This discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this quarterly report on Form 10-Q, or Quarterly Report, and the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2008, or 2008 Annual Report, as filed with the Securities and Exchange Commission, or SEC. Operating results are not necessarily indicative of results that may occur in future periods.

This Quarterly Report includes forward-looking statements, which involve a number of risks and uncertainties. These forward-looking statements can generally be identified as such because the context of the statement will include words such as "may," "will," "intend," "plan," "believe," "anticipate," "expect," "estimate," "predict," "potential," "continue," "likely," or "opportunity," the negative of these words or other similar words. Similarly, statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects and other statements that are not historical facts are also forward-looking statements. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Quarterly Report are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the time this Quarterly Report was filed with the SEC. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. These risks and uncertainties include, without limitation, the risk factors identified in our SEC reports, including this Quarterly Report. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. Except as required by law, we undertake no obligation to update publicly or revise our forward-looking statements.

OVERVIEW AND RECENT DEVELOPMENTS

We are a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing oral drugs in four major therapeutic areas:
cardiovascular, central nervous system, inflammatory and metabolic diseases. Our most advanced drug candidate, lorcaserin hydrochloride, or lorcaserin, is being investigated in a Phase 3 clinical trial program for weight management. We have a broad pipeline of novel compounds targeting G protein-coupled receptors, or GPCRs, an important class of validated drug targets, which includes compounds being evaluated independently and with partners, including Merck & Co., Inc., or Merck, and Ortho-McNeil-Janssen Pharmaceuticals, Inc., or Ortho-McNeil-Janssen. We incorporated on April 14, 1997 in the state of Delaware and commenced operations in July 1997.

Our recent developments include:

• Announced positive, highly significant top-line results from the BLOSSOM (Behavioral modification and LOrcaserin Second Study for Obesity Management) Phase 3 trial. Lorcaserin patients achieved highly significant categorical and absolute weight loss over 52 weeks of treatment. About two-thirds (63.2%) of lorcaserin patients dosed twice daily who

• Announced a late-breaking oral presentation from the pivotal BLOSSOM trial and additional positive data from the pivotal BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity Management) Phase 3 trial at the 27th Annual Scientific Meeting of The Obesity Society. The new BLOSSOM data demonstrate improvements in patients' body composition, cardiovascular risk factors and quality of life. The new BLOOM data demonstrate that lorcaserin significantly improved markers of cardiovascular risk and glycemic parameters and was not associated with depression or suicidal ideation. Lorcaserin patients who completed the BLOOM trial according to protocol lost 31% of their excess body weight, compared to 12% for the placebo group.

• Completed dosing in all lorcaserin clinical trials we expect to be included in the NDA we plan to submit to the FDA by the end of 2009.

• Completed a public offering of 12.5 million shares of common stock, resulting in net proceeds to us of $49.7 million.

• Received net proceeds of $95.6 million from a $100.0 million loan provided by Deerfield Management. The outstanding principal accrues interest until maturity in June 2013 at a rate of 7.75% per annum. In connection with the loan, we issued Deerfield warrants for 28 million shares of our common stock at an exercise price of $5.42 per share. On or before June 17, 2011, Deerfield may make a one-time election to provide us with up to an additional $20.0 million under similar terms, with the additional loan also maturing in June 2013. For each additional $1.0 million in funding, we will issue Deerfield additional warrants for 280,000 shares of our common stock at an exercise price of $5.42 per share. We repaid Deerfield the first scheduled principal repayment of $10.0 million upon completion of our public offering in July.

RESULTS OF OPERATIONS

We are providing the following summary of our revenues, research and development expenses and general and administrative expenses to supplement the more detailed discussion below. The following tables are stated in millions.

