10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2011

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             

Commission file number 001-34828

TRIUS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	2834	20-1320630
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

6310 Nancy Ridge Drive, Suite 101

San Diego, California 92121

(858) 452-0370

(Address, including zip code and telephone number, including

area code, of registrant’s principal executive offices)

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the issuer’s common stock, par value $.0001 per share, as of November 4, 2011 was 28,555,800.

INDEX

		Page
Part I.	FINANCIAL INFORMATION		1
Item 1.	Financial Statements		1
	Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010		1
	Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (unaudited)		2
	Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited)		3
	Notes to Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		26
Part II.	OTHER INFORMATION		27
Item 1A.	Risk Factors		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 5.	Other Information
Item 6.	Exhibits		51
SIGNATURES			52

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Trius Therapeutics, Inc.

Balance Sheets

(In thousands except share and per share data)

	September 30, 2011			December 31, 2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	32,447		$	14,515
Short-term investments, available-for-sale		37,079			30,823
Accounts receivable		4,721			1,832
Prepaid expenses and other current assets		1,824			1,389
Total current assets		76,071			48,559
Property and equipment, net		930			701
Other assets		25			240
Total assets	$	77,026		$	49,500
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,857		$	2,147
Accrued liabilities		5,176			1,661
Common stock warrant liability		6,178			—
Current portion of deferred revenue		431			—
Total current liabilities		15,642			3,808
Deferred revenue		—			238
Total liabilities		15,642			4,046
Stockholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at September 30, 2011 and December 31, 2010; no shares issued and outstanding at September 30, 2011 and December 31, 2010		—			—
Common stock, $0.0001 par value; 200,000,000 shares authorized at September 30, 2011 and December 31, 2010; 28,549,789 and 23,648,646 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		4			3
Additional paid-in capital		144,251			122,593
Accumulated other comprehensive income		10			—
Accumulated deficit		(82,881	)		(77,142	)
Total stockholders’ equity		61,384			45,454
Total liabilities and stockholders’ equity	$	77,026		$	49,500

See accompanying notes.

1

Trius Therapeutics, Inc.

Statements of Operations

(In thousands except per share data)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011			2010
Revenues:
Contract research	$	2,995	$	1,940		$	8,568		$	5,511
License fees		25,708		—			25,708			—
Collaborations		1,733		—			1,733			—
Total revenues		30,436		1,940			36,009			5,511
Operating expenses:
Research and development		14,903		6,039			35,722			13,675
General and administrative		3,731		1,296			8,550			3,527
Total operating expenses		18,634		7,335			44,272			17,202
Income (Loss) from operations		11,802		(5,395	)		(8,263	)		(11,691	)
Other income (expense):
Interest income		5		1			19			1
Interest expense		—		(3,095	)		—			(3,889	)
Fair value adjustment of stock warrant liability		2,504		(9	)		2,504			467
Other income (expense)		—		1			1			(1	)
Total other income (expense)		2,509		(3,102	)		2,524			(3,422	)
Net income (loss)		14,311		(8,497	)		(5,739	)		(15,113	)
Accretion of deferred financing costs on redeemable convertible preferred stock		—		(3	)		—			(17	)
Net income (loss) attributable to common stockholders	$	14,311	$	(8,500	)	$	(5,739	)	$	(15,130	)
Net income (loss) per share, basic	$	0.50	$	(0.57	)	$	(0.22	)	$	(2.71	)
Weighted-average shares outstanding, basic		28,527		14,834			25,816			5,568
Net income (loss) per share, diluted	$	0.49	$	(0.57	)	$	(0.22	)	$	(2.71	)
Weighted-average shares outstanding, diluted		29,477		14,834			25,816			5,568

See accompanying notes.

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Trius Therapeutics, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2011			2010
Operating activities
Net loss	$	(5,739	)	$	(15,113	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		372			306
Share-based compensation		1,994			631
Amortization of investment premiums		462			1
Gain on fair value adjustment of stock warrant liability		(2,504	)		(467	)
Interest accrual on convertible notes payable		—			912
Beneficial conversion charge on convertible notes payable		—			2,902
Deferred revenue		193			72
Changes in operating assets and liabilities:
Accounts receivable		(2,889	)		(667	)
Prepaid expenses and other current assets		(435	)		(234	)
Accounts payable		1,710			1,116
Accrued liabilities		3,541			734
Other assets		216			(162	)
Net cash used in operating activities		(3,079	)		(9,969	)
Investing activities
Purchases of short-term investments		(40,995	)		—
Maturities of short-term investments		34,287			—
Purchases of property and equipment		(601	)		(297	)
Net cash used in investing activities		(7,309	)		(297	)
Financing activities
Proceeds from issuance of common stock and warrants, net of underwriting discounts and offering costs		28,013			48,350
Proceeds from exercise of stock options and stock issuances under employee stock purchase plans		307			1
Initial public offering costs		—			(1,907	)
Payments on capital lease obligation		—			(69	)
Repurchase of common stock		—			(1	)
Net cash provided by financing activities		28,320			46,374
Net increase in cash and cash equivalents		17,932			36,108
Cash and cash equivalents at beginning of period		14,515			18,259
Cash and cash equivalents at end of period	$	32,447		$	54,367
Supplemental cash flow information
Cash paid for interest	$	—		$	2

See accompanying notes.

3

Trius Therapeutics, Inc.

NOTES TO FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Trius Therapeutics, Inc. (the “Company”) was originally incorporated in California in June 2004 as RexC Pharmaceuticals, Inc. and changed its name to Rx³ Pharmaceuticals, Inc. in September 2004. In February 2007, the Company changed its name to Trius Therapeutics, Inc. and reincorporated in Delaware in December 2007. The Company is a biopharmaceutical company focused on the discovery, development and commercialization of innovative antibiotics for life-threatening infections.

Initial Public Offering

On August 6, 2010, the Company completed its Initial Public Offering (“IPO”) of common stock pursuant to a registration statement that was declared effective on August 2, 2010. In the IPO, the Company sold 10,000,000 shares of its common stock, at a price of $5.00 per share. As a result of the IPO, the Company raised a total of $45.1 million in net proceeds after deducting underwriting discounts and commissions of $1.6 million and offering expenses of $3.3 million. Costs directly associated with the Company’s IPO were capitalized and recorded as deferred IPO costs prior to the closing of the IPO. These costs were recorded as a reduction of the proceeds received in arriving at the amount to be recorded in additional paid-in capital.

