Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K for the year ended December 31, 2008.

EXECUTIVE SUMMARY

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel prescription pain management products. On May 20, 2008, the U.S. Food and Drug Administration (FDA) approved our first product, ENTEREGŪ(alvimopan), for the management of postoperative ileus following bowel resection surgery (POI). POI causes significant discomfort for patients and results in increased expense to healthcare providers. ENTEREG is specifically indicated to accelerate the time to upper and lower gastrointestinal (GI) recovery following partial large or small bowel resection surgery with primary anastomosis. We also have a number of product candidates in various stages of clinical and preclinical development.

For the six months ended June 30, 2009, our total revenues and net loss were $15.7 million and $29.7 million, respectively. Net shipments of ENTEREG for the three and six months ended June 30, 2009 were $2.9 million and $4.9 million, respectively, of which we recognized $2.4 million and $3.8 million, respectively, as net product sales under our revenue recognition policy. We will need sales of ENTEREG to increase significantly beyond current levels before we will be able to achieve profitability and positive cash flow from operations. Ultimately, we may never generate sufficient revenues from ENTEREG for us to reach profitability, generate positive cash flow or sustain, on an ongoing basis, our current or projected levels of operations.

In June 2009, we announced a restructuring that resulted in the reduction of approximately 45 positions, or 28% of our workforce, as well as other cost saving initiatives. Our primary focus going forward will continue to be on ENTEREG and the advancement of our clinical programs. We have reduced and restructured our discovery group to focus on late-stage, preclinical compounds, with fewer resources dedicated to early-stage programs. Once this reduction in force and other cost savings initiatives are fully in place, we expect that annualized net cash used in operating activities will be reduced by approximately $12 million. During the three months ended June 30, 2009, the Company recorded a restructuring charge of $4.2 million, consisting of $2.2 million related to employee severance and benefits related costs and a $2.0 million non-cash asset impairment charge.

ENTEREG for POI

Together with our partner, Glaxo Group Limited (Glaxo), we launched ENTEREG in the United States in mid-2008. ENTEREG is detailed primarily by Glaxo's national hospital-based sales organization. We are co-promoting ENTEREG in certain hospitals with a field force that numbers approximately 25 persons. ENTEREG was approved in POI subject to a Risk Evaluation and Mitigation Strategy (REMS) under which the product is available only to hospitals that perform bowel resections and are enrolled in the ENTEREG Access Support and Education (E.A.S.E.) Program. As of June 30, 2009, approximately 1,425 hospitals have registered under the E.A.S.E. program. Additionally, as of June 30, 2009, we estimate that approximately 600 hospitals had accepted ENTEREG for inclusion on their formularies, including 365 of the 1,400 hospitals that perform approximately 80% of the bowel resection surgeries in the United States.

Under our agreement with Glaxo, we have a profit-sharing arrangement under which we are allocated 45% of profits and losses, as defined, and Glaxo is allocated 55% of profits and losses. Profits are calculated as net sales of ENTEREG less certain agreed-upon costs and are subject to certain adjustments. Beginning in mid-2011, the parties will share such profits and losses equally.

As required by our FDA approval letter for ENTEREG, we began a Phase 4 clinical trial in the first quarter of 2009 intended to evaluate the safety and efficacy of ENTEREG in patients undergoing radical cystectomy for bladder cancer.

Delta Opioid Receptor Agonists

We are collaborating with Pfizer Inc. (Pfizer) for the development and commercialization of the delta opioid receptor agonist compounds ADL5859 and ADL5747 (Pfizer compounds PF-04856880 and PF-04856881, respectively), for the treatment of pain. The delta receptor is one of three opioid receptors that are believed to modulate pain, although all marketed opioid drugs interact primarily with one such receptor, the mu receptor. We have identified a series of novel, orally-active delta agonists that selectively stimulate the delta opioid receptor. Our goal is to develop medications that produce pain relief similar to traditional mu opioids, while reducing or eliminating some typical narcotic side effects.

In early 2009, we initiated several pharmacokinetic (PK) studies of ADL5859 and ADL5747 following the results of several Phase 2a studies with ADL5859 in 2008 that showed no statistically significant difference in efficacy versus placebo, along with an excessive degree of pharmacokinetic variability. The results of these recent PK studies appear to explain the variability seen in the previous Phase 2a studies and Pfizer and we intend to initiate Phase 2a proof-of-concept studies in two chronic pain indications in the fourth quarter of 2009.

