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). 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. Delayed GI recovery causes significant discomfort for patients and results in increased expense to healthcare providers. We also have a number of product candidates in various stages of clinical and preclinical development.

For the nine months ended September 30, 2009, our total net revenues and net loss were $24.4 million and $40.9 million, respectively. Net shipments of ENTEREG for the three and nine months ended September 30, 2009 were $4.0 million and $8.9 million, respectively, of which we recognized $3.3 million and $7.2 million, respectively, as net product sales under our revenue recognition policy. We will need net 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 September 2009, we acquired from Eli Lilly and Company (Lilly) the exclusive worldwide rights to OpRA III (Adolor compound ADL5945), a Phase 1 clinical-stage product candidate. ADL5945 is a potent opioid receptor antagonist, with potential use in multiple therapeutic indications. We intend initially to develop ADL5945 to treat opioid bowel dysfunction (OBD) and plan to initiate clinical trials of this compound for this indication in early 2010. ADL5945 will be developed in parallel with ADL7445 as part of our OBD Program. Under the terms of the agreement, we paid Lilly $2.0 million in September 2009. In addition to the $2.0 million payment, we will be required to pay royalties on net sales of the product and up to approximately $70 million in milestones, which are contingent upon achievement of pre-defined, late-stage clinical and regulatory events and achievement of certain sales targets.

ENTEREG

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 co-promote ENTEREG in certain hospitals with a field force that numbers approximately 25 persons. ENTEREG was approved 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 September 30, 2009, approximately 1,550 hospitals have registered in the E.A.S.E. Program. Additionally, as of September 30, 2009, we estimate that approximately 725 hospitals had accepted ENTEREG for inclusion on their formularies, including 435 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 and losses 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 today all marketed opioid drugs interact primarily with only 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 seen with mu opioids, including dependence, sedation and respiratory depression.

In October 2009, Pfizer and we initiated a Phase 2a proof-of-concept study of ADL5859 and ADL5747 in osteoarthritis patients. Pfizer and we also intend to initiate a Phase 2b proof-of-concept study of ADL5747 in post-herpetic neuralgia in early 2010.

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 OBD.

We are developing ADL7445 and ADL5945 to treat OBD. These compounds are small molecule, mu opioid receptor antagonists intended to block the adverse effects of opioid analgesics on the GI tract without affecting analgesia. We submitted an Investigational New Drug Application (IND) for ADL7445 in September 2009 and intend to initiate clinical evaluation of this compound during the fourth quarter of 2009. We licensed ADL5945 from Lilly in September 2009 and intend to initiate clinical testing of this compound in early 2010.

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 $94.4 million at September 30, 2009 and $131.9 million at December 31, 2008, representing 91% of our total assets. We invest excess cash predominantly in U.S. Treasury obligations. Our working capital, which is calculated as current assets less current liabilities, was $75.5 million at September 30, 2009 compared to $112.3 million at December 31, 2008. The decrease in cash, cash equivalents, 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 nine months ended September 30, 2009 and 2008:

                                                Nine Months Ended September 30,
                                                    2009                 2008
  Net loss                                    $    (40,858,259 )     $ (14,825,346 )
  Adjustments for non-cash operating items          (1,345,339 )        (4,976,479 )

  Net cash operating loss                          (42,203,598 )       (19,801,825 )
  Net change in assets and liabilities               8,155,289           1,733,137

  Net cash used in operating activities       $    (34,048,309 )     $ (18,068,688 )

  Net cash provided by investing activities   $     30,301,501       $   9,388,511

  Net cash used in financing activities       $             -        $    (277,669 )

Net Cash Used in Operating Activities

Net cash used in operating activities of $34.0 million and $18.1 million for the nine months ended September 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 nine months ended September 30, 2009 and 2008, we received net payments of $13.4 million and $26.4 million, respectively, under such collaboration agreements. Of the $13.4 million received during the nine months ended September 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 $26.4 million received during the nine months ended September 30, 2008 included a $20.0 million milestone payment related to the FDA's approval of ENTEREG. In addition, we received $8.1 million of cash related to net shipments of ENTEREG during the nine months ended September 30, 2009.

Net Cash Provided By Investing Activities

Net cash provided by investing activities relates to purchases and maturities of investment securities, capital expenditures for property and equipment and proceeds from the sale of 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 $30.3 million for the nine months ended September 30, 2009 as compared to $9.4 million for the nine months ended September 30, 2008. The increase in cash provided by investing activities for the nine months ended September 30, 2009 is primarily attributable to 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 September 30, 2009 was $495.9 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, at current expenditure levels, we will need ENTEREG sales to increase significantly beyond current levels before we will be able to achieve profitability and positive cash flows from operations.

Prior to the FDA approval of ENTEREG, costs associated with the manufacture of alvimopan were expensed to research and development. As a result, at September 30, 2009, we have inventory related to alvimopan that carries a zero-cost and is not reflected on the September 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 all 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.