Upon the closing of the IPO, 1,454,545 shares of the Company’s convertible preferred stock and 66,863,641 shares of the Company’s redeemable convertible preferred stock automatically converted into a total of 7,943,959 shares of the Company’s common stock. Also upon the closing of the IPO, $19.2 million of secured convertible notes (including accrued interest thereon) converted into 4,643,227 shares of the Company’s common stock, a non-cash charge of $2.9 million related to such conversion was recorded, and the preferred stock warrant liability was reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock.

Private Placement

On May 31, 2011, the Company closed a Private Placement (“Private Placement”) transaction with certain accredited investors pursuant to which an aggregate of 4,750,000 units were sold at a purchase price of $6.35 per unit, with each unit consisting of one share of common stock and a warrant to purchase an additional 0.35 shares of common stock. Each warrant is exercisable in whole or in part for a period of five years commencing on November 27, 2011 at a per share exercise price of $8.50, subject to certain adjustments as specified in the warrant. As a result of the Private Placement, the Company raised a total of $28.0 million in net proceeds after deducting underwriting discounts and commissions of $1.9 million and offering expenses of $0.3 million.

Collaboration and License Agreement

On July 26, 2011, the Company entered into a Collaboration and License Agreement (the “Bayer Agreement”) with Bayer Pharma AG (“Bayer”) which is an exclusive agreement to develop and commercialize the Company’s lead antibiotic, tedizolid phosphate (“tedizolid”), in China, Japan and substantially all other countries in Asia, Africa, Latin America and the Middle East, excluding North and South Korea (the “Bayer Licensed Territory”). Under the Bayer Agreement, the Company retains full development and commercialization rights outside the Bayer Licensed Territory, including the United States, Canada and the European Union. In exchange for development and commercialization rights in the Bayer Licensed Territory, Bayer paid the Company $25.0 million upfront and agreed to support approximately 25% of the future development costs of tedizolid required for global approval for treatment of acute bacterial skin and skin structure infections (“ABSSSI”) and pneumonia, subject to certain adjustments and limitations. In addition, Bayer agreed to support 100% of the future development costs required for local approval in the Bayer Licensed Territory. The Company is also eligible to receive up to $69.1 million upon the achievement of certain development and regulatory milestones and commercial milestones and will receive double-digit royalties on net sales of tedizolid in the Bayer Licensed Territory. None of the payments that the Company has received from Bayer to date, whether recognized as revenue or deferred, are refundable even if the related program is not successful.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents.

Short-term Investments Available-for-Sale

Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums and accretion of discounts is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income (expense). The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Accounts Receivable

Accounts receivable at September 30, 2011 represent amounts due under the Bayer Agreement and from federal funding sources based upon federal contracts with the National Institute of Allergy and Infectious Diseases (“NIAID”), a part of the National Institutes of Health (“NIH”), the Defense Threat Reduction Agency (“DTRA”), an agency within the U.S. Department of Defense, and the Lawrence Livermore National Laboratory (“LLNL”), a part of the U.S. Department of Energy’s National Nuclear Security Administration. Accounts receivable at December 31, 2010 represent amounts due from NIAID and DTRA.

Property and Equipment, Net

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful economic lives of the related assets.

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment. The Company will record impairment losses on long-lived assets used in operations when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. While the Company’s current and historical operating losses and cash flows are indicators of impairment, the Company believes the future cash flows to be received support the carrying value of its long-lived assets and, accordingly, the Company has not recognized any impairment losses through September 30, 2011.

Preferred Stock Warrant Liability and Common Stock Warrants

Warrants to purchase the Company’s convertible preferred stock were classified as liabilities and, through the date of the IPO, were recorded at estimated fair value with changes in market value recorded as other income (expense). Upon the closing of the IPO on August 6, 2010, all preferred stock converted into common stock and warrants to purchase preferred stock converted into warrants to purchase common stock. The fair value of the preferred stock warrants was estimated on the date of the IPO and recorded to additional paid-in capital upon conversion to common stock warrants. The Company reassessed the accounting treatment for the warrants as of the IPO date and deemed that accounting for the warrants within additional paid-in capital was appropriate.

The Company evaluated the accounting treatment for the warrants to purchase the Company’s common stock that were issued in conjunction with the Private Placement and determined that liability classification was appropriate. Upon closing of the Private Placement, the warrants were classified as a liability and are marked to estimated fair value at each reporting date with changes in estimated fair value recorded as other income (expense).

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued liabilities and warrants to purchase common stock. Fair value estimates of these instruments are made at a specific point in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash and cash equivalents,

5

accounts receivable, accounts payable, and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. The fair value of marketable securities is based upon market prices quoted on the last day of the fiscal period. The fair value of the common stock warrants is determined using a Black-Scholes model.

Revenue Recognition

The Company’s revenues are derived from the Bayer Agreement and federal contracts with NIAID, DTRA and LLNL. The Company recognizes revenues when all four of the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

The Company’s license and collaboration agreements contain multiple elements, including non-refundable upfront fees, payments for reimbursement of internal and third-party development and regulatory costs, payments associated with achieving specific milestones and royalties based on specified percentages of net product sales, if any. The Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

Revenue recognition for agreements with multiple deliverables is based on the individual units of accounting determined to exist in the agreement. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.

For agreements entered into after December 31, 2010 with multiple deliverables, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence, or VSOE, of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.

The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under an agreement.

Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement.

When a payment is specifically tied to a separate earnings process, revenues are recognized when the specific performance obligation associated with the payment is completed. Performance obligations typically consist of significant and substantive milestones pursuant to the related agreement. Revenues from milestone payments may be considered separable from funding for development and regulatory services because of the uncertainty surrounding the achievement of milestones for products in early stages of development. Accordingly, these payments are allowed to be recognized as revenue if and when the performance milestone is achieved if they represent a separate earnings process. Milestones do not include events that occur solely upon the passage of time or as a result of a counterparty’s performance.

When determining whether or not to account for transactions under the milestone method, the Company makes a determination at the inception of the agreement of whether or not each milestone is considered substantive. During this assessment process, the Company considers if achievement of the milestone is based in whole or in part on the Company’s performance or on the occurrence of a separate outcome resulting from the Company’s performance, if there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and if achievement will result in additional payments being due.

With respect to revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with federal contracts, where the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, the Company records revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the consolidated statements of operations.