Opioid Bowel Dysfunction Program

Opioid receptors in the GI tract, or peripheral opioid receptors, regulate functions such as motility, water secretion and absorption. Stimulation of these GI mu-opioid receptors by morphine, or other opioid analgesics, can slow gut motility and disrupt normal GI function that allows for the passage, absorption and excretion of ingested solid materials resulting in a number of symptoms, including severe constipation. In patients who take opioid analgesics to treat chronic and persistent pain, this condition is known as opioid bowel dysfunction (OBD).

We are developing ADL7445 to treat OBD. ADL7445 is a proprietary, small molecule, peripherally-acting mu-opioid receptor antagonist intended to block the adverse effects of opioid analgesics on the GI tract without affecting analgesia. We intend to submit an Investigational New Drug Application (IND) for ADL7445 in the third quarter of 2009 and to initiate clinical evaluation of ADL7445 thereafter.

Discovery Research and In-licensing Efforts

Following our restructuring in June 2009, we reorganized our discovery group to focus on late-stage, preclinical compounds, with fewer resources dedicated to early-stage programs. Further, we believe there may be opportunities to expand our product portfolio through the acquisition or in-licensing of products and/or product development candidates and we intend to continue to explore and evaluate such opportunities.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments were $108.6 million at June 30, 2009 and $131.9 million at December 31, 2008, representing 93% and 91% of our total assets, respectively. We invest excess cash predominantly in U.S. Treasury obligations. Our working capital, which is calculated as current assets less current liabilities, was $89.1 million at June 30, 2009 compared to $112.3 million at December 31, 2008. The decrease in cash, cash equivalents and short-term investments and working capital was primarily from the use of cash to fund our operations, offset partially by $9.3 million received from Glaxo as a result of the modification of certain payment provisions under our collaboration agreement.

The following is a summary of selected cash flow information for the six months ended June 30, 2009 and 2008:

                                                    Six Months Ended June 30,
                                                     2009               2008
     Net loss                                    $ (29,729,187 )    $ (1,570,066 )
     Adjustments for non-cash operating items       (1,038,617 )      (3,036,302 )

     Net cash operating loss                       (30,767,804 )      (4,606,368 )
     Net change in assets and liabilities            9,178,868           610,774

     Net cash used in operating activities       $ (21,588,936 )    $ (3,995,594 )

     Net cash provided by investing activities   $  20,788,256      $    701,999

     Net cash used in financing activities       $          -       $   (387,217 )

Net Cash Used in Operating Activities

Net cash used in operating activities of $21.6 million and $4.0 million for the six months ended June 30, 2009 and 2008, respectively, resulted primarily from research and development expenditures associated with our product candidates and selling, general and administrative expenses, offset by payments received under the Glaxo and Pfizer collaboration agreements. For the six months ended June 30, 2009 and 2008, we received net payments of $12.1 million and $23.4 million, respectively, under such collaboration agreements. Of the $12.1 million received during the six months ended June 30, 2009, $9.3 million was related to the acceleration of payments owed by Glaxo to the Company under the terms of Amendment No. 4 of the Glaxo collaboration agreement. The $23.4 million received during the six months ended June 30, 2008 included a $20.0 million milestone payment related to the FDA's approval of ENTEREG. In addition, we received $4.5 million of cash related to net shipments of ENTEREG during the six months ended June 30, 2009.

Net Cash Provided By Investing Activities

Net cash provided by investing activities relates to purchases and maturities of investment securities, as well as capital expenditures for property and equipment. We expect to fund a significant portion of our future operations through the sale or maturities of investments in our portfolio, which consist primarily of U.S. Treasury obligations.

Net cash provided by investing activities was $20.8 million for the six months ended June 30, 2009 as compared to $0.7 million for the six months ended June 30, 2008. The increase in cash provided by investing activities for the six months ended June 30, 2009 is primarily attributable to an increase in cash provided from the net maturities of available-for-sale securities.

Outlook

We expect to use our cash, cash equivalents and short-term investments to fund our operations. Since inception, we have experienced significant operating losses and negative operating cash flow and have funded our operations primarily from the proceeds received from the sale of our equity securities, as well as from amounts received under collaboration agreements. Our accumulated deficit at June 30, 2009 was $484.8 million and we expect to continue to incur substantial losses for at least the next several years.

