibiotics and for the treatment of other diseases.

Solithromycin.In the future we may pursue secondary indications for solithromycin to treat other respiratory tract infections such as pharyngitis, sinusitis and chronic bronchitis, as well as other infectious diseases such as infections in CF patients, otitis media (middle ear infection),Helicobacter gastritis, malaria, tuberculosis, eye infections and COPD. Of these additional indications, we are currently most interested in bacterial urethritis and CF infections. In CF, the second most common bacteria that infects the lung isS. aureus, against which solithromycin has demonstrated activity. In addition, our pre-clinical work suggests that solithromycin is likely to have greater anti-inflammatory properties than azithromycin, which is commonly used in CF patients for its anti-inflammatory properties.

Taksta. Given the historical use of fusidic acid and its safety profile, we believe Taksta can also address osteomyelitis and infections related to CF, all of which tend to require long-term or chronic treatment, as well as ABSSSI that generally requires seven to 14 days of treatment. Fusidic acid is used in certain countries in Europe to treatS. aureus infections in CF patients and is active against 40S. aureus strains isolated from CF clinics in the U.S. AllS. aureus strains were susceptible to fusidic acid. A CF patient has been treated under our compassionate use program for approximately eight months with some demonstrated symptomatic relief.

Other Research Programs. Shortly after our inception, we entered into a collaborative research and development and license agreement with Optimer Pharmaceuticals, Inc., or Optimer. The license agreement gives us exclusive access to a library of over 500 macrolide compounds, which we have further expanded through our own discovery efforts. Macrolides are complex structures which can be chemically modified to eliminate their antibacterial activities. We intend to use our extensive macrolide library to develop drugs with no antibiotic effect and replace off-label use of older macrolides in inflammatory conditions and other indications such as diabetic gastroparesis. Several compounds have been identified through our screening programs that could potentially address therapeutic needs in the areas of inflammation, diabetic gastroparesis and cancer. We believe that partnering these candidates in the pre-clinical stage can result in viable candidates for non-antibiotic drugs.

We are conducting pre-clinical studies for the use of macrolides in treating diabetic gastroparesis, which is related to a lack of neural response in the gastrointestinal tract of diabetic patients, and gastroesophageal reflux disease, or GERD, both likely to be helped by addressing motilin function. Motilin is a hormone released in the upper small intestine that helps control the pattern of smooth muscle contractions that initiate in the stomach and carry through to the small and large intestines. Erythromycin and related antibiotics have known activity as motilin agonists. Through our screening program, we have selected a lead candidate that is active in the motilin receptor binding assay, functional assays using cloned human motilin receptor in mammalian cells, as well as in rabbit duodenal strip contraction assays. These compounds have been optimized for pharmacokinetic properties and oral bioavailability and are in pre-clinical development.

Our Commercialization Strategy

We will pursue commercialization strategies intended to maximize the value of each product. We plan to develop our product candidates through late-stage clinical studies and, upon approval, either sell our products directly through our own hospital-based sales force, which we would need to assemble, or through partnerships, which we would need to negotiate with larger pharmaceutical companies.

Solithromycin.The solithromycin opportunity will be maximized by having both a hospital-based sales force and a primary care sales force. We believe we could build a sales force to sell directly to the hospital market. A large pharmaceutical company with an established commercial organization may be better positioned to maximize solithromycin sales in the primary care market. There may be an opportunity to partner with a large pharmaceutical company in a manner that enables us to retain either promotion or co-promotion rights in certain markets, such as the hospital market. We believe solithromycin represents an attractive commercialization opportunity outside the U.S. and we plan to seek commercial partners in selected regions as appropriate. We also plan to conduct the necessary trials to establish the utility of solithromycin for the treatment of a broader variety of respiratory and other infections including sinusitis, bronchitis and other forms of pneumonia.

Taksta. The initial market for Taksta will be in the treatment of prosthetic joint infections. Patients with prosthetic joint infections are generally admitted to the hospital to begin antibiotic treatment and determine whether a debridement procedure that retains the prosthetic joint will be performed or whether the prosthetic joint will be removed. Following whatever procedure is necessary, patients are discharged and treated on an outpatient basis. Subject to finding a collaborative partner, the next market for Taksta would be in the U.S. in the hospital emergency department for treatment of ABSSSI infections. Both markets could also be addressed by the same hospital-based sales force we may build to sell solithromycin. Secondary markets for Taksta include dermatology, podiatry, plastic surgery and pediatrics community practices in the U.S., which may be best addressed by a larger pharmaceutical partner. We also plan, through clinical trials, regulatory filings and publications, to expand the data establishing the utility of Taksta for the treatment of a wide variety of serious infections including osteomyelitis, especially in the pediatric population.

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Competition

Our industry is highly competitive and subject to rapid and significant technological change. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. We believe that the key competitive factors that will affect the development and commercial success of solithromycin, Taksta and any other product candidates that we develop are efficacy, safety and tolerability profile, convenience in dosing, price and reimbursement. Many of our potential competitors, including many of the organizations named below, have substantially greater financial, technical and human resources than we do and significantly more experience in the discovery, development and regulatory approvals of products, and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval for drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render solithromycin, Taksta or any other product candidates that we become obsolete or non-competitive before we can recover the expenses of developing and commercializing any product candidates. We anticipate that we will face intense and increasing competition as new drugs enter the market, as advanced technologies become available and as generic forms of currently branded drugs become available. Finally, the development of new treatment methods for the diseases we are targeting could render our drugs non-competitive or obsolete.

We anticipate that, if approved, solithromycin will compete with other antibiotics that demonstrate CABP activity. These include azithromycin (sold under the brand names Zithromax and Z-PAK by Pfizer Inc. and available as a generic), clarithromycin (sold under the brand name Biaxin by Abbott Laboratories and available as a generic), moxifloxacin (sold under the brand name Avelox by Bayer AG), levofloxacin (sold under the brand name Levaquin by Johnson & Johnson and available as a generic), linezolid (sold under the brand name Zyvox by Pfizer Inc.), ceftriaxone (sold under the brand name Rocephin by F. Hoffman-La Roche Ltd and available as a generic) and ceftaroline (sold under the brand name Teflaro by Forest Laboratories, Inc.). We also are aware of various drugs under development for the treatment of CABP, including BC-3781 (under development by Nabriva Therapeutics AG and licensed to Forest Labs), delafloxacin (under development by Rib-X Pharmaceuticals, Inc.), and omadacycline/PTK-796 (under development by Paratek Pharmaceuticals, Inc.).

We anticipate that, if approved, Taksta will compete with other antibiotics that demonstrate MRSA activity. These include vancomycin, linezolid (sold under the brand name Zyvox by Pfizer Inc.), daptomycin (sold under the brand name Cubicin by Cubist Pharmaceuticals, Inc.), quinupristin/dalfopristin (sold under the brand name Synercid by Pfizer, Inc.), tigecycline (sold under the brand name Tygacil by Pfizer Inc.), and ceftaroline (sold under the brand name Teflaro by Forest Laboratories, Inc.). In addition, an NDA has recently been approved for telavancin (to be sold as Vibativ by Theravance, Inc. and Astellas Pharma, Inc.). Further, we expect that product candidates currently in Phase 3 development, or that could enter Phase 3 development in the near future, may represent significant competition if approved. These include ceftobiprole (under development by Basilea Pharmaceutica AG and approved in Canada and Switzerland), omadacycline/PTK-796 (under development by Paratek Pharmaceuticals, Inc.), NXL-103 (under development by AstraZeneca PLC), radezolid (under development by Rib-X Pharmaceuticals, Inc.), tedizolid (under development by Trius Therapeutics, Inc.), delafloxacin (under development by Rib-X Pharmaceuticals, Inc.), dalbavancin (under development by Durata Therapeutics, Inc.) and oritavancin (under development by The Medicines Company). A number of generic antibiotics are used to treat staphylococcal prosthetic joint infections, including levofloxacin, ciprofloxacin, cefazolin, trimethoprim/sulfamethoxazole (Bactrim) doxycycline, nafcillin rifampin. None of them, however, can be used in monotherapy to treat prosthetic joint infections and none of them are approved for MRSA infections.

Intellectual Property

Due to the length of time and expense associated with bringing new products to market, biopharmaceutical companies have traditionally placed considerable importance on obtaining and maintaining patent protection for significant new technologies, products and processes. solithromycin is a new chemical entity developed from the macrolide library of compounds licensed from Optimer and is covered by a series of patents and patent applications, which claim, among other things, the composition of matter of solithromycin. The original patents covering the composition of matter for fusidic acid have expired. Our proprietary position for Taksta has two bases. For prosthetic joint infections, if Taksta is the first fusidic acid product approved by the FDA, it would be a new chemical entity, or NCE, and would receive five years of data exclusivity under the Hatch-Waxman Act, which would be increased to 10 years under the GAIN Act should it be passed by Congress. If Cempra is successful in obtaining orphan drug status for prosthetic joint infections, the first exclusivity period would be extended to seven years and this period, together with the five years granted under the GAIN Act, would provide 12 years exclusivity. In addition, we expect that Taksta would also be eligible for pediatric exclusivity. For infections such as ABSSSI, we intend to rely on our loading dose regimen, which is subject to a filed patent application, the opportunity for regulatory exclusivity in the U.S. under the Hatch-Waxman Act and our exclusive supply relationship with Ercros S.A., as further detailed in “Manufacturing.”

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Our success will depend in part on our ability to protect the proprietary nature of solithromycin, Taksta and our other product candidates, technology, and know-how, to operate without infringing on the proprietary rights of others, and to prevent others from infringing our proprietary rights. We seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions, and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation, and in-licensing opportunities to develop and maintain our proprietary position.

We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our technology.

Most of our portfolio consists of intellectual property that we own ourselves or that we exclusively license from Optimer. The intellectual property licensed from Optimer primarily relates to solithromycin and related compounds, and to other macrolide and ketolide compounds. Internally, we typically develop those compounds further and refine them to determine commercial applicability.

We have applied, and are applying, for patents directed to our three main areas of focus: (1) macrolide and ketolide antibiotics, (2) fusidic acid antibiotics, and (3) macrolides and ketolides for non-antibiotic uses, both in the U.S. and, when appropriate, in other countries. As of December 31, 2011, our owned and in-licensed patent portfolio consisted of two issued patents in the U.S., and approximately 40 other patent applications pending worldwide. Of these, approximately five patent applications, which are not licensed from Optimer, relate to fusidic acid.

With respect to solithromycin and a broad group of macrolide antibiotics, our U.S. patent portfolio consists of two issued U.S. patents, U.S. Patent Nos. 7,601,695 and 8,012,943, each entitled “Novel Antibacterial Agents,” which we exclusively license from Optimer. U.S. Patent No. 7,601,695 (US ‘695) issued on October 13, 2009 and is scheduled to expire in 2025, including a Patent Term Adjustment of 330 days under 35 U.S.C. § 154(b). U.S. Patent No. 8,012,943 (US ‘943) issued on September 6, 2011, is scheduled to expire in 2024, and does not include a Patent Term Adjustment under 35 U.S.C. § 154(b). The exclusively in-licensed portfolio also includes a continuing patent application of US ‘695 and US ‘943 pending in the U.S., corresponding patent applications pending in Canada and Europe (European Patent Convention), and a patent registration that has been initiated in Hong Kong. Prosecution is ongoing in each of those patent applications. Each of the foregoing patents and applications ultimately arise from a PCT international application filed on March 5, 2004, which claims a priority benefit to U.S. provisional applications filed on March 10, 2003, and May 6, 2003.

We have also filed additional patent applications pending in the U.S., Australia, Canada, China, Europe, Israel, India, and Japan that claim related chemical compounds, morphological forms, pharmaceutical compositions, pharmaceutical formulations, methods for treating particular infections and other diseases, and/or manufacturing processes. We are seeking to develop a strategy to increase the breadth of solithromycin coverage, particularly in the U.S., Europe, and Asia, and prosecution is ongoing in each case. We have filed patent applications eligible for worldwide coverage claiming two new crystalline forms of solithromycin. In addition, we have filed patent applications eligible for worldwide coverage claiming processes for manufacturing solithromycin and related compounds from either clarithromycin or erythromycin. Those same patent applications also claim the composition of matter of various intermediates used in those processes. solithromycin and related compounds have also been described by us in U.S. and international patent applications claiming their use in (a) treating bacterial infections arising from one or more resistant bacterial strains, including bacterial strains resistant to other macrolides or ketolides, (b) biowarfare and biodefense applications, (c) treatingMycobacterium infections, including tuberculosis andMycobacterium avium infections, (d) treating bacterial gastrointestinal diseases, and (e) treating eye infections. We have also filed U.S. and international patent applications claiming pharmaceutical compositions and pharmaceutical formulations of solithromycin and related compounds, including lyophilized forms of solithromycin, parenteral formulations of solithromycin for IV and intramuscular delivery, and topical formulations of solithromycin for ocular delivery. We have filed, or are preparing for filing, U.S. and international patent applications covering solithromycin and other macrolides and ketolides for treating diseases other than infection, including inflammatory diseases, cystic fibrosis, motilin receptor-mediated diseases and malaria to increase the breadth of coverage of other macrolides and ketolides in the U.S., Europe, and Asia.

We have engaged, and continue to engage, in research efforts to exploit the potential of the in-licensed Optimer inventions, including solithromycin and related compounds, in new therapy areas, and to discover new forms and formulations of solithromycin and related compounds. Our research efforts have indicated that solithromycin may also be useful in treating particular bacterial infections that may be considered to be generally untreatable with macrolide antibiotics, including bacterial infections arising from one or more resistant strains. In addition, alternative physical forms and alternative formulations of solithromycin and related compounds are being developed. If we are able to obtain issued patents for those forms and formulations, and the treatment methods, then we will have several years of additional coverage above and beyond the expiration of the patents covering the chemical composition of solithromycin.

With respect to fusidic acid, we are developing a strategy to increase the breadth of our fusidic acid coverage in the U.S., Europe, and Asia. We have filed patent applications covering fusidic acid in the U.S. and as Patent Cooperation Treaty, or PCT,

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international patent applications. The fusidate sodium chemical entity itself is a compound which is no longer subject to composition of matter patents in the U.S. Therefore, our pending patent applications claim new dosing protocols and uses of fusidic acid, and new formulations and packaging. Patent applications have been filed in the U.S. and/or the Patent Cooperation Treaty on the novel loading dose regimen that has been developed to overcome pre-existing limitations on a broader, more effective use of fusidic acid in the treatment of bacterial infections, including infections not previously considered to be susceptible to fusidic acid, like urethritis, and for new formulations of fusidic acid for direct bronchial and pulmonary delivery. We have also filed patent applications in the U.S. covering new formulations and packaging of fusidic acid dosage units to overcome the storage limitations of fusidic acid. Each of these applications is also eligible for international patent protection.

In addition to filed patent applications claiming new dosing protocols and formulations of fusidic acid for treating infections, we plan to obtain regulatory exclusivity for the first use of fusidic acid through approval with the FDA. We are not aware of any competing applications before the FDA seeking approval for fusidic acid. Therefore, we believe that, if the FDA approves an NDA of ours for Taksta before the FDA approves an NDA or other application for fusidic acid use filed by any competitor, pursuant to amendments to Section 505 of the Food, Drug and Cosmetic Act enacted in 2008, we will have at least five years of regulatory exclusivity in the U.S. for the first approved indication for fusidic acid. We believe that the 2008 amendments will also provide us with three years of exclusivity for any additional uses.

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the U.S., a patent’s term may be lengthened by Patent Term Adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in granting a patent, or may be shortened if a patent is terminally disclaimed over another patent. For a more comprehensive discussion of patent term and extensions thereto, please see “Business—Government Regulation and Product Approval.”

While we pursue patent protection and enforcement of solithromycin, fusidic acid and our other product candidates, and aspects of our technologies when appropriate, we also rely on trade secrets, know-how and continuing technological advancement to develop and maintain our competitive position. To protect this competitive position, we regularly enter into confidentiality and proprietary information agreements with third parties, including employees, independent contractors, suppliers and collaborators. Our employment policy requires each new employee to enter into an agreement containing provisions generally prohibiting the disclosure of confidential information to anyone outside of our company and providing that any invention conceived by an employee within the scope of his or her employment duties is our exclusive property. We have a similar policy with respect to independent contractors, generally requiring independent contractors to enter into agreements containing provisions generally prohibiting the disclosure of confidential information to anyone outside of our company and providing that any invention conceived by an independent contractor within the scope of his or her services is our exclusive property with the exception of contracts with universities and colleges that may be unable to make such assignments. Furthermore, our know-how that is accessed by third parties through collaborations and research and development contracts and through our relationships with scientific consultants is generally protected through confidentiality agreements with the appropriate parties.

Further, we seek trademark protection in the U.S. and internationally where available and when appropriate. We have a registered trademark in the U.S. for the CEMPRA mark, which we use in connection with our pharmaceutical research and development services, and which we plan to use with our proposed products. We also have received Notices of Allowance from the U.S. Patent and Trademark Office for the TAKSTA, STRAFEX, and STAFREL marks. We plan to use the TAKSTA mark with our proposed sodium fusidate product. The remaining marks may be used with the sodium fusidate product or other proposed products.

Collaborations and Commercial Agreements

Optimer Pharmaceuticals, Inc. In March 2006, we entered into a Collaborative Research and Development and License Agreement with Optimer, a biotechnology company focused on discovering, developing and commercializing innovative anti-infective products. Under this agreement, we obtained access to a library of over 500 macrolide compounds, including solithromycin. Optimer granted us an exclusive license to these compounds in all countries of the world except ASEAN countries, with the right to sublicense, under Optimer’s patents and know-how related to certain macrolide and ketolide antibiotics and related proprietary technology. The exclusivity of our license is potentially subject to the U.S. government’s right to obtain a non-exclusive, irrevocable, royalty-free, paid-up right to practice and have practiced certain patents worldwide. As partial consideration for granting us such license, we issued shares of our common stock to Optimer. We also have an obligation to make additional payments upon achievement of specified development, regulatory and commercialization milestones. The aggregate amount of such milestone payments we may need to pay is based in part on the number of products developed under the agreement. The aggregate amount would be $27.5 million if four products are developed and gain FDA approval. Additional limited milestone payments would be due if we develop more than four products. In July 2010 and July 2012, we made $0.5 million and $1.0 million milestone payments, respectively to Optimer after our successful completion of the Phase 1 and Phase 2 trials for oral solithromycin, respectively. We are also obligated to make tiered, mid-single-digit royalty payments to Optimer based on annual net sales of licensed products outside the ASEAN countries, which royalties are subject to reduction in the event additional licenses are obtained from third parties in order to practice our rights under the agreement and/or we are required to grant a compulsory license to a third party.

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The agreement also includes the grant of an exclusive license to Optimer and its affiliates, with rights of sublicense, under our patents and other intellectual property in any products covered by the agreement to permit Optimer to develop and/or commercialize such products in ASEAN countries. In consideration of such license, Optimer will pay us $1.0 million in milestone payments for the first two products that receive regulatory approval or have a first commercial sale in any ASEAN country, as well as tiered, mid-single-digit royalty payments based on net sales of such products, which royalties are subject to reduction in the event additional licenses are obtained from third parties in order to practice Optimer’s rights under the agreement and/or Optimer is required to grant a compulsory license to a third party. The agreement also included a collaborative research program, to be performed by the parties, which was completed on March 31, 2008.

The Optimer patents and know-how existing as of the effective date of the agreement and improvements thereof remain the property of Optimer. Except for such improvements, any know-how or inventions developed by Optimer pursuant to the agreement or that relate to the licensed products (except those generated by using grant monies provided by the U.S. government) vest in us subject to the license we granted to Optimer. Optimer has the responsibility to prosecute the Optimer patents relating to macrolide antibiotics. We will be responsible for prosecuting any patents controlled by us that relate to macrolide antibiotics other than the Optimer patents described above. We will have the first right to prosecute patents claiming joint inventions. We have the first right to control any proceeding involving alleged infringement of Optimer patents with respect to rights granted to us under the agreement and Optimer has such right regarding alleged infringement of our patents with respect to rights granted to Optimer under the agreement. Should we exercise our right to control any proceeding involving alleged infringement of Optimer patents, we will be responsible for the costs of these proceedings.

Subject to certain exceptions, on a country-by-country and product-by-product basis, a party’s rights and obligations under the agreement continue until the later of: (i) the expiration of the last to expire patent rights of a covered product in the applicable country or (ii) ten years from the first commercial sale of a covered product in the applicable country. As a result, the final expiration date of the Optimer license is indeterminable until the last such patents issue and results of potential patent extensions are known, or each of the first commercial sales are made, as applicable. Upon expiration of the agreement with respect to a particular product and country, the licenses granted in the agreement with respect to such product and country will remain in effect and convert to a perpetual, unrestricted, fully-paid, royalty-free, worldwide license. Either party may terminate the agreement (i) in the event of a material breach by the other party, subject to prior notice and the opportunity to cure, (ii) in the event the other party fails to use diligent efforts to develop and commercialize products in its respective territory, or if the other party makes a determination not to develop and commercialize at least one product under the agreement, or (iii) in the event of the other party’s bankruptcy. In the case of these terminations, the terminating party can elect that all licenses granted by the other party survive, subject to continuing royalty, payment and other obligations. Additionally, either party may terminate the agreement for any reason upon 30 days’ prior written notice, in which case the non-terminating party can elect that all licenses granted by the other party survive, subject to continuing royalty, payment, and other obligations.

The Scripps Research Institute.Effective June 12, 2012, we entered into a license agreement with The Scripps Research Institute (“TSRI”), whereby TSRI licensed to the Company rights, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes. The rights licensed to us are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, we paid a one-time only, non-refundable license issue fee in the amount of $350,000 which was charged to research and development expense in the second quarter of 2012. Our rights under the agreement are subject to certain customary rights of the U.S. government that arise or result from TSRI’s receipt of research support from the U.S. government.

We are also obligated to pay annual maintenance fees to TSRI in the amount of (i) $50,000 each year for the first three years (beginning on the first anniversary of the agreement), and (ii) $85,000 each year thereafter (beginning on the fourth anniversary of the agreement). Each calendar year’s annual maintenance fees will be credited against sales royalties due under the agreement for such calendar year. Under the terms of the agreement, we must pay TSRI low single-digit percentage royalties on the net sales of the products covered by the TSRI patents for the life of the TSRI patents, a low single-digit percentage of non-royalty sublicensing revenue received with respect to countries in the nonexclusive territory and a mid-single-digit percentage of sublicensing revenue received with respect to countries in the exclusive territory, with the sublicensing revenue royalty in the exclusive territory and the sales royalties subject to certain reductions under certain circumstances. TSRI is eligible to receive milestone payments of up to $1.1 million with respect to regulatory approval in the exclusive territory and first commercial sale, in each of the exclusive territory and nonexclusive territory, of the first licensed product to achieve those milestones that is based upon each macrolide covered by the licensed patents. Each milestone is payable once per each macrolide. Each milestone payment made to TSRI with respect to a particular milestone will be creditable against any payment due to TSRI with respect to any sublicense revenues received in

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connection with the achievement of such milestone. Pursuant to the terms of the Optimer Agreement, any payments made to TSRI under this license for territories subject to the Optimer Agreement can be deducted from any sales-based royalty payments due under the Optimer Agreement up to a certain percentage reduction of the royalties due to Optimer.

Under the terms of the agreement, we are also required to pay additional fees on royalties, sublicensing and milestone payments if we, an affiliate with TSRI, or a sublicensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.

The term of the license agreement (and the period during which we must pay royalties to TSRI in a particular country for a particular product) will end, on a country-by-country and product-by-product basis, at such time as no patent rights licensed from TSRI cover a particular product in the particular country.

Manufacturing

We do not own or operate manufacturing facilities for the production of solithromycin, Taksta or other product candidates that we might develop, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently depend on third-party contract manufacturers for all of our required raw materials, API and finished products for our pre-clinical research and clinical trials. We employ internal resources and third-party consultants to manage our manufacturing contractors.

To date, we have ordered pre-clinical and clinical supplies for solithromycin under short-term contract orders. We employ the services of Wockhardt Limited, or Wockhardt, in Mumbai, India, to produce solithromycin API and finished oral and IV product. We do not have long-term contracts for the commercial supply of solithromycin. If solithromycin is approved for treatment of CABP by the FDA, we intend to enter into agreements with third-party contract manufacturers for the commercial production of solithromycin. We believe there are a number of qualified manufacturers who could supply clinical and commercial quantities of solithromycin.

In January 2013, we entered into a supply agreement with Wockhardt whereby we will purchase from Wockhardt at least 70% of our total annual purchases of solithromycin in any year for clinical or commercial use in humans. Pursuant to the agreement, we may develop alternative sources of solithromycin for the other 30% of our annual needs. In the event that we reasonably believe that Wockhardt will be or is unable to manufacture and/or supply us with our required amounts of solithromycin, we have the right to purchase all or any portion of our solithromycin requirements from such alternate sources. The agreement’s initial term runs until December 31, 2019. After the end of the third complete calendar year (i.e. December 31, 2016), and at the end of each calendar year thereafter, the term will automatically extend for an additional year unless either party gives written notice to the other of its intent to terminate prior to the end of such calendar year, in which case the agreement will terminate at the end of the three remaining calendar years of the term.

We have a long term supply arrangement with Ercros, S.A., or Ercros, in Madrid, Spain, in which Ercros agrees to exclusively supply us with fusidic acid in the U.S., and we agree to exclusively obtain our supply of fusidic acid for commercial sale from Ercros, subject to a right to develop a second source for limited supply quantities to produce fusidic acid for Taksta. The supply agreement with Ercros will continue until at least March 2029, subject to earlier termination for our uncured material breach or our bankruptcy or insolvency. In addition, the exclusivity restrictions on Ercros are subject to termination for our failure to file with the FDA an NDA for the sale of Taksta prior to December 31, 2017. We believe Ercros is one of only two currently known manufacturers that can produce fusidic acid compliant with the purity required for human use. Fusidic acid is difficult to produce at these purity levels because of its complex fermentation process. We believe the only other manufacturer of fusidic acid with sufficient purity is Leo Laboratories, which is using its manufacturing capacity for its own needs. We have yet to identify a viable alternate source of fusidic acid but continue to research alternatives. We intend to utilize a third-party manufacturer to produce the finished dosing formulation of Taksta.

Government Regulation and Product Approval

Government authorities in the U.S., at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record keeping, promotion, advertising, distribution, marketing and export and import of products such as those we are developing. solithromycin, Taksta and any other antibiotic product candidate that we develop must be approved by the FDA through the NDA process before they may be legally marketed in the U.S.

U.S. Drug Development Process

In the U.S., the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or FDCA, and implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to

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administrative or judicial sanctions. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a drug may be marketed in the U.S. generally involves the following:

• Completion of pre-clinical laboratory tests, animal studies and formulation studies according to good laboratory practices, or GLP, or other applicable regulations;

• Submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may begin;

• Performance of adequate and well-controlled human clinical trials according to the FDA’s current good clinical practices, or cGCP, to establish the safety and efficacy of the proposed drug for its intended use;

• Submission to the FDA of an NDA for a new drug;

• Satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the drug is produced to assess compliance with the FDA’s cGMPs to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and

• FDA review and approval of the NDA.

The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources and approvals are inherently uncertain.

Before testing any compounds with potential therapeutic value in humans, the drug candidate enters the pre-clinical testing stage. Pre-clinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. The sponsor must submit the results of the pre-clinical tests, together with manufacturing information, analytical data and any available clinical data or literature, to the FDA as part of the IND. The sponsor will also include a protocol detailing, among other things, the objectives of the first phase of the clinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated, if the first phase lends itself to an efficacy evaluation. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to safety concerns or non-compliance.

Each new clinical protocol must be submitted to the IND for FDA review, and to an Institutional Review Board, or IRB, for approval. Protocols detail, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety. An IRB is charged with protecting the welfare and rights of study participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

• Phase 1. The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

• Phase 2. The drug is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.

• Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product labeling.

Post-approval studies, or Phase 4 clinical trials, may be conducted after initial marketing approval. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for human subjects. Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within any specified period, if at all. The FDA or the sponsor or its data safety monitoring board may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

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Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

U.S. Review and Approval Processes

The results of product development, pre-clinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to the payment of substantial user fees; a waiver of such fees may be obtained under certain limited circumstances.

In addition, under the Pediatric Research Equity Act of 2003, or PREA, which was reauthorized under the Food and Drug Administration Amendments Act of 2007, or FDAAA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.

The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be re-submitted with the additional information. The re-submitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether the manufacturing controls are adequate to assure and preserve the product’s identity, strength, quality and purity. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. During the drug approval process, the FDA also will determine whether a risk evaluation and mitigation strategy, or REMS, is necessary to assure the safe use of the drug. If the FDA concludes REMS is needed and notifies the drug sponsor of this decision, the sponsor of the application must submit a proposed REMS; the FDA will not approve a marketing application without a REMS, if required.

In addition, under the FDAAA, all NCEs prior to approval are referred to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions, unless the Secretary of Health and Human Services provides in the action letter on the drug application a summary of the reasons why it was not referred. An advisory committee is a panel of experts who provide advice and recommendations when requested by the FDA on matters of importance that come before the agency. The FDA is not bound by the recommendation of an advisory committee but it generally follows such recommendations.

The approval process is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. The FDA will issue a complete response letter if the agency decides not to approve the NDA in its present form. The complete response letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require Phase 4 testing which involves post-approval clinical trials designed to further assess a drug safety and effectiveness after NDA approval and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized.

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Under the Orphan Drug Act, special incentives exist for companies to develop products for rare diseases or conditions, which are defined to include those diseases or conditions that affect fewer than 200,000 people in the U.S. Companies must submit their request that the FDA grant a drug orphan designation prior to submission of an NDA or biologic license application for that product. Products designated as orphan drugs are eligible for special grant funding for research and development, FDA assistance with the review of clinical trial protocols, potential tax credits for research, reduced filing fees for marketing applications, and a special seven-year period of market exclusivity after marketing approval. Orphan drug exclusivity prevents FDA approval of applications by others for the same drug and the designated orphan disease or condition. The FDA may approve a subsequent application from another entity if the FDA determines that the application is for a different drug or different use, or if the FDA determines that the subsequent product is clinically superior, or that the holder of the initial orphan drug approval cannot assure the availability of sufficient quantities of the drug to meet the public’s need. A grant of an orphan designation is not a guarantee that a product will be approved. If a sponsor receives orphan drug exclusivity upon approval, there can be no assurance that the exclusivity will prevent another entity or a similar drug from receiving approval for the same or other uses.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our product candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. Subject to certain limitations, the patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application, up to a total of five years. Only one patent applicable to an approved drug is eligible for the extension. The application for such extension must be submitted prior to the expiration of the patent and within 60 days of the drug’s approval. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In the future, we may apply for restoration of patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA.

Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications of other companies seeking to reference another company’s NDA. The FDCA provides a five-year period of non-patent data exclusivity within the U.S. to the first applicant to obtain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the pre-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Pediatric exclusivity is another type of exclusivity in the U.S. Pediatric exclusivity, if granted, provides an additional six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study. The current pediatric exclusivity provision was reauthorized in September 2007 as part of the FDAAA.

We believe that both solithromycin and Taksta will benefit from the marketing incentives of the GAIN Act, enacted in 2012. This legislation rewards a Qualified Infectious Disease Product with five years of additional exclusivity (added to the five years of Hatch-Waxman exclusivity) when its NDA is approved. The NDA also receives priority review, which reduces the standard 12-month review time by four months. Because solithromycin and Taksta are being developed to treat indications that involve MRSA, we believe each will qualify as a Qualified Infectious Disease Product because MRSA has been identified as a qualified infections disease pathogen.

Fusidic acid has been approved for oral use in many countries, including Western countries, outside the U.S. for more than three decades to treat ABSSSI, as well as other types of infections caused by staphylococci and ß-hemolytic streptococci, but it has never

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been approved in the U.S. This is because of the general lack of intellectual property protection that was available for the molecule until recently. Significant patent protection expired in the 1980’s, and antibiotics were not eligible for Hatch-Waxman Act data exclusivity, which affords a five-year period of data exclusivity upon approval of a new chemical entity, or NCE, in the U.S. In November 1997, the FDA Modernization Act, or FDAMA, repealed section 507 of the Federal, Food, Drug, and Cosmetic Act, or FDCA, under which marketing applications for antibiotics were previously approved. This law made antibiotics, like other drugs, eligible for Hatch-Waxman Act exclusivity. However, fusidate/fusidic acid was the subject of a marketing application received by FDA under Section 507 of the FDCA before November 21, 1997, the effective date of FDAMA. Antibiotics for which marketing applications were submitted before that date, even if the application was not approved, as was the case with fusidic acid, are known as “old” antibiotics. Old antibiotics were not eligible for the exclusivity provisions afforded by FDAMA. Consequently, although fusidic acid had never been approved in the U.S., as an old antibiotic, it was not eligible for the five-year NCE exclusivity. The passage of Public Law (PL) 110-379 on October 8, 2008, allowed old antibiotics such as fusidic acid to obtain five-year NCE exclusivity upon NDA approval, thereby making development of fusidic acid for the U.S. feasible. In response to our question based on unclear language in PL 110-379 regarding other exclusivities, we received notification from the FDA in January 2011 that old antibiotics such as fusidic acid would also be eligible for orphan and pediatric exclusivity. The Generating Antibiotic Incentives Now (GAIN) Act (H.R. 1282) was introduced in June 2011. This law would extend the NCE data exclusivity period for qualified antibiotic products such as fusidic acid from five years to 10 years.

Post-Approval Requirements

Any drug product for which we receive FDA approval will be subject to continuing regulation by the FDA, including, among other things, record keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, cGMP requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. The FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Future FDA and state inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems (quality or safety) occur after the product reaches the market. Later discovery of previously unknown quality, safety, or other problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, warning letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties.

In addition, from time to time, legislation is drafted, introduced and passed in the U.S. Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. For example, in September 2007, the FDAAA was enacted giving the FDA enhanced post-market authority, including the authority to require post-market studies and clinical trials, labeling changes based on new safety information and compliance with a risk evaluation and mitigation strategy. Failure to comply with any requirements under the new law may result in significant penalties. The law also authorized significant civil money penalties for the dissemination of false or misleading direct-to-consumer advertisements and allows the FDA to require companies to submit direct-to-consumer television drug advertisements for FDA review prior to public dissemination. Additionally, the law expanded the clinical trial registry so that sponsors of all clinical trials, except for Phase 1 clinical trials, are required to submit certain clinical trial information for inclusion in the clinical trial registry data bank. In addition to this legislation, the FDA regulations and policies are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.

Other U.S. Health Care Laws and Compliance Requirements

In the U.S., our activities are subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, and state and local governments. For example, sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy provisions of the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws, each

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as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Under the Veterans Health Care Act, or VHCA, drug companies are required to offer certain drugs at a reduced price to a number of federal agencies including U.S. Department of Veterans Affairs and U.S. Department of Defense, the Public Health Service and certain private Public Health Service designated entities in order to participate in other federal funding programs including Medicare and Medicaid. Recent legislative changes purport to require that discounted prices be offered for certain U.S. Department of Defense purchases for its TRICARE program via a rebate system. Participation under the VHCA requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations.

In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities or register their sales representatives, as well as prohibiting pharmacies and other health care entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing, and prohibiting certain other sales and marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.

Foreign Regulation

In addition to regulations in the U.S., we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products to the extent we choose to sell any products outside of the U.S. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required to obtain FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

E.U. member states require both regulatory clearances by the national competent authority and a favorable ethics committee opinion prior to the commencement of a clinical trial. Under the E.U. regulatory systems, we may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all E.U. member states. The centralized procedure is compulsory for medicines produced by certain biotechnological processes, products with a new active substance indicated for the treatment of certain diseases such as neurodegenerative disorder or diabetes and products designated as orphan medicinal products and optional for those products which are highly innovative or for which a centralized process is in the interest of patients. The decentralized procedure of approval provides for approval by one or more other, or concerned, member states of an assessment of an application performed by one member state, known as the reference member state. Under the decentralized approval procedure, an applicant submits an application, or dossier, and related materials (draft summary of product characteristics, draft labeling and package leaflet) to the reference member state and concerned member states. The reference member state prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report, each concerned member state must decide whether to approve the assessment report and related materials. If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points may eventually be referred to the European Commission, whose decision is binding on all member states.

Pharmaceutical Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we obtain regulatory approval. In the U.S. and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend considerably on the availability of reimbursement from third-party payors. Third-party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drugs for a particular indication. Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain FDA approvals. Our products may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

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In 2003, the U.S. government enacted legislation providing a prescription drug benefit for Medicare recipients, which became effective at the beginning of 2006. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketing approval. However, to obtain payments under this program, we would be required to sell products to Medicare recipients through prescription drug plans operating pursuant to this legislation. These plans will likely negotiate discounted prices for our products. In March 2010, the Patient Protection and Affordable Care Act became law, which substantially changed the way healthcare is financed by both governmental and private insurers. We anticipate that this legislation will result in additional downward pressure on coverage and the price that we receive for any approved product. Federal, state and local governments in the U.S. continue to consider legislation to limit the growth of health care costs, including the cost of prescription drugs. Future legislation could limit payments for pharmaceuticals such as the drug candidates that we are developing.

Different pricing and reimbursement schemes exist in other countries. In the European Community, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of our particular drug products to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the U.S. has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Corporate History and Information

We were formed as Cempra Holdings, LLC, a limited liability company under the laws of the State of Delaware, on May 16, 2008. Cempra Holdings, LLC was formed in connection with a reorganization whereby the stockholders of Cempra Pharmaceuticals, Inc., a corporation formed under the laws of the State of Delaware on November 18, 2005, exchanged their shares of Cempra Pharmaceuticals, Inc. stock for shares of Cempra Holdings, LLC, pursuant to a merger of a subsidiary of Cempra Holdings, LLC with and into Cempra Pharmaceuticals, Inc., as a result of which Cempra Pharmaceuticals, Inc. became a wholly owned subsidiary of Cempra Holdings, LLC. On January 29, 2012, we effected a 1-for-9.5 reverse stock split of all of our common and preferred shares. The ratio for the reverse stock split was determined by our Board of Directors. The reverse stock split was approved by the holders of our pre-conversion common and preferred shares. All share and per share amounts referred to in this report have been adjusted to reflect the effect of the 1-for-9.5 reverse stock split.

On February 2, 2012, Cempra Holdings, LLC converted from a Delaware limited liability company to a Delaware corporation and was renamed Cempra, Inc. As a result of the corporate conversion, the holders of common shares of Cempra Holdings, LLC became holders of shares of common stock of Cempra, Inc. and the holders of preferred shares of Cempra Holdings, LLC became holders of shares of common stock of Cempra, Inc. Holders of options to purchase common shares of Cempra Holdings, LLC became holders of options to purchase shares of common stock of Cempra, Inc. Holders of notes convertible into preferred shares of Cempra Holdings, LLC and associated warrants exercisable for preferred shares of Cempra Holdings, LLC became holders of shares of common stock and warrants to purchase shares of common stock of Cempra, Inc.

We effected the reverse stock split and the corporate conversion in conjunction with our initial public offering, or IPO, which closed on February 8, 2012.

We have two subsidiaries, Cempra Pharmaceuticals, Inc. and CEM-102 Pharmaceuticals, Inc. Our primary executive offices are located at 6340 Quadrangle Drive, Suite 100, Chapel Hill, NC 27517-8149, and our telephone number is (919) 313-6601. Our website address ishttp://www.cempra.com. The information contained in, or that can be accessed through, our website is not part of this report.

Employees

As of March 1, 2013, we had 25 employees, nine of whom hold Ph.D. or M.D. degrees. Twelve of our employees were engaged in research and development activities and seven were engaged in support administration, including business development and finance. None of our employees is subject to a collective bargaining agreement. We consider our relationship with our employees to be good.

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Item 1A. Risk Factors

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report and in any documents incorporated in this report by reference.

If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected. If that happens, the market price of our common stock could decline, and stockholders may lose all or part of their investment.

Risks Related to our Business

We are heavily dependent on the success of solithromycin and Taksta, which are still under clinical development. The FDA and foreign regulatory approval process is lengthy, time consuming and inherently unpredictable and if we are ultimately unable to obtain regulatory approval for solithromycin or Taksta our business will be substantially harmed.

We have no products that have been approved for sale. Our near-term prospects are substantially dependent on our ability to develop and commercialize solithromycin and Taksta. We cannot commercialize, market or sell either product in the U.S. without FDA approval. FDA approval, if received, is several years away at least. To commercialize solithromycin outside of the U.S., we would need applicable foreign regulatory approval. The clinical development of solithromycin and Taksta is susceptible to the risk of failure inherent in any stage of drug development, including failure to achieve efficacy across a broad population of patients, the occurrence of severe adverse events and the FDA or any applicable foreign regulatory authority determining that a drug product is not approvable.

The process required to obtain approval for commercialization from the FDA and similar foreign authorities is unpredictable, and typically takes many years following the commencement of clinical trials depending on numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to obtain regulatory approval may change during the course of a product’s clinical development. We may fail to obtain regulatory approval for solithromycin, Taksta or any other product candidates for many reasons, including the following:

• we may not be able to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for any indication;

• the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval, and/or the FDA may require additional, expensive trials;

• the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

• we may not be able to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

• we may not be able to demonstrate that a product candidate is non-inferior or superior to the current standard of care, future competitive therapies in development, or over placebo in any indications for which the FDA requires a placebo-controlled trial;

• the data collected from clinical trials of any product candidates that we develop may not be sufficient to support the submission of a new drug application, or NDA, or other submission or to obtain regulatory approval in the U.S. or elsewhere;

• the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval;

• the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or clinical trials;

• the FDA or comparable foreign regulatory authorities may not accept data generated at our clinical trial sites;

• the FDA or comparable foreign regulatory authorities may fail to approve the clinical practices of the third party clinical research organizations, or CROs, we use for clinical trials; and

• the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators enter into agreements for clinical and commercial supplies.

This lengthy approval process as well as the unpredictability of future clinical trial results may prevent us from obtaining regulatory approval to market solithromycin, Taksta or any future product candidates, which would significantly harm our business, financial condition, results of operations and prospects.

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Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive, can take many years to complete and its outcome is highly uncertain. Failure can occur at any time during the clinical trial process due to inadequate performance of a drug or inadequate adherence by patients or investigators to clinical trial protocols. Pursuant to FDA guidelines, new drugs must show non-inferiority or superiority to existing approved treatments. We have conducted our solithromycin for CABP and Taksta for ABSSSI clinical trials pursuant to proposed guidelines published by the FDA for drugs being developed for the treatment of CABP and ABSSSI, respectively. To date, those clinical trials demonstrate solithromycin and Taksta are comparable to current standards of care. However, because the numbers of patients in our Phase 2 trial for the oral formulation of solithromycin and our Phase 2 trial for Taksta for ABSSSI were small, our results were not powered to show, and did not show, statistical non-inferiority. If in our ongoing and any later clinical trials solithromycin or Taksta fails to demonstrate safety and/or superiority or non-inferiority according to FDA guidelines, the FDA will not approve that product candidate and we would not be able to commercialize it, which will have a material adverse effect on our business, financial condition, results of operations and prospects.

Our ongoing and planned Phase 3 trials for solithromycin may be more expensive and time consuming than we currently expect. FDA regulations require two Phase 3 trials for any drug for which an NDA is submitted. With passage of the GAIN Act, we believe that we will only need to conduct one Phase 3 trial for oral solithromycin and one Phase 3 IV to oral trial because we believe we will have developed the necessary data to support our planned NDA and satisfy the FDA requirement. However, the FDA could insist that we conduct two Phase 3 trials for oral solithromycin and two Phase 3 trials for IV to oral solithromycin, which would add to the time and cost of solithromycin’s development.

In addition, the results of pre-clinical studies and early clinical trials of product candidates may not be predictive of the results of later-stage clinical trials. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks in Phase 2 and Phase 3 clinical trials despite achieving successful results in earlier stage trials. The failure to obtain positive results in any of our Phase 2 or Phase 3 clinical trials could seriously impair the development prospects, and even prevent regulatory approval, of solithromycin or Taksta or any candidate in our existing proprietary macrolide library.

We have no experience as a company in bringing a drug to regulatory approval.

As a company, we have never obtained regulatory approval for, or commercialized, a drug. It is possible that the FDA may refuse to accept any or all of our planned NDAs for substantive review or may conclude after review of our data that our application is insufficient to obtain regulatory approval of solithromycin, Taksta or any future product candidates. If the FDA does not accept or approve any or all of our planned NDAs, it may require that we conduct additional clinical, pre-clinical or manufacturing validation studies, which may be costly, and submit that data before it will reconsider our applications. In addition, there is no FDA guidance on the approval process and study size for prosthetic joint infections and the FDA could require large non-inferiority trials that could be costly and difficult to conduct. Depending on the extent of these or any other FDA required studies, approval of any NDA or other application that we submit may be significantly delayed, possibly for several years, or may require us to expend more resources than we have available. Any delay in obtaining, or an inability to obtain, regulatory approvals would prevent us from commercializing solithromycin or Taksta, generating revenues and achieving and sustaining profitability. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve any NDA we submit. If any of these outcomes occur, we may be forced to abandon our planned NDAs for either solithromycin or Taksta or both, which would materially adversely affect our business and could potentially cause us to cease operations. We face similar risks for any approval in a foreign jurisdiction.

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Future legislation, and/or regulations and policies adopted by the FDA or other regulatory health authorities may increase the time and cost required for us to conduct and complete clinical trials for solithromycin, Taksta or other product candidates that we develop.

The FDA has established regulations, guidelines and policies to govern the drug development and approval process, as have foreign regulatory authorities. Any change in regulatory requirements due to the adoption by the FDA and/or foreign regulatory authorities of new legislation, regulations, or policies may require us to amend existing clinical trial protocols or add new clinical trials to comply with these changes. Such amendments to existing protocols and/or clinical trial applications or the need for new ones, may significantly impact the cost, timing and completion of the clinical trials.

In particular, drugs being tested and/or developed for the treatment of CABP and ABSSSI, including solithromycin and Taksta, are subject to proposed guidelines published by the FDA in March 2009 (with new guidelines proposed in November 2011) and August 2010, respectively. We have conducted our clinical trials to date according to the standards established by these proposed guidelines, but we expect the FDA will revise the proposed guidelines for CABP before we submit our NDA for solithromycin. Any new proposed guidelines may require us to conduct additional clinical trials, re-run previously completed trials to gather data at different endpoints or according to different protocols, or otherwise materially alter our planned clinical development of solithromycin. Any such regulatory change may materially increase our costs, delay the completion of our clinical trials, and otherwise impact our ability to obtain regulatory approval for our product candidate. Furthermore, the FDA’s guidance documents are not binding on the FDA. As a result, the FDA may not accept the results of clinical trials we conduct even though they follow the FDA’s most recent guidance.

In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process, particularly in our areas of focus, may significantly delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing and other requirements.

We might not successfully differentiate solithromycin from telithromycin (Ketek^®), a macrolide found to cause severe side effects.

Ketek is a macrolide antibiotic that the FDA approved in 2004 for the treatment of multi-drug resistant pneumococci and other CABP bacteria. Soon after release, however, Ketek was found to cause reversible visual disturbances, exacerbate myasthenia gravis (a neurological disorder characterized by improper muscle regulation) and cause liver failure. These effects led the FDA to require the drug label for Ketek to include a strengthened warning section regarding specific drug-related adverse events and contributed to Ketek being withdrawn in 2007 for the treatment of all infections other than CABP. Our research suggests these side effects are likely caused by pyridine, which is a component of Ketek. Solithromycin and older generation macrolides, including azithromycin and clarithromycin, do not have a pyridine component, which we have demonstrated inhibits the action of nicotinic acid acetylcholine receptors that could result in the side effects caused by Ketek. If our research is proven to be incorrect or if solithromycin demonstrates similar side effects, the FDA might not approve solithromycin, or, if already approved, might withdraw approval, require us to conduct additional clinical trials or require warnings on product labeling, which would significantly harm our ability to generate revenues from solithromycin. Even if the FDA approves solithromycin, physicians may not be convinced that solithromycin is a safe and effective treatment for CABP and other infections. If physicians believe solithromycin demonstrates characteristics similar to Ketek, they might not prescribe solithromycin, which would negatively affect our revenues.

Bacteria might develop resistance to solithromycin or Taksta, which would decrease the efficacy and commercial viability of that product.

Drug resistance is primarily caused by the genetic mutation of bacteria resulting from sub-optimal exposure to antibiotics where the drug does not kill all of the bacteria. While antibiotics have been developed to treat many of the most common infections, the extent and duration of their use worldwide has resulted in new mutated strains of bacteria resistant to current treatments. We are developing solithromycin and Taksta to treat patients infected with drug-resistant bacteria. With respect to solithromycin, which is a next generation macrolide, resistance issues associated with earlier generations of macrolides have led to a decrease in their use for treating serious respiratory tract infections such as CABP. If physicians, rightly or wrongly, associate the resistance issues of earlier generation macrolides with solithromycin, physicians might not prescribe solithromycin for treating a broad range of infections. Similarly, resistance to fusidic acid has developed outside the U.S. Ourin vitro studies have shown that the reason for resistance to the oral formulation is that it was not dosed optimally. We believe that overuse of topical formulations of fusidic acid also contributed to development of resistance outside the U.S. If Taksta is improperly dosed, or if our studies incorrectly attributed an increase in resistance to inappropriate dosing, bacteria might develop resistance to Taksta in the U.S. If these bacteria develop resistance to solithromycin or Taksta, the efficacy of these products would decline, which would negatively affect our potential to generate revenues from these products.

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Delays in clinical trials are common and have many causes, and any such delays could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales as currently contemplated.

We may experience delays in clinical trials of our product candidates. Our planned clinical trials might not begin on time, may be interrupted or delayed once commenced, might need to be redesigned, might not enroll a sufficient number of patients or might not be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including the following:

• delays in obtaining regulatory approval to commence a trial;

• imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;

• delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;

• delays in obtaining required institutional review board, or IRB, approval at each site;

• delays in identifying, recruiting and training suitable clinical investigators;

• delays in recruiting suitable patients to participate in a trial;

• delays in having patients complete participation in a trial or return for post-treatment follow-up;

• clinical sites dropping out of a trial to the detriment of enrollment;

• time required to add new sites;

• delays in obtaining sufficient supplies of clinical trial materials, including suitable active pharmaceutical ingredient, or API; or

• delays resulting from negative or equivocal findings of the data safety monitoring board, or DSMB, for a trial.

We were subject to such a delay in 2008 when the FDA placed a partial clinical hold on our Phase 2 clinical trial for oral solithromycin over concern about possible toxicity related to solithromycin. The FDA converted the partial clinical hold into a full clinical hold in April 2010. At the time, the FDA had concerns that solithromycin, as a fluoroketolide, may have similar toxicity issues as Ketek. While we addressed the FDA’s concerns and were allowed to proceed with the trial, which we successfully completed, the trial was delayed by approximately 12 months. While the FDA has reviewed the results of our Phase 2 clinical trial and approved a protocol for our ongoing pivotal Phase 3 trial for oral solithromycin and while we reported results of our Phase 1 trial for the IV formulation of solithromycin in October 2012, we expect to review our overall development plan for solithromycin with the FDA in an end of Phase 2 meeting regarding oral solithromycin before we proceed with our planned Phase 3 IV-to-oral trial. The FDA may not allow us to proceed with the IV-to-oral trial for any of the reasons noted above.

In addition, we are evaluating alternative IV solutions of solithromycin to develop the optimal solution and may experience delays in the commencement of our planned Phase 3 IV-to-oral trial if we cannot develop the solution in a timely or cost-effective manner.

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. In addition, the timing of our clinical trials for solithromycin is dependent on the onset, degree and timing of the CABP season, which tends to occur in the winter months in each hemisphere. We could encounter delays in our clinical trials of solithromycin or Taksta if participating physician investigators encounter unresolved ethical issues associated with enrolling patients in clinical trials of solithromycin or Taksta in lieu of prescribing approved antibiotics that have established safety and efficacy profiles. Any of these delays in completing our clinical trials could increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues.

We may be required to suspend or discontinue clinical trials due to adverse side effects or other safety risks that could preclude approval of solithromycin or Taksta or any of our future product candidates.

Our clinical trials may be suspended or terminated at any time for a number of reasons. A clinical trial may be suspended or terminated by us, our collaborators, the FDA or other regulatory authorities due to a failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, presentation of unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using the investigational drug, changes in governmental regulations or administrative actions, lack of adequate funding to continue the clinical trial, or negative or equivocal findings of the DSMB or the IRB for a clinical trial. An IRB may also suspend or terminate our clinical trials for failure to protect patient safety or patient rights. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition, regulatory

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agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe the clinical trials are not being conducted in accordance with applicable regulatory requirements or present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate any clinical trial of any product candidates that we are developing, the commercial prospects of such product candidates will be harmed and our ability to generate product revenues, if at all, from any of these product candidates will be delayed or eliminated. Any of these occurrences may harm our business, financial condition, results of operations and prospects significantly.

We have not completed a clinical trial of Taksta for the treatment of prosthetic joint infections and there is no guarantee that the results of our ongoing Phase 2 trial or any other trial we conduct will be consistent with the results of any trials conducted to date or will demonstrate safety and efficacy to the satisfaction of the FDA.

We only recently initiated, in December 2012, our Phase 2 clinical trial of Taksta for the treatment of prosthetic joint infections. While we have successfully completed a Phase 2 clinical trial comparing Taksta to linezolid for the treatment of ABSSSI the results of our completed Phase 2 trial for the treatment of ABSSSI were not powered to show, and did not show, statistical non-inferiority. Comparisons to results from other reported clinical trials, including our completed Phase 2 clinical trial for the treatment of ABSSSI, can assist in evaluating the potential efficacy of Taksta for the treatment of prosthetic joint infections; however, there are many factors that affect the outcome for patients in clinical trials, some of which are not apparent in published reports, and results from different trials often cannot be reliably compared. Therefore, there is no assurance that the results of any other trials we conduct for Taksta in the treatment of prosthetic joint infections will demonstrate safety and efficacy comparable to the results of trials conducted to date or will be sufficient to attain FDA approval.

We previously completed our end of Phase 2 meeting with the FDA for Taksta with respect to the treatment of ABSSSI. Assuming positive results in our Phase 2 trial for Taksta for prosthetic joint infections, we intend to submit our planned clinical trial activity to support an NDA submission for Taksta as a treatment for prosthetic joint infections with the FDA in the first half of 2013 after the receipt of top line data. If the Phase 2 trial data results are inadequate or the FDA believes that the plan is inadequate, it could delay or prevent our ability to receive regulatory approval or commercialize Taksta for the treatment of prosthetic joint infections.

Taksta is not well absorbed in animals, which could impair our ability to obtain FDA approval.

As required by FDA regulations, we conducted pre-clinical studies of Taksta to determine its level of absorption in animals. The studies indicated that Taksta is not very well absorbed and has a short half-life in animals, resulting in minimum exposure levels which limited the ability to test Taksta in animal models. Fusidic acid, the API in Taksta, has been used for several decades in humans outside the U.S. and we believe there is sufficient human clinical trial data for Taksta to overcome the lack of absorption in animal studies. Despite this human data, and while all of our pre-clinical tests were benign and indicated no safety or tolerability issues, our limited ability to test Taksta in animal models may adversely affect our ability to obtain FDA approval.

Even if the FDA approves solithromycin for the treatment of CABP and Taksta for the treatment of prosthetic joint infections, adverse effects discovered after approval could adversely affect the market for those products.

If we obtain regulatory approval for solithromycin, Taksta or any other product candidate that we develop, and we or others later discover that our products cause adverse effects, a number of potentially significant negative consequences could result, including:

• regulatory authorities may withdraw their approval of the product;

• regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;

• we may be required to change the way the product is administered, conduct additional clinical studies, implement a risk evaluation and mitigation strategy, or REMS, or restrict the distribution of the product;

• we could be sued and held liable for harm caused to patients and our liability insurance may not adequately cover those claims; and

• our reputation may suffer.

Any of these events could prevent us from maintaining market acceptance of the affected product candidate and could substantially increase the costs of, or prevent altogether, the commercialization of our product candidates.

We have had negative cash flows from operations and might not be able to generate sufficient cash to service our existing indebtedness to Hercules Technology Growth Capital, Inc., the level of which indebtedness could have a material adverse effect on our business, financial condition, results of operations and prospects.

On December 20, 2011, we entered into a loan and security agreement with Hercules Technology Growth Capital, Inc., or Hercules, pursuant to which we borrowed $10.0 million. We must repay the indebtedness on or before December 1, 2015. In addition,

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at the time that the loan is either due or prepaid, we must pay Hercules a fee of $400,000. Our ability to make payments on this indebtedness depends on our ability to generate cash in the future. We expect to experience negative cash flow for the foreseeable future as we fund our operations and capital expenditures. There can be no assurance that we will be in a position to repay this indebtedness when due or obtain extensions of the maturity date. We anticipate that we will need to secure additional funding in order for us to be able to satisfy our obligations when due. We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If that additional funding involves the sale of equity securities or convertible securities, it would result in the issuance of additional shares of our capital stock, which would result in dilution to our stockholders.

Moreover, this level of debt could have important consequences to you as an investor in our securities. For example, it could:

• make it more difficult for us to satisfy our obligations with respect to payments owed to our licensors;

• limit our flexibility in planning for the development, clinical testing, approval and marketing of our products;

• place us at a competitive disadvantage compared to any of our competitors that are less leveraged than we are;

• increase our vulnerability to both general and industry-specific adverse economic conditions; and

• limit our ability to obtain additional funds.

In addition, the loan is secured by all of our assets except our intellectual property. In the event we fail to make timely payments or breach any of our representations or other obligations in the agreement, or upon any circumstance or occurrence that has a material adverse effect on the loan collateral, our business operations, properties, assets, prospects or condition, or our ability to perform our obligations under the loan agreement, Hercules can declare the loan in default. Upon an event of default, the loan principal and accrued interest would become immediately due and payable and Hercules would be entitled to enforce its security interest in our assets.

The addition of further debt to our current debt levels could make it more difficult for us to repay our indebtedness and meet our other obligations and would intensify the leverage-related risks that we now face.

If we fail to obtain additional financing, we may not be able to complete the development and commercialization of solithromycin or Taksta.

We need substantial amounts of cash to complete the clinical development of solithromycin and Taksta. As of the date of this report, we estimate the cost of our research and development activities through the completion of our Phase 3 trial for oral solithromycin for CABP will be approximately $21.0 million, our costs to complete our QtC, hepatic and renal insufficiency studies of solithromycin will be approximately $6.0 million, our Phase 2 trial for Taksta for prosthetic joint infections will be approximately $4.0 million and cost of drug product and development for those trials and registration will be approximately $8.0 million, in addition to general and administrative expenses. The costs to develop solithromycin beyond our ongoing Phase 3 oral trial and Taksta beyond our ongoing Phase 2 trial will be significant and we will need to raise additional capital to continue those development activities.

We expect that our existing cash and equivalents as of December 31, 2012 will be sufficient to fund our capital requirements into 2015. This projection does not include funds to initiate the solithromycin Phase 3 IV-to-oral clinical trial. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. For example, our clinical trials may encounter technical, enrollment or other issues that could cause our development costs to increase more than we expect and we may be required to conduct additional trials requested by the FDA that could increase our costs significantly. We would also need to raise additional funds sooner if we choose to initiate clinical trials more rapidly than we presently anticipate or if we elect to conduct additional trials for alternate indications. In any event, we will require significant amounts of additional capital to obtain regulatory approval of and to commercialize solithromycin and Taksta.

We may raise additional capital from the issuance of equity and/or debt securities, collaborations with third parties, out-licensing of rights to our product candidates and other means, or a combination of any of the above. Securing additional financing, however, will require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from our day-to-day activities, which may adversely affect our management’s ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

• significantly delay, scale back or discontinue the development or commercialization of solithromycin and/or Taksta;

• seek collaborators for solithromycin and/or Taksta at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; and

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• relinquish or license, potentially on unfavorable terms, our rights to solithromycin and/or Taksta that we otherwise would seek to develop or commercialize ourselves.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing discovery, development and commercialization efforts, and our ability to generate revenues and achieve or sustain profitability will be substantially harmed.

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed in obtaining, or may ultimately not be able to obtain, regulatory approval for or commercialize solithromycin, Taksta or any other product candidates.

We have relied, and plan to continue to rely, on various CROs to recruit patients, monitor and manage data for our on-going clinical programs for solithromycin and Taksta, as well as for the execution of our pre-clinical and non-clinical studies. We control only certain aspects of our CROs’ activities; nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with the FDA’s current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA for all of our products in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable, and the FDA may require us to perform additional clinical trials before approving our product candidates. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, to evaluate the safety and effectiveness of solithromycin and Taksta to a statistically significant degree our clinical trials will require an adequately large number of test subjects. Any clinical trial that a CRO conducts abroad on our behalf is subject to similar regulation. Accordingly, if our CROs fail to comply with these regulations or recruit a sufficient number of patients, we may have to repeat clinical trials, which would delay the regulatory approval process.