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Research and Development Expenses

Research and development expenses include related salaries, benefits, license fees paid to third parties for use of their intellectual property, stock-based compensation, costs to third-party contractors to perform research, conduct clinical trials and develop drug materials, research supplies, associated overhead expenses and facilities costs. Research and development costs are expensed as incurred.

Patent Costs

Costs related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain.

Share-Based Compensation

The Company accounts for share-based compensation by measuring and recognizing compensation expense for all share-based payments made to employees and directors based on estimated grant date fair values. The Company uses the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period, and estimates the fair value of share-based awards to employees and directors using the Black-Scholes option valuation model. The Black-Scholes model requires the input of subjective assumptions, including volatility, the expected term and the fair value of the underlying common stock on the date of grant, among other inputs.

Stock options granted to non-employees are accounted for using the fair value approach. Stock options granted to non-employees are subject to periodic revaluation over their vesting terms.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income or loss and changes in equity during a period from transactions and other events and circumstances generated from non-owner sources. The Company’s comprehensive loss consisted of the net loss and unrealized gains and losses on the changes in fair value of investments.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. The Company has evaluated available evidence and concluded that the Company may not realize the benefit of its deferred tax assets; therefore a valuation allowance has been established for the full amount of the deferred tax assets at September 30, 2011 and December 31, 2010. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

Unaudited Interim Financial Data

The accompanying balance sheet as of September 30, 2011, statements of operations for the three months and nine months ended September 30, 2011 and 2010 and cash flows for the three months and nine months ended September 30, 2011 and 2010 are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2010 contained in the Company’s Annual Report on Form 10-K. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2011 and the results of operations for the three months and nine months ended September 30, 2011 and 2010 and cash flows for the three months and nine months ended September 30, 2011 and 2010. The December 31, 2010 balance sheet included herein was derived from audited financial statements, but does not include all disclosures including notes required by GAAP for complete financial statements.

The financial data and other information disclosed in these notes to the financial statements related to the three months and nine months ended September 30, 2011 and 2010 are unaudited. Interim results are not necessarily indicative of results for an entire year.

Net Income (Loss) per Common Share

Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common share

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equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, preferred stock, stock options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive.

The following table presents the computation of basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net income (loss) per share
Numerator
Net income (loss) attributable to common stockholders	$	14,311		$	(8,500	)	$	(5,739	)	$	(15,130	)
Denominator
Weighted-average common shares outstanding		28,536			14,906			25,840			5,665
Less: Weighted-average shares subject to repurchase		(9	)		(72	)		(24	)		(97	)
Denominator for basic net income (loss) per share		28,527			14,834			25,816			5,568
Basic net income (loss) per share	$	0.50		$	(0.57	)	$	(0.22	)	$	(2.71	)
Denominator for diluted net income (loss) per share		29,477			14,834			25,816			5,568
Diluted net income (loss) per share	$	0.49		$	(0.57	)	$	(0.22	)	$	(2.71	)

Potentially dilutive securities not included in the calculation of diluted net loss per common share in the table above for the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010 because to do so would be anti-dilutive are as follows (in common equivalent shares):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Common stock warrants		—		22,985		12,200		37,683
Common stock options		354,192		688,705		1,107,508		774,141
		354,192		711,690		1,119,708		811,824

Segments

The Company operates in only one segment. Management uses cash flows as the primary measure to manage its business and does not segment its business for internal reporting or decision making.

Note 2. Investments in Marketable Securities

The following is a summary of investments classified as available-for-sale securities (in thousands):

	Amortized Cost		Gross Unrealized Gains(1)		Gross Unrealized Losses(1)			Aggregate Estimated Fair Value
September 30, 2011
U.S. Treasury securities	$	37,069	$	11	$	(1	)	$	37,079
Total available-for-sale securities	$	37,069	$	11	$	(1	)	$	37,079
December 31, 2010
U.S. Treasury securities	$	30,823	$	2	$	(2	)	$	30,823
Total available-for-sale securities	$	30,823	$	2	$	(2	)	$	30,823

⁽¹⁾  Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. No securities in unrealized loss positions have been in a continuous unrealized loss position for 12 months or longer. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases.

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The amortized cost and estimated fair value of debt securities classified as available-for-sale by contractual maturity at September 30, 2011 and December 31, 2010 are presented below (in thousands):

	Maturing in 12 months or less				Maturing in more than 12 months
	Amortized Cost		Estimated Fair  Value		Amortized Cost		Estimated Fair Value
September 30, 2011
U.S. Treasury securities	$	37,069	$	37,079	$	—	$	—
Total available-for-sale securities	$	37,069	$	37,079	$	—	$	—
December 31, 2010
U.S. Treasury securities	$	30,823	$	30,823	$	—	$	—
Total available-for-sale securities	$	30,823	$	30,823	$	—	$	—

Note 3. Fair Value Measurements

The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and certain warrants to purchase common stock. Fair value measurements are classified and disclosed in one of the following three categories:

Level 1 —Quoted prices in active markets for identical assets or liabilities.

Level 2 —Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company measures its marketable securities at fair value on a recurring basis. The fair value of cash equivalents and marketable securities is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The fair value of the common stock warrant liability was determined based on “Level 3” inputs and the Black-Scholes option pricing model. Financial instruments measured at fair value as of September 30, 2011 and December 31, 2010 are classified below based on the three fair value hierarchy tiers described above (in thousands):

				Fair Value Measurements at Reporting Date Using
	Total			Level 1		Level 2		Level 3
September 30, 2011
Money Market funds, included in cash equivalents	$	5,307		$	5,307	$	—	$	—
U.S. Treasury securities, available-for-sale		37,079			37,079		—		—
Common stock warrant liability		(6,178	)		—		—		(6,178	)
Total	$	36,208		$	42,386	$	—	$	(6,178	)
December 31, 2010
Money Market funds, included in cash equivalents	$	4,039		$	4,039	$	—	$	—
U.S. Treasury securities, included in cash equivalents		9,500			9,500		—		—
U.S. Treasury securities, available-for-sale		30,823			30,823		—		—
Total	$	44,362		$	44,362	$	—	$	—

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Activity for financial instruments measured at fair value using significant unobservable inputs (Level 3) during the three and nine month periods ended September 30, 2011 and 2010 is presented in the table below (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Beginning balance	$	(8,682	)	$	(185	)	$	—		$	(661	)
Purchases		—			—			—			—
Issuances		—			—			(8,682	)		—
Settlements		—			—			—			—
Gains (losses) included in other income (expense)		2,504			(9	)		2,504			467
Transfers (to) from Level 3		—			194			—			194
Ending balance	$	(6,178	)	$	—		$	(6,178	)	$	—

Note 4. Preferred and Common Stock Warrants

Equity-classified warrants

During 2004, 2005 and 2006, in conjunction with its financing arrangements, the Company issued warrants to purchase 140,909, 40,909 and 40,090, respectively, of shares of Series A-1 convertible preferred stock at $0.55 per share and in 2007, issued warrants to purchase an aggregate of 346,363 shares of Series A-2 redeemable convertible preferred stock at $0.55 per share.

