The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes included in this Quarterly Report on Form 1O-Q and the audited financial statements and notes thereto as of and 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 filed by us with the Securities and Exchange Commission, or SEC, on March 14, 2012.

Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the "safe harbor" created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words "anticipates", "believes", "estimates", "expects", "intends", "may", "plans", "projects", "will", "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not

actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item IA, "Risk Factors" in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative antibiotics for life threatening infections. We are developing tedizolid phosphate, an intravenous, or IV, and oral antibiotic, for the treatment of serious Gram-positive bacterial infections, for acute bacterial skin and skin structure infections, or ABSSSI, and pneumonia, and subsequently for other indications, including bacteremia. ABSSSI is a new classification for complicated skin and skin structure infections, or cSSSI. Tedizolid phosphate is an IV and orally administered second generation oxazolidinone. In addition, we are discovering antibiotics for broad spectrum infections using our proprietary discovery platform under two government contracts: one funded by the National Institute of Allergy and Infectious Diseases, or NIAID, a part of the National Institutes of Health, or NIH; and a second contract with Lawrence Livermore National Laboratory, or LLNL, a part of the U.S. Department of Energy's National Nuclear Security Administration.

In December 2011, we completed our first Phase 3 clinical trial of the oral dosage form of tedizolid phosphate for the treatment of ABSSSI, and in September 2011, we initiated our second Phase 3 clinical trial of the IV to oral transition therapy for the treatment of ABSSSI and we expect to report top-line data on this second Phase 3 clinical trial in early 2013. We currently expect to submit a New Drug Application, or NDA, to the Food & Drug Administration, or FDA, for tedizolid phosphate for the treatment of ABSSSI during the second half of 2013. We have also completed a Phase 1 clinical trial which evaluated the ability of tedizolid phosphate to penetrate into the lung, for potential use in treating lung infections. Based on the results of the study, we plan to initiate a Phase 3 program of tedizolid phosphate for the treatment of pneumonia in the first half of 2013 using the same 200 mg, once daily dose of tedizolid phosphate that we are currently testing for skin infections.

In July 2011, we signed an exclusive collaboration and license agreement, the Bayer Agreement, with Bayer Pharma AG, or Bayer, to develop and commercialize tedizolid phosphate in China, Japan and substantially all other countries in Asia, Africa, Latin America and the Middle East, excluding North and South Korea, which we refer to as the Bayer Licensed Territory. We are evaluating potential strategic alliances for tedizolid phosphate in Europe.

Preclinical activities for our GyrB/ParE dual target development program, or Gyrase-B, are funded through Phase 1 clinical trials, subject to achievement of program milestones, by our NIAID contract. We are conducting Investigational New Drug, or IND, enabling studies for Gyrase-B which has potent activity against Gram-negative and Gram-positive bacterial pathogens. We expect to initiate a Phase 1 clinical trial of Gyrase-B in 2013.

In January 2012, we raised approximately $48.4 million in net proceeds from the public offering of our common stock in which we sold 9,890,000 shares of common stock at an offering price of $5.25 per share.

As of June 30, 2012, we had an accumulated deficit of $117.4 million. These losses have resulted principally from costs incurred in connection with research and development activities, including the costs of clinical trial activities associated with tedizolid phosphate, license fees and general and administrative expenses. We expect to continue to incur operating losses for the next several years as we pursue the clinical development and commercialization of tedizolid phosphate and work to discover and develop additional product candidates through our research and discovery program. As a result, we will seek to fund our operations through public or private equity or debt financings or other sources, such as collaborations and government contracts. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies.

Financial Overview

Revenues

We have recognized $76.0 million of revenues from inception through June 30, 2012. We have derived substantially all of our revenues from our Bayer Agreement and government contracts, small business innovation research, or SBIR, grants funded by the NIH, and collaborations with other third parties for the research and development of certain preclinical programs. We have no products approved for sale, and we have not generated any revenues from product sales. We expect to recognize revenues from our contracts with NIAID and LLNL as well as through our license and collaboration agreement with Bayer. We continue to pursue government contract funding for our nonclinical, preclinical and clinical programs. If our development efforts for any of our product candidates result in clinical success and regulatory approval, or other collaboration agreements with third parties, we may generate revenues from those product candidates.