In addition, our CROs are not our employees and we cannot control whether or not they devote sufficient time and resources to our on-going clinical, non-clinical and pre-clinical programs. Our CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize solithromycin, Taksta or any other product candidates that we seek to develop. As a result, our financial results and the commercial prospects for solithromycin, Taksta or any other product candidates that we seek to develop would be harmed, our costs could increase and our ability to generate revenues could be delayed or ended.

We typically engage one or more CROs on a project-by-project basis for each study or trial. While we have developed and plan to maintain our relationships with CROs that we have previously engaged, we also expect to enter into agreements with other CROs to obtain additional resources and expertise in an attempt to accelerate our progress with regard to on-going clinical, non-clinical and pre-clinical programs and specifically, the compilation of clinical trial data for submission with an NDA for each of solithromycin and Taksta. Switching or entering into new relationships with CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Although we try to carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition, results of operations or prospects.

Our dependence upon third parties for the manufacture and supply of solithromycin, Taksta and any future product candidates may cause delays in, or prevent us from, successfully developing and commercializing our products.

We do not currently have nor do we plan to build the infrastructure or capability internally to manufacture solithromycin or Taksta for use in the conduct of our clinical trials. In January 2013, we entered into an agreement with Wockhardt to supply the API and commercial supply for solithromycin. Wockhardt manufactures solithromycin according to our specifications under our proprietary rights. While we have the ability to develop alternate sources for solithromycin should Wockhardt be unable to supply our needs, we may not be able to negotiate an agreement with another source on acceptable terms, it at all.

We employ the services of Ercros S.A., or Ercros, to produce Taksta’s API and intend to utilize a third-party manufacturer to produce the finished dosing formulation of Taksta. We have a long-term exclusive supply arrangement with Ercros to produce the fusidic acid used in Taksta in which Ercros agrees to exclusively supply us with fusidic acid in the U.S., and we agree to obtain our

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supply of fusidic acid for commercial sale exclusively from Ercros, subject to a right to develop a second source for limited supply quantities. We believe Ercros is one of only two currently known manufacturers that can produce fusidic acid compliant with the purity required for human use. The second manufacturer is not available as a supplier to us. Fusidic acid is difficult to produce at these purity levels because of its complex fermentation process. As such, there are underlying risks associated with its manufacture, which could include cost overruns, new impurities, difficulties in scaling up or reproducing manufacturing processes and lack of timely availability of raw materials. We have yet to identify a viable second source of fusidic acid but continue to research alternatives. If Ercros cannot supply sufficient quantities of fusidic acid to make clinical supplies of Taksta, it would harm our ability to develop Taksta. We may not be able to locate a second manufacturer or, if we do, we may not be able to negotiate an agreement on favorable terms, if at all.

In addition, regulatory requirements could pose barriers to the manufacture of our API and finished product for solithromycin and Taksta. Our third-party manufacturers are required to comply with the FDA’s current good manufacturing practices, or cGMP, regulations. As a result, the facilities used by Wockhardt, Ercros, and any of our future manufacturers to manufacture solithromycin and Taksta must be approved by the FDA after we submit our NDA to the FDA and before approval of solithromycin and Taksta. Similar regulations apply to manufacturers of our products for use or sale in foreign countries. We do not control the manufacturing process of solithromycin or Taksta and are completely dependent on these third party manufacturing partners for compliance with the applicable regulatory requirements for the manufacture of solithromycin and Taksta API and their finished product. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for the commercial manufacture of solithromycin or Taksta, we may need to find alternative manufacturing facilities, which would result in significant delays of up to several years in obtaining approval for solithromycin or Taksta. In addition, our manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. Failure by any of our manufacturers to comply with applicable cGMP regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply, and criminal prosecutions, any of which could have a material adverse impact on our business, financial condition, results of operations or prospects.

Finally, we also could experience manufacturing delays if our third-party manufacturers give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform according to the terms of the agreement between us.

If Wockhardt, Ercros, or any alternate supplier of API or finished drug product for solithromycin or Taksta experiences any significant difficulties in its respective manufacturing processes, does not comply with the terms of the agreement between us or does not devote sufficient time, energy and care to providing our manufacturing needs, we could experience significant interruptions in the supply of solithromycin or Taksta, which could impair our ability to supply solithromycin or Taksta at the levels required for our clinical trials and commercialization and prevent or delay their successful development and commercialization.

The timing of the milestone and royalty payments we are required to make to Optimer Pharmaceuticals, Inc. and The Scripps Research Institute is uncertain and could adversely affect our cash flows and results of operations.

In March 2006, we entered into a Collaborative Research and Development and License Agreement with Optimer Pharmaceuticals, Inc., or Optimer, pursuant to which we acquired an exclusive license to certain patent applications and other intellectual property related to a series of compounds, including solithromycin, to develop and commercialize licensed products outside of the Association of South East Asian Nations, or ASEAN, countries (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand and Vietnam). We have an obligation to make additional payments upon achievement of specified development, regulatory and commercialization milestones. The aggregate amount of such milestone payments we may need to pay is based in part on the number of products developed under the agreement. The aggregate amount (including our two milestone payments to date) would be $27.5 million if four products are developed and gain FDA approval. Additional limited milestone payments would be due if we develop more than four products. We will also pay tiered mid-single-digit royalties based on the amount of annual net sales of solithromycin (or related licensed compounds), if and when approved by regulatory authorities. We have already paid a $0.5 million milestone in 2010 and a $1.0 million milestone in 2012 upon completion of our discussions with the FDA for the protocol for our pivotal Phase 3 trial for oral solithromycin. Optimer can elect to receive certain milestone payments in cash or in shares of our common stock having an equivalent fair market value. The timing of our achievement of these events and corresponding milestone payments to Optimer is subject to factors relating to the clinical and regulatory development and commercialization of solithromycin (or related licensed compounds), many of which are beyond our control. We may become obligated to make a milestone payment when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us. If we were unable to make a milestone payment, we would be in material breach of the agreement, in which event Optimer could terminate the agreement, which would result in the loss of our rights to develop and commercialize solithromycin, which would seriously harm our ability to generate revenues or achieve profitability.

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We also must pay The Scripps Research Institute various milestone and annual payments, which, while significantly lower than amounts potentially due to Optimer, could become due when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us.

Our loan agreement with Hercules contains covenants that impose restrictions on our operations that may adversely impact the operation of our business.

Our loan agreement with Hercules contains customary restrictive covenants, including restrictions on our ability to incur additional debt, transfer or place a lien or security interest on our assets, including our intellectual property, merge with or acquire other companies, redeem any shares of our capital stock or pay cash dividends to our stockholders. These restrictions may inhibit our ability to conduct our business and to provide distributions to our stockholders. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants than the Hercules loan.

The commercial success of solithromycin, Taksta and any other product candidates that we develop, if approved in the future, will depend upon attaining significant market acceptance of these products among physicians and payors.

As a company, we have never commercialized a product candidate for any indication. Even if solithromycin, Taksta or any other product candidate that we develop is approved by the appropriate regulatory authorities for marketing and sale, physicians may not prescribe our approved products, which would prevent us from generating revenues or becoming profitable. Market acceptance of solithromycin, Taksta and any other product candidates that we develop by physicians, patients and payors will depend on a number of factors, many of which are beyond our control, including:

• the clinical indications for which the product is approved;

• acceptance by physicians and payors of each product as a safe and effective treatment;

• the cost of treatment in relation to alternative treatments, including numerous generic drug products, such as azithromycin, levofloxacin and vancomycin;

• the relative convenience and ease of administration of solithromycin in the treatment of CABP and Taksta in the treatment of prosthetic joint infections;

• the availability and efficacy of competitive drugs;

• the effectiveness of our or any third party partner’s sales force and marketing efforts;

• our ability to manufacture or obtain commercial quantities of our drug products;

• our ability to deliver our products on a timely basis;

• the extent to which bacteria develop resistance to any antibiotic product candidate that we develop, thereby limiting its efficacy in treating or managing infections;

• the extent to which the product is approved for inclusion on formularies of hospitals and managed care organizations;

• whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particular infections;

• the availability of adequate reimbursement by third parties, such as insurance companies and other health care payors, and/or by government health care programs, including Medicare and Medicaid;

• our ability to have our products included in hospital formularies;

• limitations or warnings contained in a product’s FDA-approved labeling; and

• prevalence and severity of adverse side effects.

Even if the medical community accepts that solithromycin and Taksta are safe and efficacious for their approved indications, physicians may not immediately be receptive to the use or may be slow to adopt solithromycin as an accepted treatment for CABP and Taksta as an accepted treatment for prosthetic joint infections. While we believe each of solithromycin and Taksta has significant advantages, we cannot assure you that any labeling approved by the FDA will permit us to promote solithromycin and Taksta as being superior to competing products. If either or both of solithromycin or Taksta are approved but do not achieve an adequate level of

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acceptance by physicians and payors, we may not generate sufficient or any revenues from these products and we may not become profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of solithromycin and Taksta may require significant resources and may never be successful.

If approved, solithromycin and Taksta will face significant competition from branded and generic antibiotics and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. If solithromycin or Taksta is approved, we will have competitors both in the U.S. and internationally, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical and generic drug companies. Many of these companies have greater financial and other resources, such as larger research and development staffs and more experienced marketing and manufacturing organizations. As a result, these companies may obtain regulatory approval more rapidly and may be more effective in selling and marketing their products. They also may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make solithromycin, Taksta or any other product candidates that we develop obsolete. As a result, our competitors may succeed in commercializing antibiotics before we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.

If approved, both solithromycin and Taksta will face competition from currently commercially available antibiotics, as well as any competing products that may be developed in the future. In July 2012, the United States Congress passed, and President Obama signed, the Food and Drug Administration Safety and Innovation Act, which included the Generating Antibiotic Incentives Now Act, or the GAIN Act. The GAIN Act is intended to provide incentives for the development of new, qualified infectious disease products. These incentives might result in more competition in the market for new antibiotics and might cause pharmaceutical and biotechnology companies with more resources than we have to shift their efforts towards the development of products that could be competitive with our product candidates. Existing approved products that will compete with solithromycin include azithromycin (sold under the brand name Zithromax^® by Pfizer Inc. and available as a generic), clarithromycin (sold under the brand name Biaxin^® by Abbott Laboratories and available as a generic), moxifloxacin (sold under the brand name Avelox^® by Bayer AG), levofloxacin (sold under the brand name Levaquin by Johnson & Johnson and available as a generic), linezolid (sold under the brand name Zyvox by Pfizer Inc.), ceftriaxone (sold under the brand name Rocephin^® by F. Hoffman-La Roche Ltd and available as a generic) and ceftaroline (sold under the brand name Teflaro^® by Forest Laboratories, Inc.). Existing approved products that will compete with Taksta include vancomycin (available as a generic), linezolid (sold under the brand name Zyvox by Pfizer Inc.), daptomycin (sold under the brand name Cubicin by Cubist Pharmaceuticals, Inc.), quinupristin/dalfopristin (sold under the brand name Synercid^® by Sanofi-Aventis and Monarch Pharmaceuticals, Inc.), tigecycline (sold under the brand name Tygacil^® by Pfizer Inc.), telavancin (sold under the brand name Vibativ^® by Theravance, Inc. and Astellas Pharma, Inc.) and ceftaroline (sold under the brand name Teflaro by Forest Laboratories, Inc.). Generic antibiotics are typically sold at lower prices than branded antibiotics and are generally preferred by managed care providers of health services.

If we are unable to demonstrate the advantages of solithromycin or Taksta over competing drugs and drug candidates, we will not be able to successfully commercialize solithromycin or Taksta and our results of operations will suffer.

Reimbursement may not be available for solithromycin, Taksta or any other product candidates that we develop, which could make it difficult for us to sell our products profitably.

Market acceptance and sales of solithromycin, Taksta or any other product candidates that we develop will depend on reimbursement policies and may be affected by health care reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for solithromycin, Taksta or any other product candidates that we develop. Also, we cannot be sure that the amount of reimbursement available, if any, will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize solithromycin, Taksta or any other product candidates that we develop.

Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policies and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

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In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the U.S. The goal of PPACA is to reduce the cost of health care and substantially change the way health care is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on our business specifically, the PPACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of solithromycin or Taksta or any future products. Earlier this year, members of the U.S. Congress and some state legislatures sought to overturn at least portions of the legislation including those on the mandatory purchase of insurance. However, on June 28, 2012, the United States Supreme Court upheld the constitutionality of these provisions. Members of the U.S. Congress have since proposed a number of legislative initiatives, including possible repeal of the PPACA. We cannot predict the outcome or impact of current proposals or whether new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.

The availability of numerous generic antibiotics at lower prices than branded antibiotics, such as solithromycin or Taksta if either were approved for commercial introduction, may also substantially reduce the likelihood of reimbursement for such products. We expect to experience pricing pressures in connection with the sale of solithromycin, Taksta and any other products that we develop, due to the trend toward managed health care, the increasing influence of health maintenance organizations and additional legislative proposals. If we fail to successfully secure and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.

We currently have no marketing and sales organization and have no experience as a company in marketing drug products. If we are unable to establish our own marketing and sales capabilities, or enter into agreements with third parties, to market and sell our products after they are approved, we may not be able to generate product revenues.

We do not have a sales organization for the marketing, sales and distribution of any drug products. In order to commercialize any products, we must develop these capabilities on our own or make arrangements with third parties for the marketing, sales and distribution of our products. The establishment and development of our own sales force would be expensive and time consuming and could delay any product launch, and we cannot be certain that we would be able to successfully develop this capability. As a result, we may seek one or more licensing partners to handle some or all of the sales and marketing of solithromycin for CABP in the U.S. and elsewhere and Taksta for prosthetic joint infections in the U.S. There also may be certain markets within the U.S. for solithromycin for which we may seek a co-promotion arrangement. However, we may not be able to enter into arrangements with third parties to sell solithromycin or Taksta on favorable terms or at all. In the event we are unable to develop our own marketing and sales force or collaborate with a third-party marketing and sales organization, we would not be able to commercialize solithromycin, Taksta or any other product candidates that we develop, which would negatively impact our ability to generate product revenues. Further, whether we commercialize products on our own or rely on a third party to do so, our ability to generate revenue will be dependent on the effectiveness of the sales force. In addition, to the extent we rely on third parties to commercialize our approved products, we will likely receive less revenues than if we commercialized these products ourselves.

If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends in large part on our ability to attract and retain highly qualified managerial, scientific and medical personnel. In order to induce valuable employees to remain with us, we have provided stock options that vest over time. The value to employees of stock options will be significantly affected by movements in our stock price that we cannot control and may at any time be insufficient to counteract more lucrative offers from other companies.

Our scientific team has expertise in many different aspects of drug discovery and development. We conduct our operations at our facility in Chapel Hill, North Carolina, which is part of the Research Triangle consisting of Raleigh, Durham and Chapel Hill. This region is headquarters to other biopharmaceutical companies and many academic and research institutions and, as a result, at any given time there may be a shortage of experienced scientists and medical personnel. Competition for skilled personnel in our area and elsewhere in the U.S. is very intense and competition for experienced scientists may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

Despite our efforts to retain valuable employees, members of our management, scientific and medical teams may terminate their employment with us on short notice. We do not have employment agreements with Prabhavathi Fernandes, our Chief Executive Officer, Mark W. Hahn, our Chief Financial Officer or any other employee. As a result, all employees are employed on an at-will basis, which means that any of these employees could leave our employment at any time, with or without notice, and may go to work for a competitor. The loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results or financial condition. Our success also depends on our ability to continue to attract, retain and motivate highly skilled scientific and medical personnel.

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Other biotechnology and pharmaceutical companies with which we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we offer. If we are unable to continue to attract and retain high quality personnel, our ability to discover, develop and commercialize drug candidates will be limited.

We will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.

As of March 1, 2013, we had 25 employees. As our development and commercialization plans and strategies develop, we expect to expand our employee base for managerial, operational, financial and other resources and, depending on our commercialization strategy, we may further expand our employee base for sales and marketing resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from their day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize solithromycin, Taksta and our other product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth in our organization.

Even if we obtain FDA approval of solithromycin, or any other product candidate, we may never obtain approval or commercialize our products outside of the U.S., which would limit our ability to realize their full market potential. If foreign approval is obtained, there are risks in conducting business in international markets.

In order to market solithromycin or any other products outside of the U.S., we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us and require additional pre-clinical studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. Satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. In addition, our failure to obtain regulatory approval in the U.S. or any foreign country may delay or have negative effects on the process for regulatory approval in other countries. We do not have any product candidates approved for sale in the U.S. or any foreign country and we do not have experience as a company in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in a foreign country or to obtain and maintain required approvals, our potential market for solithromycin or other products will be reduced and our ability to realize the full market potential of our products will be harmed. We do not intend to commercialize Taksta outside the U.S. because of the widespread use of fusidic acid in Europe and Australia.

If approved for commercialization in a foreign country, we intend to enter into agreements with third parties to market solithromycin whenever it may be approved and wherever we have the right to market it. Consequently, we expect that we will be subject to additional risks related to entering into international business relationships, including:

• potentially reduced protection for intellectual property rights;

• the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

• unexpected changes in tariffs, trade barriers and regulatory requirements;

• economic weakness, including inflation, or political instability in particular foreign economies and markets;

• compliance with laws for employees traveling abroad;

• foreign taxes, including withholding of payroll taxes;

• foreign currency fluctuations, which could result in increased operating expenses and reduced revenues;

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• workforce uncertainty in countries where labor unrest is more common than in the U.S.;

• production shortages resulting from any events affecting API and/or finished drug product supply or manufacturing capabilities abroad;

• business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires; and

• failure to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act.

These and other risks may materially adversely affect our ability to attain or sustain revenue from international markets.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with federal and state health care fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the health care industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We have incurred significant operating losses since inception and anticipate that we will incur continued losses for the foreseeable future.

As of December 31, 2012, we had an accumulated deficit of approximately $121.2 million. We have no revenues and have funded our operations to date from the private sale of equity and debt securities and our initial public offering. We expect to incur substantial additional losses over the next several years as our research, development, pre-clinical testing, and clinical trial activities increase, especially those related to solithromycin and Taksta. In addition, we also expect to incur additional costs operating as a public company. The amount of future losses and when, if ever, we will achieve profitability are uncertain.

To raise additional funds to support our business operations, we may issue equity or debt securities. Debt securities could contain restrictive covenants that may adversely impact the operation of our business. The issuance of equity securities or convertible debt securities would result in dilution to our stockholders.

The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. For example, in August 2011, we issued 10.0% unsecured convertible notes (the “August 2011 Notes”) in the aggregate principal amount of $5,000,000. The August 2011 Notes contained restrictive covenants that prohibited us from incurring new indebtedness in excess of $0.5 million in the aggregate and granting a security interest on any of our material assets without the consent of the holders of at least a majority of the aggregate outstanding principal amount of the August 2011 Notes. Pursuant to this authority, the holders of the August 2011 Notes approved the Hercules debt financing that we closed in December 2011. The August 2011 Notes automatically converted into shares of our common stock upon the closing of our IPO and their restrictive covenants terminated at such time. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants than the August 2011 Notes. In addition, the sale of equity securities or convertible debt securities would result in the issuance of additional shares of our capital stock, which would result in dilution to our stockholders.

Our limited operating history makes it difficult to evaluate our business and prospects.

We began operations in 2006. Our operations to date have been limited to financing and staffing our company, conducting product development activities for solithromycin and Taksta and performing research and development with respect to our proprietary macrolide library. We have not yet demonstrated an ability as a company to obtain regulatory approval for or commercialize a product candidate. Consequently, the ability to predict our future performance may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products.

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Risks Related to Our Industry

We are subject to extensive and costly government regulation.

Antibiotics, including those we are developing and plan to develop in the future, are subject to extensive and rigorous domestic government regulation including regulation by the FDA, the Centers for Medicare and Medicaid Services, other divisions of the U.S. Department of Health and Human Services, the U.S. Department of Justice, state and local governments and their respective foreign equivalents. The FDA regulates the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import and export of pharmaceutical products. If any products we develop are tested or marketed abroad, they will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its uses. Such foreign regulation may be equally or more demanding than corresponding U.S. regulation.

Government regulation substantially increases the cost and risk of researching, developing, manufacturing and selling products. Our failure to comply with these regulations could result in significant fines or the inability of our product candidates to obtain and maintain regulatory approval, which would have a materially adverse effect on our business, financial condition, results of operations and prospects.

Even if we obtain regulatory approval for solithromycin, Taksta or any of our future product candidates, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.

Even if regulatory approval in the U.S. is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the labeling ultimately approved for solithromycin and/or Taksta if any, may include restrictions on use. Solithromycin, Taksta or any of our other product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record keeping and reporting of safety and other post-market information. The holder of an approved NDA is subject to obligations to monitor and report adverse events and instances of the failure of a product to meet the specifications in the NDA. Application holders must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Application holders must also submit advertising and other promotional material to the FDA and report on ongoing clinical trials. Legal requirements have also been enacted to require disclosure of clinical trial results on publicly available databases.

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. If we or 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, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing, requiring new warnings or other labeling changes to limit use of the drug, requiring that we conduct additional clinical trials, imposing new monitoring requirements, or requiring that we establish a REMS. Advertising and promotional materials must comply with FDA rules in addition to other potentially applicable federal and state laws. The distribution of product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act. Sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veteran’s Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws. If we or our third party collaborators fail to comply with applicable regulatory requirements, a regulatory agency may:

• conduct an investigation into our practices and any alleged violation of law;

• issue warning letters or untitled letters asserting that we are in violation of the law;

• seek an injunction or impose civil or criminal penalties or monetary fines;

• suspend or withdraw regulatory approval;

• suspend any ongoing clinical trials;

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

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

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• seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall; or

• refuse to allow us to enter into supply contracts, including government contracts.

The occurrence of any event or penalty described above may force us to expend significant amounts of time and money and may significantly inhibit our ability to bring to market or continue to market our products and generate revenues. Similar regulations apply in foreign jurisdictions.

Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents from our clinical trial participants, and will face an even greater risk if we commercialize solithromycin or Taksta in the U.S. or other additional jurisdictions or if we engage in the clinical testing of new product candidates or commercialize any additional products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

• decreased demand for our products or product candidates that we may develop;

• loss of revenue;

• injury to our reputation;

• withdrawal of clinical trial participants;

• initiation of investigations by regulators;

• costs to defend the related litigation;

• a diversion of management’s time and our resources;

• substantial monetary awards to trial participants or patients;

• product recalls, withdrawals or labeling, marketing or promotional restrictions;

• exhaustion of any available insurance and our capital resources;

• the inability to commercialize our products or product candidates; and

• a decline in our stock price.

Although we maintain general liability insurance of up to $2.0 million in the aggregate and clinical trial liability insurance of $5.0 million in the aggregate for each of solithromycin and Taksta, this insurance may not fully cover potential liabilities. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect our business, financial condition, results of operations, and prospects.

If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical, biological and radioactive materials and viruses. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations in the U.S. govern the use, manufacture, storage, handling and disposal of hazardous materials. Although we believe that our procedures for use, handling, storing and disposing of these materials (all of which only occur at third-party sites operated by our contractors) comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. We also cannot predict the impact on our business of new or amended environmental laws or regulations, or any changes in the way existing and future laws and regulations are interpreted or enforced. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources, and we do not carry liability insurance

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covering the use of hazardous materials. If we fail to comply with applicable requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-up costs, or capital expenditures for control equipment or operational changes necessary to achieve or maintain compliance. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which adversely affect our business, financial condition, results of operations, and prospects.

Risks Related to our Intellectual Property

Our ability to pursue the development and commercialization of solithromycin depends upon the continuation of our licenses from Optimer and TSRI.

Our agreement with Optimer provides us with a worldwide exclusive license to develop and sell solithromycin outside of ASEAN countries. We are obligated to use our diligent efforts to develop and commercialize products licensed from Optimer. We have other obligations to Optimer under the license related to progress reporting, payment terms and confidentiality. If we are unable to make the required milestone and royalty payments under the agreement, if we do not continue to use diligent efforts to develop and commercialize solithromycin or if we otherwise materially breach the agreement, our rights to develop and commercialize solithromycin would terminate and revert to Optimer. In addition, either we or Optimer may terminate the agreement upon the uncured material breach of the agreement. If our agreement with Optimer is terminated by Optimer, we would lose our rights to develop and commercialize solithromycin, which would adversely affect our business, financial condition, results of operations, and prospects.

Our agreement with TSRI provides us with a license to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes, with exclusive rights as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and non-exclusive rights in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations (which are not included in the license with TSRI). We are obligated to use commercially reasonable efforts to develop and obtain regulatory approvals to market and sell one or more licensed products. TSRI may terminate the agreement due to our insolvency, our conviction for a felony relating to the development, manufacture, use, marketing, distribution or sale of a licensed product, or upon an uncured breach of the agreement by us, including failure to make any required payment. If our agreement with TSRI is terminated by TSRI, we could lose our rights to synthesize and/or manufacture solithromycin under the licensed TSRI technology, which could adversely affect our business, financial condition, results of operations, and prospects.

Another party could develop a fusidic acid product and achieve FDA regulatory exclusivity in the U.S. before we do, potentially preventing our ability to commercialize Taksta.

We will rely partly on FDA regulatory exclusivity to protect our proprietary rights for Taksta, our fusidic acid product, in the U.S. Fusidic acid has been approved and sold for several decades in Europe and other countries outside the U.S., but it has never been approved in the U.S. We believe this was due to the lack of regulatory exclusivity that was available for the molecule until the passage of Public Law 110-379 on October 8, 2008, which allowed old antibiotics such as fusidic acid to obtain five-year new chemical entity, or NCE, exclusivity upon NDA approval. This exclusivity will be granted to the first fusidic acid product that receives NDA approval. During the exclusivity period, the FDA will not accept an application filed by a third party that relies on any data contained in the approved NDA. Although we are not aware of another party currently developing fusidic acid for use in the U.S. for any indication, if another party were to do so and obtain NDA approval before we do, we would not be able to obtain approval for Taksta for any disease until after any period of regulatory exclusivity if our NDA relies on data contained in the previously approved NDA. In that event, we may not be able to commercialize Taksta, which would harm our ability to generate revenue and achieve profitability.

Our competitive position may be harmed if a competitor obtains orphan drug exclusivity for the treatment of prosthetic joint infections before we do. Even if we were to obtain orphan drug exclusivity, a competitor could obtain approval of a different drug for the treatment of prosthetic joint infections or for the same drug upon a showing that its drug is clinically superior to ours, which would harm our business.

Orphan drug designation is an important element of our competitive strategy for Taksta. The company that obtains the first FDA approval for a drug that is designated as an orphan drug for a rare disease receives a type of marketing exclusivity known as “orphan drug exclusivity.” Orphan drug exclusivity prevents FDA approval of applications by others for the same drug and the designated orphan disease or condition for seven years from the date of NDA approval. If the orphan indication is the first NDA approved for the drug, the drug is also eligible for the five-year Hatch-Waxman exclusivity for NCEs. Orphan and Hatch-Waxman exclusivities run concurrently.

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The FDA may approve a subsequent application from another entity for the orphan indication of prosthetic joint infections if it determines that the application is for a different drug. The FDA may also approve a subsequent application for fusidic acid for an indication other than prosthetic joint infections. Orphan exclusivity does not block the same drug from being approved for another indication; however, Hatch-Waxman exclusivity could block an NDA submission for a period of five years after approval if the subsequent application referenced data in the earlier NDA.

The FDA may approve a subsequent application from another entity for the same drug for the same designated and approved orphan indication during the orphan exclusivity period if it determines that the subsequent product is clinically superior, or that the holder of the initial orphan drug approval cannot assure the availability of sufficient quantities of the drug to meet the public’s need.

If we do not receive orphan exclusivity for Taksta for the treatment of prosthetic joint infections, our business would be negatively affected. In addition, even if we do obtain orphan exclusivity for Taksta, the FDA may permit other companies to market other drugs for the same condition or use. In addition, the FDA may approve another fusidic acid product for prosthetic joint infections during our period of orphan drug exclusivity if it can be demonstrated that the drug is clinically superior to our drug, or if we are unable to supply sufficient product to meet the public’s need. This could create a more competitive market for us.

If our efforts to protect the proprietary nature of the intellectual property related to solithromycin, Taksta, and our other product candidates are not adequate, we may not be able to compete effectively in our market.

Our commercial success will depend in part on our ability to obtain additional patents and protect our existing patent position as well as our ability to maintain adequate protection of other intellectual property for solithromycin, Taksta and any future products in the U.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. The patent positions of pharmaceutical companies are highly uncertain. The legal principles applicable to patents are in transition due to changing court precedent and legislative action and we cannot assure you that the historical legal standards surrounding questions of validity will continue to be applied or that current defenses relating to issued patents in these fields will be sufficient in the future. Changes in patent laws in the U.S. such as the America Invents Act of 2011 may affect the scope, strength and enforceability of our patent rights or the nature of proceedings which may be brought by us related to our patent rights. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S., and we may encounter significant problems in protecting our proprietary rights in these countries. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies, solithromycin, Taksta and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.

These risks include the possibility that:

• the patent applications that we licensed or have filed on our own may fail to result in issued patents in the U.S. or in foreign countries;

• patents issued or licensed to us or our partners may be challenged, discovered to have been issued on the basis of insufficient or incorrect information and/or held to be invalid or unenforceable;

• the scope of any patent protection may be too narrow to exclude other competitors from developing or designing around these patents;

• we or our licensors were not the first to make the inventions covered by each of our issued patents and pending patent applications;

• we or our licensors were not the first to file patent applications for these inventions;

• we may fail to comply with procedural, documentary, fee payment and other similar provisions during the patent application process, which can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights;

• future product candidates may not be patentable;

• others will claim rights or ownership with regard to patents and other proprietary rights which we hold or license;

• delays in development, testing, clinical trials and regulatory review may reduce the period of time during which we could market our product candidates under patent protection; and

• we may fail to timely apply for patents on our technologies or products.

While we apply for patents covering both our technologies and potential products, including solithromycin and Taksta, as we deem appropriate, many biopharmaceutical companies and university and research institutions already have filed patent applications or have received patents in our areas of product development. These entities’ applications, patents and other intellectual property rights may conflict with patent applications to which we have rights and could prevent us from obtaining patents or could call into

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question the validity of any of our patents, if issued, or could otherwise adversely affect our ability to develop, manufacture or commercialize antibiotic candidates. In addition, if third parties file patent applications in the technologies that also claim technology to which we have rights, we may have to participate in interference, derivation or other proceedings with the U.S. Patent and Trademark Office, or USPTO, or applicable foreign patent regulatory authorities, as applicable, to determine our rights in the invention, which may be time-consuming and expensive. Moreover, issued patents may be challenged during post-grant proceedings brought by a third party or the USPTO, or in foreign countries, or in the courts. These proceedings may result in loss of patent claims or adverse changes to the scope of the claims.