We may never generate significant product sales, achieve profitable operations or generate positive cash flows from operations and, even if profitable operations are achieved, they may not be sustained on a continuing basis or sufficient to support our current or projected levels of investment in our research and development programs and our other operations. At this time, we cannot accurately assess a number of factors that will influence the levels of future product sales, such as the degree of market acceptance, patent protection and exclusivity of ENTEREG, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch other product candidates. However, we will need sales of ENTEREG to increase significantly beyond current levels before we will be able to achieve profitability and positive cash flows from operations. In June 2009, we announced a restructuring that we expect will reduce annualized net cash used in operating activities by approximately $12 million. We believe that our existing cash, cash equivalents and short-term investments are adequate to fund our restructured operations into 2012 based upon the level of research and development and marketing and administrative activities we believe will be necessary to achieve our strategic objectives. We may need to obtain funding for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at all.

ENTEREG

Our ability to generate positive cash flow from operations depends, in large part, on our ability to successfully commercialize ENTEREG in the United States. To that end, we expect that sales and marketing expenses associated with the product will continue to increase for the remainder of 2009. Prior to the FDA approval of ENTEREG, costs associated with the manufacture of alvimopan were expensed to research and development. As a result, at June 30, 2009, we have inventory related to alvimopan that carries a zero-cost and is not reflected on the June 30, 2009 balance sheet. Certain of this inventory is expected to be used in further research and development activities, with the remaining inventory available for commercial sale. To the extent that this inventory is sold, our cost of product sales will not reflect costs associated with such product manufacture, and our gross margins will be favorably impacted. We currently are unable to estimate the timing of the impact to future profitability resulting from the sell-through of any inventory manufactured after FDA approval of ENTEREG for POI.

Research and Development

Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products. We expect to continue to incur significant levels of research and development expenditures related to our clinical product candidates. We expect to begin or continue a number of clinical programs including, among others, a Phase 4 study of ENTEREG in patients undergoing radical cystectomy, additional Phase 2a clinical trials of ADL5747 and ADL5859 and Phase 1 clinical trials for ADL7445. We also expect to continue to conduct research, preclinical studies and process development activities on our other preclinical product candidates, although as a result of our recent restructuring, the level of such expenditures will be significantly reduced compared to previous years. Should these programs advance to later stages of development, it is likely that expenses related to these efforts will increase over time.

RESULTS OF OPERATIONS

This section should be read in conjunction with the discussion above under "Liquidity and Capital Resources."

Product Sales

Net product sales are derived solely from ENTEREG. ENTEREG was approved by the FDA in May 2008 and product shipments to hospitals began in June 2008. In accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, and Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists, we defer recognition of revenue associated with the first shipment of ENTEREG to each hospital customer as we are not yet able to reasonably estimate future returns. When an existing customer places a new order, we recognize product sales on the previous shipment for an amount equal to the lesser of (a) the previous shipment or (b) the new order. Hospital orders are processed through wholesalers; however, ENTEREG is drop-shipped from Glaxo's warehouse directly to a registered hospital. Wholesalers remit payment to Glaxo and, on a monthly basis, Glaxo remits the net proceeds to us. We record product sales net of prompt payment discounts, returns and other discounts as reported to us by Glaxo. While we undertake certain procedures to review the reasonableness of this information, we cannot obtain absolute assurance over the accounting methods and controls over such information utilized by Glaxo.

Net shipments of ENTEREG for the three and six months ended June 30, 2009 were $2.9 million and $4.9 million, respectively, and we recognized net product sales of $2.4 million and $3.8 million under our revenue recognition policy during the three and six months ended June 30, 2009, respectively. Since our commercial launch in June 2008, approximately 450 hospitals have reordered ENTEREG. We have a customer deposit balance of $1.0 million at June 30, 2009. Customer deposits represent net shipments made for which payment has been received from Glaxo, but which have not yet been recognized as product sales revenue.

No product sales were recognized prior to the third quarter of 2008.

Contract Revenues

Contract revenues are derived from our collaboration agreements with Glaxo and Pfizer and include milestone payments, cost reimbursement, amortization of up-front license fees and other revenue. Contract revenues were $6.7 million and $27.0 million for the three months ended June 30, 2009 and 2008, respectively, and were $11.9 million and $33.2 million for the six months ended June 30, 2009 and 2008, respectively. Contract revenues for the three and six months ended June 30, 2008 were favorably impacted by a $20.0 million milestone payment received from Glaxo in conjunction with the FDA approval of ENTEREG. In addition, Pfizer contract revenues decreased due primarily to reduced amortization of deferred licensing fees resulting from increases to the estimated performance period during the third quarter of 2008 and the first quarter of 2009. These decreases were partially offset by increased reimbursement under the ENTEREG profit-sharing arrangement and revenue that was recognized related to $9.3 million of payments received from Glaxo during the six months ended June 30, 2009 under the terms of Amendment No. 4 to the collaboration agreement. Of the $9.3 million received, $0.9 million was recognized as revenue and $8.4 million was deferred and is being recognized as revenue on a straight-line basis over the estimated remaining performance period under the collaboration agreement, which extends to March 2016. See Note 6 to the financial statements in Part 1, Item 1 of this report.