The preferred stock warrants were accounted for as a liability and recorded at fair value with increases or decreases in the fair value of such warrants recorded as other income (expense) in the Statement of Operations. Upon the closing of the IPO on August 6, 2010, all preferred stock converted into common stock and warrants to purchase preferred stock converted into warrants to purchase common stock. The Company reassessed the fair value accounting for the preferred stock warrants due to their conversion on August 6, 2010 to common stock warrants and determined that fair value measurement was no longer appropriate and that recognition as a component of additional paid-in capital was proper. The fair value of these formerly preferred stock warrants increased by $9,000 during the three months ended September 30, 2010 and decreased by approximately $467,000 during the nine months ended September 30, 2010.

Liability-classified warrants

In conjunction with the Private Placement that closed on May 31, 2011, the Company issued warrants to purchase 1,662,500 shares of common stock at $8.50 per share. These warrants become exercisable on November 27, 2011 and expire five years thereafter. The Company valued the warrants as derivative financial instruments as of the date of issuance and recorded them as a liability. The Company will continue to value the warrants at each reporting date, with any changes in fair value being recorded as other income (expense) in the Statement of Operations. The fair value of the warrants decreased by $2.5 million during the three and nine months ended September 30, 2011.

The determination that the warrants should be recorded as a liability is due to the fact that the warrants contain a net cash settlement provision under which the warrant holders may require the Company to purchase the warrants in exchange for a cash payment following the announcement of specified events defined as Fundamental Transactions (“Fundamental Transactions”) involving the Company (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 net cash settlement provision requires use of the Black-Scholes model in calculating the cash payment value in the event of a Fundamental Transaction or a Delisting.

The net 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 the Company’s common stock, the volatility of the Company’s common stock, the expected term of the warrant, the risk-free interest rate based on U.S. Treasury security yields, and the Company’s dividend yield. The warrant requires use of a volatility assumption equal to the greater of (i) 100%, (ii) the 30-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting, or (iii) the arithmetic average of the 10, 30, and 50-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting.

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 the Company’s common stock, the historical volatility of the stock prices of the Company’s peer group, risk-free rates based on U.S. Treasury security yields, the expected term of the warrants and the Company’s dividend yield. Changes in these assumptions can materially affect the fair value estimate. The Company could ultimately incur amounts to settle the warrant under the net cash settlement value that is significantly different than the carrying value of the liability in the financial statements. The Company 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.

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During the three months ended September 30, 2011, 14,174 equity-classified warrants were net exercised resulting in the issuance of 6,431 shares of common stock. During the nine months ended September 30, 2011, 49,691 equity-classified warrants were net exercised resulting in the issuance of 21,560 shares of common stock. At September 30, 2011, there were 1,678,884 common stock warrants outstanding of which 16,384 were exercisable. The common stock warrants outstanding will expire between three years and six years from September 30, 2011. At December 31, 2010, there were 66,075 common stock warrants outstanding and exercisable.

Note 5. Convertible Notes Payable

In November 2009, the Company sold $19.2 million in aggregate principal amount of secured convertible promissory notes (the “2009 Notes”) in a private placement to certain existing investors and other parties with whom it had substantive, pre-existing relationships. The 2009 Notes were secured by a first priority security interest in all of the Company’s assets and were convertible into equity upon the occurrence of certain events. The 2009 Notes accrued interest at a rate of 8% per annum and had a maturity date of the earlier of (1) January 31, 2011 or (2) the sale of the company, or all or substantially all of its assets. The 2009 Notes (including interest thereon) were automatically converted into 4,643,227 shares of common stock upon the closing of the IPO on August 6, 2010 (representing a conversion at a 12.5% discount to the IPO price) and the Company recognized a $2.9 million non-cash charge as a component of interest expense as a result of the conversion. Interest expense related to the 2009 Notes for the three months and nine months ended September 30, 2010 was $155,000 and $912,000, respectively. There was no interest expense incurred related to the 2009 Notes for the three months or nine months ended September 30, 2011 due to their conversion upon the IPO in August 2010.

Note 6. Share-based Compensation

The Company granted 524,000 stock options to certain employees and consultants of the Company with a weighted average exercise price of $6.53 per share during the nine months ended September 30, 2011. The stock options granted by the Company had an exercise price equal to the closing market price of the Company’s common stock on the date of grant. There were 241,750 stock options granted to employees and consultants during the nine months ended September 30, 2010.

The following table summarizes stock option activity during the nine months ended September 30, 2011:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2010		1,992,078		$	2.60		8.69
Granted		524,000			6.53
Exercised		(46,395	)		1.19
Canceled		(604	)		1.29
Options outstanding at September 30, 2011		2,469,079		$	3.46		8.31	$	7,550
Options vested or expected to vest at September 30, 2011		2,461,692		$	3.46		8.31	$	7,537
Options exercisable at September 30, 2011		1,159,543		$	2.19		7.42	$	4,839

At September 30, 2011 and December 31, 2010, there was approximately $3.8 million and $3.2 million, respectively, of total unrecognized compensation costs related to outstanding options which is expected to be recognized over a weighted average period of 2.73 and 2.84 years, respectively.

Compensation cost for stock options granted to employees is based on the estimated grant date fair value and is recognized over the vesting period of the applicable option on a straight-line basis. The estimated weighted average grant date fair value of stock options granted to employees during the three months and nine months ended September 30, 2011 was $4.83 and $4.21, respectively.