If we or our licensors or partners fail to obtain and maintain patent protection for our product candidates, or our proprietary technologies and their uses, companies may be dissuaded from collaborating with us. In such event, our ability to commercialize solithromycin, Taksta and our other product candidates may be threatened, we could lose our competitive advantage and the competition we face could increase, all of which could adversely affect on our business, financial condition, results of operations, and prospects.

If we are sued for infringing intellectual property rights of third parties, litigation will be costly and time consuming and could prevent us or delay us from developing or commercializing our product candidates.

Our commercial success depends, in part, on our not infringing the patents and proprietary rights of other parties and not breaching any collaboration or other agreements we have entered into with regard to our technologies and products. Numerous third-party U.S. and non-U.S. issued patents and pending applications exist in the areas of antibacterial treatment, including compounds, formulations, treatment methods and synthetic processes that may be applied towards the synthesis of antibiotics. Although no legal action has been commenced or threatened against us by a third party for infringing intellectual property rights, we cannot provide assurances that we or our partners will be free to manufacture or market our product candidates as planned, or that we or our licensors’ and partners’ patents will not be opposed or litigated by third parties. We are currently negotiating a license with a third party for technology used in our manufacturing process for solithromycin. There can be no assurances that we will be able to obtain a license to such patent on favorable terms or at all. Failure to obtain such license may have a material adverse effect on our business.

There is a substantial amount of litigation involving intellectual property in the biopharmaceutical industry generally. If a third party asserts that we infringe its patents or other proprietary rights, we could face a number of risks that could adversely affect our business, financial condition, results of operations, and prospects, including:

• infringement and other intellectual property claims, which would be costly and time consuming to defend, whether or not we are ultimately successful, which in turn could delay the regulatory approval process, consume our capital and divert management’s attention from our business;

• substantial damages for past infringement, which we may have to pay if a court determines that our products or technologies infringe a competitor’s patent or other proprietary rights;

• a court prohibiting us from selling or licensing our technologies or future products unless the third party licenses its patents or other proprietary rights to us on commercially reasonable terms, which it is not required to do;

• if a license is available from a third party, we may have to pay substantial royalties or lump sum payments or grant cross licenses to our patents or other proprietary rights to obtain that license; and

• redesigning our products so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.

Although we are not currently party to any legal proceedings relating to our intellectual property, in the future, third parties may file claims asserting that our technologies, processes or products infringe on their intellectual property. We cannot predict whether third parties will assert these claims against us or our partners or against the licensors of technology licensed to us, or whether those claims will harm our business. In addition, the outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. If we or our partners were to face infringement claims or challenges by third parties relating to our product candidates, an adverse outcome could subject us to significant liabilities to such third parties, and force us or our partners to curtail or cease the development of some or all of our product candidates, which could adversely affect our business, financial condition, results of operations, and prospects.

We may be required to file lawsuits or take other actions to protect or enforce our patents or the patents of our licensors, which could be expensive and time consuming.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally.

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In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents, or those of our licensors, do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents, or those of our licensors, at risk of being invalidated, held unenforceable or interpreted narrowly and could put our patent applications, or those of our licensors, at risk of not issuing. Moreover, we may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the U.S. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, if securities analysts or investors perceive public announcements of the results of hearings, motions or other interim proceedings or developments to be negative, the price of our common stock could be adversely affected. The occurrence of any of the above could adversely affect our business, financial condition, results of operations, and prospects.

The intellectual property protection for our products is dependent on third parties.

With respect to patent applications relating to solithromycin or other compounds licensed from Optimer, Optimer retains rights in ASEAN countries. Generally, we do not have the right to prosecute and maintain any applications in those countries, unless Optimer elects not to file, prosecute or maintain any or all of such patents. Our potential future licensors also may retain the right to prosecute and maintain the patent rights that they license to us. If Optimer or other licensors fail to appropriately prosecute and maintain patent protection for any of our product candidates in those countries controlled by them, our ability to develop and commercialize those products may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products in those countries.

With respect to inventions that are jointly made by us and one of our licensors, partners or potential partners, we would need to determine, with our licensors, partners or potential partners, who would be responsible for the prosecution of patents relating to any joint inventions should they arise. In addition, we may be required to cede control of prosecution of our patents to partners or potential partners in order to consummate a partnering transaction. If any of our licensors or partners fails to appropriately prosecute and maintain patent protection for any of our product candidates in those countries controlled by them, our ability to develop and commercialize those products may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products in those countries.

If we are unable to protect the confidentiality of certain information, the value of our products and technology could be materially adversely affected.

We also rely on trade secrets, know-how and continuing technological advancement to develop and maintain our competitive position. To protect this competitive position, we regularly enter into confidentiality and proprietary information agreements with third parties, including employees, independent contractors, suppliers and collaborators. We cannot, however, ensure that these protective arrangements will be honored by third parties, and we may not have adequate remedies if these arrangements are breached. In addition, enforcement of claims that a third party has illegally obtained and is using trade secrets, know-how and technological advancements is expensive, time consuming and uncertain. Non-U.S. courts are sometimes less willing than U.S. courts to protect this information. Moreover, our trade secrets, know-how and technological advancements may otherwise become known or be independently developed by competitors in a manner providing us with no practical recourse against the competing parties. If any such events were to occur, they could adversely affect our business, financial condition, results of operations, and prospects.

We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our business.

The USPTO has allowed our trademark applications for our mark “Taksta”, and, if we submit statements of use to the USPTO in a timely manner, the USPTO will issue trademark registrations, subject to unforeseen circumstances that arise. Although we are not currently aware of any oppositions to or cancellations of our registered trademarks or pending applications, it is possible that one or more of the applications could be subject to opposition or cancellation after the marks are registered. The registrations will be subject to use and maintenance requirements. We have not yet registered all of our trademarks in all of our potential markets and there are names or symbols other than “Cempra” that may be protectable marks for which we have not sought registration. Failure to secure those registrations could adversely affect our business. We cannot assure you that opposition or cancellation proceedings will not be filed against our trademarks or that our trademarks would survive such proceedings.

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

As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Such claims may lead to material costs for us, or an inability to protect or use valuable intellectual property rights, which could adversely affect our business, financial condition, results of operations, and prospects.

Risks Related to Ownership of Our Common Stock

An active trading market for our common stock may not develop to provide our stockholders with adequate liquidity.

Prior to February 3, 2012, there had not been a public market for our common stock. Since that time, our common stock has been thinly traded. We cannot assure you that an active trading market for our common stock will develop, or if it does develop, it may not be maintained. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active.

We might not be able to maintain the listing of our common stock on the Nasdaq Global Market.

Our common stock began listing on the Nasdaq Global Market on February 3, 2012, under the symbol “CEMP.” We might not be able to maintain the listing standards of that exchange. If we fail to maintain the listing requirements, our common stock might trade on the Nasdaq Capital Market, or move to the OTC Bulletin Board or in the “pink sheets” maintained by Pink OTC Markets, Inc. The OTC Bulletin Board and the “pink sheets” are generally considered to be markets that are less efficient and less broad than the Nasdaq Capital Market.

The market price of our common stock may be highly volatile, and you could lose all or part of your investment.

Our stock began trading on the Nasdaq Global Market on February 3, 2012. Between that date and March 1, 2013, it has traded between $5.26 and $9.56. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include:

• any delay in commencement of our planned Phase 3 clinical trial for IV to oral solithromycin or our Phase 3 clinical trials for Taksta;

• adverse results or delays in clinical trials;

• any delay in filing our NDAs for solithromycin or Taksta and any adverse development or perceived adverse development with respect to the FDA’s review of the NDAs, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

• changes in laws or regulations applicable to our products or product candidates, including but not limited to clinical trial requirements for approvals;

• unanticipated serious safety concerns related to the use of solithromycin, Taksta or any of our other product candidates;

• a decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

• the inability to obtain adequate product supply for solithromycin, Taksta or any other approved drug product, or the inability to do so at acceptable prices;

• adverse regulatory decisions;

• the introduction of new products or technologies offered by us or our competitors;

• the effectiveness of our or our potential partners’ commercialization efforts;

• the inability to effectively manage our growth;

• actual or anticipated variations in quarterly operating results;

• the failure to meet or exceed the estimates and projections of the investment community;

• the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

• the overall performance of the U.S. equity markets and general political and economic conditions;

• developments concerning our sources of manufacturing supply and any commercialization partners;

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• announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

• disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

• additions or departures of key scientific or management personnel;

• adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

• sales of our common stock by our stockholders in the future;

• significant lawsuits, including patent or stockholder litigation;

• changes in the market valuations of similar companies;

• the trading volume of our common stock;

• effects of natural or man-made catastrophic events or other business interruptions; and

• other events or factors, many of which are beyond our control.

In addition, the stock market in general, and the NASDAQ Global Market and the stock of biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

At February 28, 2013, our executive officers, directors and entities affiliated with certain of our directors beneficially owned approximately 42% of our outstanding voting common stock. Therefore, these stockholders have the ability to influence us through their ownership position. These stockholders may be able to determine the outcome of all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

The requirements of being a public company adds to our operating costs and might strain our resources and distract our management.

We became a public company on February 2, 2012. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Global Market have imposed various requirements on public companies. While we may opt to rely on certain exemptions from these requirements provided in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our management and other personnel still need to devote a substantial amount of time to compliance initiatives. Moreover, we anticipate that compliance with certain rules and regulations will increase our legal, accounting and financial compliance costs substantially. We estimate the additional costs we may incur to respond to these requirements to range from $0.9 million to $1.2 million annually, although unforeseen circumstances could increase actual costs. In addition, these rules and regulations may make our activities related to legal, accounting and financial compliance more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth will make our common stock less attractive to investors or otherwise negatively impact the price of our stock.

The JOBS Act contains provisions that, among other things, reduce reporting requirements for qualifying companies. As an “emerging growth company”, we evaluate the benefits of relying on the other reduced reporting requirements provided by the JOBS Act.

Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we have chosen to rely on these exemptions, and as a result, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the

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audit and the financial statements (auditor discussion and analysis), and disclose executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering, or IPO, on February 8, 2012 or until we otherwise no longer satisfy the criteria to be an emerging growth company, whichever is earlier. We cannot be certain if our scaled disclosure will make our stock less attractive to investors or negatively affect the price of our stock.

If we fail to establish and maintain proper internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

SEC rules that implement Section 404 of the Sarbanes-Oxley Act require us to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. We first became subject to this requirement for this report. While we have concluded that our internal control over financial reporting was effective as of December 31, 2012, there can be no assurance that we will be able to so conclude in the future or that we will not identify one or more material weaknesses in our internal controls in connection with future evaluations. Additionally, we have opted to rely on the exemptions provided in the JOBS Act, and will not be required to provide our independent auditor’s assessment of our internal controls over financial reporting until such time we cease to be an “emerging growth company”, which, at the latest, would be for our annual report on Form 10-K for the year ending December 31, 2017. Investors may lose confidence in our operating results, our stock price could decline and we may be subject to litigation or regulatory enforcement actions if (i) in the future we are unable to conclude that our internal control over financial reporting is effective, (ii) we identify material weaknesses in our internal control over financial reporting, which could result in financial statement errors which, in turn, could require us to restate our operating results or (iii) when required, our independent auditors are unwilling or unable to provide us with an attestation report on the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. Any of these events could cause investors to lose confidence in our operating results, our stock price could decline and we may be subject to litigation or regulatory enforcement actions. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, we may not be able to remain listed on the NASDAQ Global Market.

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to decline.

Certain holders of shares of our common stock are entitled to rights with respect to the registration under the Securities Act of 1933, as amended, or the Securities Act, of shares of our common stock or shares of our common stock issuable upon the exercise of warrants held by these individuals or entities. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. A limited number of securities and industry analysts currently publish research on our company. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which might cause our stock price and trading volume to decline.

Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the Internal Revenue Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carry-forwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We believe that, with the financing transactions that have occurred over the past three years, we may have triggered an “ownership change” limitation. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards to offset U.S. federal taxable income may be subject to limitations, which potentially could result in increased future tax liability to us.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

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We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will be limited to the value of their stock.

In addition, pursuant to the terms of the Hercules loan, for as long as the Hercules loan is outstanding, we may not pay any cash dividends on our common stock.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if an acquisition would benefit our stockholders, and could also make it more difficult to remove our current management. These provisions include:

• authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

• limiting the removal of directors by the stockholders;

• creating a staggered board of directors;

• prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders;

• eliminating the ability of stockholders to call a special meeting of stockholders; and

• establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by the board of directors. This provision could have the effect of discouraging, delaying or preventing someone from acquiring us or merging with us, whether or not it is desired by or beneficial to our stockholders. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease approximately 6,074 square feet of space for our headquarters in Chapel Hill, North Carolina under an agreement that expires in November 2014. We are expecting to hire additional employees during 2013 which will require us to locate additional space on commercially reasonable terms.

Item 3. Legal Proceedings

We are not a party to any legal proceedings and we are not aware of any claims or actions pending or threatened against us. In the future, we might from time to time become involved in litigation relating to claims arising from our ordinary course of business.

Item 4. Mine Safety Disclosures

Not applicable

PART II

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

Our common stock is traded under the symbol “CEMP” and is quoted on the NASDAQ Global Market. Our common stock began trading on the NASDAQ Global Market on February 3, 2012, on a “when-issued” basis. On February 6, 2012, the first trading day after the distribution, “when-issued” trading with respect to our common stock ended and “regular way” trading began. As a result, our stock was not listed in any year prior to 2012.

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On March 1, 2013, the closing price for the common stock as reported on the NASDAQ Global Market was $6.66.

As of March 1, 2013, there were 32 stockholders of record, which excludes stockholders whose shares were held in nominee or street name by brokers. We believe that, when our record holders and stockholders whose shares are held in nominee or street name by brokers are combined, we have in excess of 400 stockholders.

Dividend Policy

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors our board deems relevant.

Pursuant to the terms of the Hercules loan, for as long as the Hercules loan is outstanding, we may not pay any cash dividends on our common stock.

Equity Compensation Plans

The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this report.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. 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. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including those set forth under “Item 1A. Risk Factors.”

Overview

We are a clinical-stage pharmaceutical company focused on developing antibiotics to meet critical medical needs in the treatment of bacterial infectious diseases, particularly respiratory tract infections and chronic and acute staphylococcal infections. Our lead program, solithromycin, which we are developing in both oral and IV formulations initially for the treatment of CABP, one of the most serious infections of the respiratory tract, recently initiated a pivotal Phase 3 clinical trial of the oral formulation for the treatment of CABP in a global multi-center double-blinded study. We have also released data from a Phase 2 study of solithromycin in uncomplicated gonorrhea. Our second program is Taksta, which we are developing in the U.S. as an oral treatment for prosthetic joint infections caused byS. aureus, including MRSA. In December 2012, we initiated a Phase 2 trial for Taksta in patients with prosthetic joint infections.

We acquired worldwide rights (exclusive of ASEAN countries) to a library of over 500 macrolide compounds, including solithromycin, from Optimer in March 2006. We entered into a long-term supply arrangement with Ercros in March 2011, pursuant to which we have the exclusive right to acquire fusidic acid for the production of Taksta. We believe Ercros is one of only two currently known manufacturers that can produce fusidic acid compliant with the purity required for human use.

We have devoted substantially all of our resources to our drug development efforts, including conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from any source. From inception in November 2005 through December 31, 2012, we raised a total of $176.4 million from the issuance of debt, sale of convertible notes, convertible preferred shares, common shares and common stock, including $58.0 million from the sale of common stock in our IPO in February 2012 and $25.1 million from the sale of common stock in a private placement in October 2012.

We have incurred losses in each year since our inception in November 2005. Our net losses were approximately $19.7 million, $21.2 million and $24.2 million for the years ended December 31, 2010, 2011 and 2012, respectively. As of December 31, 2012, we had an accumulated deficit of approximately $121.2 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

• initiate or continue our clinical trials of solithromycin and Taksta and our other product candidates;

• operate as a public company;

• seek regulatory approvals for our product candidates that successfully complete clinical trials;

• build appropriate manufacturing facilities for the manufacture of, or outsource the manufacture of, any products for which we may obtain regulatory approval;

• establish our own sales force, or contract with third parties, for the sales, marketing and distribution of any products for which we obtain regulatory approval;

• maintain, expand and protect our intellectual property portfolio;

• continue our other research and development efforts;

• hire additional clinical, quality control, scientific and management personnel; and

• add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.

We do not expect to generate product revenue unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the commercialization of solithromycin and Taksta or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operating activities through a combination of equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.

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Our Board of Directors approved a 1-for-9.5 reverse stock split of our common and preferred shares on January 12, 2012, which became effective on January 29, 2012. All references to common stock, common shares outstanding, average number of common shares outstanding and per share amounts in our consolidated financial statements and notes to consolidated financial statements have been restated to reflect the 1-for-9.5 reverse stock split on a retroactive basis.

Financial Overview

Revenue

To date, we have not generated revenue from the sale of any products or from any other source. In the future, we anticipate generating revenue from a combination of sales of our products, if approved, whether through our own or a third-party sales force, and license fees, milestone payments and royalties in connection with strategic collaborations regarding any of our product candidates. We expect that any revenue we generate will fluctuate from quarter to quarter. If we or our strategic partners fail to complete the development of solithromycin or Taksta in a timely manner or obtain regulatory approval for them, or if we fail to develop our own sales force or find one or more strategic partners for the commercialization of approved products, our ability to generate future revenue, and our financial condition and results of operations would be materially adversely affected.

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting pre-clinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize our research and development expenses as they are incurred. Our research and development expenses consist primarily of:

• employee-related expenses, which include salaries, benefits and share compensation expense, for personnel in research and development functions;

• fees paid to consultants and clinical research organizations, or CROs, in connection with our clinical trials, and other related clinical trial costs, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

• costs related to acquiring and manufacturing clinical trial materials;

• costs related to compliance with regulatory requirements;

• consulting fees paid to third parties related to non-clinical research and development;

• research supplies; and

• license fees and milestone payments related to in-licensed technologies.

From inception through December 31, 2012, we have incurred $83.7 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of solithromycin for CABP and Taksta for prosthetic joint infections and to further advance our other product candidates.

Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials, and related clinical trial fees. Our internal resources, employees and infrastructure are not directly tied to any individual research project and are typically deployed across multiple projects. Through our clinical development programs, we are advancing solithromycin and Taksta in parallel primarily for the treatment of CABP and prosthetic joint infections, respectively, as well as for other indications. Through our pre-clinical development programs, we are seeking to develop macrolide product candidates for non-antibacterial indications.

The following table sets forth costs incurred on a program-specific basis for solithromycin and Taksta, excluding personnel-related costs. Macrolide research includes costs for discovery programs. All employee-related expenses for those employees working in research and development functions are included in “Research and development payroll” in the table, including salary, bonus, employee benefits and share-based compensation. We do not allocate insurance or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in “Indirect research and development expense” in the table.

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	Year Ended December 31,
	2010		2011		2012
	(in thousands)
Direct research and development expense by program:
Solithromycin	$	10,173	$	14,129	$	12,786
Taksta		2,903		282		1,079
Macrolide research		89		162		46
Research and development personnel cost		1,751		1,865		2,657
Total direct research and development expense		14,916		16,438		16,568
Indirect research and development expense		558		434		301
Total research and development expense	$	15,474	$	16,872	$	16,869

The successful development of our clinical and pre-clinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or pre-clinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

• the scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;

• future clinical trial results; and

• the timing of regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

We have begun our pivotal trial program for solithromycin, which we believe will require two Phase 3 trials, including one trial with oral solithromycin and one trial with IV solithromycin stepping down to oral solithromycin. Both of these trials will be randomized, double-blinded studies conducted against a comparator drug agreed upon with the FDA, for which we will have to show non-inferiority from an efficacy perspective and acceptable safety and tolerability. Using feedback received from the FDA, we began the Phase 3 trial with oral solithromycin in December 2012. We plan to have an end-of Phase 2 meeting with the FDA in the first half of 2013 and initiate the IV to oral Phase 3 study in the second half of 2013, depending on funds being available.

In 2010, we successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated efficacy, safety and tolerability that was comparable to linezolid. Like ABSSSI, prosthetic joint infections are often caused byS. aureus, including MRSA. At this time, however, we do not intend to pursue Taksta as a treatment for ABSSSI. In December 2012, we initiated a Phase 2 trial of Taksta in patients with prosthetic joint infections.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including share-based compensation, for employees in executive, operational, finance and human resources functions. Other significant general and administrative expenses include professional fees for accounting, legal, and information technology services, facilities costs, and expenses associated with obtaining and maintaining patents.

We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates and as we operate as a public company. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

Other Income (Expense), Net

Interest income consists of interest earned on our cash and equivalents as well as changes in fair value of warrants issued in connection with the August 2011 Notes. We expect our interest income to decrease as we fund the development of our programs.

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Interest expense in 2010 consisted primarily of non-cash interest costs related to changes in the fair value of our Class C purchase option described below. Interest expense in 2011 consists of interest accrued under the August 2011 Notes and the Hercules loan as described below. Interest expense in 2012 consists of interest accrued and paid under the Hercules loan as described below as well as changes in fair value of warrants issued in connection with the Hercules warrant agreement as described below.

In August 2011, we issued unsecured convertible notes, referred to as the August 2011 Notes, in the original aggregate principal amount of $5.0 million. The August 2011 Notes bore interest at a rate of 10.0% per annum, originally were to mature on August 4, 2012 and precluded us from incurring any other debt in excess of $0.5 million or granting a security interest in any of our assets without the consent of the noteholders. This restriction was revised by our shareholders in connection with the Hercules loan (discussed below) in December 2011. Also in connection with the Hercules loan, in December 2011, we and the holders of the August 2011 Notes agreed to extend the maturity dates of the August 2011 Notes to May 29, 2016. We did not record any gain or loss in connection with the extension of the maturity date of the August 2011 Notes because we determined that the extension of the maturity date of the August 2011 Notes met the criteria of a troubled debt restructuring outlined in ASC Topic 470-60, Troubled Debt Restructurings. The August 2011 Notes converted into shares of common stock in connection with the IPO completed in February 2012. Additionally, we granted warrants to the holders of the August 2011 Notes, which, after completion of the IPO in February 2012, became exercisable for shares of common stock with an exercise price equal to the IPO price of $6.00.

In December 2011, we entered into a $20.0 million loan and security agreement with Hercules Technology Growth Capital, Inc., or Hercules (referred to as the December 2011 Note), pursuant to which we borrowed $10.0 million upon closing. The principal amount outstanding under the initial $10.0 million advance bears interest at the greater of (i) 9.55%, or (ii) the sum of 9.55% plus the prime lending rate, as published by theWall Street Journal, minus 3.25% per annum. Prior to October 1, 2012, we had the ability to request an additional advance in the amount of $10.0 million. We elected not to request the additional borrowing and let the option expire. We will be required to make interest only payments through March 2013, which can be extended to June 30, 2013 upon satisfaction of certain conditions. Principal and interest payments will start after March 31, 2013 or any later extended date. The principal balance outstanding on the loan agreement and all accrued but unpaid interest thereunder will be due and payable on December 1, 2015. In addition, on the earliest to occur of (i) the loan maturity date, (ii) the date that we prepay all of the outstanding advances and accrued interest, or (iii) the date that all of the advances and interest become due and payable, we must pay Hercules a fee of $400,000. We granted Hercules a security interest in all of our assets, except for our intellectual property. Our obligations to Hercules include restrictions on borrowing, asset transfers, placing liens or security interests on our assets, including our intellectual property, mergers and acquisitions and distributions to stockholders.

In connection with the loan agreement, we entered into a warrant agreement with Hercules, under which Hercules has the right to purchase 39,038 shares of our common stock. The exercise price per share is equal to $10.25 per share, subject to adjustment in the event of a merger, reclassification, subdivision or combination of shares or stock dividend and subject also to antidilution protection. The warrant expires on December 20, 2021. Proceeds equal to the fair value of the warrants was recorded as a liability at the date of issuance and the borrowings under the Hercules loan will be increased to equal the face amount of the borrowings plus interest through interest expense over the term of the loan using the effective interest method. Each period up to our IPO, we marked to market the warrant and any changes in fair value were recorded in other income (expense).

In connection with closing of the first tranche of our Class C redeemable convertible preferred share financing in 2009, the investors had the option to purchase a pro rata amount of Class C preferred shares in the second tranche at any time prior to the earlier of the closing of the second tranche or September 30, 2010. In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 480, Distinguishing Liabilities from Equity, we allocated $5.2 million of the Class C proceeds to the fair value of this purchase option, referred to as the Class C purchase option, and recorded it as a liability at the closing of the first tranche of Class C preferred shares. At each reporting period and immediately prior to conversion, any change in the fair value of the Class C purchase option was recorded as interest expense or income. We measured the fair value of the Class C purchase option based upon contemporaneous valuations and utilized the Black-Scholes option-pricing model at each balance sheet date. The Class C purchase option was automatically exercised for Class C preferred shares at the time of the closing of the second tranche of our Class C preferred share offering in April 2010 and, accordingly, the Class C purchase option was converted to Class C preferred shares.

We also reported other income of $0.5 million during the year ended December 31, 2010 due to our receipt of a qualifying therapeutic discovery project tax credit in this amount pursuant to Section 48D of the Internal Revenue Code. We did not have any other items of other income or expense during the years ended December 31, 2011 and 2012.

Accretion of Redeemable Preferred Shares

Our redeemable convertible preferred shares were initially recorded on our balance sheet at their cost, less associated issuance costs. The amount reflected on the balance sheet for our convertible preferred shares is increased by periodic accretion so that the amount reflected on the balance sheet will equal the aggregate redemption price at the redemption date. From inception through February 2012, the date of our IPO, we have recorded cumulative accretion related to share issuance costs of $0.3 million.

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Yield was cumulative and payable to the holders of preferred shares in advance of any distributions on common shares but only when, if and as declared by our board of directors. The holders of Class C preferred shares had been earning an annual yield at a rate of 8.0% of the original purchase price since May 13, 2009. Through May 13, 2009, the holders of Class A preferred shares and Class B preferred shares earned an annual yield at a rate of 8.0% of the original purchase price. From inception through February 2012, the date of our IPO, we recorded cumulative yield of $13.7 million through periodic accretions which increase the carrying value of the preferred shares and is charged against additional paid-in capital to the extent available or shareholders’ equity (deficit).

The Class C holders had the right and option, after the fifth anniversary of the original issue date, or May 13, 2014, by a vote of 60% of the Class C holders (including at least one of two specified holders), to require us to redeem the Class C shares at a redemption price equal to the original price per share plus all cumulative and undeclared yield. If the Class C holders had elected to redeem their shares, the Class A and Class B holders would have had the right and option, by a vote of holders of two-thirds of the Class A and Class B shares, voting together as a single class, to require us to redeem the Class A and Class B shares at a redemption price equal to the original price per share plus all cumulative and undeclared dividends. All of our outstanding preferred shares converted into shares of common stock upon the completion of our IPO in February 2012.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation, on an ongoing basis. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Our significant accounting policies are described in more detail in the notes to our audited consolidated financial statements included in this report. We believe the following accounting policies to be most critical to the judgments and estimates used in preparation of our financial statements and such policies have been reviewed and discussed with our audit committee.

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable vendor personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include:

• fees paid to CROs in connection with pre-clinical or clinical trials;

• fees paid to investigative sites in connection with clinical trials;

• milestone payments; and

• unpaid salaries, wages and benefits.

We accrue our expenses related to clinical trials based on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not currently anticipate the future settlement of existing accruals to differ materially from our estimates.

Valuation of Financial Instruments

Purchase Option Liability

We accounted for our Class C purchase option in accordance with FASB ASC Topic 480,Distinguishing Liabilities from Equity, which requires that a financial instrument, other than an outstanding share, that, at inception, includes an obligation to repurchase the issuer’s equity regardless of the timing or likelihood of the redemption, shall be classified as a liability. We measured the fair value of the Class C purchase option based upon contemporaneous valuations and utilized the Black-Scholes option-pricing model at each balance sheet date. We recorded changes in fair value of the Class C purchase option as interest income or expense.

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The significant assumptions we used in estimating the fair value of the Class C purchase option included the strike price, estimated volatility, risk-free interest rate, estimated fair value of the Class C preferred shares, and the estimated life of the Class C purchase option. These assumptions were used to establish an expected set of cash flows which were probability-weighted and present valued to determine a fair value.

The Class C purchase option was automatically exercised for Class C preferred shares at the time of the closing of the second tranche of our Class C preferred share offering in April 2010 and, accordingly, the Class C purchase option liability was converted to Class C preferred shares.

Liability-classified warrants

In connection with the issuance of the August 2011 Notes, we issued warrants, referred to as the August 2011 Warrants, that have a term of seven years. The August 2011 Warrants gave holders the right to purchase a certain number of our shares or securities at a specified exercise price respective to the first of the following scenarios to occur: (i) a Company or subsidiary sale (as defined in the August 2011 Warrants); (ii) maturity of the August 2011 Notes; (iii) a Qualified Private Financing, or QPF; or (iv) an initial public offering. Upon either a Company or subsidiary sale or upon maturity of the August 2011 Notes, the August 2011 Warrants were convertible into the number of Class C preferred shares equal to 25% of the principal amount of the August 2011 Notes divided by the Class C Conversion Price. Upon either a QPF or a initial public offering, the August 2011 Warrants were convertible into the number of either the QPF or IPO securities equal to 25% of the principal amount of the August 2011 Notes divided by either the price per share of the securities issued in the QPF or the offering price of our common shares (or equivalent security) in the IPO, respectively. Upon completion of our IPO on February 8, 2012, the warrants became exercisable for 876,621 shares of our common stock at an exercise price of $6.00 per share.

The fair value of the warrants was determined using a Black-Scholes model. The valuation of warrants is subjective and is affected by changes in inputs to the valuation model including the price per share of our common stock, the historical volatility of the stock prices of our peer group, risk-free rates based on U.S. Treasury security yields, the expected term of the warrants and our dividend yield. Changes in these assumptions can materially affect the fair value estimate. We continued to classify the estimated fair value of the warrants as a liability until the completion of our IPO when the warrant liability was reclassified to additional paid-in capital.

In connection with the $20,000,000 loan and security agreement with Hercules under which we borrowed $10,000,000 upon closing on December 20, 2011, we entered into a warrant agreement with Hercules, under which Hercules has the right to purchase up to 39,038 shares of common stock at an exercise price per share of $10.25 subject to adjustment in the event of a merger, reclassification, subdivision or combination of shares or stock dividend and subject also to antidilution protection. The warrant expires on December 20, 2021. Proceeds equal to the fair value of the warrants will be recorded as a liability at the date of issuance and the borrowings under the Hercules loan will be increased to equal the face amount of the borrowings plus interest through interest expense over the term of the loan using the effective interest method.