Cost of Product Sales

Cost of product sales was $0.2 million and $0.4 million for the three and six months ended June 30, 2009, respectively, and consisted primarily of royalty payments under certain alvimopan license agreements and FDA

fees. Prior to the FDA approval of ENTEREG, costs associated with the manufacture of alvimopan were expensed to research and development. Since product shipped during the six months ended June 30, 2009 was manufactured prior to FDA approval, no manufacturing costs were incurred or recorded in cost of product sales during the six months ended June 30, 2009.

Research and Development Expenses

Our research and development expenses can be identified as internal or external expenses. External expenses include expenses incurred with clinical research organizations, contract manufacturers and other third-party vendors. Internal expenses include expenses such as personnel, laboratory and overhead expenses.

Research and development expenses were $12.0 million and $13.3 million for the three months ended June 30, 2009 and 2008, respectively, and were $24.3 million and $24.7 million for the six months ended June 30, 2009 and 2008, respectively, and consist of the following:

                                             Three Months Ended June 30,       Six Months Ended June 30,
                                                2009              2008            2009            2008
External research and development
expenses:
ENTEREG POI program                        $     1,307,814    $  1,958,483   $    2,428,153   $  3,667,227
Delta agonist program                            1,811,873       2,754,976        2,677,805      4,128,421
OBD program                                      1,454,980          50,596        2,957,149         50,596
Other programs                                   1,542,932       1,145,414        3,066,006      3,487,389

Total external research and development
expenses                                         6,117,599       5,909,469       11,129,113     11,333,633
Total internal research and development
expenses                                         5,854,592       7,352,707       13,165,701     13,349,615

Total research and development expenses    $    11,972,191    $ 13,262,176   $   24,294,814   $ 24,683,248

We report all expenses gross within our statements of operations in accordance with Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, and, as such, the above table does not reflect any cost reimbursements from our collaboration partners.

Total research and development expenses decreased for the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008 primarily due to lower costs of clinical studies incurred during 2009 in our delta agonist program and lower expenses in our ENTEREG POI program. These decreases were partially offset by higher expenses related to the development of our OBD program.

There are significant risks and uncertainties inherent in the preclinical and clinical studies associated with each of our research and development programs. These studies may yield varying results that could delay, limit or prevent the advancement of a program through the various stages of product development and significantly impact the costs to be incurred, and time involved, in bringing a program to completion. As a result, the cost to complete such programs, as well as the period in which net cash inflows from significant programs are expected to commence, are not reasonably estimable.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses were $9.5 million and $7.2 million for the three months ended June 30, 2009 and 2008, respectively, and were $17.4 million and $12.8 million for the six months ended June 30, 2009 and 2008, respectively. The increase in 2009 compared to 2008 was primarily driven by higher sales and marketing expenses associated with the commercialization of ENTEREG.

Restructuring Charge

As a result of our June 2009 restructuring, we recorded a charge of $4.2 million for the three and six months ended June 30, 2009, consisting of $2.2 million of employee severance and benefit related costs and a $2.0 million non-cash impairment charge primarily related to leasehold improvements and laboratory equipment used for activities which were eliminated pursuant to our restructuring. There was no restructuring charge for the three or six months ended June 30, 2008.

Interest Income, Net

Our interest income, net was $0.3 million and $1.0 million for the three months ended June 30, 2009 and 2008, respectively, and was $0.8 million and $2.7 million for the six months ended June 30, 2009 and 2008, respectively. This decrease was due to lower investment balances resulting primarily from the use of cash in operating activities and an overall decline in interest rates.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. In preparing these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We develop and periodically change these estimates and assumptions based on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2008 in the "Critical Accounting Policies and Estimates" section and the "Recently Issued Accounting Pronouncements" section of Part II, Item 7 and in Note 2 to the financial statements within Part II, Item 8.