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As stock-based compensation expense recognized is based on options ultimately expected to vest, the expense has been reduced for estimated forfeitures. The fair value of each employee option grant during the nine months ended September 30, 2011 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Nine months ended September 30, 2011
Expected volatility	75%
Expected term (in years)	5.27-6.08
Risk-free interest rate	1.02%-2.71%
Expected dividend yield	0%

Expected Volatility. The expected volatility rate used to value stock option grants is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the pharmaceutical and biotechnology industry in a similar stage of development.

Expected Term. The Company elected to utilize the “simplified” method for “plain vanilla” options to value stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option.

Risk-free Interest Rate. The risk-free interest rate assumption was based on zero-coupon U.S. Treasury instruments that had terms consistent with the expected term of the stock option grants.

Expected Dividend Yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on its historical experience. Groups of employees that have similar historical forfeiture behavior are considered separately for expense recognition.

Stock options granted to non-employees are accounted for using the fair value approach. The fair value of non-employee option grants are estimated using the Black-Scholes option-pricing model and are remeasured over the vesting term as earned. The estimated fair value is expensed over the applicable service period. The Company granted 5,000 stock options to non-employees during the nine months ended September 30, 2011. There were no stock options granted to non-employees during the nine months ended September 30, 2010. The Company recognized expense related to non-employee options of $(3,000) and $(11,000) during the three months ended September 30, 2011 and 2010, respectively, and $9,000 and $18,000 during the nine months ended September 30, 2011 and 2010, respectively.

Share-Based Compensation Summary. Share-based compensation expense includes stock options granted to employees and non-employees and has been reported in the Company’s statements of operations as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Research and development	$	336	$	75	$	967	$	238
General and administrative		416		160		1,027		393
Total	$	752	$	235	$	1,994	$	631

Since the Company had a net operating loss carryforward as of September 30, 2011, no excess tax benefits for the tax deductions related to share-based awards were recognized in the statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised during the nine months ended September 30, 2011 and 2010 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities.

Note 7. Common Stock Reserved for Issuance

The following table summarizes shares of common stock reserved for future issuance:

	September 30, 2011		December 31, 2010
Common stock warrants		1,678,884		66,075
Shares available for purchase under the 2010 Employee Stock Purchase Plan		619,133		465,835
Common stock options outstanding		2,469,079		1,992,078
Common stock options available for future grant		1,876,139		1,666,076
Total common shares reserved for issuance		6,643,235		4,190,064

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Note 8. Comprehensive Income (Loss)

Comprehensive income (loss) was comprised of the following for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011			2010
Net income (loss)	$	14,311	$	(8,497	)	$	(5,739	)	$	(15,113	)
Unrealized gain on available-for-sale investments		1		—			10			—
Comprehensive income (loss)	$	14,312	$	(8,497	)	$	(5,729	)	$	(15,113	)

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Note 9. Significant Collaborative Agreements

On July 26, 2011, the Company entered into the Bayer Agreement which is an exclusive agreement to develop and commercialize the Company’s lead antibiotic, tedizolid in the Bayer Licensed Territory. Under the Bayer Agreement, the Company retains full development and commercialization rights outside the Bayer Licensed Territory, including the United States, Canada and the European Union. In exchange for development and commercialization rights in the Bayer Licensed Territory, Bayer paid the Company $25.0 million upfront and agreed to support approximately 25% of the future development costs of tedizolid required for global approval for the treatment of ABSSSI and pneumonia, subject to certain adjustments and limitations. In addition, Bayer agreed to support 100% of the future development costs required for local approval in the Bayer Licensed Territory. The Company is also eligible to receive up to $69.1 million upon the achievement of certain development, regulatory and commercial milestones and will receive double-digit royalties on net sales of tedizolid in the Bayer Licensed Territory.

Pursuant to the accounting guidance under Accounting Standards Codification 605-25 or (“ASC 605-25”), which governs revenue recognition for multiple element arrangements, the Company has evaluated the two material non-contingent deliverables under the Agreement and determined that each meets the criteria for separation and therefore both will be treated as separate units of accounting, as follows:

• The License (“License”) to develop and commercialize tedizolid in the Bayer Licensed Territory; and

• Certain Global Development Plan Services (“Global Development Plan Services”) which will be conducted by the Company through an expected date of December 2017.

The Bayer Agreement requires that the Company manufacture and supply bulk drug product for commercial use for up to five years from the first commercial sale of tedizolid in the Bayer Licensed Territory. Since these manufacturing efforts are contingent upon regulatory approvals for commercialization and there were no firm orders for commercial supply at or near the execution of the agreement, this obligation is deemed a contingent deliverable and was not valued at the inception of the arrangement.

The Company allocated the estimated arrangement consideration based on the percentage of the relative selling price of each unit of accounting. The Company estimated the selling price of the License using the relief from royalty method income approach. The Company estimated the selling prices of the Global Development Plan Services using estimated third party costs.

Since the delivery of the License occurred upon the execution of the Agreement and there was no general right of return, approximately $24.9 million of the upfront payment was allocated to the License and was recorded as License revenue during the three and nine months ended September 30, 2011. The remaining $0.1 million was allocated to the Global Development Plan Services and was recorded as Collaboration revenue during the three and nine months ended September 30, 2011.

The Global Development Plan Services are expected to be performed through December 2017, with no general right of return. Therefore, all allocated arrangement consideration related to the Global Development Plan Services will be recognized as revenue in proportion to the percentage of actual costs incurred during the period to estimated total Global Plan Services expected throughout the collaboration. On September 28, 2011 the Company dosed its first patient in its second global Phase 3 study of tedizolid for the treatment of ABSSSI. This event triggered a $2.0 million payment to the Company under the Bayer Agreement. The Company reallocated the new expected arrangement consideration and added $0.8 million to the license and $1.2 million to the Global Development Plan Services. The $0.8 million was recorded as license revenues immediately, as there are no ongoing services to be provided for the license. The amount recognizable as revenue for the Global Development Plan Services is equal to the percentage calculated by dividing the cumulative costs completed as of the time of earning the payment divided by the total expected costs to be incurred by the Company during the Global Development Plan Service period and then multiplying this percentage by the new updated arrangement consideration for the Global Development Plan Services. From this amount, the previous cumulative amount recognized for Global Development Plan Service revenues is subtracted in order to calculate the amount of Global Development Plan Service revenues to record for the period. The revenue to be recorded, however, is the lower of this amount or the actual amount of Global Development Plan Service billings for the period. For the three and nine months ended September 30, 2011, the calculation of Global Development Plan Services was equal to the billings for the quarter which included the $1.2 million allocated to the Global Development Plan Services related to the $2.0 million payment plus the $0.4 million billed during the quarter related to actual Global Development Plan services performed.