The fair value of the Hercules warrants is determined using a Binomial model. The valuation of warrants is subjective and is affected by changes in inputs to the valuation model including the price per share of our common stock, the historical volatility of the stock prices of our peer group, risk-free rates based on U.S. Treasury security yields, the expected term of the warrants and our dividend yield. Changes in these assumptions can materially affect the fair value estimate. We will continue to classify the estimated fair value of the Hercules warrant as a liability and record changes in fair value in other income (expense).

Share-Based Compensation

In accordance with FASB ASC Topic 718,Stock Compensation, as modified or supplemented, we measure compensation cost for share-based payment awards granted to employees and non-employee directors at fair value using the Black-Scholes option-pricing model. We recognize compensation expense on a straight-line basis over the service period for awards expected to vest. Share-based compensation cost related to share-based payment awards granted to non-employees is adjusted each reporting period for changes in the fair value of our shares until the measurement date. The measurement date is generally considered to be the date when all services have been rendered or the date that options are fully vested.

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Share-based compensation expense includes options granted to employees and non-employees and has been reported in our statements of operations as follows:

	Year Ended December 31,
	2010		2011		2012
	(in thousands)
Research and development	$	58	$	158	$	520
General and administrative		108		286		1,149
Total	$	166	$	444	$	1,669

We calculate the fair value of share-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions, including share price volatility, the expected life of options, risk-free interest rate and the fair value of the underlying common shares on the date of grant. In developing our assumptions, we take into account the following:

• we do not have sufficient history to estimate the volatility of our common share price. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. For the purpose of identifying peer companies, we consider characteristics such as industry, length of trading history, similar vesting terms and in-the-money option status. We plan to continue to use the guideline peer group volatility information until the historical volatility of our common shares is relevant to measure expected volatility for future option grants;

• we determine the risk-free interest rate by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant;

• the assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future;

• we determine the average expected life of options based on the mid-point between the vesting date and the contractual term; and

• we estimate forfeitures based on our historical analysis of actual option forfeitures.

The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2010, 2011, and 2012 are set forth below:

	Year Ended December 31,
	2010						2011					2012
	Employees			Non-employees			Employees			Non-employees		Employees			Non-employees
Volatility		75.2	%		76.7	%		73.9	%		N/A		72.5	%		53.5	%
Risk-free interest rate		2.2	%		3.1	%		2.5	%		N/A		1.3	%		1.6	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		N/A		0.0	%		0.0	%
Expected life of options (in years)		5.9			9.1			6.1			N/A		5.5			9.5

The following table presents the grant dates, number of underlying shares and related exercise prices of options granted to employees and non-employees, including non-employee directors, from January 1, 2010 through December 31, 2012, as well as the estimated fair value of the options and the underlying common shares on the grant date.

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Date of Grant	Number of Shares Subject to Options Granted		Exercise Price Per Share		Estimated Fair Value Per Common Share at Grant Date		Reassessed Fair Market Value Per Common Share
February 2, 2010		46,890	$	2.09	$	2.09	$	2.09
February 19, 2010		1,053	$	2.09	$	2.09	$	2.09
July 28, 2010		167,585	$	2.09	$	2.09	$	2.09
December 8, 2010		176,083	$	2.09	$	2.09	$	4.28
March 1, 2011		101,772	$	2.28	$	2.28	$	5.04

The estimated fair value per common share in the table above represents the determination by our board of directors of the fair value of our common shares as of the date of grant, taking into consideration various objective and subjective factors, including the conclusions of valuations of our common shares, as discussed below.

Due to the absence of an active market for our common shares, the fair value of our common shares for purposes of determining the exercise price for option grants was determined in good faith by our board of directors, with the assistance and upon the recommendation of management, based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid,Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid, including:

• the common shares underlying the option involved illiquid securities in a private company;

• the prices of our Class A, Class B and Class C preferred shares sold by us primarily to outside investors in arm’s length transactions, and the rights, preferences and privileges of the preferred shares relative to the common shares;

• our results of operations, financial position and the status of our research and development efforts, including the status of clinical trials for our product candidates under development;

• the composition of, and changes to, our management team and board of directors;

• the material risks related to our business;

• our business strategy;

• achievement of enterprise milestones, including the results of clinical trials and our entry into or termination of collaboration and license agreements;

• the market performance of publicly traded companies in the life sciences and biotechnology sectors, and recently completed mergers and acquisitions of companies comparable to us;

• the likelihood of achieving a liquidity event for the holders of our common shares and options, such as, an initial public offering given prevailing market conditions;

• external market conditions affecting the life sciences and biotechnology industry sectors; and

• contemporaneous valuations of our common shares prepared by independent third-party consultants.

Option Grants in February 2010

Our board of directors granted options on February 2, 2010 and on February 19, 2010, with each option having an exercise price of $2.09 per share. In establishing this exercise price, in addition to the objective and subjective factors discussed above, our board of directors also considered input from management, as well as the most recent available common share valuation as of May 13, 2009. Pursuant to the May 13, 2009 contemporaneous valuation, the fair value of our common shares was determined to be $2.09 per share.

In the May 13, 2009 contemporaneous valuation, the two market approaches used to determine the fair market value of our equity were the Direct Market Data Method and a limited guideline public company analysis. Estimates from these methods were then utilized within an income approach, the Discounted Future Returns Model. For purposes of the discounted future returns method, our estimated future revenues from the sale or licensing of product candidates and earnings before interest, tax, depreciation and amortization (or EBITDA) were estimated for 2010 – 2015, the period which a liquidity event was expected. Once the fair market

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value of our equity was determined, it was allocated among our preferred and common shares outstanding using the probability weighted expected return method, or PWERM. Under the PWERM approach, share value is derived from the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class. The fair value of our common shares was estimated using a probability-weighted analysis of the present value of the returns afforded to common shareholders under two future shareholder exit or liquidity event scenarios: an initial public offering, or IPO, and a private sale to a larger private or public company.

In the May 13, 2009 contemporaneous valuation, a probability weighting was used for each exit event scenario. The probability weightings assigned to the respective exit scenarios were primarily based on consideration of our various drug development programs, industry clinical success rates, our expected near-term and long-term funding requirements, and an assessment of the current financing and biotechnology industry environments at the time of the valuation. The expected timing of either of these exit events occurring was 2.8 years from the valuation date.

In the May 13, 2009 contemporaneous valuation, we applied a discount for lack of marketability of 40% to reflect the fact that our common shares represented a minority interest in our company and there was no market mechanism to sell these shares. A common shareholder would have to wait for a liquidity event such as an IPO or a sale of our company to enable the sale of the common shares. We used an option pricing model to determine the value of this lack of marketability. We also applied an additional 10% discount to reflect the incremental risk from both scientific and financial risk factors.

The board of directors then determined that the events and circumstances that occurred between May 13, 2009 and February 2010 did not indicate a significant change in the fair value of our common shares during that period. The additional specific facts and circumstances considered by our board of directors for the February 2010 valuations included the following:

• the second tranche of our Class C redeemable preferred share financing was anticipated to close in the first half of 2010; and

• two newly elected directors joined our board of directors.

Based on all of these factors, our board of directors determined that the fair value of our common shares at both February 2, 2010 and February 19, 2010 was $2.09 per share. In connection with the preparation of our consolidated financial statements included in this report, we reassessed the fair value of our common shares for financial reporting purposes at February 2, 2010 and February 19, 2010 and determined that no adjustment was necessary.

Option Grants on July 28, 2010

Our board of directors granted options on July 28, 2010 with each option having an exercise price of $2.09 per share. In establishing this exercise price, in addition to the objective and subjective factors discussed above, our board of directors also considered input from management, as well as the most recent available common share valuation completed in May 2010 performed contemporaneously as of December 31, 2009 pursuant to which the fair value of our common shares was determined to be $1.71 per share.

In the December 31, 2009 contemporaneous valuation, the discounted cash flow, or DCF, method, which is an accepted method within the income approach, was used to determine the fair market value of our equity. Once the fair market value of our equity was determined, it was allocated among our preferred and common shares outstanding using the option pricing method. These methods are outlined in the AICPA Practice Aid and are discussed in further detail below.

To reach enterprise value as of December 31, 2009, a valuation using DCF methodology at the valuation date was performed. Under the DCF method, the fair value of the business is estimated based on the stream of benefits investors expect to receive, the timing of such benefits and the risk borne by investors.

Once the enterprise value pursuant to the DCF analyses was determined, the enterprise value was allocated among our various classes of shares outstanding based on the characteristics of each such class and its claim on our assets. Our equity outstanding as of the valuation date included preferred shares, common shares and the Class C purchase option. Stock characteristics that were factored into the analyses included liquidation preferences, participation features, convertibility features and value sharing between classes of shares. Since the proceeds of any liquidation event were to be divided among the holders of our preferred shares prior to any distribution to the holders of our common shares, it was determined that the common shares have the nature of a call option, with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred shares are liquidated. Accordingly, the option pricing method was used to estimate the value of our common shares. Under the option pricing method, taken into account were the relative seniority, rights, liquidation preferences and conversion ratios of the convertible preferred shares, common shares and the Class C purchase option as of the valuation date under the following two future shareholder exit or liquidity event scenarios: a sale of our company, referred to as the Sale scenario; and an IPO if we were not sold, referred to as the IPO scenario.

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Restricted securities can generally be purchased at prices substantially below those of identical but freely marketable securities due to the very real risk of market decline inherent in holding restricted securities. As such the valuation relied on the Finnerty Model, which relates discount for lack of marketability to the length of the holding period for unregistered equity in a publicly traded corporation’s stock, and the volatility of the underlying publicly traded equity. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model indicated a discount for lack of marketability of approximately 15% for the common shares. As such, a discount for lack of marketability of 15% was applied. The discount for lack of marketability used in the December 31, 2009 valuation was lower than the discount for lack of marketability used in the May 13, 2009 valuation because the December 31, 2009 valuation assumed that a liquidity event would occur in a shorter period from the date of the valuation than did the May 13, 2009 valuation.

The fair market value of our common shares was estimated using the option pricing method utilizing the binomial model described above, with the following assumptions for each scenario: Sale scenario: a risk-free interest rate of 0.5%, a dividend yield of 0%, volatility of the expected market value of our total invested equity of approximately 66.0%, and an expected term of one year; and IPO scenario: a risk-free interest rate of 1.0%, a dividend yield of 0%, volatility of the expected market value of our total invested equity of approximately 66.0% and an expected term of 1.75 years. Based on the foregoing, it was determined by the contemporaneous valuation that the fair value of our common shares in December 2009 was $1.71 per share.

The board of directors then determined that there were events and circumstances that occurred between December 31, 2009 and July 2010 that indicated the fair value of our common shares should remain at the $2.09 as had been determined by the board in February 2010. The additional specific facts and circumstances considered by our board of directors for its July 2010 valuation included:

• our having received $20.5 million from the closing of the second tranche of our Class C redeemable preferred share financing in April 2010;

• preparation for enrollment in our solithromycin Phase 2 oral trial that commenced in July 2010; and

• our having received favorable Taksta Phase 2 clinical trial data in July 2010.

Based on all of these factors, the board determined that the fair value of our common shares at July 28, 2010 was $2.09 per share. In connection with the preparation of our consolidated financial statements included in this report, we reassessed the fair value of our common shares for financial reporting purposes at July 28, 2010 and determined that no adjustment was necessary.

Option Grants on December 8, 2010

Our board of directors granted options on December 8, 2010, with each option having an exercise price of $2.09 per share.

In connection with the preparation of our consolidated financial statements included in this report, after giving consideration to the estimated values that could be obtained in an IPO in the first quarter of 2012 and based on market and other conditions, we determined in September 2011, that the grant date fair value of the options granted on December 8, 2010 required adjustment. Accordingly, we reassessed the fair value of our common shares at December 8, 2010 for financial reporting purposes. In light of current market factors in the third quarter of 2011, we used a PWERM approach to retrospectively reassess the value of our common shares as of December 8, 2010.

In reassessing the fair value of our common shares, the board of directors considered the factors in their previous assessment of the December 8, 2010 fair value assessment, including:

• in September 2010, we commenced enrollment of patients in our solithromycin Phase 2 oral trial;

• in September 2010, we commenced enrollment of healthy volunteers in our Phase 1 IV trial of solithromycin;

• in October 2010, we had a successful end of Phase 2 meeting with the FDA on Taksta for ABSSSI; and

• in December 2010, we began significant discussions with potential partners for Taksta for ABSSSI.

In August 2011, we decided to pursue an initial public offering of our common shares and held an organizational meeting with underwriters. In light of this fact, management determined that it was prudent to reassess its previous determination of fair market value of common stock. Accordingly, a retrospective valuation was performed as of December 31, 2010 using a discounted cash flow, or DCF, method, which is an accepted method within the income approach, to determine the fair market value of our equity. To arrive at an average enterprise value, a DCF was prepared utilizing various scenarios, including: partnership funding for one or both solithromycin and Taksta; an acquisition of one or both solithromycin and Taksta; an acquisition of the entire company; partial partnership of one product candidate and no additional efforts on the other product candidate; and/or a liquidation of the company. In each of these scenarios, we prepared a discounted cash flow assessment, which included product revenue as early as 2015 and income from operations beginning in 2018. Once the fair market value for our equity was determined, it was allocated among our preferred and common shares using the probability weighted return method or PWERM. Under the PWERM approach, share value is derived from the probability weighted present value of expected future investment returns, considering each of the possible outcomes available

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to us, as well as the economic and control rights of each share class. The fair value of our common shares was estimated using a probability-weighted analysis of the present value of the returns afforded to common shareholders under eight future shareholder exit or liquidity event scenarios, including an IPO, a sale to a larger private or public company, and a liquidation of our company, each with different timelines and valuations. We discounted the probability-weighted cash flows from each liquidation date to the valuation date using our weighted-average cost of capital. In the retrospective valuation, the weightings previously assigned to an IPO exit scenario were updated to assign additional weighting to these outcomes. In addition, the timing of the exit scenarios was also updated in order to be consistent with the assumed IPO timeline established by management with the underwriters in August 2011.

After applying a discount for lack of marketability of 10%, the retrospective valuation indicated a fair market value of $4.28 per share. Restricted securities can generally be purchased at prices substantially below those of identical but freely marketable securities due to the very real risk of market decline inherent in holding restricted securities. As such the valuation relied on the Finnerty Model, which relates discount for lack of marketability to the length of the holding period for unregistered equity in a publicly traded corporation’s stock, and the volatility of the underlying publicly traded equity. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model indicated a discount for lack of marketability of approximately 10% for the common shares. As such, a discount for lack of marketability of 10% was applied. The increase in the fair market value from $2.09 per common share at July 28, 2010 to $4.28 per common share at December 8, 2010, was primarily driven by the timing of the exit scenarios and the weightings assigned to the liquidity events. The timing of the exit scenarios was updated to reflect our discussions with underwriters in August of 2011 surrounding our IPO. In the reassessment of our fair market value of common stock as of December 8, 2010, we assigned 52.5% probability to the IPO scenarios; 17.5% probability to the merger and acquisition scenarios; and 30% to the liquidation scenario.

Based on these factors, our board of directors determined that the retrospectively reassessed fair value of our common shares for financial reporting purposes at December 8, 2010 was $4.28 per share. The compensation charges reflected in our consolidated financial statements included in this report reflect the reassessments of fair value that we conducted with respect to the December 8, 2010 option grants in the nine-month period ended September 30, 2011. No adjustment was recorded for the year ended December 31, 2010, as such amounts were immaterial.

Option Grants on March 1, 2011

Our board of directors granted options on March 1, 2011, with each option having an exercise price of $2.28 per share.

In connection with the preparation of our consolidated financial statements included in this report, after giving consideration to the estimated values that could be obtained in an IPO in the first quarter of 2012 and based on market and other conditions, we determined in September 2011, that the grant date fair value of the options granted on March 1, 2011 required adjustment. Accordingly, we reassessed the fair value of our common shares at March 1, 2011 for financial reporting purposes. In light of current market factors in the third quarter of 2011, we used a PWERM approach to retrospectively reassess the value of our common shares as of March 1, 2011.

In reassessing the fair value of our common shares, the board of directors considered the factors in their previous assessment of the March 1, 2011 fair value assessment, including:

• in March 2011, the Data Safety Monitoring Board concluded that our Phase 2 oral trial of solithromycin would need no further meetings with that body, based upon the safety and efficacy data it had reviewed to date; and

• we were in active discussions with multiple potential partners to potentially license multiple territories and channels for Taksta.

In August 2011, we decided to pursue an initial public offering of our common shares and held an organizational meeting with underwriters. In light of this fact, management determined that it was prudent to reassess its previous determination of fair market value of our common shares. Accordingly, a retrospective valuation was performed as of March 31, 2011 using a DCF method, which is an accepted method within the income approach, to determine the fair market value of our equity. To arrive at an average enterprise value, a DCF was prepared utilizing various scenarios, including: partnership funding for one or both solithromycin and Taksta; an acquisition of one or both solithromycin and Taksta; an acquisition of the entire company; partial partnership of one product candidate and no additional efforts on the other product candidate; and/or a liquidation of the company. In each of these scenarios, we prepared a discounted cash flow assessment, which included product revenue as early as 2015 and income from operations beginning in 2018. Once the fair market value for our equity was determined, it was allocated among our preferred and common shares using the probability weighted return method or PWERM. Under the PWERM approach, share value is derived from the probability weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class. The fair value of our common shares was estimated using a probability-weighted analysis of the present value of the returns afforded to common shareholders under eight future shareholder exit or liquidity event scenarios, including an IPO, a sale to a larger private or public company, and a liquidation of our company, each with different timelines and valuations. We discounted the probability-weighted cash flows from each liquidation date to the valuation date using our weighted-average cost of capital. In the retrospective valuation, the weightings previously assigned to an IPO exit scenario were updated to assign additional weighting to these outcomes. In addition, the timing of the exit scenarios was also updated in order to be consistent with the assumed IPO timeline established by management with the underwriters in August 2011.

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After applying a discount for lack of marketability of 10%, the retrospective valuation indicated a fair market value of $5.04 per share. Restricted securities can generally be purchased at prices substantially below those of identical but freely marketable securities due to the very real risk of market decline inherent in holding restricted securities. As such the valuation relied on the Finnerty Model, which relates discount for lack of marketability to the length of the holding period for unregistered equity in a publicly traded corporation’s stock, and the volatility of the underlying publicly traded equity. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model indicated a discount for lack of marketability of approximately 10% for the common shares. As such, a discount for lack of marketability of 10% was applied. The increase in the fair market value from $4.28 per common share at December 8, 2010 to $5.04 per common share at March 1, 2011, was primarily driven by the timing of the exit scenarios and the weightings assigned to the liquidity events. The timing of the exit scenarios was updated to reflect our discussions with underwriters in August of 2011 surrounding our IPO. We assigned 62.5% probability to the IPO scenarios; 17.5% probability to the merger and acquisition scenarios; and 20% to the liquidation scenario. These scenarios were more heavily weighted towards an IPO scenario on or before March 2012, which indicated a higher enterprise valuation than the other scenarios. In addition, as previously described, we discounted the probability-weighted cash flows from each liquidation date to the valuation date using our weighted-average cost of capital. As the remaining time between the valuation date and the most probable scenario, or IPO scenario, of March 31, 2012 decreased, the impact of the discount applied also decreased. These factors led to increase in value associated with our equity.

Based on these factors, the board determined that the retrospectively reassessed fair value of our common shares for financial reporting purposes at March 1, 2011 was $5.04 per share. The compensation charges reflected in our consolidated financial statements included in this report reflect the reassessments of fair value that we conducted with respect to the March 1, 2011 option grants in the nine months ended September 30, 2011.

There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding our future performance; the time to completing an IPO, a strategic merger or sale, or other liquidity event; and the timing and probability of continuing to successfully progress our various product candidates toward commercialization, as well as determinations of the appropriate valuation methods. If different assumptions had been applied in the valuations, our share-based compensation expense, net loss and net loss per share could have been significantly different. While the assumptions used to calculate and account for share-based compensation awards represents management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if revisions are made to the underlying assumptions and estimates, our share-based compensation expense could vary significantly from period to period.

Despite the fact that, prior to becoming a public company, there were no additional stock option grants since March 1, 2011, we performed a contemporaneous valuation of the fair market value of our common stock at August 1, 2011, September 30, 2011 and again at December 31, 2011, which indicated a fair market value of $6.46 per common share, $8.45 per common share and $9.88 at each valuation date, respectively.

In the August 1, 2011, September 30, 2011 and the December 31, 2011 contemporaneous valuations, the discounted cash flow, or DCF, method was consistently applied to determine the fair market value of our equity or enterprise value. Once the fair market value for the equity was determined, it was allocated among our preferred and common shares using the probability weighted return method, or PWERM. The fair value of our common shares was estimated using a probability-weighted analysis of the present value of the returns afforded to common shareholders under eight future exit or liquidity event scenarios, including: an initial public offering, or IPO; a sale to a larger private or public company; and a liquidation of the company; each with different timelines and valuations. We discounted the probability-weighted cash flows from each liquidation date to the valuation date using its weighted-average cost of capital. In the December 31, 2011 contemporaneous valuation, we assigned additional weighting to the IPO exit scenarios, which was based primarily on the consideration of our successes in various drug development programs, increased discussions with potential partners for Taksta and the filing of the registration statement on Form S-1 in October 2011. In addition, the other qualitative factors considered in the August 1, 2011, September 30, 2011 and December 31, 2011 contemporaneous valuations, included:

• From a qualitative perspective, during the fourth quarter of 2011, we decided to immediately pursue the development of Taksta as a treatment for prosthetic joint infections, which decreased our expected development costs and increased our potential product revenue in future periods. These factors led to an increase in the fair value of our common stock in the fourth quarter of 2011;

• In June 2011, we completed enrollment in the Phase 2 trial of oral solithromycin;

• In July 2011, top-line data indicated efficacy and safety for the Phase 2 trial of oral solithromycin;

• In August 2011, the Phase 2 data from the oral trial of solithromycin indicated comparable efficacy and safety to the comparable product in the trial;

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• In August 2011, subsequent to the data publication, we hired a consultant in the Japanese market to seek partner candidates for solithromycin;

• In August and September 2011, increased interest in partnerships for Taksta was identified and successful meetings held with potential partners; and

• In August and September 2011, interest in solithromycin significantly increased within our industry given the positive Phase 2 data.

In the August 1, 2011 and the September 30, 2011 contemporaneous valuations, we applied a discount for lack of marketability of 10%. The August 1, 2011 and the September 30, 2011 valuation relied on the Finnerty Model, which relates discount for lack of marketability to the length of the holding period for unregistered equity in a publicly traded corporation’s stock, and the volatility of the underlying publicly traded equity. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model indicated a discount for lack of marketability of approximately 10% for the common shares. As such, a discount for lack of marketability of 10% was applied in August and September 2011.

In the December 31, 2011 contemporaneous valuation, we applied a discount for lack of marketability of 2.5%. In the December 31, 2011 valuation, we utilized the Finnerty model as a base in determining our discount for lack of marketability. However, due to the increase in certainty surrounding the liquidity events, including the potential IPO, we selected a discount for lack of marketability below that indicated by the Finnerty model. Therefore, a discount for lack of marketability of 2.5% was applied.

The increases in the fair market value from $5.04 per common share at March 1, 2011 to $6.46 per common share at August 1, 2011 to $8.45 per common share at September 30, 2011 and to $9.88 per common share at December 31, 2011, were primarily driven by two items. First, the weightings of the exit scenarios was updated to reflect our discussions with underwriters surrounding our planned IPO, which indicated an IPO scenario on or before March 2012. The weightings associated with the exit scenarios were as follows as of March 1, 2011, August 1, 2011, September 30, 2011 and December 31, 2011, respectively:

Exit Scenario	March 1, 2011			August 2, 2011			September 30, 2011			December 31, 2011
IPO		62.5	%		72.5	%		75.0	%		85.0	%
Merger or acquisition		17.5	%		17.5	%		17.5	%		10.0	%
Liquidation		20.0	%		10.0	%		7.5	%		5.0	%

The change in the scenario weightings over these time periods increased the value per common share, as estimated exit value associated with the IPO scenarios was greater than the liquidation scenario. Second, as previously described, we discounted the probability-weighted cash flows from each liquidation date to the valuation date using our weighted-average cost of capital. As the remaining time between the valuation date and the most probable scenario, or IPO scenarios, of March 31, 2012 decreased in each of the respective valuations, the impact of the discount applied also decreased. These quantitative elements, coupled with the qualitative factors described above, led to increase in value associated with our equity.

As noted above, our board of directors estimated the fair value of our common stock during these periods based on contemporaneous valuations performed. We believe that the composition of our board of directors resulted in a fair and reasonable view of the stock value and, together with the valuations performed, resulted in a fair valuation of our common stock.

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Results of Operations

Comparison of Year Ended December 31, 2011 and Year Ended December 31, 2012

The following table summarizes the results of our operations for each of the years ended December 31, 2011 and 2012, together with the changes in those items in dollars:

	Year Ended December 31,						Increase/ (Decrease)
	2011			2012
	(in thousands)
Revenue	$	—		$	—		$	—
Research and development expense (1)		16,872			16,869			(3	)
General and administrative expense (1)		3,708			6,069			2,361
Other income (expense), net		(641	)		(1,289	)		(648	)
(1) Includes the following stock-based compensation expenses:
Research and development expense	$	158		$	520		$	362
General and administrative expense		286			1,149			863

Revenue

We did not recognize any revenue for the years ended December 31, 2011 and 2012.

Research and Development Expense

Research and development expense remained consistent for the year ended December 31, 2012 compared to the year ended December 31, 2011 as a result of a $1.4 million decrease in expenses incurred for solithromycin, a $0.7 million increase in expenses incurred for Taksta and a $0.7 million increase in indirect expenses.

The $1.4 million decrease in expenses related to solithromycin for the year ended December 31, 2012 as compared to the year ended December 31, 2011 resulted primarily from decreases of $3.5 million related to the completion of our oral Phase 2 trial in 2011, $3.2 million related to API purchases in 2011 that did not recur in 2012 and $1.3 million of lower pre-clinical costs as partially offset by an increase of $4.5 million of costs related to the initiation of our Phase 3 trial for oral solithromycin in 2012, $0.8 million of increased drug development costs, and license fee and milestone payments of $1.0 million related to the achievement of the Phase 2 milestone with Optimer Pharmaceuticals and $0.4 million related to our entry into a licensing agreement with The Scripps Research Institute.

General and Administrative Expense

General and administrative expense increased by $2.3 million for the year ended December 31, 2012 compared to the year ended December 31, 2011 as a result of increased employee expense of $1.2 million, primarily stock compensation expense, director and officer insurance of $0.4 million and professional service fees of $0.7 million, all of which are related to our being a public company.

Other Income (Expense), Net

Other income (expense), net decreased by $0.7 million in the year ended December 31, 2012 compared to the year ended December 31, 2011 as a result of a $0.1 million increase in fair value adjustments recorded as interest income and a $0.8 million increase in interest expense related to the August and December 2011 Notes.

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Comparison of Year Ended December 31, 2010 and Year Ended December 31, 2011

The following table summarizes the results of our operations for each of the years ended December 31, 2010 and 2011, together with the changes in those items in dollars and as a percentage:

	Year Ended December 31,						Increase/ (Decrease)
	2010			2011
	(in thousands)
Revenue	$	—		$	—		$	—
Research and development expense (1)		15,474			16,872			1,398
General and administrative expense (1)		3,198			3,708			510
Other income (expense), net		(1,002	)		(641	)		(361	)
(1) Includes the following stock-based compensation expenses:
Research and development expense	$	58		$	158		$	100
General and administrative expense		108			286			178

Revenue

We did not recognize any revenue for the years ended December 31, 2010 and 2011.

Research and Development Expense

Research and development expense increased by $1.4 million for the year ended December 31, 2011 compared to the year ended December 31, 2010 as a result of a $4.0 million increase in direct expenses incurred for solithromycin and a $2.6 million decrease in direct expenses incurred for Taksta. Enrollment of patients in the oral Phase 2 trials of solithromycin was the primary cause of the increase in direct research and development expenses of $4.0 million during the year ended December 31, 2011 compared to the year ended December 31, 2010. We did not conduct any clinical trials for Taksta in 2011, which resulted in decreased direct research and development expenses of $2.6 million during the year ended December 31, 2011 compared to the year ended December 31, 2010, when Taksta was completing its Phase 2 clinical trial. Indirect research and development expenses decreased by $0.1 million during the year ended December 31, 2011 compared to the year ended December 31, 2010 as a result of decreased consulting costs.

General and Administrative Expense

General and administrative expense increased $0.5 million for the year ended December 31, 2011 compared to the year ended December 31, 2010. Financing activities in 2011 drove increases in legal, accounting and tax services that were partially offset by decreases in employee costs and information technology services from reduced headcount in business development and a change in IT service provider.

Other Income (Expense), Net

Other income (expense), net decreased by $0.4 million, or 36.0%, in the year ended December 31, 2011 compared to the year ended December 31, 2010 as a result of a $1.5 million decrease in fair value adjustments and a $0.5 million decrease in grant income recorded as other income in 2010, partially offset by a $0.6 million increase in interest expense related to the August and December 2011 Notes.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in November 2005 through December 31, 2012, we have funded our operations primarily with $176.4 million from debt, and the sale of convertible notes, convertible preferred shares, common shares and common stock.

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The gross proceeds we have received from the issuance and sale of our convertible notes and preferred and common shares are as follows:

Issue		Number of Shares		Gross Proceeds
Class A	2006		789,191	$	7,497	(1)
Class A	2007		1,557,895		14,800
Class B	2007		809,717		10,000
Class C	2009		2,488,686		25,500
Class C	2010		2,000,700		20,500
August 2011 Notes	2011		—		5,000
December 2011 Note	2011		—		10,000
Common Stock / Initial Public Offering	2012		9,660,000		57,960
Common Stock / Private Placement	2012		3,864,461		25,119

(1) Includes $3,197 of converted notes payable and accrued interest.

As of December 31, 2012, we had cash and equivalents of approximately $70.1 million.

Cash Flows

The following table sets forth the major sources and uses of cash for the periods set forth below:

	Year Ended December 31,
	2010			2011			2012
	(in thousands)
Net cash provided by (used in):
Operating activities	$	(17,553	)	$	(18,315	)	$	(23,107	)
Investing activities		(162	)		(13	)		(8	)
Financing activities		20,499			13,882			77,622
Net increase (decrease) in cash and equivalents	$	2,784		$	(4,446	)	$	54,507

Operating Activities. Cash used in operating activities of $17.6 million during the year ended December 31, 2010 was primarily a result of our $19.7 million net loss, partially offset by changes in operating assets and liabilities of $0.4 million and non-cash items of $1.7 million of which $1.5 million was attributable to the change in the fair value of the Class C purchase option. Cash used in operating activities of $18.3 million during the year ended December 31, 2011 was primarily a result of our $21.2 million net loss, coupled with changes in operating assets and liabilities of $2.0 million, partially offset by non-cash items of $0.9 million. Cash used in operating activities of $23.1 million during the year ended December 31, 2012 was primarily a result of our $24.2 million net loss, coupled with changes in operating assets and liabilities of $0.9 million, partially offset by non-cash items of $2.0 million.