Revenues



                                          Three months ended       Nine months ended
                                            September 30,            September 30,
     Source of revenue                    2009         2008        2009         2008
     Manufacturing services agreement   $     1.7    $     1.5   $     4.7    $     5.5
     Collaborative agreements                 0.9          0.4         3.0          1.6

     Total revenues                     $     2.6    $     1.9   $     7.7    $     7.1

Research and development expenses

                                                       Three months ended         Nine months ended
                                                         September 30,              September 30,
Type of expense                                        2009          2008         2009         2008
External clinical and preclinical study fees and
expenses                                            $      7.7    $     27.9    $    39.8    $   90.9
Salary and other personnel costs (excluding
non-cash share-based compensation)                         7.7          10.3         27.3        31.3
Facility and equipment costs                               3.8           4.1         11.7        12.0
Other                                                      1.1           1.7          3.6         5.2
Non-cash share-based compensation                          1.0           1.1          2.9         3.3
Research supplies                                          0.8           2.4          3.7         8.3

Total research and development expenses             $     22.1    $     47.5    $    89.0    $  151.0

General and administrative expenses

                                                    Three months ended        Nine months ended
                                                      September 30,             September 30,
Type of expense                                     2009         2008          2009        2008
Salary and other personnel costs (excluding
non-cash share-based compensation)                $     1.9    $     2.3    $      6.5    $   7.4
Legal, accounting and other professional fees           1.7          1.1           6.0        6.6
Facility and equipment costs                            0.8          1.0           2.7        2.7
Non-cash share-based compensation                       0.6          0.7           2.2        2.8
Other                                                   0.4          0.8           1.3        2.4

Total general and administrative expenses         $     5.4    $     5.9    $     18.7    $  21.9

THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

Revenues. We recorded revenues of $2.6 million during the three months ended September 30, 2009, compared to $1.9 million during the three months ended September 30, 2008. Our revenues for the three months ended September 30, 2009 included $1.7 million under our manufacturing services agreement with Siegfried Ltd, or Siegfried, an increase of $0.2 million from the $1.5 million of manufacturing services revenues recorded in the three months ended September 30, 2008. Our revenues for the three months ended September 30, 2009 also included $0.9 million for patent activities and additional sponsored research from our collaborations with Ortho-McNeil-Janssen and Merck, compared to $0.4 million for patent activities in the three months ended September 30, 2008.

Absent any new collaborations or achievement of a milestone in one of our existing collaborations, we expect our 2009 revenues will consist primarily of reimbursement for patent activities from our collaborators and manufacturing services revenue under our manufacturing services agreement with Siegfried. Under such Siegfried agreement, until at least December 31, 2010, Siegfried may sub-contract to us the manufacture of certain drug products it previously manufactured for its customers, and we agreed to perform such manufacturing up to certain specified amounts. Also under such agreement, Siegfried guarantees a minimum level of cost absorption, which we will record as revenues, of CHF 1.8 million in the remaining quarter of 2009 and CHF 6.6 million in 2010. Using the exchange rate in effect on September 30, 2009, this would translate to approximately $1.8 million and $6.4 million in manufacturing services revenues for the balance of 2009 and 2010, respectively.

Revenues from our collaborators for milestones that may be achieved in the future are difficult to predict, and our revenues may vary significantly from quarter to quarter and year to year. We expect that any significant revenues for at least the short term will depend on the clinical success of our partnered programs as well as whether we partner lorcaserin or any of our other current or future drug candidates. Ultimately, we expect our revenues in the long term to primarily depend upon the regulatory approval and commercialization of our partnered or internally developed drugs.

Cost of manufacturing services. Cost of manufacturing services is comprised of direct costs associated with manufacturing drug products for Siegfried under our manufacturing services agreement, including related salaries, other personnel costs and machinery depreciation costs. Cost of manufacturing services of $1.7 million was recorded for each of the three-month periods ended September 30, 2009 and 2008.

Research and development expenses. Research and development expenses, which account for the majority of our expenses, consist primarily of costs associated with external clinical and preclinical study fees, manufacturing costs and other related expenses, and the development of our earlier-stage programs and technologies. Our most significant research and development costs are for clinical trials (including payments to contract research organizations, or CROs), preclinical study fees, salaries and personnel, research supplies, and facility and equipment costs. We expense research and development expenses to operations as they are incurred when these expenditures relate to our research and development efforts and have no alternative future uses. Other than external expenses for our clinical and preclinical programs, we generally do not track our research and development expenses by project; rather, we track such expenses by the type of cost incurred.