Revenues recognized in the Statement of Operations related to the Bayer Agreement were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
License fees	$	25,708	$	—	$	25,708	$	—
Collaborations		1,733		—		1,733		—
Total	$	27,441	$	—	$	27,441	$	—

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As of September 30, 2011, the Company had $193,000 of short-term deferred revenue related to the Bayer Agreement.

Development expenses incurred by Trius that pertain to the Global Development Plan Services are being charged to research and development expense.

The Company may receive up to an additional $67.1 million upon the achievement of certain development, regulatory and commercial events. The Company has elected the milestone method for recognizing milestone payments into revenue. In order for milestone consideration to be deemed substantive, it should:

1. Be commensurate with either the vendor’s performance to achieve the milestone or the enhancement of value of the item delivered as a result of the specific outcome resulting from the vendor’s performance to achieve the milestone

2. Relate solely to past performance; and

3. Be reasonable relative to all deliverables and payment terms in the arrangement.

Approximately $34.1 million of the future payments that the Company may receive are related to the achievement of certain development and regulatory events and $35.0 million if certain commercial sales thresholds are met. The Company has determined that $19.1 million of the development and regulatory payments are based upon its efforts. The remaining $15.0 million of the development and regulatory payments and all $35.0 million of potential payments for the achievement of the commercial sales thresholds are based upon the efforts of the collaborator.

Bayer has the ability to terminate the Bayer Agreement in its entirety by providing at least six months notice to the Company within the first two years of the Agreement. After two years, Bayer must provide at least 90 days notice. In addition, Bayer has the right to terminate the Agreement within 30 days of determining that either of the Company’s two ongoing Phase 3 clinical trials of tedizolid phosphate for the treatment of ABSSSI has not been completed successfully or of becoming aware of any material toxicity and/or material drug safety event or issue concerning tedizolid.

Note 10. Commitments

The Company’s amended facility lease will expire on June 30, 2013 and the Company has options to extend the lease through June 30, 2014. In addition to the minimum lease payments, the Company is required to pay a pro-rata share of certain building expenses. Rent expense for the three months ended September 30, 2011 and 2010 was $163,000 and $107,000, respectively. Rent expense for the nine months ended September 30, 2011 and 2010 was $449,000 and $340,000, respectively.

Note 11. Recent Accounting Pronouncements

Occasionally, new accounting standards are issued or proposed by the Financial Accounting Standards Board, or other standard-setting bodies that the Company adopts by the effective date specified within the standard. Unless otherwise discussed, standards that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

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In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, and change a principle or requirement for fair value measurements or disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its financial statements.

In June 2011, the FASB issued updated accounting guidance related to the presentation of comprehensive income. This guidance requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2010 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 25, 2011.

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 (formerly known as torezolid phosphate), an intravenous, or IV, and oral antibiotic, for the treatment of serious gram-positive bacterial infections, initially for acute bacterial skin and skin structure infections, or ABSSSI, and subsequently for other indications. ABSSSI is a new classification for complicated skin and skin structure infections, or cSSSI. We initiated our Phase 3 clinical program for tedizolid phosphate for the treatment of ABSSSI in August 2010, under which we completed enrollment of our first Phase 3 clinical trial in August 2011 and enrolled the first patient in our second Phase 3 clinical trial in September 2011. We reached agreement with the United States Food and Drug Administration, or FDA, under the Special Protocol Assessment, or SPA, process, on the designs of both our first and second Phase 3 clinical trials of tedizolid phosphate for the treatment of ABSSSI. We completed a Phase 1 clinical trial during the first quarter of 2011which evaluated the ability of tedizolid to penetrate into the lung for potential use in treating lung infections. Based on the results of the study, we plan to pursue further development of tedizolid phosphate for the treatment of pneumonia using the same 200 milligram, 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 with Bayer Pharma AG, or Bayer, to develop and commercialize our lead Phase 3 antibiotic, tedizolid phosphate in China, Japan and substantially all other countries in Asia, Africa, Latin America and the Middle East, excluding North and South Korea, or the Bayer Licensed Territory. We intend to continue to evaluate potential ex-US territory strategic alliances for tedizolid phosphate outside of the Bayer Licensed Territory. In addition, we are developing antibiotics for gram-negative infections using our proprietary discovery platform under three contracts: one funded by the National Institute of Allergy and Infectious Diseases, or NIAID, a part of the National Institutes of Health, or NIH, a second funded by the Defense Threat Reduction Agency, or DTRA, a part of the Department of Defense, and a new third contract that we entered into in April 2011 with Lawrence Livermore National Laboratory, or LLNL, a part of the U.S. Department of Energy’s National Nuclear Security Administration.

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We acquired worldwide rights to tedizolid phosphate outside of North and South Korea, or Korea, from Dong-A Pharmaceutical Co., Ltd., or Dong-A, in January 2007. Since then we have progressed tedizolid phosphate from filing an Investigational New Drug Application, or IND, into our Phase 3 clinical program. In addition, we have substantially lowered the manufacturing costs of tedizolid phosphate.

In September 2008, we entered into a five-year contract with NIAID under which we may receive up to $27.7 million to support our development of novel dual-target antibacterial agents as therapeutics for the treatment of gram-negative biodefense pathogens, which the Company also believes can be developed into commercial products. The scope of the contract includes preclinical, nonclinical and clinical IND and New Drug Application, or NDA,-enabling development activities. Pursuant to our NIAID contract, we retain a worldwide nonexclusive royalty-free license for each invention to which NIAID obtains title, and the United States government retains certain march-in rights with respect to our inventions developed under our NIAID contract. From contract inception through September 30, 2011, we have recognized $17.0 million in revenues related to the research performed under the NIAID contract.

In April 2010, we entered into a four and one-half year contract with DTRA under which we may receive up to $29.5 million to support a preclinical program to identify targets of antibacterial compounds from marine natural product libraries from The Regents of the University of California, or UCSD, and to apply our structure based drug design and development capabilities to optimize promising antibacterial compounds for activity against gram-negative bacteria, including multiple biodefense pathogens. Pursuant to the DTRA contract, we retain a worldwide nonexclusive royalty-free license for each invention to which DTRA obtains title, and the United States government retains certain march-in rights with respect to these same inventions. From contract inception through September 30, 2011, we have recognized $4.8 million in revenues related to the research performed under our DTRA contract.

