The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including those set forth under "Item 1A. Risk Factors."

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 staphylococcal infections. Our lead program, solithromycin, 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 initiated a pivotal Phase 3 clinical trial of the oral formulation for the treatment of CABP in a global multi-center double-blinded study. We have also released data from a Phase 2 study of solithromycin in uncomplicated gonorrhea. Our second program is Taksta, which we are developing in the U.S. as an oral treatment for prosthetic joint infections caused by S. aureus, including MRSA. In December 2012, we initiated 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 solithromycin, 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 December 31, 2012, we raised a total of $176.4 million from the issuance of debt, sale of convertible notes, convertible preferred shares, common shares and common stock, including $58.0 million from the sale of common stock in our IPO in February 2012 and $25.1 million from the sale of common stock in a private placement in October 2012.

We have incurred losses in each year since our inception in November 2005. Our net losses were approximately $19.7 million, $21.2 million and $24.2 million for the years ended December 31, 2010, 2011 and 2012, respectively. As of December 31, 2012, we had an accumulated deficit of approximately $121.2 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 solithromycin 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;

• establish our own sales force, or contract with third parties, for the sales, marketing and distribution of any products for which we 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 solithromycin 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 solithromycin 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 December 31, 2012, we have incurred $83.7 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 solithromycin for CABP and Taksta for prosthetic joint infections 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 solithromycin and Taksta in parallel primarily for the treatment of CABP and prosthetic joint infections, 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 solithromycin 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 payroll" 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.

                                                            Year Ended December 31,
                                                         2010         2011         2012
                                                                 (in thousands)
 Direct research and development expense by program:
 Solithromycin                                         $ 10,173     $ 14,129     $ 12,786
 Taksta                                                   2,903          282        1,079
 Macrolide research                                          89          162           46
 Research and development personnel cost                  1,751        1,865        2,657

 Total direct research and development expense           14,916       16,438       16,568
 Indirect research and development expense                  558          434          301

 Total research and development expense                $ 15,474     $ 16,872     $ 16,869

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 have begun our pivotal trial program for solithromycin, which we believe will require two Phase 3 trials, including one trial with oral solithromycin and one trial with IV solithromycin stepping down to oral solithromycin. Both 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. Using feedback received from the FDA, we began the Phase 3 trial with oral solithromycin in December 2012. We plan to have an end-of Phase 2 meeting with the FDA in the first half of 2013 and initiate the IV to oral Phase 3 study in the second half of 2013, depending on funds being available.

In 2010, we successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated efficacy, safety and tolerability that was comparable to linezolid. Like ABSSSI, prosthetic joint infections are often caused by S. aureus, including MRSA. At this time, however, we do not intend to pursue Taksta as a treatment for ABSSSI. In December 2012, we initiated a Phase 2 trial of Taksta in patients with prosthetic joint infections.

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.

We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates and as we operate as a public company. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

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 August 2011 Notes. We expect our interest income to decrease as we fund the development of our programs.

Interest expense in 2010 consisted primarily of non-cash interest costs related to changes in the fair value of our Class C purchase option described below. Interest expense in 2011 consists of interest accrued under the August 2011 Notes and the Hercules loan as described below. Interest expense in 2012 consists of interest accrued and paid under the Hercules loan as described below as well as changes in fair value of warrants issued in connection with the Hercules warrant agreement as described below.

In August 2011, we issued unsecured convertible notes, referred to as the August 2011 Notes, in the original aggregate principal amount of $5.0 million. The August 2011 Notes bore interest at a rate of 10.0% per annum, originally were to mature on August 4, 2012 and precluded us from incurring any other debt in excess of $0.5 million or granting a security interest in any of our assets without the consent of the noteholders. This restriction was revised by our shareholders in connection with the Hercules loan (discussed below) in December 2011. Also in connection with the Hercules loan, in December 2011, we and the holders of the August 2011 Notes agreed to extend the maturity dates of the August 2011 Notes to May 29, 2016. We did not record any gain or loss in connection with the extension of the maturity date of the August 2011 Notes because we determined that the extension of the maturity date of the August 2011 Notes met the criteria of a troubled debt restructuring outlined in ASC Topic 470-60, Troubled Debt Restructurings. The August 2011 Notes converted into shares of common stock in connection with the IPO completed in February 2012. Additionally, we granted warrants to the holders of the August 2011 Notes, which, after completion of the IPO in February 2012, became exercisable for shares of common stock with an exercise price equal to the IPO price of $6.00.