Research and development expenses decreased by $25.4 million to $22.1 million for the three months ended September 30, 2009, from $47.5 million for the three months ended September 30, 2008. This was primarily due to decreases of
(i) $20.2 million in external clinical and preclinical study fees and expenses due to completing our BLOOM and BLOSSOM lorcaserin trials in 2009, as well as completing our clinical trials of APD125 in 2008, and prioritizing our spending towards activities that support filing an NDA for lorcaserin, (ii) $2.6 million in salary and other personnel costs as a result of the workforce reduction we completed in June 2009 and (iii) $1.6 million in research supplies primarily due to having less research personnel, as well as our cost-containment efforts. Although we expect to continue to incur substantial research and development expenses in 2009, primarily related to lorcaserin, we expect that our total research and development expenses in 2009 will be significantly lower than the 2008 level as we believe that most of the expenses from our BLOOM and BLOSSOM trials have been recognized. In addition, in light of our current financial condition, we do not plan to initiate in the near term any clinical trials of any other of our drug candidates, but are exploring the

feasibility of initiating clinical trials of APD916 or APD811 next year. APD916 is being investigated for the treatment of narcolepsy and cataplexy, and potentially other indications, and APD811 is our lead drug candidate for the treatment of pulmonary arterial hypertension. Further, as a result of the workforce reduction, we expect that our research and development expenses, particularly salary, other personnel costs and research supplies, in the fourth quarter of 2009 will be significantly lower than in the first quarter of 2009. We also expect to incur substantial manufacturing costs for lorcaserin in 2010 and beyond, whether we decide to market and commercialize lorcaserin independently or with a partner.

Included in the $7.7 million total external clinical and preclinical study fees and expenses noted in the table above for the three months ended September 30, 2009 was $7.4 million related to our lorcaserin program and $0.1 million related to each of our APD125 and APD811 programs. We previously studied APD125 for insomnia. Included in the $27.9 million total external clinical and preclinical study fees and expenses noted in the table above for the three months ended September 30, 2008 was $23.1 million related to our lorcaserin program, $4.2 million related to our APD125 program and $0.1 million related to each of our APD791 and APD916 programs. APD791 is our lead drug candidate for the treatment and prevention of arterial thrombosis.

General and administrative expenses. General and administrative expenses decreased by $0.5 million to $5.4 million for the three months ended September 30, 2009, from $5.9 million for the three months ended September 30, 2008. This change was primarily comprised of (i) an increase of $0.4 million in patent fees, (ii) a decrease of $0.4 million in salary and other personnel costs as a result of the workforce reduction we completed in June 2009 and (iii) a decrease of $0.3 million in lorcaserin market research expenses. We expect that our total general and administrative expenses in 2009 will be lower than the 2008 level as a result of the workforce reduction and other cost-containment measures. We also expect that, unless a partner pays for commercialization, marketing and business development expenses related to lorcaserin, our total general and administrative expenses will increase significantly beginning in 2010 primarily due to increases in such lorcaserin expenses.

Amortization of acquired technology and other intangibles. We recorded $0.6 million for amortization of acquired technology and other intangibles in both of the three month periods ended September 30, 2009 and 2008. The workforce we acquired from Siegfried in January 2008 is being amortized over its estimated benefit of two years, for which we expect to record the remaining amortization expense of $0.2 million in the fourth quarter of 2009. Our patented Melanophore technology, which we acquired in 2001 for $15.4 million, is our primary screening technology and is being amortized over its estimated useful life of 10 years. We expect to record charges of $0.4 million in the fourth quarter of 2009, $1.5 million in 2010 and $0.3 million in 2011 for amortization of this technology.