On May 3, 2012, the Defense Threat Reduction Agency, or DTRA, notified us that, due to programmatic priorities toward later stage programs, it elected not to exercise its option to extend funding under the four and one-half-year federal contract with us for the development of novel antibiotics directed against gram-negative bacterial pathogens, and the contract was not extended beyond July 20, 2012. As a result, we discontinued our marine natural products discovery program, which was solely funded by the DTRA contract. We have shifted our internal resources from the marine natural products discovery program to our other later stage programs and do not expect any associated negative impact on our cash requirements as a result of this decision.

Research and Development Expenses

The majority of our operating expenses to date have been for research and development activities related to tedizolid phosphate and our nonclinical and preclinical programs. Research and development expenses consist of: (1) expenses incurred under agreements with contract research organizations, or CROs, and investigative sites, which conduct a substantial portion of our nonclinical and preclinical studies, and all of our clinical trials; (2) employee-related expenses, which include salaries, benefits and share-based compensation;
(3) payments to third-party manufacturers, which produce our active pharmaceutical ingredient and finished drug product; (4) license fees paid to third parties for use of their intellectual property; (5) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements and equipment and laboratory and other supplies; and
(6) payments to consultants.

The following table presents our research and development expenses for the periods indicated (in thousands):

                                                    Three Months Ended            Six Months Ended
                                                         June 30,                     June 30,
                                                    2012           2011          2012          2011
Clinical and nonclinical research and
development (including manufacturing)            $   13,511      $  7,573      $ 27,156      $ 15,367
Preclinical research and development                  2,868         2,803         6,069         5,452

Total                                            $   16,379      $ 10,376      $ 33,225      $ 20,819

At this time, due to the inherently unpredictable nature of nonclinical, preclinical and clinical development and given the early stage of our preclinical programs, we are unable to estimate with any certainty the costs we will incur in the continued development of tedizolid phosphate and our preclinical programs for potential commercialization. Clinical development timelines, the probability of success and development costs can differ materially from expectations. While we are currently focused on advancing tedizolid phosphate and our preclinical programs, our future research and development expenses will depend on the clinical success of each product candidate that we develop, as well as ongoing assessments of the commercial potential of such product candidates. In addition, other than our collaboration agreement with Bayer, we cannot forecast with any degree of certainty which product candidates may be subject to future collaborations or contracts, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect to incur increased research and development expenses as we continue our Phase 3 clinical program for tedizolid phosphate. In addition, we expect to incur significant research and development costs as we perform additional clinical trials necessary to obtain regulatory approval of tedizolid phosphate for additional indications, as well as to advance our preclinical programs.

The costs of clinical trials may vary significantly over the life of a project owing to but not limited to the following:

• Per patient trial costs;

• The number of sites included in the trials;

• The countries in which the trials are conducted;

• The length of time required to enroll eligible patients;

• The number of patients that participate in the trials;

• The number of doses that patients receive;

• The cost of comparative agents used in trials;

• The drop-out or discontinuation rates of patients;

• Potential additional safety monitoring or other studies requested by regulatory agencies;

• The duration of patient follow-up; and

• The efficacy and safety profile of the product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for personnel in administration, finance, commercial strategy and business development. Other significant expenses include professional fees for general legal services, legal expenses to pursue patent protection of our intellectual property, accounting fees, director fees, directors' and officers' insurance premiums, fees for investor relations services, share-based compensation and allocated facility costs. We expect our general and administrative expense to increase as we continue to operate as a public company and build our corporate infrastructure in support of continued development of tedizolid phosphate and our preclinical programs. These increases likely will include additional salaries and related expenses, consultant fees, and expenses related to enhanced business systems.

Interest Income

Interest income consists of interest earned on our cash, cash equivalents and investments in marketable securities.