In December 2011, we entered into a $20.0 million loan and security agreement with Hercules Technology Growth Capital, Inc., or Hercules (referred to as the December 2011 Note), 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. Prior to October 1, 2012, we had the ability to request an additional advance in the amount of $10.0 million. We elected not to request the additional borrowing and let the option expire. We will be required to make interest only payments through March 2013, which can be extended to June 30, 2013 upon satisfaction of certain conditions. Principal and interest payments will start after March 31, 2013 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 39,038 shares of our common stock. 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. Proceeds equal to the fair value of the warrants was recorded as a liability at the date of issuance and the borrowings under the Hercules loan will be increased to equal the face amount of the borrowings plus interest through interest expense over the term of the loan using the effective interest method. Each period up to our IPO, we marked to market the warrant and any changes in fair value were recorded in other income (expense).

In connection with closing of the first tranche of our Class C redeemable convertible preferred share financing in 2009, the investors had the option to purchase a pro rata amount of Class C preferred shares in the second tranche at any time prior to the earlier of the closing of the second tranche or September 30, 2010. In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 480, Distinguishing Liabilities from Equity, we allocated $5.2 million of the Class C proceeds to the fair value of this purchase option, referred to as the Class C purchase option, and recorded it as a liability at the closing of the first tranche of Class C preferred shares. At each reporting period and immediately prior to conversion, any change in the fair value of the Class C purchase option was recorded as interest expense or income. We measured the fair value of the Class C purchase option based upon contemporaneous valuations and utilized the Black-Scholes option-pricing model at each balance sheet date. The Class C purchase option was automatically exercised for Class C preferred shares at the time of the closing of the second tranche of our Class C preferred share offering in April 2010 and, accordingly, the Class C purchase option was converted to Class C preferred shares.

We also reported other income of $0.5 million during the year ended December 31, 2010 due to our receipt of a qualifying therapeutic discovery project tax credit in this amount pursuant to Section 48D of the Internal Revenue Code. We did not have any other items of other income or expense during the years ended December 31, 2011 and 2012.

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. From inception through February 2012, the date of our IPO, we have recorded cumulative accretion related to share issuance costs of $0.3 million.

Yield was 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 had 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. From inception through February 2012, the date of our IPO, we recorded cumulative yield of $13.7 million 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).

The Class C holders had the right and option, after the fifth anniversary of the original issue date, or May 13, 2014, by a vote of 60% of the Class C holders (including at least one of two specified holders), to require us to redeem the Class C shares at a redemption price equal to the original price per share plus all cumulative and undeclared yield. If the Class C holders had elected to redeem their shares, the Class A and Class B holders would have had the right and option, by a vote of holders of two-thirds of the Class A and Class B shares, voting together as a single class, to require us to redeem the Class A and Class B shares at a redemption price equal to the original price per share plus all cumulative and undeclared dividends. All of our outstanding preferred shares converted into shares of common stock upon the completion of our IPO in February 2012.

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.

Our significant accounting policies are described in more detail in the notes to our audited consolidated financial statements included in this report. We believe the following accounting policies to be most critical to the judgments and estimates used in preparation of our financial statements and such policies have been reviewed and discussed with our audit committee.

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable vendor personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include:

• fees paid to CROs in connection with pre-clinical or clinical trials;

• fees paid to investigative sites in connection with clinical trials;

• milestone payments; and

• unpaid salaries, wages and benefits.

We accrue our expenses related to clinical trials based on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not currently anticipate the future settlement of existing accruals to differ materially from our estimates.

Valuation of Financial Instruments

Purchase Option Liability

We accounted for our Class C purchase option in accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, which requires that a financial instrument, other than an outstanding share, that, at inception, includes an obligation to repurchase the issuer's equity regardless of the timing or likelihood of the redemption, shall be classified as a liability. We measured the fair value of the Class C purchase option based upon contemporaneous valuations and utilized the Black-Scholes option-pricing model at each balance sheet date. We recorded changes in fair value of the Class C purchase option as interest income or expense.

The significant assumptions we used in estimating the fair value of the Class C purchase option included the strike price, estimated volatility, risk-free interest rate, estimated fair value of the Class C preferred shares, and the estimated life of the Class C purchase option. These assumptions were used to establish an expected set of cash flows which were probability-weighted and present valued to determine a fair value.

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