The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2011, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2011. In addition to historical information, this discussion and analysis 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 "Part I. Item 1. Business - Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

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 stapylococcal infections. Our lead program, CEM-101, 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 completed a successful Phase 2 clinical trial of the oral formulation for the treatment of CABP demonstrating comparable efficacy to the current standard of care, levofloxacin, with a favorable safety and tolerability profile. Our second program is Taksta, which we are developing in the U.S. as an oral treatment for bacterial infections caused by S. aureus, including MRSA, such as prosthetic joint infections and ABSSSI. We have successfully completed a Phase 2 ABSSSI clinical trial in patients with S. aureus infections, including MRSA, in which Taksta showed a favorable safety and tolerability profile and comparable efficacy to linezolid, the only FDA-approved oral antibiotic for treatment of MRSA. We expect to initiate in 2012 a pivotal Phase 3 trial for oral CEM-101 in patients with CABP and 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 CEM-101, 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 March 31, 2012, we raised a total of $151.3 million from the issuance of debt, sale of convertible notes, convertible preferred shares and common shares, including $58.0 million from the sale of common stock in our initial public offering in February 2012.

We have incurred losses in each year since our inception in November 2005. Our net losses were approximately $5.3 million and $3.2 million for the three months ended March 31, 2011 and March 31, 2012. As of March 31, 2012, we had an accumulated deficit of approximately $100.1 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 CEM-101 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;

• 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 CEM-101 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.

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 CEM-101 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 March 31, 2012, we have incurred $68.7 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 CEM-101 for CABP and Taksta for ABSSSI 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 CEM-101 and Taksta in parallel primarily for the treatment of CABP and ABSSSI, 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 CEM-101 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 personnel cost" 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.

                                                              Three Months Ended March 31,
                                                              2011                   2012
                                                               (Unaudited, in thousands)
Direct research and development expense by program:
CEM-101                                                   $       3,615          $       1,214
Taksta                                                               89                     30
Macrolide research                                                   79                      3
Research and development personnel cost                             523                    605


Total direct research and development expense                     4,306                  1,852
Indirect research and development expense                            94                     24

Total research and development expense                    $       4,400          $       1,876

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 are currently planning our pivotal trial program for CEM-101, which we believe will require three Phase 3 trials, including one trial with oral CEM-101 and two trials with IV CEM-101 stepping down to oral CEM-101. All 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. We are planning to discuss our proposed pivotal trial program with the FDA at our end of Phase 2 meeting for oral CEM-101, which we expect will occur in the second quarter of 2012. We expect to begin the Phase 3 trial with oral CEM-101 in the second half of 2012. Following completion of our ongoing Phase 1 trial with IV CEM-101, we plan to commence our IV-to-oral Phase 3 trials.

We have successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated a favorable safety and tolerability profile and efficacy that was comparable to linezolid. We have completed a successful end of Phase 2 meeting with the FDA in which we presented our plan to conduct two Phase 3 clinical trials for Taksta as a treatment for ABSSSI; however at this time, we do not intend to commence Phase 3 trials in ABSSSI without a collaborative partner. We plan to initiate a Phase 2 trial with Taksta in patients with prosthetic joint infections in 2012.

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.

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 December 2011 Note. We expect our interest income to increase during 2012 as we invested the net proceeds from the IPO pending their use in our operations.

Interest expense consists of interest incurred on the August 2011 Notes and December 2011 Note as well as changes in fair value of warrants issued in connection with the notes. We expect interest expense to increase during 2012 due to the outstanding December 2011 Note.

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.

Yield is 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 have 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. Yield is recorded 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).

Upon completion of our IPO, all of our outstanding preferred shares, including $13.7 million of accrued yield, converted into a total of 9,958,502 shares of common stock.

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.

For a description of our critical accounting policies and estimates, please refer to the "Critical Accounting Policies and Estimates" section of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012. There have been no material changes in any of our accounting policies since December 31, 2011.

Results of Operations

Comparison of Three Months Ended March 31, 2011 and Three Months Ended March 31, 2012

The following table summarizes the results of our operations for each of three-month periods ended March 31, 2011 and 2012, together with the changes in those items in dollars and as a percentage:

                                                 Three Months Ended
                                                      March 31,
                                                                                   Increase/
                                                2011                2012           (Decrease)            %
                                              (Unaudited, in thousands)
Revenue                                    $           -          $     -         $         -              -
Research and development expense                    4,392            1,876              (2,516 )        (57.3 )%
General and administrative expense                    880              972                  92           10.5 %
Other income (expense), net                             1             (301 )              (302 )        100.0 %

Revenue

We did not recognize any revenue for the three months ended March 31, 2011 and 2012.