Income Taxes

We assess income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

We have had federal and state net operating loss carryforwards and federal and state research and development tax credit carryforwards. Under Section 382/383 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, substantial changes in our ownership may limit the amount of net operating loss carryforwards and development tax credit carryforwards that could be utilized annually in the future to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses and tax credits before they expire. We recently completed an updated Section 382/383 study to ascertain whether the public offering of common stock that was completed in January 2012 may have triggered an "ownership change," which could limit the future use of our net operating loss and tax credit carryforwards. Based upon this updated study, we have determined that an "ownership change" did occur but that the annual limitation would not have a material impact on our ability to use net operating loss and tax credit carryforwards. In each period since our inception, we have recorded a valuation allowance for the full amount of our net deferred tax asset, as the realization of such net deferred tax asset is uncertain.

Change in Fair Value of Common Stock Warrants Liability

We have issued warrants to purchase our common stock that may require us to purchase unexercised warrants for a cash amount equal to their fair value following the announcement of specified events defined as Fundamental Transactions involving us (e.g., merger, sale of all or substantially all assets, tender offer, or share exchange) or a delisting ("delisting"), which is deemed to occur when the common stock is no longer listed on a national securities exchange. The cash settlement provisions require use of the Black-Scholes model in calculating the cash payment value in the event of a Fundamental Transaction or a delisting. As a consequence of these provisions, the warrants are classified as a liability on our balance sheets. The cash settlement value at the time of any future Fundamental Transaction or delisting will depend upon the value of the following inputs at that time: the price per share of our common stock, the volatility of our common stock, the expected term of the warrant, the risk-free interest rate based on U.S. Treasury security yields, and our dividend yield.

The fair value of the warrants is determined using a Black-Scholes model. The valuation of warrants is subjective and is affected by changes in inputs to the valuation model including the price per share of our common stock, the historical volatility of the stock prices of companies included in our peer group, risk-free rates based on U.S. Treasury security yields, the expected term of the warrants and our dividend yield. Changes in these assumptions can materially affect the fair value estimate. We could ultimately incur amounts to settle the warrant at a cash settlement value that is significantly different than the carrying value of the liability on our financial statements. We will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire, or are amended in a way that would no longer require these warrants to be classified as a liability. Changes in the fair value of the common stock warrants liability are recognized as a component of other income (expense) in the Statement of Operations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of financial condition and results of operations is based on our 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to preclinical, nonclinical and clinical development costs and drug manufacturing costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity within Note 1 to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Comparison of the Three Months Ended June 30, 2012 and 2011

Revenues

The following table summarizes our revenues for the three months ended June 30,
2012 and 2011 (in thousands, except percentages):



                                 Three Months Ended
                                      June 30,                $            %
                                  2012          2011       Change        Change
           Contract research   $    2,220      $ 2,859     $  (639 )         (22 )%
           Collaborations           3,220           -        3,220            -
           License fees               784           -          784            -

           Total               $    6,224      $ 2,859     $ 3,365           118 %

Contract research revenues decreased for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 primarily due to decreased research performed under our DTRA contract as a result of DTRA's election in May 2012 not to extend the contract. This decrease was partially offset by an increase in research performed under our NIAID and LLNL contracts.

License and collaboration revenues for the three months ended June 30, 2012 relate to activities performed under our collaboration and license agreement with Bayer that we entered into in July 2011. We performed certain development and regulatory services under the Bayer collaboration and license agreement during the three months ended June 30, 2012 for which we recognized $2.0 million as collaboration revenues. In addition, we earned a $2.0 million milestone payment for progress made on our second Phase 3 clinical trial of tedizolid phosphate. At the inception of the Bayer Agreement, we determined that this milestone would be substantive when earned. Therefore, the $2.0 million payment was recognized as revenue during the quarter ended June 30, 2012 with $0.8 million recorded as License revenues and $1.2 million recorded as Collaboration revenues in accordance with the ratio of the estimated selling prices of each unit of accounting determined at inception of the Bayer Agreement.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2012 and 2011 (in thousands, except percentages):

Three Months Ended June 30, $ % 2012 2011 Change Change Research and development expenses $ 16,379 $ 10,376 $ 6,003 58 %