In April 2011, we entered into a three year research contract with LLNL for the development of novel antibiotics directed against gram negative multi-drug resistant bacterial pathogens. Trius may receive up to $3.0 million over three years in support of its development efforts. From contract inception through September 30, 2011, we have recognized $0.5 million in revenues related to the research performed under the LLNL contract.

We were originally incorporated as RexC Pharmaceuticals, Inc. in California in June 2004 and changed our name to Rx³ Pharmaceuticals, Inc. in September 2004. We subsequently changed our name to Trius Therapeutics, Inc. in February 2007 and reincorporated in Delaware in December 2007. We have incurred significant net losses since our inception. As of September 30, 2011, we had an accumulated deficit of $82.9 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 programs. As a result, we will continue to 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 when needed would have a negative impact on our financial condition and our ability to pursue our business strategies.

On August 6, 2010, we completed our initial public offering, or IPO, of common stock pursuant to a Registration Statement that was declared effective on August 2, 2010. In the IPO, we sold 10,000,000 shares of our common stock, at a price of $5.00 per share. As a result of the IPO, we raised a total of $45.1 million in net proceeds after deducting underwriting discounts and commissions of $1.6 million and offering expenses of $3.3 million. Upon the closing of the IPO, 1,454,545 shares of our convertible preferred stock and 66,863,641 shares of our redeemable convertible preferred stock automatically converted into 7,943,959 shares of our common stock. Also upon the closing of the IPO, $19.2 million of secured convertible notes (including accrued interest thereon) converted into 4,643,227 shares of our common stock, a $2.9 million non-cash beneficial conversion charge was recorded, and our preferred stock warrant liability was reclassified to additional paid-in capital upon the conversion of the warrants to purchase preferred stock into warrants to purchase common stock.

On May 31, 2011, we closed a private placement (“Private Placement”) transaction, or the Private Placement, with certain accredited investors pursuant to which an aggregate of 4,750,000 units were sold at a purchase price of $6.35 per unit, with each unit consisting of one share of common stock and a warrant to purchase an additional 0.35 shares of common stock. Each warrant is exercisable in whole or in part for a period of five years commencing on November 27, 2011 at a per share exercise price of $8.50, subject to certain adjustments as specified in the warrant. As a result of the Private Placement, we raised a total of $28.0 million in net proceeds after deducting underwriting discounts and commissions of $1.9 million and offering expenses of $0.3 million.

On July 26, 2011, we signed our collaboration and license agreement with Bayer to develop and commercialize tedizolid phosphate in the Bayer Licensed Territory. Under the collaboration and license agreement, we are responsible for all development and commercialization activities outside of the Bayer Licensed Territory. We retain full development and commercialization rights outside of the Bayer Licensed Territory including the United States, Canada and the European Union. In exchange for development and commercialization rights in the Bayer Licensed Territory, Bayer paid us $25.0 million upfront and agreed to support approximately 25% of the development costs of tedizolid phosphate required for global approval for the treatment of ABSSSI and pneumonia. In addition, Bayer agreed to be responsible for 100% of future development as well as the future development costs required for local approval in the Bayer Licensed Territory. We are also eligible to receive up to $69.1 million upon the achievement of certain development and regulatory milestones and commercial milestones and are entitled to receive double-digit royalties on net sales of tedizolid phosphate in the Bayer Licensed Territory.

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On August 2, 2011 we reached agreement with the FDA, under the Special Protocol Assessment or SPA process, on the design of our second Phase 3 clinical trial of the intravenous and oral dosage forms of tedizolid phosphate for the treatment of ABSSSI. This double-blind pivotal study compares the efficacy and safety of once-daily administration of 200 milligrams of tedizolid phosphate for six days of treatment to twice-daily administration of 600 milligrams of linezolid (Zyvox^®, Pfizer) for 10 days of treatment. All patients will be initiated on the IV dosage form for a minimum of two infusions and will be transitioned to the oral dosage form at the discretion of the clinical investigator. As with our first and on-going Phase 3 clinical trial testing the oral dosage form of tedizolid phosphate, the primary efficacy endpoint of this IV-to-oral transition study will be the cessation of spread and reduction in lesion size and absence of fever at 48 to 72 hours following initiation of treatment. Secondary endpoints will include, among other things, sustained clinical response at the end of therapy visit, and the investigator’s assessment of clinical response at all visits and clinical success at the post treatment evaluation visit. Provided non-inferiority is met, an assessment of superiority of tedizolid phosphate to linezolid with respect to the primary efficacy endpoint will also be made. The first patient was enrolled in this pivotal study in September 2011.

Financial overview

Revenues

We have recognized $55.0 million of revenues from inception through September 30, 2011. We have derived substantially all of our revenues from our Bayer Agreement and NIAID, DTRA and LLNL 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, DTRA, 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.

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, 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 September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Clinical and nonclinical research and development (including manufacturing)	$	3,046	$	4,321	$	8,498	$	8,898
Preclinical research and development		11,857		1,718		27,224		4,777
Total	$	14,903	$	6,039	$	35,722	$	13,675

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.

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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 short-term investments.

Interest Expense

There is no interest expense for the three or nine months ended September 30, 2011. For the three and nine months ended September 30, 2010, interest expense consisted primarily of interest accrued on the notes payable prior to their conversion, interest accrued or paid on our capital leases and non-cash interest related to the amortization of debt discount costs associated with the capital leases and non-cash interest expense associated with the increase in fair value of the preferred stock warrants issued in connection with obtaining our capital leases.

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 (“Fundamental Transactions”) involving the Company (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 the Company’s common stock, the volatility of the Company’s common stock, the expected term of the warrant, the risk-free interest rate based on U.S. Treasury security yields, and the Company’s 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 the Company’s common stock, the historical volatility of the stock prices of the Company’s peer group, risk-free rates based on U.S. Treasury security yields, the expected term of the warrants and the Company’s 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. The Company 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.

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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. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K, other than as mentioned below regarding revenue recognition.