Investing Activities. Net cash used in investing activities was $0.2 million for the year ended December 31, 2010, $13,000 for the year ended December 31, 2011, and $8,000 for the year ended December 31, 2012. Cash used in investing activities during all of these periods reflected our purchases of equipment.

Financing Activities. Net cash provided by financing activities was $20.5 million for the year ended December 31, 2010, $13.9 million for the year ended December 31, 2011, and $77.6 million for the year ended December 31, 2012. The cash provided by financing activities in 2010 consisted primarily of proceeds from the second closing of Class C shares of $20.5 million partially offset by $9,000 of issuance costs. The cash provided by financing activities in the year ended December 31, 2011 consisted primarily of proceeds from the August 2011 Notes of $5.0 million and the Hercules loan of $10.0 million offset by $307,000 of issuance costs and $881,000 of IPO issuance costs. Additionally, we received $70,000 of proceeds from the issuance of common shares pursuant to the exercise of stock options. The cash provided by financing activities of $77.6 million in the year ended December 31, 2012 consisted of gross proceeds of $58.0 million from the IPO and a $25.0 million private placement, respectively offset by $3.9 million and $1.7 million of underwriting discounts and offering costs.

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Funding Requirements

To date, we have not generated any product revenue from our development stage product candidates or from any other source. We do not know when, or if, we will generate any product revenue. We do not expect to generate product revenue unless and until we obtain marketing approval of, and commercialize solithromycin and/or Taksta or any of our other product candidates. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, solithromycin and Taksta and our other product candidates. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We will need substantial additional funding in connection with our continuing operations.

We expect that our existing cash and equivalents, including interest thereon, will enable us to fund our operating expenses and capital expenditure requirements into 2015. This projection does not include funds to initiate the solithromycin Phase 3 IV-to-oral clinical trial. We will need to obtain additional financing for the continued development of solithromycin, Taksta and our other product candidates and prior to the commercialization of any of these product candidates. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.

Our future capital requirements will depend on many factors, including:

• the progress, costs and results of our ongoing oral solithromycin Phase 3 trial, the results of our planned end-of-Phase 2 meeting with the FDA for the planned Phase 3 IV-to-oral trial for solithromycin, our ongoing Taksta Phase 2 trial and any future trials for solithromycin and Taksta;

• the scope, progress costs, and results of pre-clinical development, laboratory testing and clinical trials for our other product candidates;

• the costs, timing and outcome of regulatory review of our product candidates;

• the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

• our ability to establish collaborations on favorable terms;

• the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;

• revenue if any, received from sales of our product candidates, if approved by the FDA;

• the extent to which we acquire or invest in businesses, products and technologies; and

• our ability to obtain government or other third-party funding.

Until we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of any securities may include liquidation or other preferences that adversely affect our stockholders’ rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, such as currently imposed under the loan from Hercules. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

We plan to seek partners or other sources of third-party funding, including government grants, for the continued development of solithromycin and Taksta and our other product candidates. If we are unable to raise additional funds when needed, whether on favorable terms or not, we may be required to delay, limit, reduce or terminate our development of our product candidates, or our commercialization efforts, or to grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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Contractual Obligations and Commitments

The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2012 and the effects such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

	Total		1-3 years		4-5 years		More Than 5 years
Operating lease	$	243	$	243	$	—	$	—
The Scripps Research Institute		798		168		170		460
December 2011 Note		10,400		10,400		—		—
Interest on December 2011 Note		1,792		1,792		—		—
Total	$	13,233	$	12,603	$	170	$	460

Effective June 12, 2012, Cempra Pharmaceuticals, Inc., our wholly owned subsidiary, entered into a license agreement with The Scripps Research Institute, or TSRI, whereby TSRI licensed to us rights, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes. The rights licensed to us are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, we paid a one-time only, non-refundable license issue fee in the amount of $350,000. Our rights under the agreement are subject to certain customary rights of the U.S. government that arise or result from TSRI’s receipt of research support from the U.S. government.

We are also obligated to pay annual maintenance fees to TSRI in the amount of (i) $50,000 each year for the first three years (beginning on the first anniversary of the agreement), and (ii) $85,000 each year thereafter (beginning on the fourth anniversary of the agreement). Each calendar year’s annual maintenance fees will be credited against sales royalties due under the agreement for such calendar year. Under the terms of the agreement, we must pay TSRI low single-digit percentage royalties on the net sales of the products covered by the TSRI patents for the life of the TSRI patents, a low single-digit percentage of non-royalty sublicensing revenue received with respect to countries in the nonexclusive territory and a mid-single-digit percentage of sublicensing revenue received with respect to countries in the exclusive territory, with the sublicensing revenue royalty in the exclusive territory and the sales royalties subject to certain reductions under certain circumstances. TSRI is eligible to receive milestone payments of up to $1.1 million with respect to regulatory approval in the exclusive territory and first commercial sale, in each of the exclusive territory and nonexclusive territory, of the first licensed product to achieve those milestones that is based upon each macrolide covered by the licensed patents. Each milestone is payable once per each macrolide. Each milestone payment made to TSRI with respect to a particular milestone will be creditable against any payment due to TSRI with respect to any sublicense revenues received in connection with the achievement of such milestone. Any payments made to TSRI under the TSRI license for territories subject to the Optimer agreement can be deducted pursuant to the terms of the license agreement we have with Optimer Pharmaceuticals, from any sales-based royalty payments due under the Optimer agreement up to a certain percentage reduction of the royalties due to Optimer.

Under the terms of the TSRI agreement, we are also required to pay additional fees on royalties, sublicensing and milestone payments if we, an affiliate, or a sub licensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.

The term of the TSRI license agreement (and the period during which we must pay royalties to TSRI in a particular country for a particular product) will end, on a country-by-country and product-by-product basis, at such time as no patent rights licensed from TSRI cover a particular product in the particular country. We have included in the table above the annual payments due TSRI, but have not included any other payments because we cannot estimate if, when or in what amounts such payments will become due under the agreement.

In November 2011, we entered into a new operating lease agreement for our current office space in Chapel Hill, North Carolina. The new lease term is 42 months with an expiration date of November 30, 2014. Aggregate lease payments over the term will be $401,248.

In December 2011, we entered into a $20,000,000 loan and security agreement with Hercules and borrowed $10,000,000 upon closing. In connection with the loan agreement, we entered into a warrant agreement with Hercules, under which Hercules has the right to purchase up to 39,038 shares of common stock at an exercise price of $10.25 per share. In addition, on the earliest to occur of (i) the loan maturity date, (ii) the date that we prepay all of the outstanding advances and accrued interest, or (iii) the date that all of the advances and interest become due and payable, we must pay Hercules a fee of $400,000.

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In March 2006, we entered into a Collaborative Research and Development and License Agreement with Optimer. Under the terms of the Optimer agreement, we acquired exclusive rights to further develop and commercialize certain Optimer technology worldwide, excluding ASEAN countries. As partial consideration for this license, during 2007 and 2006, we issued to Optimer an aggregate of 1,193,638 common shares with a total value of $0.2 million. We also have an obligation to make additional payments upon achievement of specified development, regulatory and commercialization milestones. The aggregate amount of such milestone payments we may need to pay is based in part on the number of products developed under the agreement. The aggregate amount of such payments would be $27.5 million if four products are developed and gain FDA approval. Additional limited milestone payments would be due if we develop more than four products. In July 2010, we made a $0.5 million milestone payment to Optimer after our successful completion of the Phase 1 trial for oral solithromycin and in July 2012 we made a $1.0 million milestone payment upon completion of our discussions with the FDA for the protocol for our proposed pivotal Phase 3 trial for oral solithromycin. Optimer can elect to receive certain milestone payments in cash or in shares of our common stock having an equivalent fair market value. We are also obligated to make tiered, mid-single-digit royalty payments to Optimer based on annual net sales of licensed products outside the ASEAN countries, which royalties are subject to reduction in the event additional licenses are obtained from third parties in order to practice our rights under the agreement and/or we are required to grant a compulsory license to a third party. We have not included these payments in the table above because we cannot estimate if, when or in what amounts such payments will become due under this agreement.

We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for pre-clinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice and therefore we believe that our non-cancelable obligations under these agreements are not material.

Net Operating Losses

As of December 31, 2012, the Company had federal net operating loss carryforwards of approximately $68.6 million and state net economic loss tax carryforwards of approximately $67.6 million. The net operating loss carryforwards begin to expire in 2026 and 2021 for federal and state tax purposes, respectively. The Company also had federal research and development credit carryforwards of approximately $2.5 million which begin to expire in 2026 and federal charitable contribution carryforwards of approximately $76,000 which begin to expire in 2014.

The Tax Reform Act of 1986 contains provisions which limit the ability to utilize the net operating loss carryforwards in the case of certain events including significant changes in ownership interests. If the Company’s net operating loss carryforwards are limited, and the Company has taxable income which exceeds the permissible yearly net operating loss carryforward, the Company would incur a federal income tax liability even though net operating loss carryforwards would be available in future years.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under SEC rules.

Recent Accounting Pronouncements

In February 2013, FASB issued guidance establishing new requirements for disclosing reclassifications of items out of accumulated other comprehensive income. Specifically, (1) disclosure is required of the changes in components of accumulated OCI, (2) disclosure is required of the effects on individual line items in net income for each item of accumulated OCI that is reclassified in its entirety to net income, and (3) cross references are required to other disclosures that provide additional details for OCI items that are not reclassified in their entirety to net income. The guidance will be effective for interim and annual periods beginning after December 15, 2012. We are in the process of evaluating this guidance and currently do not believe that it will have a material effect on our consolidated financial statements.

Cautionary Statement

We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. The following statement highlights some of these risks. For more detail, see “Item 1A. Risk Factors”.

Statements contained in this Form 10-K that are not historical facts are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our expectations might not be attained. Forward-looking statements involve known and unknown risks that could cause actual results to differ materially from expected results. Factors that could cause actual results to differ materially from our expectations expressed in the report include, among others: risks related to the costs, timing, regulatory review and results of our studies and clinical trials; our ability to obtain FDA approval of our product candidates; differences between historical studies on which we have based our planned clinical trials and actual results from our trials; our

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anticipated capital expenditures, our estimates regarding our capital requirements, and our need for future capital; our liquidity and working capital requirements; our expectations regarding our revenues, expenses and other results of operations; the unpredictability of the size of the markets for, and market acceptance of, any of our products; our ability to sell any approved products and the price we are able realize; our need to obtain additional funding and our ability to obtain future funding on acceptable terms; our ability to retain and hire necessary employees and to staff our operations appropriately; our ability to compete in our industry and innovation by our competitors; our ability to stay abreast of and comply with new or modified laws and regulations that currently apply or become applicable to our business; estimates and estimate methodologies used in preparing our financial statements; the future trading prices of our common stock and the impact of securities analysts’ reports on these prices; and the risks set out in our filings with the SEC.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates.

We do not believe that our cash and equivalents have significant risk of default or illiquidity. While we believe our cash and equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and equivalents at one or more financial institutions that are in excess of federally insured limits.

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during 2010, 2011 or 2012.

Item 8. Financial Statements and Supplementary Data

The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15.

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

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that information to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide the reasonable assurance discussed above.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of these inherent limitations, management does not expect that our internal controls over financial reporting will prevent all error and all fraud. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.

This annual report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting due to an exemption provided by the JOBS Act for emerging growth companies.

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Changes in Internal Control over Financial Reporting

No change to our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

We have adopted a written code of ethics and business conduct that applies to our directors, executive officers and all employees. We intend to disclose any amendments to, or waivers from, our code of ethics and business conduct that are required to be publicly disclosed pursuant to rules of the SEC by filing such amendment or waiver with the SEC. This code of ethics and business conduct can be found in the corporate governances section of our website,www.cempra.com.

Executive Officers

As of March 7, 2013, our executive officers are Dr. Prabhavathi Fernandes, our President and Chief Executive Officer and Mark W. Hahn, our Chief Financial Officer. Information for each is provided below.

Name	Age (as of 03/8/13)		Business Experience For Last Five Years
Prabhavathi Fernandes, Ph.D.		63	Dr. Fernandes, one of our founders, has been our President and Chief Executive Officer and a member of our board of directors since our founding in November 2005. Prior to that, she was President and Chief Executive Officer of several privately-held companies, including DarPharma, Inc. from 2003 to 2005, Ricerca Biosciences from 2000 to 2003 and Small Molecule Therapeutics from 1998 to 2000. Dr. Fernandes was Vice President, Drug Discovery of Bristol-Myers Squibb Company from 1988 to 1998, Senior Director of Squibb Pharmaceutical Research Institute from 1987 to 1988, Senior Project Leader of Abbott Laboratories from 1983 to 1987 and Senior Microbiologist of the Squibb Institute for Medical Research, the research division of E.R. Squibb and Sons, from 1980 to 1983. During her years at Squibb, Abbott and Bristol-Meyers Squibb, she was directly involved in the development of numerous antibiotics, four of which have been approved by the FDA and one achieving sales over a billion dollars. She has served on the advisory board of Optimer Pharmaceuticals, Inc. since 2004 and the supervisory board of GPC Biotech AG from 2004 to 2008. Dr. Fernandes served on the product development working group for Biodefense for the National Institute of Allergy and Infectious Diseases from 2003 to 2004 and the U.S. Congressional Panel for Assessment of Impact of Antibiotic Resistant Bacteria and the American Society for Microbiology Advisory Panel for Antibiotic Resistance from 1991 to 1995. Dr. Fernandes holds a B.S. in botany, zoology and chemistry from the University of Bangalore (India), an M.S. in microbiology from the Christian Medical College (India) and a Ph.D. in microbiology from Thomas Jefferson University, Philadelphia,
Mark W. Hahn		50	Mr. Hahn has been our Executive Vice President and Chief Financial Officer since February 2010. From 2008 to 2009, Mr. Hahn was the Chief Financial Officer of Athenix Corp., an agricultural biotechnology company, leading its merger with Bayer CropScience, where he served as Finance Director into 2010. Mr. Hahn has been the chief financial officer of various companies including GigaBeam Corporation, a telecommunications equipment company, from 2007 to 2008; BuildLinks, Inc., a software company, from 2002 to 2007; PerformaWorks, Inc., a software company, from 2001 to 2002; and Charles & Colvard, Ltd., a consumer products company, from 1996 to 2001. Mr. Hahn also served in various capacities, culminating in Senior Manager, at Ernst & Young and its predecessors from 1984 until 1996. Mr. Hahn holds a B.B.A. in accounting and finance from the University of Wisconsin-Milwaukee and is a certified public accountant in the State of Maryland and North Carolina.

The other information required by this Item concerning our directors is incorporated by reference from the section captioned “Proposal No. 1—Election of Directors” and “Corporate Governance” contained in our proxy statement related to the 2013 Annual Meeting of Stockholders scheduled to be held on May 23, 2013 which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

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Item 11. Executive Compensation

Compensation Objectives and Components

Our Chief Executive Officer and Chief Financial Officer are our only executive officers, who we refer to as our Named Executive Officers. Our Board has delegated responsibility for creating and reviewing the compensation of our entire senior management team, including our Named Executive Officers, to the Compensation Committee of our Board.

The primary objectives of the Compensation Committee with respect to executive compensation are to attract, retain and motivate executive officers who will make important contributions to the achievement of our business goals and success. The Compensation Committee believes that the most effective executive compensation program will reward the achievement of annual, long-term and strategic goals of our company. Our executive compensation program has been designed to link short- and long-term cash and equity incentives to the achievement of measurable corporate and individual performance objectives, and to align executives’ incentives with shareholder value creation. To achieve these objectives, the Compensation Committee has recommended that we maintain, and expects to continue to recommend further implementation of, compensation plans that tie a substantial portion of our Named Executive Officers’ overall compensation to our research, development, and operational performance.

Prior to our initial public offering in February 2012, we had not retained compensation consultants to review our policies and procedures relating to executive compensation. The Compensation Committee, with the input of management, developed our compensation plans by utilizing publicly available compensation data for national and regional companies in the pharmaceutical industry. The Compensation Committee also considered competitive market practices based on the experience of the members of the Compensation Committee. While disparities in market capitalization, size, product pipeline and other factors may exist, we believe that the practices of national, regional and other companies in the pharmaceutical industry provide us with appropriate comparative compensation guidance, because these companies operate in our same industry, tend to have similar organizational structures and tend to compete with us for executives and other employees. We selected companies against which to measure our compensation practices in an informal manner and did not establish a definitive group of peer companies against which we measured ourselves. The companies we selected depended on the data that was available to us, publicly or otherwise, at the time we reviewed our compensation practices. Subsequent to our initial public offering, we engaged Pay Governance, LLC, an independent compensation consultant, to review our executive compensation practices. The Compensation Committee, with the assistance of Pay Governance, developed a group of 15 public companies as our peers, which peer group was used by Pay Governance to conduct an executive compensation benchmarking study in March 2012. Based on the results of this benchmarking study, as well as other factors considered by the Compensation Committee, the Compensation Committee increased the salaries of our named executive officers and their target bonuses in 2012 to be more competitive. In the future, the Compensation Committee intends to use information provided from that review, as well as information gathered by the Committee as it has done in the past, to guide our policies and procedures relating to executive compensation.

Based on these overall objectives and philosophy, the Compensation Committee has designed an executive compensation program that generally seeks to bring base salaries and total executive compensation in line with the companies at a similar stage of clinical development represented in the compensation data we review. Our program allows the Compensation Committee to determine each component of an executive’s compensation based on a number of factors, including (a) the executive’s overall experience and skills (with an emphasis on particular industry experience), (b) the executive’s position and responsibilities in comparison to other executives at the company and (c) the demand within our market for the executive’s skills relative to other executives in our industry.

The principal components of our executive compensation program are base salary, annual bonus, and long-term incentives. Our Compensation Committee believes that each component of executive compensation must be evaluated and determined with reference to competitive market data, individual and corporate performance, our recruiting and retention goals, internal equity and consistency, and other information we deem relevant. We believe that in the pharmaceutical industry stock option awards are a primary motivator in attracting and retaining executives, in addition to salary and cash incentive bonuses. The Board, generally based on a recommendation of the Compensation Committee, approves all salary increases, as well as bonuses and stock option awards, if any, for Named Executive Officers. Annual base salary increases and annual bonuses, to the extent granted, are generally implemented during the first calendar quarter of the year.

We provide base salaries for our Named Executive Officers to compensate them for their services rendered during the fiscal year. Base salaries for our Named Executive Officers have been established based on their position and scope of responsibilities, their prior experience and training, and competitive market compensation data we review for similar positions in our industry. Base salaries are reviewed periodically and may be increased for merit reasons based on the executive’s performance, for retention reasons or if the base salary is not competitive to salaries paid by comparative companies for similar positions. Additionally, we may adjust base salaries throughout the year for promotions or other changes in the scope or breadth of an executive’s role or responsibilities.

We have also implemented an annual cash incentive performance program, under which annual corporate goals are proposed by management and approved by the Compensation Committee at the start of each calendar year. These corporate goals include the achievement of qualitative operational goals and predefined research and development milestones. Each goal is weighted as to importance by the Compensation Committee. The individual performance of our Named Executive Officers is based on the level of

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achievement of a combination of corporate goals and goals related to their respective areas of responsibility. Annual cash bonuses granted to our Named Executive Officers are tied to the achievement of these corporate goals.

Our equity-based long-term incentive program is designed to align our Named Executive Officers’ long-term incentives with shareholder value creation. We believe that long-term participation by our executive officers in equity-based awards is a critical factor in the achievement of long-term company goals and business objectives. Our 2006 Plan allowed and our 2011 Plan allows the grant to executive officers of stock options, as well as other forms of equity incentives, as part of our overall compensation program. We typically make an initial award of stock options to new executives in connection with the commencement of their employment. These grants generally have an exercise price equal to the fair market value of our common stock on the grant date and a vesting schedule of 1/4 vesting after one year and the remaining award vesting in equal monthly installments over the next three years. The initial stock option awards are intended to provide the executive with incentive to build value in our company over an extended period of time and to maintain competitive levels of total compensation. The size of the initial stock option award is determined based on numerous factors, including the executive’s skills and experience, the executive’s responsibilities with us and an analysis of the practices of national, regional and other companies in the pharmaceutical industry similar in size to us. Thereafter, our practice is to make annual stock option awards as part of our overall performance management program. Typically, these grants are made to ensure the executive’s average equity and option amounts are in line with similar positions at comparable companies. As with base salary and initial equity award determinations, a review of all components of the executive’s compensation is conducted when determining annual equity awards to ensure that an executive’s total compensation conforms to our overall philosophy and objectives.

Other Compensation

We maintain broad-based benefits and perquisites that are provided to all eligible employees, including health insurance, life and disability insurance, dental insurance and paid vacation.

Severance and Change in Control Benefits

We do not have employment arrangements with either of our Named Executive Officers or any other employee. As such, none of our Named Executive Officers are entitled to severance or change in control benefits. However, each Named Executive Officer is entitled to receive any amounts earned during the term of his or her employment, including salary and unused vacation pay regardless of the manner in which a Named Executive Officer’s employment terminates.

Tax and Accounting Considerations

U.S. federal income tax generally limits the tax deductibility of compensation we pay to our Named Executive Officers to $1.0 million in the year the compensation becomes taxable to the executive officers. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements. Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. Rather, we seek to maintain flexibility in how we compensate our executive officers so as to meet a broader set of corporate and strategic goals and the needs of shareholders, and as such, we may be limited in our ability to deduct amounts of compensation from time to time. Accounting rules require us to expense the cost of our stock option grants. Because of option expensing and the impact of dilution on our shareholders, we pay close attention to, among other factors, the type of equity awards we grant and the number and value of the shares underlying such awards.

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Summary Compensation Table

The following table sets forth information concerning the compensation paid or accrued to our Named Executive Officers in 2011 and 2012.

Name and Principal Position	Year		Salary ($)		Bonus ($)		Option awards(1) ($)		Non-equity incentive plan compensation(2) ($)		All other compensation(3) ($)		Total ($)
Prabhavathi Fernandes, Ph.D.		2012		391,356		—		762,000		136,779		45,855		1,335,990
Director, President and		2011		275,000		—		—		70,744		33,481		308,481
Chief Executive Officer
Mark Hahn		2012		250,027		—		190,500		51,568		24,278		516,373
Executive Vice President and		2011		203,333		—		—		47,569		22,152		225,485
Chief Financial Officer

(1) The reported amounts represent the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 2 of the financial statements included in this report.

(2) Non-equity incentive plan compensation represents amounts earned in 2011 and 2012 as annual performance awards, which were paid in 2012 and 2013, respectively.

(3) These amounts represent the following in 2011 and 2012, respectively: for Dr. Fernandes, $9,800 and $10,000 in 401(k) matching contributions, $2,527 and $2,778 in life, disability, and accidental death and dismemberment insurance premiums paid by us on her behalf, and $21,154 and $33,077 in unused paid time off; and for Mr. Hahn, $8,271 and $10,000 in 401(k) matching contributions, $2,458 and $2,528 in life, disability, and accidental death and dismemberment insurance premiums paid by us on his behalf, and $11,423 and $11,750 in unused paid time off.

Employment Arrangements

We do not have employment arrangements with either of our Named Executive Officers or any other employee.

Outstanding Equity Awards at Fiscal Year-End 2012

The following table contains certain information concerning unexercised options for the Named Executive Officers as of December 31, 2012.

	Option Awards
Name	Grant date		Number of securities underlying unexercised options exercisable(#)		Number of securities underlying unexercised options unexercisable(#)		Option exercise price ($)		Option expiration date
Prabhavathi Fernandes, Ph.D.(1)		03/20/12		—		100,000		7.62		03/19/22
		12/08/10		20,349		20,349		2.09		12/07/20
		07/28/10		22,754		11,379		2.09		07/28/20
		08/10/09		68,493		13,701		2.09		08/09/19
		06/03/08		54,273		—		2.47		06/03/18
		08/08/06		12,105		—		1.43		08/07/16
Mark W. Hahn(1)		03/20/12		—		25,000		7.62		03/19/22
		12/08/10		4,537		4,537		2.09		12/07/20
		07/28/10		5,095		2,548		2.09		07/28/20
		02/02/10		38,098		8,792		2.09		02/01/20

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(1) In respect of the awards granted on March 20, 2012, all will vest on the first anniversary of the grant date. In respect of the awards granted on July 28 and December 8, 2010, 1/48^th of the options vest at the end of each month over 48 months, beginning on April 26, 2010 for the July options and 30 days after the grant date for the December options. In respect of the awards granted on June 3, 2008 and August 10, 2009, 1/4^th of the options vest on the first anniversary of the grant date, and 1/48^th of the options vest at the end of each month after the first anniversary over 36 months. In respect of the awards granted on February 2, 2010, 1/48^th of the options vest at the end of each month over 48 months, beginning on September 25, 2009.

Potential Payments on Change of Control

We do not have employment arrangements with either of our Named Executive Officers or any other employee. As such, none of our Named Executive Officers are entitled to severance or change in control benefits. However, each Named Executive Officer is entitled to receive any amounts earned during the term of his or her employment, including salary and unused vacation pay regardless of the manner in which a Named Executive Officer’s employment terminates.

Director Compensation

Director Compensation in Fiscal 2012

The following table shows the compensation earned by each non-employee director of our company for the year ended December 31, 2012.

Name	Fees Earned or Paid in Cash ($)		Option  Awards ($)(1)(2)		Total ($)
Dov Goldstein, M.D.		36,000		114,300		150,300
John Johnson		33,750		114,300		148,050
Richard Kent, M.D.		30,000		114,300		144,300
Garheng Kong, M.D., Ph.D.		63,750		137,160		200,910
I. Wistar Morris III(3)		—		114,300		114,300
P. Sherrill Neff		30,000		114,300		144,300
David Gill		37,500		188,750		226,250

(1) The reported amounts represent the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 2 of the financial statements included in this report.

(2) At December 31, 2012, the following directors held options to purchase common shares in the following amounts: Dr. Goldstein, 15,000 shares; Mr. Johnson, 43,784 shares; Dr. Kent, 15,000 shares; Dr. Kong, 46,784 shares; and Mr. Neff, 15,000.

(3) Mr. Morris ceased to be a director on May 23, 2012.

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Directors Compensation Plan

Prior to our initial public offering in February 2012, we did not pay our non-employee directors any cash compensation other than John Johnson (as described above) and one other former director, and only provided equity compensation, in the form of options, to Mr. Johnson (as described above), Dr. Garheng Kong and one other former director. Subsequent to our initial public offering, our Board, with the assistance of Pay Governance, LLC, an independent compensation consultant, determined that compensation for directors should be a mix of cash and equity-based compensation. Beginning March 20, 2012, all members of the Board receive an annual cash retainer of $35,000. The Chairman of the Board, if not a Named Executive Officer, receives an additional annual cash retainer of $35,000. The chairman of our Audit Committee receives an additional annual cash retainer of $15,000. The chairman of our Compensation Committee receives an additional cash retainer of $15,000 in 2012, reduced to $10,000 for each year thereafter. The chairman of the Nominating and Governance Committee receives an additional annual cash retainer of $8,000. Other members of our Audit Committee, Compensation Committee and Nominating and Governance Committee receive additional annual cash retainers of $5,000. Beginning in 2012, each director receives an initial grant of 25,000 option shares when first appointed to the Board and thereafter annual grants of 15,000 option shares. The Chairman of the Board, if not a Named Executive Officer, receives an additional annual grant of 3,000 option shares.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth the indicated information as of December 31, 2012 with respect to our equity compensation plans:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by our shareholders		1,162,602	$	4.18		1,063,399
Equity compensation plans not approved by our shareholders		39,038	$	10.25		—
Total		1,201,640				1,063,399

Our equity compensation plans consist of the Sixth Amended and Restated 2006 Stock Plan and the 2011 Equity Incentive Plan, both of which were approved by our stockholders.

The shares included in the table that were not approved by our stockholders are issuable pursuant to warrants issued to Hercules as part of the loan and security agreement we entered into with Hercules, pursuant to which we have borrowed $10 million.

The other information required by this Item is incorporated by reference to the information under the section captioned “Security Ownership of Certain Beneficial Owners and Management” contained in the proxy statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference to the information under the section captioned “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters—Independence of Directors” contained in the proxy statement.

Item 14. Principal Accounting Fees and Services

The information required by this Item is incorporated by reference to the information under the section captioned “Audit and Audit Committee Matters” contained in the proxy statement.

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Item 15. Exhibits, Financial Statement Schedules

	Page
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Redeemable Preferred Shares and Shareholders’ Equity (Deficit)		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

(2) Financial Statement Schedules:

All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.

(3) Exhibits. The following exhibits are included herein or incorporated herein by reference:

Exhibit No.	Description
1.1	Form of Underwriting Agreement.(3)
2.1	Form of Plan of Conversion of Cempra Holdings, LLC.(5)
3.1	Certificate of Incorporation of Cempra, Inc. (2)
3.2	Form of Bylaws of Cempra, Inc.(5)
3.3	Certificate of Formation of Cempra Holdings, LLC dated May 16, 2008. (5)
3.4	Cempra Holdings, LLC Second Amended and Restated Limited Liability Company Agreement dated as of May 13, 2009, as amended.(5)
4.1	Specimen of Common Stock Certificate of Cempra, Inc. (3)
4.2	Form of Registration Rights Agreement by and among Cempra, Inc. and certain of its stockholders, to be effective upon the corporate conversion.(5)
4.3	Cempra Holdings, LLC Preferred Unit Purchase Warrant and Global Amendment thereto dated October 11, 2011. (5)
4.4	Cempra Holdings, LLC Unsecured Convertible Promissory Note and Global Amendment thereto dated October 11, 2011. (5)
4.5	Warrant Agreement, dated December 20, 2011, between Cempra Holdings, LLC and Hercules Technology Growth Capital, Inc. (3)
4.6	Global Amendment, dated December 20, 2011, to Cempra Holdings, LLC Unsecured Convertible Promissory Note dated August 5, 2011, as amended October 11, 2011. (3)
4.7	Fifth Amendment to Cempra Holdings, LLC Second Amended and Restated Limited Liability Company Agreement, effective as of January 12, 2012.(1)
4.8	Registration Rights Agreement, dated October 18, 2012 among Cempra, Inc. and the investors named therein. (7)
10.1	Forms of Indemnification Agreements by and between Cempra, Inc. and its directors. (5)

83

Exhibit No.	Description
10.2	Cempra, Inc. Sixth Amended and Restated 2006 Stock Plan.(2)
10.3	Cempra, Inc. 2011 Equity Incentive Plan and Form of Stock Option Agreement thereunder.(2)
10.4*	Collaborative Research and Development and License Agreement dated March 31, 2006, by and between Cempra Pharmaceuticals, Inc. and Optimer Pharmaceuticals, Inc. (5)
10.5*	Supply Agreement effective March 15, 2011, by and among CEM-102 Pharmaceuticals, Inc., Ercros S.A. and Gyma Laboratories of America, Inc. (5)
10.6	Office Lease Agreement dated November 9, 2011 between Cempra Pharmaceuticals, Inc. and Property Reserve, Inc. (4)
10.7	Loan and Security Agreement dated December 20, 2011 between Cempra Holdings, LLC and Hercules Technology Growth Capital, Inc. (3)
10.8	Secured Promissory Note dated December 20, 2011, issued by Cempra Holdings, LLC to Hercules Technology Growth Capital, Inc. (3)
10.9*	License Agreement, effective June 12, 2012, between The Scripps Research Institute and Cempra Pharmaceuticals, Inc. (6)
10.10	Securities Purchase Agreement, dated October 18, 2012 among Cempra, Inc. and the investors named therein.(7)
10.11**	API Manufacturing and Supply Agreement, dated as of January 30, 2013, by and between Wockhardt Ltd. and Cempra Pharmaceuticals, Inc.
21.1	List of subsidiaries of Cempra Holdings, LLC. (5)
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S. C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S. C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* The Registrant has received confidential treatment with respect to portions of this exhibit. Those portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request.

** Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

(1) Incorporated by reference to the exhibit filed in the Registrant’s Amendment No. 5 to Registration Statement on Form S-1 filed on January 30, 2012.

(2) Incorporated by reference to the exhibit filed in the Registrant’s Amendment No. 3 to Registration Statement on Form S-1 filed on January 13, 2012.

(3) Incorporated by reference to the exhibit filed in the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 filed on December 22, 2011.

(4) Incorporated by reference to the exhibit filed in the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed on November 22, 2011.

(5) Incorporated by reference to the exhibit filed in the Registrant’s Registration Statement on Form S-1 filed on October 12, 2011.

(6) Incorporated by reference to the exhibit filed in the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed on August 8, 2012.

(7) Incorporated by reference to the exhibit filed in the Registrant’s Current Report on Form 8-K filed on October 24, 2012.

84

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

CEMPRA, INC.
By:	/s/ Prabhavathi Fernandes, Ph.D.
	Prabhavathi Fernandes, Ph.D. President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on behalf of the Registrant and on the dates indicated.

Signature	Title	Date
/s/ Prabhavathi Fernandes, Ph.D. Prabhavathi Fernandes, Ph.D.	President, Chief Executive Officer and Director (Principal Executive Officer)	March 7, 2013
/s/ Mark W. Hahn Mark W. Hahn	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 7, 2013
/s/ Garheng Kong, M.D., Ph.D. Garheng Kong, M.D., Ph.D.	Chairman of the Board	March 7, 2013
/s/ Dov Goldstein, M.D. Dov Goldstein, M.D.	Director	March 7, 2013
/s/ John H. Johnson John H. Johnson	Director	March 7, 2013
/s/ Richard Kent, M.D. Richard Kent, M.D.	Director	March 7, 2013
/s/ P. Sherrill Neff P. Sherrill Neff	Director	March 7, 2013
/s/ David N. Gill David N. Gill	Director	March 7, 2013

INDEX TO

CONSOLIDATED FINANCIAL STATEMENTS

CEMPRA, INC.

(A Development Stage Company)

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2012, and 2011		F-3
Consolidated Statements of Operations for the Years ended December  31, 2012, 2011, 2010 and the period from November 18, 2005 (inception) to December 31, 2012		F-4
Consolidated Statements of Redeemable Preferred Shares and Shareholders’ Equity (Deficit) for the period from November 18, 2005 (inception) to December 31, 2012		F-5
Consolidated Statements of Cash Flows for the Years ended December  31, 2012, 2011, 2010 and the period from November 18, 2005 (inception) to December 31, 2012		F-8
Notes to Consolidated Financial Statements		F-9

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Cempra, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of redeemable preferred shares and shareholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Cempra, Inc. and its subsidiaries (a development stage enterprise) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 and cumulatively for the period from November 18, 2005 (date of inception) to December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina

March 7, 2013

F-2

CEMPRA, INC.

(A Development Stage Company)

Consolidated Balance Sheets

	December 31, 2011			December 31, 2012
Assets
Current assets
Cash and equivalents	$	15,602,264		$	70,108,754
Prepaid expenses		284,040			264,981
Deferred offering expenses		880,742			—
Total current assets		16,767,046			70,373,735
Furniture, fixtures and equipment, net		81,920			43,217
Deposits		9,870			321,394
Total assets	$	16,858,836		$	70,738,346
Liabilities
Current liabilities
Accounts payable	$	2,980,878		$	2,171,633
Accrued expenses		545,300			341,918
Accrued payroll and benefits		421,101			604,548
Warrant liability		1,120,849			—
Current portion of long-term debt		—			2,226,610
Total current liabilities		5,068,128			5,344,709
Convertible notes payable		4,457,927			—
Long-term debt		9,503,895			7,623,285
Total liabilities		19,029,950			12,967,994
Commitments and Contingencies
Redeemable Convertible Preferred Shares		94,514,036			—
Shareholder’s Equity (Deficit)
Common shares; 100,000,000 shares authorized, no par value; 533,839 shares issued and outstanding at December 31, 2011 and none issued and outstanding at December 31, 2012		—			—
Common stock; $.001 par value; none issued and outstanding at December 31, 2011 and 80,000,000 shares authorized; 24,903,774 shares issued and outstanding at December 31, 2012		—			24,904
Additional paid-in capital		—			178,970,975
Deficit accumulated during the development stage		(96,685,150	)		(121,225,527	)
Total shareholders’ equity (deficit)		(96,685,150	)		57,770,352
Total liabilities, redeemable convertible preferred shares and shareholders’ equity (deficit)	$	16,858,836		$	70,738,346

The accompanying notes are an integral part of these consolidated financial statements

F-3

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Operations

										Period From November 18, 2005 (Inception) to December 31, 2012
	Year Ended December 31,
	2010			2011			2012
Revenue	$	—		$	—		$	—		$	—
Operating expenses
Research and development		15,474,430			16,871,825			16,869,078			83,727,560
General and administrative		3,198,237			3,707,563			6,068,457			21,562,460
Total costs and expenses		18,672,667			20,579,388			22,937,535			105,290,020
Loss from operations		(18,672,667	)		(20,579,388	)		(22,937,535	)		(105,290,020	)
Other income (expenses)
Interest income		4,183			81,063			107,564			1,473,110
Interest expense		(1,495,398	)		(722,454	)		(1,396,818	)		(5,639,322	)
Other income		488,958			—			—			488,958
Total other income (expense)		(1,002,257	)		(641,391	)		(1,289,254	)		(3,677,254	)
Net loss and comprehensive loss		(19,674,924	)		(21,220,779	)		(24,226,789	)		(108,967,274	)
Accretion of redeemable convertible preferred shares		(3,238,263	)		(3,763,061	)		(313,588	)		(14,002,842	)
Net loss attributable to common shareholders	$	(22,913,187	)	$	(24,983,840	)	$	(24,540,377	)	$	(122,970,116	)
Basic and diluted net loss attributable to common shareholders per share	$	(46.60	)	$	(47.53	)	$	(1.23	)
Basic and diluted weighted average shares outstanding		491,722			525,689			19,882,585

The accompanying notes are an integral part of these consolidated financial statements

F-4

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Redeemable Preferred Shares and Shareholders’ Equity (Deficit)

	Series A Preferred Shares						Series B Preferred Shares				Series C Preferred Shares				Common Shares				Common Stock				Additional Paid-In Capital			Deficit During the Development Stage			Total Shareholders’ Equity (Deficit)
	Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount
Balance as of November 18, 2005 (inception date)		—		$	—			—	$	—		—	$	—		—	$	—		—	$	—	$	—		$	—		$	—
Net loss		—			—			—		—		—		—		—		—		—		—		—			(26,463	)		(26,463	)
Balance as of December 31, 2005		—			—			—		—		—		—		—		—		—		—		—			(26,463	)		(26,463	)
Issuance of common shares to founders		—			—			—		—		—		—		179,825		—		—		—		171			—			171
Issuance of common shares for service		—			—			—		—		—		—		30,702		—		—		—		14,583			—			14,583
Issuance of common shares for license agreement		—			—			—		—		—		—		64,311		—		—		—		91,362			—			91,362
Issuance of Series A preferred share, net of share issuance costs of $150,570		789,191			7,346,745			—		—		—		—		—		—		—		—		—			—			—
Accretion of redeemable convertible preferred shares		—			232,782			—		—		—		—		—		—		—		—		(122,443	)		(110,339	)		(232,782	)
Share-based compensation		—			—			—		—		—		—		—		—		—		—		16,327			—			16,327
Net loss		—			—			—		—		—		—		—		—		—		—		—			(2,228,948	)		(2,228,948	)
Balance as of December 31, 2006		789,191			7,579,527			—		—		—		—		274,838		—		—		—		—			(2,365,750	)		(2,365,750	)
Issuance of common shares upon exercise of options		—			—			—		—		—		—		8,947		—		—		—		5,250			—			5,250
Issuance of Series A preferred shares, net of issuance costs of $20,435		1,557,895			14,779,563			—		—		—		—		—		—		—		—		—			—			—
Conversion of Series A preferred shares to common shares upon financing participation default		(55,120	)		(523,644	)		—		—		—		—		55,120		—		—		—		523,644			—			523,644
Issuance of common shares to CEO		—			—			—		—		—		—		77,368		—		—		—		124,950			—			124,950
Issuance of common shares for license agreement		—			—			—		—		—		—		61,335		—		—		—		99,055			—			99,055
Issuance of Series B preferred shares, net of issuance costs of $43,682		—			—			809,717		9,956,318		—		—		—		—		—		—		—			—			—
Accretion of redeemable convertible preferred shares		—			1,526,057			—		100,000		—		—		—		—		—		—		(808,919	)		(817,138	)		(1,626,057	)
Share-based compensation		—			—			—		—		—		—		—		—		—		—		56,020			—			56,020
Net loss		—			—			—		—		—		—		—		—		—		—		—			(8,075,240	)		(8,075,240	)

F-5

	Series A Preferred Shares				Series B Preferred Shares				Series C Preferred Shares					Common Shares				Common Stock				Additional Paid-In Capital			Deficit During the Development Stage			Total Shareholders’ Equity (Deficit)
	Shares		Amount		Shares		Amount		Shares		Amount			Shares		Amount		Shares		Amount
Balance as of December 31, 2007		2,291,966		23,361,503		809,717		10,056,318		—		—			477,608		—		—		—		—			(11,258,128	)		(11,258,128	)
Issuance of common shares upon exercise of options		—		—		—		—		—		—			13,469		—		—		—		13,113			—			13,113
Accretion of redeemable convertible preferred shares		—		1,731,269		—		806,390		—		—			—		—		—		—		(106,124	)		(2,431,536	)		(2,537,660	)
Share-based compensation		—		—		—		—		—		—			—		—		—		—		93,011			—			93,011
Net loss		—		—		—		—		—		—			—		—		—		—		—			(14,902,317	)		(14,902,317	)
Balance as of December 31, 2008		2,291,966		25,092,772		809,717		10,862,708		—		—			491,077		—		—		—		—			(28,591,981	)		(28,591,981	)
Issuance of Series C preferred shares, net of issuance cost of $251,733		—		—		—		—		2,488,675		25,248,268			—		—		—		—		—			—			—
Series C Warrant		—		—		—		—		—		(5,174,381	)		—		—		—		—		—			—			—
Accretion of redeemable convertible preferred shares		—		667,997		—		301,946		—		1,321,490			—		—		—		—		(123,404	)		(2,168,029	)		(2,291,433	)
Beneficial conversion costs of Series B preferred shares		—		—		—		73,995		—		—			—		—		—		—		—			(73,995	)		(73,995	)
Share-based compensation		—		—		—		—		—		—			—		—		—		—		123,404			—			123,404
Net loss		—		—		—		—		—		—			—		—		—		—		—			(18,611,814	)		(18,611,814	)
Balance as of December 31, 2009		2,291,966		25,760,769		809,717		11,238,649		2,488,675		21,395,377			491,077		—		—		—		—			(49,445,819	)		(49,445,819	)
Issuance of common shares upon exercise of options		—		—		—		—		—		—			3,947		—		—		—		8,250			—			8,250
Issuance of Series C preferred shares, net of issuance cost of $9,279		—		—		—		—		2,000,700		20,490,721			—		—		—		—		—			—			—
Series C Warrant		—		—		—		—		—		8,597,116			—		—		—		—		—			—			—

F-6

	Series A Preferred Shares						Series B Preferred Shares						Series C Preferred Shares						Common Shares					Common Stock				Additional Paid-In Capital			Deficit During the Development Stage			Total Shareholders’ Equity (Deficit)
	Shares			Amount			Shares			Amount			Shares			Amount			Shares			Amount		Shares		Amount
Accretion of redeemable convertible preferred shares		—			24,464			—			6,390			—			3,207,407			—			—		—		—		(174,061	)		(3,064,202	)		(3,238,263	)
Beneficial conversion costs of Series B preferred shares		—			—			—			30,082			—			—			—			—		—		—		—			(30,082	)		(30,082	)
Share-based compensation		—			—			—			—			—			—			—			—		—		—		165,811			—			165,811
Net loss		—			—			—			—			—			—			—			—		—		—		—			(19,674,924	)		(19,674,924	)
Balance as of December 31, 2010		2,291,966			25,785,233			809,717			11,275,121			4,489,375			53,690,621			495,024			—		—		—		—			(72,215,027	)		(72,215,027	)
Issuance of common shares upon exercise of options		—			—			—			—			—			—			38,815			—		—		—		69,932			—			69,932
Accretion of redeemable convertible preferred shares		—			24,464			—			6,391			—			3,732,206			—			—		—		—		(513,717	)		(3,249,344	)		(3,763,061	)
Share-based compensation		—			—			—			—			—			—			—			—		—		—		443,785			—			443,785
Net loss		—			—			—			—			—			—			—			—		—		—		—			(21,220,779	)		(21,220,779	)
Balance as of December 31, 2011		2,291,966			25,809,697			809,717			11,281,512			4,489,375			57,422,827			533,839			—		—		—		—			(96,685,150	)		(96,685,150	)
Issuance of common stock upon exercise of options		—			—			—			—			—			—			—			—		10,351		10		34,498			—			34,508
Issuance of common stock upon initial public offering, net of issuance costs of $4.7 million		—			—			—			—			—			—			—			—		9,660,000		9,660		53,184,681			—			53,194,341
Issuance of common stock upon private placement, net of issuance costs of $1.7 million		—			—			—			—			—			—			—			—		3,864,461		3,865		23,508,098			—			23,511,963
Conversion of common shares to common stock		—			—			—			—			—			—			(533,839	)		—		533,839		534		(534	)		—			—
Accretion of redeemable convertible preferred shares		—			2,038			—			533			—			311,017			—			—		—		—		—			(313,588	)		(313,588	)
Conversion of redeemable convertible preferred shares to common stock upon initial public offering		(2,291,966	)		(25,811,735	)		(809,717	)		(11,282,045	)		(4,489,375	)		(57,733,844	)		—			—		9,958,502		9,959		94,817,665			—			94,827,624
Conversion of convertible notes payable to common stock upon initial public offering		—			—			—			—			—			—			—			—		876,621		876		4,723,658			—			4,724,534
Reclassification of warrant liability to additional paid-in capital		—			—			—			—			—			—			—			—		—		—		1,033,647			—			1,033,647
Share-based compensation		—			—			—			—			—			—			—			—		—		—		1,669,262			—			1,669,262
Net loss		—			—			—			—			—			—			—			—		—		—		—			(24,226,789	)		(24,226,789	)
Balance as of December 31, 2012		—		$	—			—		$	—			—		$	—			—		$	—		24,903,774	$	24,904	$	178,970,975		$	(121,225,527	)	$	57,770,352

The accompanying notes are an integral part of these consolidated financial statements

F-7

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Cash Flows

	Year Ended December 31,									Period From November 18, 2005 (Inception) to December 31,
	2010			2011			2012			2012
Operating activities
Net loss	$	(19,674,924	)	$	(21,220,779	)	$	(24,226,789	)	$	(108,967,274	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		46,920			75,141			47,140			241,843
Issuance of common shares for service		—			—			—			14,583
Issuance of common shares for license agreement		—			—			—			190,418
Share-based compensation		165,811			443,785			1,669,262			2,692,570
Change in fair value of warrant liabilities		1,495,398			(4,730	)		(87,204	)		3,330,801
Amortization of debt issuance costs		—			394,300			355,663			749,963
Changes in operating assets and liabilities
Prepaid expenses		262,292			4,231			19,059			(264,981	)
Deposits		21,450			43,642			(311,524	)		(321,394	)
Accounts payable		714,097			1,434,696			(809,245	)		2,171,631
Accrued expenses		(568,633	)		413,103			53,564			598,863
Accrued payroll and benefits		(15,757	)		101,975			183,447			604,547
Net cash used in operating activities		(17,553,346	)		(18,314,636	)		(23,106,627	)	$	(98,958,430	)
Investing activities
Purchases of furniture, fixtures and equipment		(161,892	)		(13,389	)		(8,437	)		(285,059	)
Purchase of investments		—			—			—			(14,306,177	)
Proceeds from sale of investments		—			—			—			14,306,177
Net cash used in investing activities		(161,892	)		(13,389	)		(8,437	)		(285,059	)
Financing activities
Proceeds from borrowing on convertible promissory notes		—			5,000,000			—			8,100,000
Proceeds from borrowing on long-term debt		—			10,000,000			—			10,000,000
Proceeds from exercise of stock options		8,250			69,932			34,508			131,223
Proceeds from issuance of common stock upon initial public offering, net of underwriting discounts		—			—			54,777,800			54,777,800
Proceeds from issuance of common stock upon private placement, net of underwriting discounts		—			—			23,511,962			23,511,962
Payment of share issuance costs		(9,279	)		—			—			(475,699	)
Payment of debt issuance costs		—			(306,898	)		—			(306,898	)
Payment of offering costs		—			(880,742	)		(702,716	)		(1,583,458	)
Proceeds from issuance of redeemable convertible preferred shares		20,500,000			—			—			75,197,313
Net cash provided by financing activities		20,498,971			13,882,292			77,621,554			169,352,243
Net change in cash and equivalents		2,783,733			(4,445,733	)		54,506,490			70,108,754
Cash and equivalents at beginning of the period		17,264,264			20,047,997			15,602,264			—
Cash and equivalents at end of the period	$	20,047,997		$	15,602,264		$	70,108,754		$	70,108,754
Supplemental cash flow information
Cash paid for interest	$	—		$	—		$	920,514		$	920,514
Non-cash investing and financing activities
Accretion of redeemable convertible preferred shares	$	3,238,261		$	3,763,061		$	313,588		$	14,002,845
Beneficial conversion costs of Series B preferred shares	$	30,082		$	—		$	—		$	104,077
Notes payable converted into Series A redeemable convertible preferred shares	$	—		$	—		$	—		$	3,100,000
Allocation of the Class C proceeds to the Class C Purchase Option	$	—		$	—		$	—		$	5,174,381
Conversion of the Class C Purchase Option	$	(8,597,116	)	$	—		$	—		$	(8,597,116	)
Allocation of the convertible note proceeds to warrant	$	—		$	852,485		$	—		$	852,485
Allocation of the long-term debt proceeds to warrant	$	—		$	273,094		$	—		$	273,094
Conversion of convertible notes payable and accrued interest into common stock	$	—		$	—		$	4,724,534		$	4,724,534
Conversion of redeemable convertible preferred shares into common stock	$	—		$	—		$	94,827,625		$	94,827,625
Reclassification of warrant liability to additional paid-in capital	$	—		$	—		$	1,033,647		$	1,033,647

The accompanying notes are an integral part of these consolidated financial statements

F-8

CEMPRA, INC.

(A Development Stage Company)

December 31, 2012

Notes to Consolidated Financial Statements

1. Description of Business

Cempra, Inc. (the “Company” or “Cempra”, previously known as Cempra Holdings, LLC) is the successor entity of Cempra Pharmaceuticals, Inc. which was incorporated on November 18, 2005 and commenced operations in January 2006. Cempra is located in Chapel Hill, North Carolina, and is a pharmaceutical company developing medicines to treat drug-resistant bacterial infections in the community and hospital.

On February 2, 2012, Cempra Holdings, LLC converted from a Delaware limited liability company to a Delaware corporation and was renamed Cempra, Inc. As a result of the corporate conversion, the holders of both common and preferred shares of Cempra Holdings, LLC became holders of shares of common stock of Cempra, Inc. Holders of options to purchase common shares of Cempra Holdings, LLC became holders of options to purchase shares of common stock of Cempra, Inc. Holders of notes convertible into preferred shares of Cempra Holdings, LLC and associated warrants exercisable for preferred shares of Cempra Holdings, LLC became holders of shares of common stock and warrants to purchase shares of common stock of Cempra, Inc.

The Company is in its development stage as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915,Development Stage Entities. The Company’s activities since inception have consisted principally of acquiring product and technology rights, raising capital and performing research and development activities. Since inception, the Company has incurred significant losses from operations and expects losses to continue for the foreseeable future. The Company’s success depends primarily on the successful development and regulatory approval of its product candidates and its ability to obtain adequate financing as discussed below.

As of December 31, 2012, the Company has incurred losses since inception of $109.0 million. The Company expects to continue to incur losses and require additional financial resources to advance its products to either the commercial stage or liquidity events.

There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition.

2. Basis of Presentation

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts and results of operations of Cempra and its wholly owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of 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 those estimates.

Cash Equivalents and Concentrations of Risks

The Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the U.S. The Company maintains cash in accounts which are in excess of federally insured limits.

Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and equivalents. The Company’s cash and equivalents were primarily invested in money market funds invested exclusively in treasury securities. Total cash and equivalent balances have exceeded insured balances by the Federal Depository Insurance Company (“FDIC”).

F-9

Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Furniture, fixtures and leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred.

Furniture, fixtures and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If there is an impairment, a loss is recognized.

Deferred Offering Costs

Deferred public offering costs represent legal, accounting and other direct costs related to the Company’s efforts to raise capital through a public sale of the Company’s common stock. Costs related to the Company’s IPO activities were deferred until the completion of the IPO, at which time they were reclassified to additional paid-in capital as a reduction of the IPO proceeds. At December 31, 2011, approximately $0.9 million of offering costs were recorded as a prepaid asset.

Income Taxes

Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements. In estimating future tax consequences, the Company considers all expected future events other than enactment of changes in tax laws or rates. A valuation allowance is recorded, if necessary, to reduce net deferred tax assets to their realizable values if management does not believe it is more likely than not that the net deferred tax assets will be realized.

Segment and Geographic Information

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates and manages its business as one operating segment and all of the Company’s operations are in North America.

Intellectual Property

The Company’s policy is to file patent application(s) to protect technology, inventions and improvements that are considered important to the development of its business. The patent positions of technology companies, including the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. The Company accounts for its intellectual property under the guidance of FASB ASC Topic 350,Intangibles—Goodwill and Other.Patent costs since inception have been expensed as incurred.

Research and Development Expenses

Research and development (“R&D”) expenses include direct and indirect R&D costs. Direct R&D consists principally of external costs, such as fees paid to investigators, consultants, central laboratories and clinical research organizations, including costs incurred in connection with our clinical trials, and related clinical trial fees and all employee-related expenses for those employees working in research and development functions, including stock-based compensation for R&D personnel. Indirect R&D costs include insurance or other indirect costs related to our research and development function to specific product candidates. R&D costs are expensed as incurred.

Redeemable Convertible Preferred Shares

The Company accounted for its mandatorily redeemable preferred shares under the requirements of FASB ASC Topic 480,Distinguishing Liabilities from Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The carrying value of redeemable convertible preferred shares is increased by periodic accretions so that the carrying amount will equal the redemption amount at the redemption date. These increases are effected through charges against additional paid-in capital, to the extent it is available, or the deficit accumulated during the development stage. The convertible shares were converted to common stock upon completion of our IPO.

F-10

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common stock shares outstanding during the period. Diluted loss per share is computed by dividing the net loss by the weighted average number of common stock shares adjusted for the dilutive effect of common stock equivalent shares outstanding during the period. Common stock equivalents consist of convertible senior notes (using the “as if converted” method), stock options, restricted stock shares and stock warrants. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect on earnings per share.

Share-Based Compensation

The Company accounts for share-based compensation following the provisions of FASB ASC Topic 718,Stock Compensation. The Company measures compensation cost for share-based payment awards granted to employees and non-employee directors at fair value using the Black-Scholes option-pricing model. The Company recognizes compensation expense on a straight-line basis over the service period for awards expected to vest. Compensation cost related to share-based payment awards granted to non-employees is adjusted each reporting period for changes in the fair value of the Company’s shares until the measurement date. The measurement date is generally considered to be the date when all services have been rendered or the date on which options are fully vested.

The Company recorded the following share-based compensation expense in accordance with ASC Topic 718:

	Year Ended December 31,
	2010		2011		2012
Research and development	$	58,120	$	158,102	$	519,717
General and administrative		107,691		285,683		1,149,545
Total		165,811		443,785		1,669,262

Allocations to research and development and general and administrative expense are based upon the department to which the associated employee reported. No related tax benefits of the share-based compensation expense have been recognized.

All employee stock options issued during 2012 and before December 8, 2010 were granted at an exercise price equal to or above the fair value of the stock at the date of grant; therefore, there was no intrinsic value.

For the year ended December 31, 2011, for financial reporting purposes, the Company determined that options granted on December 8, 2010 and March 11, 2011 were granted at an amount less than fair market value. The compensation element was recorded in 2011. No adjustment was recorded in 2010, as the amounts were immaterial.

Valuation Assumptions for Stock Option Plans

The employee share-based compensation expense recognized was determined using the Black-Scholes option-pricing model. Option-pricing models require the input of subjective assumptions and these assumptions can vary over time. The assumptions used to determine the fair value of each option grant are as follows:

	2010						2011					2012
	Employees			Non- Employees			Employees			Non- Employees		Employees			Non- Employees
Estimated dividend yield		0.0	%		0.0	%		0.0	%		N/A		0.0	%		0.0	%
Expected unit price volatility		75.2	%		76.7	%		73.9	%		N/A		72.5	%		53.5	%
Risk-free interest rate		2.2	%		3.1	%		2.5	%		N/A		1.3	%		1.6	%
Expected life of option (in years)		5.9			9.1			6.1			N/A		5.5			9.5
Weighted-average fair value per share	$	0.13		$	0.19		$	0.16			N/A	$	4.65		$	3.86

F-11

Expected stock price volatility is based on an average of several peer public companies due to the Company’s limited history. For purposes of identifying peer companies, the Company considered characteristics such as industry, length of trading history, similar vesting terms and in-the-money option status. The risk-free rate is based on the U.S. Treasury yield curve during the expected life of the option. The dividend yield percentage is zero because the Company neither currently pays dividends nor intends to do so during the expected option term. The expected term represents the average time that options are expected to be outstanding. The expected term of employee share options is based on the mid-point between the vesting date and the contractual term, which is in accordance with the simplified method prescribed in SEC Staff Accounting Bulletin No. 107,Share-Based Payment, and the expected term for share-based compensation granted to non-employees is the contractual life.

New Accounting Pronouncements

In May 2011, the FASB issued amended guidance on fair value measurements. This amended accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This accounting standard is effective on a prospective basis for interim and annual reporting periods beginning on or after December 15, 2011. As this accounting standard only requires enhanced disclosure, the adoption of this standard did not impact the Company’s financial position or results of operations.

In June 2011, the authoritative guidance for presentation of comprehensive income was amended to eliminate the option to present other comprehensive income and its components in the statement of changes in shareholders’ deficit. Companies can elect to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. The Company adopted this new guidance on January 1, 2012, as required and it did not have an impact on the Company’s financial position or results of operations.

In February 2013, FASB issued guidance establishing new requirements for disclosing reclassifications of items out of accumulated other comprehensive income. Specifically, (1) disclosure is required of the changes in components of accumulated OCI, (2) disclosure is required of the effects on individual line items in net income for each item of accumulated OCI that is reclassified in its entirety to net income, and (3) cross references are required to other disclosures that provide additional details for OCI items that are not reclassified in their entirety to net income. The guidance will be effective for interim and annual periods beginning after December 15, 2012. We are in the process of evaluating this guidance and currently do not believe that it will have a material effect on our consolidated financial statements.

3. Fair Value of Financial Instruments

The carrying values of cash equivalents, prepaid expenses, and accounts payable at December 31, 2012 approximated their fair values due to the short-term nature of these items. At December 31, 2011, the Company held warrant liabilities that were required to be measured at fair value on a recurring basis. The warrant liability was reclassified to additional paid-in capital upon completion of the Company’s IPO in February 2012.

The Company’s valuation of financial instruments is based on a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

At December 31, 2011 and December 31, 2012, financial instruments and respective fair values have been classified as follows:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2011
Assets:
Money Market Funds	$	12,634,219	$	—	$	—	$	12,634,219
Total assets at fair value:	$	12,634,219	$	—	$	—	$	12,634,219
Liabilities:
Warrant liabilities	$	—	$	—	$	1,120,849	$	1,120,849
Total Liabilities at Fair Value:	$	—	$	—	$	1,120,849	$	1,120,849

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2012
Assets:
Money Market Funds	$	67,783,021	$	—	$	—	$	67,783,021
Total assets at fair value:	$	67,783,021	$	—	$	—	$	67,783,021

F-12

The change in the fair value measurement using significant unobservable inputs (Level 3) is summarized below:

Balance at December 31, 2010	$	—
Allocation of convertible note proceeds to warrant		852,485
Allocation of long-term debt proceeds to warrant		273,094
Change in fair value recorded as interest income		(4,730	)
Balance at December 31, 2011	$	1,120,849
Change in fair value recorded as interest expense		17,461
Change in fair value recorded as interest income		(104,663	)
Reclassification of August 2011 Warrant to additional paid-in capital		(865,216	)
Reclassification of Hercules Warrant to additional paid-in capital		(168,431	)
Balance at December 31, 2012	$	—

The warrant liability represents the Company’s allocation of a portion of the proceeds from the August 2011 Notes and the December 2011 Note (both as defined in Note 7). The allocation of the proceeds from the August 2011 Notes and the December 2011 Note was based on the fair value of the warrant liability on the dates of grant. The Company accounted for the warrant liability in accordance with ASC Topic 480,Distinguishing Liabilities from Equity, which requires that a purchase option to acquire redeemable equity (either puttable or mandatorily redeemable) be reported as liabilities. The Company measured the fair value of the warrant liability based upon contemporaneous valuations. The August 2011 Warrants (as defined in Note 7) utilized the Black-Scholes pricing model while the Hercules Warrant (as defined in Note 7) utilized the Binomial model at each balance sheet date. The Company recorded changes in the fair value of the warrant liability as interest expense or interest income, as applicable.