During the three months ended June 30, 2012 our research and development costs related primarily to our clinical trials of tedizolid phosphate as well as research under our NIAID, DTRA and LLNL contracts and other preclinical activities. Development expenses for tedizolid phosphate increased by approximately $6.0 million during the three months ended June 30, 2012 primarily due to clinical and nonclinical costs to support our planned NDA filing with the FDA.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended June 30, 2012 and 2011 (in thousands, except percentages):

Three Months Ended June 30, $ % 2012 2011 Change Change General and administrative expenses $ 3,311 $ 2,478 $ 833 34 %

The increase in general and administrative expenses was primarily due to additional commercial planning activities for tedizolid phosphate.

Other Income (Expense)

The following table summarizes our other income (expense) for the three months
ended June 30, 2012 and 2011 (in thousands, except percentages):



                                                    Three Months Ended
                                                         June 30,                 $             %
                                                    2012            2011        Change       Change
Interest income                                  $        7         $   7      $     -             0 %
Other income (expense)                                   -             -             -            -
Fair value adjustment of common stock warrant
liability                                              (955 )          -            955           -

Total Other Income (Expense)                     $     (948 )       $   7      $    955        13643 %

Other income and expense for the three months ended June 30, 2012 resulted primarily from the remeasurement of the estimated fair value of the common stock warrant liability. This liability is remeasured at each reporting date with changes in estimated fair value recorded as other income or expense. The increase in the estimated fair value of the common stock warrant liability during the three months ended June 30, 2012 was due primarily to the increase in our stock price since March 31, 2012.

Comparison of the Six Months Ended June 30, 2012 and 2011

Revenues

The following table summarizes our revenues for the six months ended June 30, 2012 and 2011 (in thousands, except percentages):

                                  Six Months Ended
                                      June 30,               $             %
                                  2012         2011        Change        Change
            Contract research   $   5,231     $ 5,574     $   (343 )          (6 )%
            Collaborations          8,091          -         8,091            -
            License fees            2,734          -         2,734            -

            Total               $  16,056     $ 5,574     $ 10,482           188 %

Contract research revenues decreased for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 primarily due to decreased research performed under our DTRA and NIAID contracts. These decreases were partially offset by an increase in work performed under our LLNL contract which was entered into in April 2011.

License and collaboration revenues for the six months ended June 30, 2012 relate to activities performed under our collaboration and license agreement with Bayer that we entered into in July 2011. We performed certain development services under the Bayer Agreement during the six months ended June 30, 2012 for which we recognized $3.8 million as collaboration revenues. In addition, we earned a $5.0 million payment that was contingent upon the successful completion of our first Phase 3 clinical trial of tedizolid phosphate and a $2.0 million payment for progress made on our second Phase 3 clinical trial of tedizolid phosphate. At the inception of the Bayer Agreement, we determined that these milestones would be substantive when earned. Therefore, the $5.0 and $2.0 million payments were recognized as revenue with $2.7 million recorded as License revenues and $4.3 million recorded as Collaboration revenues in accordance with the ratio of the estimated selling prices of each unit of accounting determined at inception of the Bayer Agreement.

Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2012 and 2011 (in thousands, except percentages):

Six Months Ended June 30, $ % 2012 2011 Change Change Research and development expenses $ 33,225 $ 20,819 $ 12,406 60 %

During the six months ended June 30, 2012, our research and development costs related primarily to our clinical trials of tedizolid phosphate as well as research under our NIAID, DTRA, LLNL contracts and other preclinical activities. During the six months ended June 30, 2011, our research and development costs related primarily to our clinical trials of tedizolid phosphate as well as research under our NIAID and DTRA contracts. Development expenses for tedizolid phosphate increased by approximately $11.8 million during the six months ended June 30, 2012 primarily due to clinical and nonclinical costs to support our planned NDA filing with the FDA.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the six months ended June 30, 2012 and 2011 (in thousands, except percentages):

Six Months Ended June 30, $ % 2012 2011 Change Change General and administrative expenses $ 6,315 $ 4,820 $ 1,495 31 %

. . .