Interest and other income (expense), net. Interest and other expense, net, increased by $5.8 million to $7.6 million for the three months ended September 30, 2009, from $1.8 million for the three months ended September 30, 2008. This increase in expense was primarily due to (i) a $5.4 million increase in interest expense related to the Deerfield loan, (ii) a $2.5 million non-cash loss on extinguishment of debt resulting from the $10.0 million repayment on the Deerfield loan and (iii) a $1.3 million decrease in interest income attributable to both lower interest rates and cash balances. This increase was partially offset by (i) a $2.5 million non-cash gain from the revaluation of our derivative liabilities and (ii) a $1.6 million write-down on our investment in TaiGen Biotechnology Co., Ltd., which we recorded in 2008. We expect our interest expense will continue to be substantial as a result of the Deerfield loan and payments on our lease financing obligations.

Dividends on redeemable convertible preferred stock. Because we redeemed all of the outstanding shares of our Series B Convertible Preferred Stock, or Series B Preferred, in November 2008, we recorded no dividends related to such stock in the three months ended September 30, 2009, compared to $0.6 million in the three months ended September 30, 2008.

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

Revenues. We recorded revenues of $7.7 million during the nine months ended September 30, 2009, compared to $7.1 million during the nine months ended September 30, 2008. Our revenues for the nine months ended September 30, 2009 included $4.7 million under our manufacturing services agreement with Siegfried and $3.0 million for patent activities and additional sponsored research from our collaborations with Ortho-McNeil-Janssen and Merck. Our revenues for the nine months ended September 30, 2008 included $5.5 million under our manufacturing services agreement with Siegfried and $1.6 million for patent activities from our collaborations with Ortho-McNeil-Janssen and Merck.

Cost of manufacturing services. Cost of manufacturing services decreased to $4.7 million for the nine months ended September 30, 2009, compared to $6.4 million for the nine months ended September 30, 2008. This decrease was primarily due to a decrease in manufacturing service activities.

Research and development expenses. Research and development expenses decreased $62.0 million to $89.0 million for the nine months ended September 30, 2009, from $151.0 million for the nine months ended September 30, 2008. This was primarily due to decreases of (i) $51.1 million in external clinical and preclinical study fees and expenses primarily due to completing our BLOOM and BLOSSOM trials, as well as completing our clinical trials of APD125, (ii) $4.6 million in research supplies due to having less

research personnel, as well as our cost-containment efforts and (iii) $4.0 million in salary and personnel costs. Included in the $39.8 million of total external clinical and preclinical study fees and expenses for the nine months ended September 30, 2009 was $38.4 million related to our lorcaserin program, $0.6 million related to our APD811 program and $0.4 million related to receipt of the complete data package from our Phase 2b clinical trial of APD125. Personnel-related employee separation costs resulting from the workforce reduction are reflected as a separate line item in our condensed consolidated statements of operations. Included in the $90.9 million of total external clinical and preclinical study fees and expenses for the nine months ended September 30, 2008 was $77.5 million related to our lorcaserin program, $9.9 million related to our APD125 program, $1.4 million related to our APD916 program and $1.2 million related to our APD791 program.

General and administrative expenses. General and administrative expenses decreased $3.2 million to $18.7 million for the nine months ended September 30, 2009, from $21.9 million for the nine months ended September 30, 2008. This was primarily due to decreases of (i) $0.9 million in salary and personnel costs,
(ii) $0.6 million in legal fees, primarily patent fees, and (iii) $0.6 million in non-cash share-based compensation expense.

Restructuring charges. We recorded a charge of $3.3 million in the nine months ended September 30, 2009 in connection with the workforce reduction we completed in June 2009.

Amortization of acquired technology and other intangibles. We recorded $1.7 million for amortization of acquired technology in each of the nine-month periods ended September 30, 2009 and 2008 related to our Melanophore screening technology and the workforce we acquired from Siegfried.