The Company used significant assumptions in estimating the fair value of the warrant liability including the estimated volatility, risk free interest rate, estimated fair value of the preferred shares, and the estimated life of the warrant. These assumptions were used to establish an expected set of cash flows which were probability-weighted and discounted to present value to determine a fair value.

The August 2011 Warrant liability and Hercules Warrant liability were reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock, in connection with the Company’s IPO.

The estimated fair value of our August 2011 Notes (see Note 7) at December 31, 2011 was $5.0 million and its carrying value was $4.5 million. Fair value was determined based on available market information and appropriate valuations methodologies. The August 2011 Notes were converted to common stock in February 2012 when the Company completed its IPO.

The December 2011 Note (see Note 7) has a variable interest rate and accordingly, its carrying value approximates its fair value. At December 31, 2011 and December 31, 2012, the carrying value was $9.5 million and $9.8 million, respectively.

4. Research and License Agreements

Optimer Pharmaceuticals, Inc.

In March 2006, the Company, through its wholly owned subsidiary, Cempra Pharmaceuticals, Inc., entered into a Collaborative Research and Development and License Agreement (“Optimer Agreement”) with Optimer Pharmaceuticals, Inc. (“Optimer”). Under the terms of the Optimer Agreement, the Company acquired exclusive rights to further develop and commercialize certain Optimer technology worldwide, excluding member nations of the Association of Southeast Asian Nations.

In exchange for this license, during 2006 and 2007, the Company issued an aggregate of 125,646 common shares with a total fair value of $190,418 to Optimer. These issuances to Optimer were expensed as incurred in research and development expense.

F-13

In July 2010, the Company paid a $500,000 milestone payment to Optimer after the successful completion of its first solithromycin Phase 1 program. In July 2012, the Company paid a $1,000,000 milestone after the successful completion of its first solithromycin Phase 2 program. Both milestones were expensed as incurred in research and development expense. Under the terms of the Optimer Agreement, the Company will owe Optimer additional payments, contingent upon the achievement of various development, regulatory and commercialization milestone events. The aggregate amount of such milestone payments the Company may need to pay is based in part on the number of products developed under the agreement and would total $27,500,000 (including payments made to date) if four products are developed through FDA approval. The Company will also pay tiered mid-single-digit royalties based on the amount of annual net sales of its approved products.

The Scripps Research Institute

In June 2012, the Company entered into a license agreement with The Scripps Research Institute (“TSRI”), whereby TSRI licensed to the Company rights, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes. The rights licensed to the Company are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, the Company paid a one-time only, non-refundable license issue fee in the amount of $350,000 which was charged to research and development expense in the second quarter of 2012.

The Company is also obligated to pay annual maintenance fees to TSRI in the amount of (i) $50,000 each year for the first three years (beginning on the first anniversary of the agreement), and (ii) $85,000 each year thereafter (beginning on the fourth anniversary of the agreement). Each calendar year’s annual maintenance fees will be credited against sales royalties due under the agreement for such calendar year. Under the terms of the agreement, the Company must pay TSRI low single-digit percentage royalties on the net sales of the products covered by the TSRI patents for the life of the TSRI patents, a low single-digit percentage of non-royalty sublicensing revenue received with respect to countries in the nonexclusive territory and a mid-single-digit percentage of sublicensing revenue received with respect to countries in the exclusive territory, with the sublicensing revenue royalty in the exclusive territory and the sales royalties subject to certain reductions under certain circumstances. TSRI is eligible to receive milestone payments of up to $1.1 million with respect to regulatory approval in the exclusive territory and first commercial sale, in each of the exclusive territory and nonexclusive territory, of the first licensed product to achieve those milestones that is based upon each macrolide covered by the licensed patents. Each milestone is payable once per each macrolide. Each milestone payment made to TSRI with respect to a particular milestone will be creditable against any payment due to TSRI with respect to any sublicense revenues received in connection with the achievement of such milestone. Pursuant to the terms of the Optimer Agreement, any payments made to TSRI under this license for territories subject to the Optimer Agreement can be deducted from any sales-based royalty payments due under the Optimer Agreement up to a certain percentage reduction of the royalties due to Optimer.

Under the terms of the agreement, the Company is also required to pay additional fees on royalties, sublicensing and milestone payments if the Company, an affiliate with TSRI, or a sub licensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.

F-14

5. Furniture, Fixtures and Equipment

Furniture, fixtures and equipment consist of the following as of:

	Useful Life (years)		December 31,
			2011		2012
Computer equipment		2	$	191,332	$	191,889
Software		2		46,594		46,594
Furniture		5		33,890		38,792
Leasehold improvements		3		4,808		4,809
Total furniture, fixtures and equipment				276,624		282,084
Less accumulated depreciation				194,704		238,867
Furniture, fixtures and equipment, net			$	81,920	$	43,217

Depreciation expense for the years ended December 31, 2010, 2011 and 2012 was $46,920, $75,142 and $47,140, respectively. Depreciation expense for the cumulative period from inception through December 31, 2012 was $241,843.

F-15

6. Accrued Expenses

Accrued expenses are comprised of the following as of:

	December 31,
	2011		2012
Accrued professional fees	$	281,907	$	238,179
Accrued interest		236,000		82,236
Deferred rent		27,393		21,503
Total accrued expenses	$	545,300	$	341,918

7. Unsecured Convertible Promissory Note & Debt

Notes payable and debt consist of:

	December 31,
	2011		2012
10.0% Convertible Notes due 2016, net of unamortized discount of $542,073 and $0* at December 31, 2011 and 2012, respectively	$	4,457,927	$	—
9.55% Long-term Debt due 2015, net of unamortized discount of $896,105 and $550,105* at December 31, 2011 and 2012, respectively		9,503,895		9,849,895
Total notes payable and long-term debt		13,961,822		9,849,895
Less:
Current maturities		—		(2,226,610	)
Total	$	13,961,822	$	7,623,285

* The fair value of the warrants embedded within the 10.0% Convertible Notes ($847,755) and the 9.55% Long-term Debt ($273,094) is separately classified as a warrant liability at December 31, 2011 in the consolidated balance sheets. Upon the completion of the IPO in February 2012, the fair value of the warrant liability was adjusted to fair value and reclassified to additional paid-in capital as such, no additional fair value adjustments will be required.

10% Unsecured Convertible Promissory Note

In August 2011, the Company issued 10.0% unsecured convertible notes (the “August 2011 Notes”) in the original aggregate principal amount of $5,000,000.

Upon completion of the IPO, the August 2011 Notes and accrued interest of $5.3 million converted into 876,621 shares of common stock.

In connection with the issuance of the August 2011 Notes, the Company issued warrants (the “August 2011 Warrants”) that have a term of seven years. The August 2011 Warrants gave holders the right to purchase a certain number of Company shares or securities at a specified exercise price with respect to the first to occur of several scenarios. Upon completion of the IPO, the warrants became exercisable for an aggregate of 208,332 shares of the Company’s common stock at an exercise price of $6.00 per share and the related warrant liability was reclassified to additional paid-in capital.

9.55% Long-term Debt

In December 2011, the Company entered into a $20,000,000 loan and security agreement (the “December 2011 Note”) with Hercules Technology Growth Capital, Inc. (“Hercules”) and borrowed $10,000,000 upon closing. The principal amount outstanding under the $10,000,000 borrowing bears interest at the greater of (i) 9.55%, or (ii) the sum of 9.55% plus the prime lending rate, as published by the Wall Street Journal, minus 3.25% per annum. The terms of the December 2011 Note agreement provided that the Company could, at any time prior to October 1, 2012, request another borrowing in the aggregate amount of $10,000,000. The Company elected not to request the additional borrowing and let the option expire on September 30, 2012. The Company will be required to make interest only payments through March 31, 2013, which can be extended to June 30, 2013 upon satisfaction of certain conditions. Principal and interest payments will start after March 31, 2013 or any later extended date. The principal balance outstanding on the loan agreement and all accrued but unpaid interest thereunder will be due and payable on December 1, 2015. In addition, on

F-16

the earliest to occur of (i) the loan maturity date, (ii) the date that the Company prepays all of the outstanding advances and accrued interest, or (iii) the date that all of the advances and interest become due and payable, the Company must pay Hercules a fee of $400,000. The Company granted Hercules a security interest in all of its assets, except intellectual property. The Company’s obligations to Hercules include restrictions on borrowing, asset transfers, placing liens or security interests on the Company’s assets including its intellectual property, mergers and acquisitions and distributions to stockholders.

In connection with the loan agreement, the Company entered into a warrant agreement with Hercules (the “Hercules Warrant”), under which Hercules has the right to purchase 39,038 shares of the Company’s common stock. The exercise price is equal to $10.25 per share subject to adjustment in the event of a merger, reclassification, subdivision or combination of shares or stock dividend and subject also to antidilution protection. The Hercules Warrant expires on December 20, 2021. Proceeds equal to the fair value of the Hercules Warrant were recorded as a liability at the date of issuance and the borrowings under the December 2011 Note will be increased to equal the face amount of the borrowings plus interest through interest expense over the term of the loan using the effective interest method. Upon completion of the IPO, the warrant liability was reclassified to additional paid-in capital.

Scheduled Maturities:

Scheduled maturities of long-term debt are as follows:

Year Ending December 31:
2013	$	2,226,610
2014		3,235,386
2015(1)		4,938,004
Total	$	10,400,000
Less: Unamortized discount		(550,105	)
Less: Current portion of long-term debt		(2,226,610	)
Long-term debt	$	7,623,285

(1) On the date that all of the principal and interest of the December 2011 Note become due and payable, the Company must pay Hercules an end of term fee of $400,000, which is represented in year 2015 of the table above.

8. Commitments and Contingencies

The Company leases certain equipment and its office space under the terms of lease agreements which expire in November 2014.

Future minimum lease payments required under non-cancellable operating leases as of December 31, 2012 are as follows:

	Operating Leases
2013		126,280
2014		117,081
Total Minimum Lease Payments	$	243,361

Rent expense for the years ended December 31, 2010, 2011 and 2012 was $128,624, $125,969 and $114,642, respectively. Rent expense for the cumulative period from inception through December 31, 2012 was $668,726.

See Note 4—Research and Development and License Agreement for contingencies related to the Optimer Agreement and the TSRI agreement.

F-17

9. Shareholders’ Equity (Deficit)

Authorized Shares

Prior to the IPO, the Company was authorized to issue 100,000,000 common shares (the “Common Shares”) and subsequent to the IPO the Company is authorized to issue 80,000,000 shares of common stock (the “Common Stock”). Prior to the IPO, the Company was authorized to issue 72,115,040 preferred shares, 21,773,669 of which were designated as Class A redeemable convertible preferred shares (“Class A”), 7,692,308 of which were designated as Class B redeemable convertible preferred shares (“Class B”) and 42,649,063 of which were designated as Class C redeemable convertible preferred shares (“Class C”).

Common Shares

During 2011, the Company issued 38,815 Common Shares at a weighted average price of $1.81 per share for the exercise of share option grants.

During 2010, the Company issued 3,947 Common Shares at a weighted average price of $2.09 per share for the exercise of share option grants.

During 2009, the Company did not issue any Common Shares.

During 2008, the Company issued 13,469 Common Shares at a weighted average price of $0.95 per share for the exercise of share option grants.

During 2007, the Company issued 77,368 Common Shares at $1.62 per share to its Chief Executive Officer and President in conjunction with the closing of the second tranche of the Class A share financing.

During 2007, under the terms of the Optimer Agreement, the Company issued 61,335 Common Shares at $1.62 per share to Optimer upon the second tranche closing of the Class A share financing. Additionally, during 2006, the Company issued 10,965 and 53,346 Common Shares at $0.48 per share and $1.62 per share, respectively, in conjunction with the execution of the Optimer Agreement and closing of the first tranche of the Class A share financing.

During 2007, upon closing of the second tranche of the Class A share financing the Company converted 55,120 Class A shares into the same number of Common Shares as required under the terms of the Class A financing agreement when an original Class A participant elected not to participate in the second tranche closing.

During 2007, the Company issued 8,947 Common Shares at an average price of $0.57 per share for the exercise of share option grants.

During 2006, the Company issued 179,825 Common Shares at $0.001 per share to its founders subject to share restriction agreements. Under the terms of the share restriction agreements, the Company had the right to purchase the unvested portion of the restricted Common Share for the lesser of the original purchase price per share, or the then current fair market value, under certain conditions outlined in the share restriction agreements, including termination of employment. Additionally, vesting would have accelerated upon a change in control of the Company. One eighth of the shares were immediately vested upon issuance and the remaining shares vested at a rate of 1/48^th per month, commencing on January 1, 2006. As of December 31, 2010 all such shares were fully vested and released from all restrictions.

During 2006, the Company issued 30,702 Common Shares at $0.48 per share to members of the Company’s Board of Directors.

Common Stock

In connection with the IPO, all of the Company’s outstanding common and preferred shares, including accrued yield of $13.7 million, automatically converted into a total of 10,492,341 shares of its common stock and the preferred stock warrant liability was reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock. In addition, the Company’s August 2011 Notes and related accrued interest converted into 876,621 shares of common stock.

During 2012, the Company issued 10,351 shares of Common Stock at a weighted average price of $3.33 per share for the exercise of share option grants.

During October 2012, the Company sold 3,864,461 shares of its common stock at $6.50 per share to certain institutional accredited investors in a private placement financing, raising an aggregate of $25,118,997 before sales agency fees and offering costs of approximately $1.7 million. In connection with this financing, the Company entered into a registration rights agreement, pursuant to which it agreed to register the resale of the shares of common stock issued in the financing.

F-18

During February 2012, the Company completed its IPO issuing 9,660,000 shares of common stock, at a price of $6.00 per share, resulting in net proceeds to the Company of approximately $53.2 million after deducting underwriting discounts of $3.2 million and offering costs of $1.6 million.

Preferred Shares

During April 2010, the Company closed the second tranche of the Class C share financing and issued 2,000,700 Class C shares for $10.25 per share for total gross proceeds of $20,500,000, less issuance costs of $9,279.

During May 2009, the Company closed the first tranche of the Class C share financing and issued 2,488,686 Class C shares for $10.25 per share for total gross proceeds of $25,500,000, less issuance costs of $251,733.

During November 2007, the Company closed the Class B share financing and issued 809,717 Class B shares for $12.35 per share for total gross proceeds of $10,000,000, less issuance costs of $43,682.

During March 2007, the Company closed the second tranche of the Class A share financing and issued 1,557,895 Class A shares for $9.50 per share for total gross proceeds of $14,799,998, less issuance costs of $20,435.

During 2006, the Company closed the first tranche of the Class A share financing and issued 789,191 Class A shares for $9.50 per share, of which $4,300,000 was received in cash and $3,197,315 was converted from notes payable and accrued interest, less issuance costs of $150,570.

Yield

Yield was cumulative and payable to the Preferred Holders (as defined below) in advance of any distributions to common shareholders but only when, if and as declared by the Board of Directors. The holders of Class C (“Class C Holders”) earned annual yield at a rate of 8.0% of the original purchase price from May 2009 through the date of the Company’s IPO. Through May 2009, the holders of Class A and Class B (“Class A & B Holders”) earned annual yield at a rate of 8.0% of the original purchase price (the A, B and C Holders collectively referred to as “Preferred Holders”). Since inception through December 31, 2012, the Company has recorded cumulative yield of $13,726,613 through periodic accretions which increases the carrying value of the Preferred Shares (as defined below) and is charged against additional paid- in-capital to the extent available or shareholders’ equity (deficit).

Liquidation

Upon any liquidation, dissolution, winding up of the Company, or a merger or consolidation transaction in which the shareholders of the Company immediately prior to the merger or consolidation owned less than 50% of the voting power of the merged or consolidated entity or its parent immediately after such merger or consolidation (the “Liquidation Event”), the Class C Holders were entitled to receive an amount equal to their original cash investment amount plus all declared but unpaid dividends thereon plus a premium preference of 50% of their original cash investment (the “Liquidating Amount”), the Class A and B Holders were entitled to receive an amount equal to their original cash investment amount plus all declared but unpaid dividends thereon and all Preferred Holders would participate with the common holders as if the Preferred Holders share had been converted to common immediately prior to the Liquidation Event. If the cumulative distributions, as defined, exceeded $350,000,000, the Class C Holders’ premium preference would have been reduced to zero.

Conversion

The Preferred Holders’ shares were convertible into common shares at any time at the option of the holder, subject to adjustment. The initial conversion price of the Class A, Class B and Class C shares (collectively, “Preferred Shares”) would have been equal to the consideration paid per share, and the initial conversion ratio shall be 1:1. In accordance with the anti-dilution protection described below in connection with the Class C transactions, the conversion ratio for Class B shares was changed to 1.0984 common shares for each preferred share.

Automatic Conversion

The Preferred Shares would have automatically converted into Common Shares upon (i) consummation of a firm commitment underwritten public offering with a price per share not less than $30.74 and aggregate proceeds in excess of $40,000,000 (a “Qualified Public Offering”) or (ii) an affirmative vote by two-thirds of Preferred Holders and 60% of the Class C Holders, including at least one of two specified Class C Holders. Upon automatic conversion, any unpaid yield was to be paid in cash or, in the case of a Qualified Public Offering, upon the affirmative vote by two-thirds of Preferred Holders and 60% of the Class C Holders, including at least one of two specified Class C Holders, in Common Shares (see Note 13).

F-19

Anti-dilution Protection

The Preferred Holders had proportional anti-dilution protection for share splits, share dividends and similar recapitalizations. Anti-dilution price protection for additional sales of securities by the Company would have been on a broad-based weighted average basis. During 2009 and 2010, the Company recorded $73,995 and $30,082 to deficit during the development stage for the beneficial conversion given to the Preferred Holders of the Class B shares as anti-dilution protection, which was related to the issuance of the Class C shares.

Voting

The Preferred Shares could vote with Common Shares on an as converted basis. Preferred Holders would generally vote together with the Common Shares as a single class, but would also have class vote approval rights as provided by law and others as specified.

Protective Provisions

Consent of at least two-thirds of Preferred Holders and 60% of the Class C Holders, including at least one of two specified Class C Holders would have been required for (i) any sale of the Company or substantially all of its assets, (ii) any merger of the Company with another entity, (iii) any liquidation, dissolution, or winding up of the Company, (iv) any amendment of the Company’s charter or bylaws that would adversely alter or affect holders of the Preferred Shares, (v) any action that authorizes or issues additional Preferred Shares of the Company (whether of any existing series of preferred shares or of a new class of equity or debt) having preferences prior to or at parity with the Preferred Shares as to dividends, liquidation, redemption, or assets, or (vi) any other action that alters any of the powers, preferences, privileges, or rights of the Preferred Shares so as to adversely affect the Preferred Shares.

Redemption Right

The Class C Holders had the right and option, after the fifth anniversary of the original issue date, by a vote of 60% of the Class C Holders (including at least 1 of 2 specified holders), to require the Company to redeem the Class C Shares at a redemption price equal to the original price per share plus all cumulative and undeclared yield. If the Class C Holders elected to redeem their shares, the Class A and B Holders had the right and option, by a vote of holders of two-thirds of the Class A and B shares, voting together as a single class, to require the Company to redeem the Class A and B shares at a redemption price equal to the original price per share plus all cumulative and undeclared dividends. The Company could have redeemed the Preferred Shares from any source of funds legally available 90 days following the date of the redemption vote. If no funds or insufficient funds were legally available, the unredeemed shares were to be carried forward and entitled to the yield, conversion and other rights, preferences, privileges and restrictions of the Preferred Shares until such unredeemed shares had been redeemed and the redemption price had been paid.

Registration Rights

The Preferred Holders had certain rights to require the Company to register their Preferred Shares with the Securities and Exchange Commission.

Participation Rights

Investors had a pro rata right, based on their respective percentage equity ownership on an as converted, fully diluted basis, to purchase sufficient common share equivalents to maintain their respective ownership in the Company on any future offerings or issuances by the Company, subject to customary exclusion, including but not limited to shares issued under share options plans for employees, officers and consultants. These participation rights terminated upon a qualified public offering.

10. Stock Option Plans

The Company adopted the 2006 Stock Plan in January 2006 (“the 2006 Plan”). The 2006 Plan provided for the granting of incentive share options, nonqualified share options and restricted shares to Company employees, representatives and consultants. As of December 31, 2012, there were options for an aggregate of 702,185 shares issued and outstanding under the 2006 Plan.

F-20

The Company’s board of directors adopted the 2011 Equity Incentive Plan in October 2011 (the “2011 Plan”), which authorizes the issuance of up to 1,526,316 shares under the 2011 Plan. As of December 31, 2012, there were 1,063,399 options shares available under the 2011 Plan.

The 2011 Plan became effective upon the conversion of Cempra Holdings, LLC from a limited liability company to a corporation on February 2, 2012 and was adopted by the Company’s shareholders immediately thereafter. Upon effectiveness of the 2011 Plan, the Company eliminated the authorization for any unissued shares previously reserved under the Company’s 2006 Plan. The stock awards previously issued under the 2006 Plan remain in effect in accordance with the terms of the 2006 Plan.

The following table summarizes the Company’s 2006 and 2011 Plan activity:

	Number of Options			Exercise Price		Contractual Term  (in years)		Intrinsic Value (1)
Outstanding—December 31, 2009		548,567		$	2.00
Granted		391,610			2.09
Exercised		(3,947	)		2.09
Forfeited		(156,616	)		2.19
Expired		(23,097	)		2.47
Outstanding—December 31, 2010		756,517			2.00
Granted		101,772			2.28
Exercised		(38,815	)		1.81
Forfeited		(84,153	)		2.19
Expired		(19,510	)		2.09
Outstanding—December 31, 2011		715,811			2.00
Granted		475,417			7.45
Exercised		(10,351	)		3.33
Forfeited		(18,275	)		5.86
Expired		—			—
Outstanding—December 31, 2012		1,162,602			4.18		7.66	$	3,068,483
Exercisable—December 31, 2012		636,399			2.91		6.76		2,343,304
Vested and expected to vest at December 31, 2012(2)		1,111,678		$	4.10		7.61	$	3,003,006

(1) Intrinsic value is the excess of the fair value of the underlying common shares as of December 31, 2012 over the weighted-average exercise price.

(2) The number of stock options expected to vest takes into account an estimate of expected forfeitures.

The following table summarizes certain information about all options outstanding as of December 31, 2012:

	Options Outstanding				Options Exercisable
Exercise Price	Number of Options		Weighted Average Remaining Contractual Term (in years)		Number of Options		Weighted Average Remaining Contractual Term (in years)
$0.48		33,686		3.42		33,686		3.42
$1.43		24,737		3.60		24,737		3.60
$1.62		39,265		3.97		39,265		3.97
$2.09		450,128		7.33		312,043		7.21
$2.28		59,064		8.16		27,260		8.16
$2.47		95,305		5.34		95,305		5.34
$6.72		66,500		9.39		3,750		9.39
$7.47		119,000		9.27		3,750		9.60
$7.55		25,000		9.25		18,750		9.25
$7.62		249,917		9.22		77,853		9.22
		1,162,602				636,399

F-21

During the year ended December 31, 2010, 2011 and 2012, the Company recorded $165,811, $443,785, and $1,669,262 in share-based compensation expense, respectively. From inception to December 31, 2012, the Company has recognized $2,692,570 in share-based compensation expense. As of December 31, 2012, approximately $882,000 of total unrecognized compensation cost related to unvested share options is expected to be recognized over a weighted-average period of 1.25 years.

11. Income Taxes

No provision for U.S. Federal or state income taxes has been recorded as the Company has incurred net operating losses since inception.

Significant components of the Company’s deferred income tax assets as of December 31, 2011 and 2012 consist of the following:

	2011		2012
Current
Deferred income tax assets
Other current assets	$	41,500	$	26,400
Total net deferred income taxes, current		41,500		26,400
Less valuation allowance		41,500		26,400
Total net deferred income taxes, current	$	—	$	—
Non-current
Deferred income tax assets
Tax loss carryforwards	$	19,628,400	$	26,382,100
Contribution carryforwards		22,700		25,800
Tax credits		2,496,600		2,498,800
Other assets		5,230,500		7,412,800
Total net deferred income taxes, non-current		27,378,200		36,319,500
Less valuation allowance		27,378,200		36,319,500
Total net deferred income tax	$	—	$	—

At December 31, 2011 and 2012, the Company provided a full valuation allowance against its net deferred tax assets since at that time, the Company could not assert that it was more likely than not that these deferred tax assets would be realized. There was an increase in the valuation allowance in the current year in the amount of $8,926,200, all of which was allocable to current operating activities.

As of December 31, 2012, the Company had federal net operating loss carryforwards of approximately $68,634,000 and state net economic loss tax carryforwards of approximately $67,550,600. The net operating loss carryforwards begin to expire in 2026 and 2021 for federal and state tax purposes, respectively. The Company also had federal research and development credit carryforwards of approximately $2,498,800 which begin to expire in 2026 and federal charitable contribution carryforwards of approximately $75,900 which begin to expire in 2014.

The Tax Reform Act of 1986 contains provisions which limit the ability to utilize the net operating loss carryforwards in the case of certain events including significant changes in ownership interests. If the Company’s net operating loss carryforwards are limited, and the Company has taxable income which exceeds the permissible yearly net operating loss carryforward, the Company would incur a federal income tax liability even though net operating loss carryforwards would be available in future years.

The reasons for the difference between actual income tax expense (benefit) for the years ended December 31, 2010, 2011 and 2012 and the amount computed by applying the statutory federal income tax rate to losses before income tax (benefit) are as follows:

F-22

	2010						2011						2012
	Amount			% of Pretax Earnings			Amount			% of Pretax Earnings			Amount			% of Pretax Earnings
United States federal tax at statutory rate	$	(6,689,500	)		34	%	$	(7,215,100	)		34	%	$	(8,237,100	)		34	%
State taxes (net of federal benefit)		(887,300	)		5	%		(957,100	)		5	%		(1,092,600	)		4.5	%
Nondeductible expenses		(178,400	)		1	%		12,700			0	%		342,300			(1.4	%)
Gain on property distribution		—			0	%		—			0	%		—			0	%
Loss from pass-through entity		628,200			(3	%)		468,700			(2	%)		58,700			(0.2	%)
Credits		(593,100	)		3	%		(557,500	)		3	%		—			0	%
Other, net		182,400			(1	%)		(61,900	)		0	%		2,500			0	%
Change in valuation allowance		7,537,700			(38	%)		8,310,200			(39	%)		8,926,200			(36.9	%)
Provision for income taxes	$	—			0	%	$	—			0	%	$	—			0	%

Effective January 1, 2007, the Company adopted the provisions of the FASB guidance on accounting for uncertainty in income taxes. These provisions provide a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under these provisions, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Assessing an uncertain tax position begins with the initial determination of the sustainability of the position and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The cumulative effect of this adoption is recorded as an adjustment to the opening balance of its retained deficit on the adoption date.

As a result of adopting this guidance, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. As of December 31, 2012, the Company had no unrecognized tax benefits.

The Company’s policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. At the adoption date of January 1, 2007 and as of December 31, 2012, the Company had no accrued interest or penalties related to uncertain tax positions.

The Company has analyzed its filing positions in all significant federal and state jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to United States Federal, state, and local tax examinations by tax authorities for years before 2009 although carryforward attributes that were generated prior to 2009 may still be adjusted upon examination by the taxing authorities if they either have been or will be used in a future period. No income tax returns are currently under examination by taxing authorities.

12. Net Loss Per Share

Basic and diluted net loss per common share was determined by dividing net loss attributable to common shareholders by the weighted average common shares outstanding during the period. The Company’s potentially dilutive shares, which include redeemable convertible preferred shares, convertible debt, warrants and common share options, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

F-23

The following table presents the computation of basic and diluted net loss per common share:

	Year Ended December 31,
	2010			2011			2012
Net loss attributable to common shareholders	$	(22,913,187	)	$	(24,983,840	)	$	(24,540,377	)
Weighted average common share outstanding, basic and diluted		491,722			525,689			19,882,585
Net loss per share attributable to common shareholders, basic and diluted	$	(46.60	)	$	(47.53	)	$	(1.23	)

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

	December 31,
	2010		2011		2012
Redeemable convertible preferred share		7,034,894		7,670,733		691,623
Convertible debt		—		200,942		44,682
Warrants outstanding		—		45,869		239,021
Stock options outstanding		612,882		755,467		1,049,660
Class C Purchase Options Outstanding		230,667		—		—
		7,878,443		8,673,011		2,024,986

F-24

13. Selected Quarterly Data (unaudited, in thousands, except for loss per share data)

	Quarter Ended
	March 31, 2012			June 30, 2012			September 30, 2012			December 31, 2012
Operating expenses
Research and development	$	1,876		$	7,424		$	3,156		$	4,413
General and administrative		972			1,777			1,495			1,825
Loss from operations		2,848			9,201			4,651			6,238
Interest income		(105	)		(1	)		(1	)		(1	)
Interest expense		407			328			331			331
Other income		—			—			—			—
Net Loss	$	3,150		$	9,528		$	4,981		$	6,568
Accretion of redeemable convertible preferred shares		314			—			—			—
Net loss attributable to common shareholders	$	3,464		$	9,528		$	4,981		$	6,568
Net loss per share—basic and diluted	$	(0.26	)	$	(0.45	)	$	(0.24	)	$	(0.27	)
Shares used in calculating basic and diluted net loss per share		13,251			21,035			21,038			24,147
	Quarter Ended
	March 31, 2011			June 30, 2011			September 30, 2011			December 31, 2011
Operating expenses
Research and development	$	4,392		$	4,361		$	6,661		$	1,458
General and administrative		880			806			965			1,057
Loss from operations		5,272			5,167			7,626			2,515
Interest income		(1	)		—			(1	)		(80	)
Interest expense		—			—			291			432
Other income		—			—			—			—
Net Loss	$	5,271		$	5,167		$	7,916		$	2,867
Accretion of redeemable convertible preferred shares		941			940			941			941
Net loss attributable to common shareholders	$	6,212		$	6,107		$	8,857		$	3,808
Net loss per share—basic and diluted	$	(12.16	)	$	(11.65	)	$	(16.59	)	$	(7.13	)
Shares used in calculating basic and diluted net loss per share		511			524			534			534

F-25