Research and Development Expense

Research and development expense decreased by $2.5 million, or 57.3%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 as a result of a $2.4 million decrease in direct expenses incurred for CEM-101 and a $0.1 million decrease in direct expenses incurred for Taksta. The completion of the oral Phase 2 trials of CEM-101 during 2011 was the primary cause of the decrease in direct research and development expenses of $2.4 million during the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Indirect research and development expenses decreased by $0.1 million, during the three months ended March 31, 2012 compared to the three months ended March 31, 2011 as a result of decreased travel expense and professional service fees.

Included in direct research and development payroll expense were share-based compensation charges of $32,000 and $65,000 for the three months ended March 31, 2011 and 2012, respectively.

General and Administrative Expense

General and administrative expense increased $0.1 million, or 10.0%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 as a result of increased stock based compensation expense and professional service fees.

Included in general and administrative expense were share-based compensation charges of $66,000 and $99,000 for the three months ended March 31, 2011 and 2012, respectively.

Other Income (Expense), Net

Other income (expense), net decreased by $0.3 million, or 100.0%, in the three months ended March 31, 2012 compared to the three months ended March 31, 2011 as a result of a $0.1 million increase in fair value adjustments recorded as interest income and a $0.4 million increase in interest expese related to the August and December 2011 Notes.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in November 2005 through March 31, 2012, we have funded our operations primarily with $151.3 million from debt, the sale of convertible notes, convertible preferred shares and common shares.

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

                                                Number
                                                  of               Gross
         Issue                      Year        Shares            Proceeds
                                                               (in thousands)
         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
         Initial Public Offering     2012       9,660,000               57,960

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

As of March 31, 2012, we had cash and equivalents of approximately $65.9 million.

In December 2011, we entered into a $20.0 million loan and security agreement with Hercules 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 the Wall Street Journal, minus 3.25% per annum. We may, at any time prior to October 1, 2012, request an additional advance in the amount of $10.0 million. The principal amount outstanding under the second $10.0 million advance will bear interest at the greater of (i) 8.75%, or (ii) the sum of 8.75% plus the prime lending rate, as published by the Wall Street Journal, minus 3.25% per annum. We will be required to make interest only payments through March 2013, which can be extended to June 2013 upon satisfaction of certain conditions. Principal and interest payments will start after December 2012 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 up to the aggregate number of shares of common stock equal to (a) $400,000 divided by the applicable exercise price, and (b) if we draw the remaining $10.0 million, that number of shares determined by dividing $400,000 by the applicable exercise price. 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.

During February 2012, we completed our IPO issuing 9,660,000 shares of common stock, at a price of $6.00 per share, resulting in net proceeds of approximately $53.2 million after deducting underwriting discounts of $3.2 million and offering costs of $1.6 million.

Upon the completion of the IPO, all of our outstanding preferred shares, including accrued yield of $13.7 million, automatically converted into a total of 9,958,502 shares of common stock and the preferred stock warrant liability of $1.0 million was reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock. In addition, our August 2011 Notes totaling $5.0 million and related accrued interest of $0.3 million converted into 876,621 shares of common stock.

Cash Flows

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



                                                          Three Months Ended
                                                               March 31
                                                        2011               2012
                                                      (Unaudited, in thousands)
  Net cash provided by (used in):
  Operating activities                              $      (5,519 )      $  (3,762 )
  Investing activities                                         (8 )             (5 )
  Financing activities                                         49           54,075

  Net increase (decrease) in cash and equivalents   $       5,477        $  50,308

Operating Activities. Cash used in operating activities of $5.5 million during the three months ended March 31, 2011 was primarily a result of our $5.3 million net loss, coupled with changes in operating assets and liabilities of $0.3 million, partially offset by non-cash items of $0.1 million. Cash used in operating activities of $3.8 million for the three months ended March 31, 2012 was primarily a result of our $3.2 million net loss and cash used by changes in operating assets and liabilities of $0.8 million partially offset by non-cash items of $0.2 million.

Investing Activities. Net cash used in investing activities was $8,000 for the . . .