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 in pain and Phase 1 clinical trials for ADL7445 and ADL5945 in OBD. 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.

We believe that our existing cash, cash equivalents and short-term investments are adequate to fund our recently 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.

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 Accounting Standards Codification (ASC) 605, Revenue Recognition, 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 in 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, a returns allowance 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 were $4.0 million and $0.6 million for the three months ended September 30, 2009 and 2008, respectively, and were $8.9 million and $0.6 million for the nine months ended September 30, 2009 and 2008, respectively. We recognized net product sales of $3.3 million and $0.2 million under our revenue recognition policy during the three months ended September 30, 2009 and 2008, respectively, and $7.2 million and $0.2 million for the nine months ended September 30, 2009 and 2008, respectively. The increase in 2009 compared to 2008 was due to an increase in the number of ordering and reordering hospitals period-over-period. Since launch, approximately 625 hospitals have reordered ENTEREG. We have a customer deposit balance of $1.2 million at September 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.

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 $5.3 million and $7.7 million for the three months ended September 30, 2009 and 2008, respectively, and were $17.2 million and $40.9 million for the nine months ended September 30, 2009 and 2008, respectively. Contract revenues for the nine months ended September 30, 2008 included a $20.0 million milestone payment received from Glaxo in conjunction with the FDA approval of ENTEREG. Contract revenues from Pfizer for the three and nine months ended September 30, 2009 decreased in 2009 due to a decrease in delta program costs, which resulted in lower cost reimbursement, as well as reduced amortization of deferred licensing fees due to extensions of the estimated performance period in the third quarter of 2008 and the first quarter of 2009. These decreases were partially offset by increased revenue that was recognized related to $9.3 million of payments received from Glaxo during the nine months ended September 30, 2009 under the terms of Amendment No. 4 to the collaboration agreement. Of the $9.3 million received, $8.4 million was received in the first quarter of 2009 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. The remaining $0.9 million was received and recognized as revenue in the second quarter of 2009.

Cost of Product Sales

Cost of product sales was $0.3 million and $0.7 million for the three and nine months ended September 30, 2009, respectively, consisting primarily of royalty payments under certain alvimopan license agreements, FDA fees and manufacturing costs. Cost of product sales was immaterial for the three and nine months ended September 30, 2008. Consistent with our revenue recognition policy, cost of product sales is recorded on a reorder basis, with inventory being relieved based on the shipment being recognized for revenue purposes.

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 $11.1 million and $14.1 million for the three months ended September 30, 2009 and 2008, respectively, and were $35.4 million and $38.8 million for the nine months ended September 30, 2009 and 2008, respectively, and consist of the following:

                                            Three Months Ended              Nine Months Ended
                                              September 30,                   September 30,
                                           2009            2008            2009            2008
External research and development
expenses:
ENTEREG program                        $    982,420    $    260,725    $  3,410,573    $  3,927,952
Delta agonist program                     2,085,950       4,328,655       4,763,755       8,457,076
OBD program                               3,117,978         580,944       6,075,127         631,540
Other programs                            1,109,211       3,092,046       4,175,217       6,579,435

Total external research and
development expenses                      7,295,559       8,262,370      18,424,672      19,596,003
Total internal research and
development expenses                      3,810,103       5,871,133      16,975,804      19,220,748

Total research and development
expenses                               $ 11,105,662    $ 14,133,503    $ 35,400,476    $ 38,816,751

We report all expenses gross within our statements of operations in accordance with ASC 605, Revenue Recognition, 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 nine months ended September 30, 2009 as compared to the three and nine months ended September 30, 2008 primarily due to lower costs of clinical studies incurred during 2009 in our delta agonist program, lower expenses in other programs and a reduction in headcount and depreciation expenses resulting from our June 2009 restructuring. These decreases were partially offset by higher expenses in our OBD program, including a $2.0 million payment to Lilly for the rights to ADL5945 in September 2009 which was expensed immediately as in-process research and development.

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 $8.7 million and $7.9 million for the three months ended September 30, 2009 and 2008, respectively, and were $26.1 million and $20.7 million for the nine months ended September 30, 2009 and 2008, respectively. The increase in 2009 compared to 2008 was primarily driven by higher sales and marketing expenses associated with ENTEREG.

Restructuring Charge

As a result of our June 2009 restructuring, we recorded a charge of $4.1 million for the nine months ended September 30, 2009. The reduction in expense of $0.1 million for the three months ended September 30, 2009 resulted from an increase in the estimated salvage value of certain impaired assets affected by the restructuring. The charge for the nine months ended September 30, 2009 consisted of $2.2 million of employee severance- and benefit-related costs and a $1.9 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 nine months ended September 30, 2008.

Interest Income, Net

Our interest income, net, was $0.2 million and $0.9 million for the three months ended September 30, 2009 and 2008, respectively, and was $1.0 million and $3.6 million for the nine months ended September 30, 2009 and 2008, respectively. This decrease was due to lower investment balances resulting primarily from the use of cash in operating activities and lower prevailing 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.