Interest and other income (expense), net. Interest and other expense, net, increased $12.3 million to $13.7 million for the nine months ended September 30, 2009, from $1.4 million for the nine months ended September 30, 2008. This increase in expense was primarily due to (i) a $6.2 million decrease in interest income, (ii) a $5.4 million increase in interest expense related to the Deerfield loan, (iii) a $2.5 million non-cash loss on extinguishment of debt and
(iv) a $1.4 million increase in interest expense related to our lease financing obligations. This increase was partially offset by a $2.2 million non-cash warrant settlement with one of our Series B warrant holders and a $1.6 million write-down on our investment in TaiGen Biotechnology Co., Ltd., both of which we recorded in 2008.

Dividends on redeemable convertible preferred stock. We recorded a dividend of $1.6 million related to our previously outstanding Series B Preferred in the nine months ended September 30, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Short term

Our sources of liquidity include our cash balances and short-term investments. As of September 30, 2009, we had $143.5 million in cash and cash equivalents and short-term investments, which reflects net proceeds of $95.6 million from the issuance of a note and related financial instruments to Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited, or collectively Deerfield, and net proceeds of $49.7 million from a public offering of our common stock, both of which we received in July 2009. Upon the closing of such public offering, we were required to repay the first scheduled payment of $10.0 million of the Deerfield loan. Other potential sources of near-term liquidity include (i) the partnering or out-licensing of our drug candidates, internal drug programs and technologies, (ii) equity, debt or other financing, (iii) the sale of facilities we own, and (iv) milestone payments from our collaborators. In addition, on or before June 17, 2011, Deerfield can make a one-time election to loan us up to an additional $20.0 million under similar terms as the initial $100.0 million loan. Although we will continue to be opportunistic in our efforts to obtain cash, we believe that our ability to obtain cash has been reduced based on ongoing uncertainties in the global economic market and our stock price. There is no guarantee that additional funding will be available or that, if available, such funding will be available on terms that we or our stockholders view as favorable.

We are prioritizing our available cash towards funding activities that support completing our lorcaserin Phase 3 program and filing an NDA for lorcaserin, which we expect to file by the end of 2009. In connection with such prioritization, we are deferring the initiation of any new clinical trials for our other programs in the near term, deferring certain costs related to lorcaserin that are non-essential to the initial commercialization of lorcaserin and continuing our cost-containment efforts. In June 2009, we completed a workforce reduction of approximately 130 employees, which we expect will result in annual operating cost savings of approximately $25.0 million. Along with this workforce reduction, we decreased the number of our research programs as well as our planned activities. We will continue to monitor and evaluate the level of our research, development and manufacturing expenditures, and may further adjust such expenditures based upon a variety of factors, such as our available cash, our ability to obtain additional cash and partner programs, the results and progress in our clinical and earlier-stage programs, the time and costs related to clinical trials and regulatory decisions, as well as the global economic environment.

Although most of the external expenses for our two pivotal Phase 3 lorcaserin trials have been expensed, we expect that our research and development expenditures will continue to be substantial for the balance of 2009 and 2010 as we continue our lorcaserin program

and select earlier-stage research and development programs. In addition to costs related to our ongoing lorcaserin BLOOM-DM (Behavioral modification and Lorcaserin for Overweight and Obesity Management in Diabetes Mellitus) trial and filing an NDA for lorcaserin, we expect to incur substantial manufacturing costs and other pre-launch costs for lorcaserin in 2010 and beyond whether we decide to market and commercialize lorcaserin independently or with a partner.

Long term

We will need to obtain substantial amounts of cash to achieve our objectives of internally developing drugs, which will take many years and potentially several hundreds of millions of dollars to develop. If we decide to market and commercialize lorcaserin or any other drug candidate independently or with a partner, we may need to invest heavily in associated manufacturing, marketing and commercialization costs. Such costs will be substantial and some will need to be incurred prior to receiving marketing approval. We do not currently have adequate internal liquidity to meet these objectives in the long term. To do so, we will need to continue our partnering activities and look to other external sources of liquidity, including the public and private financial markets and strategic partners. . . .