Revenue Recognition

Our revenues currently consist of federal contract revenues and license and collaboration revenues from third parties and historically have consisted of federal contract and grant revenues and fees for research services from license or collaboration agreements. We recognize revenues when all four of the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

For arrangements that include multiple deliverables, we determine the deliverables and then identify separate units of accounting. The expected non-contingent arrangement consideration is then allocated to the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria are considered separately for each unit of accounting. Upfront fees are allocated to the license and recorded immediately as license revenue as long as the payment is less than the value ascribed to the license. Any upfront payments in excess of the value ascribed to the license, are deferred and recognized as either license revenues or collaboration revenues, in proportion to the original percentages of estimated selling prices. For ongoing development and regulatory efforts, we record revenues as the development and regulatory efforts that are subject to reimbursement are incurred, throughout the expected development and regulatory period, and the revenues are recorded as license revenues and collaboration revenues in proportion to the current ratio of remaining license revenues and collaboration revenues to be recorded. Amounts received in advance of services performed are recorded as deferred revenue until earned.

We have made an election to utilize the milestone method for recognizing milestone payments into revenue, when the milestone is deemed substantive. In order for milestone consideration to be deemed substantive, it should:

1. Be commensurate with either the vendor’s performance to achieve the milestone or the enhancement of value of the item delivered as a result of the specific outcome resulting from the vendor’s performance to achieve the milestone;

2. Relate solely to past performance; and

3. Be reasonable relative to all deliverables and payment terms in the arrangement.

These milestones will be recorded as revenue, when achieved and will be recorded as license fees and collaboration revenues, in accordance with the initial ratios of the selling prices for the units of accounting.

For contract payments achieved during the period where we have material ongoing performance obligations, and the contract payment is deemed not to be substantive, we do not treat these payments as milestones for accounting purposes, and use the cumulative catch up approach for recording non-substantive contract payments. We update the remaining expected arrangement consideration by adding to it the amount to be received for achieving the payment. This payment amount is prorated, with a portion being applied to the allocated arrangement consideration for the license and a portion applied to the allocated arrangement consideration for the development services based upon the initial proration of the deemed selling prices for the license and development services at the inception of the agreement. We then calculate the amount of cumulative revenue recognizable for both the license and development services upon achievement of the event resulting in the payment. The amount recognizable as revenue for the development services is equal to the percentage calculated by dividing the cumulative costs completed as of the time of earning the payment divided by the total expected costs to be incurred by us during the development period and then multiplying this percentage by the new updated arrangement consideration for the development services. From this amount, we subtract the previous cumulative amount recognized for development service revenues to calculate the amount of development service revenues to record for the period. The revenue to be recorded is the lower of this amount or the actual amount of development service billings for the period. If the calculated amount is lower than the actual billings, then the difference will be recorded as deferred revenue until such time as the efforts are greater than or equal to the billings. The amount recognizable for the license is generally equal to the difference between the new allocated arrangement consideration for the license and the prior allocated arrangement consideration for the license, given that the earnings process for delivery of the license is typically complete.

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For contract payments which are not deemed to be substantive milestones in accordance with U.S. generally accepted accounting principles, or GAAP, that are expected to be achieved after the completion of any material performance obligations required by us, since there are no material further performance obligations, the earnings process is deemed complete when the contract payment is earned and the entire amount of the contract payment is recorded as License revenues and Collaboration revenues, in accordance with the initial ratios of the selling prices for the units of accounting.

Results of Operations

Comparison of the Three Months Ended September 30, 2011 and 2010

Revenues

The following table summarizes our revenues for the three months ended September 30, 2011 and 2010 (in thousands, except percentages):

	Three Months Ended September 30,				$ Change		% Change
	2011		2010
Contract research	$	2,995	$	1,940	$	1,055		54	%
License fees		25,708		—		25,708		100	%
Collaborations		1,733		—		1,733		100	%
Total	$	30,436	$	1,940	$	28,496		1468	%

Contract research revenues increased for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010 primarily due to additional research performed under our DTRA and NIAID contracts as well as the commencement of research under our LLNL contract which was entered into in April 2011.

License and collaboration revenues for the three months ended September 30, 2011 relate to commencement of activities under our collaboration and license agreement with Bayer that we signed in July 2011. Upon entry into the license and collaboration agreement, Bayer paid us an upfront payment of $25.0 million. Approximately $24.9 million of the upfront payment was allocated to the License and was recorded as license revenue during the three months ended September 30, 2011. The remaining $0.1 million was allocated to the Global Development Plan Services and was recorded as collaboration revenue during the three months ended September 30, 2011. We also performed certain development and regulatory services under the Bayer collaboration and license agreement during the three months ended September 30, 2011 for which we recognized $441,000 as collaboration revenues. In addition, we earned a $2.0 million payment that was contingent upon the first patient being dosed in our second Phase 3 clinical trial of tedizolid phosphate. We increased the allocable arrangement consideration when the contingent payment was earned and recognized $1.2 million of collaboration revenues and $0.8 million of license revenues during the three months ended September 30, 2011.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended September 30, 2011 and 2010 (in thousands, except percentages):

	Three Months Ended September 30,				$ Change		% Change
	2011		2010
Research and development expenses	$	14,903	$	6,039	$	8,864		147	%

During the three months ended September 30, 2011, 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. During the three months ended September 30, 2010, our research and development costs related primarily to preparation for the initiation of our Phase 3 clinical program for which the first patient was dosed in August 2010 and research under our NIAID and DTRA contracts. Clinical trial expenses increased by $5.5 million during the three months ended September 30, 2011 primarily due to additional development activities performed on our first Phase 3 clinical trial of tedizolid phosphate which commenced during August 2010 and initiation of our second Phase 3 clinical

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trial of tedizolid phosphate for which the first patient was dosed in September 2011. In conjunction with the initiation of our second Phase 3 clinical trial, we began to manufacture registration batches for our drug substance and drug product. During the three months ended September 30, 2011 we incurred approximately $1.3 million in manufacturing costs for the production of drug product to be used to support our registration activities .. In addition, our nonclinical research expenses increased by $987,000 during the three months ended September 30, 2011 primarily due to additional research efforts performed under our DTRA contract which commenced during April 2010.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended September 30, 2011 and 2010 (in thousands, except percentages):

	Three Months Ended September 30,				$ Change		% Change
	2011		2010
General and administrative expenses	$	3,731	$	1,296	$	2,435		188	%

The increase in general and administrative expenses was due primarily to an increase of $866,000 of costs related to partnering activities due primarily to finalizing the collaboration and license agreement with Bayer, an increase of $344,000 due to commercial planning activities, an increase of $257,000 in additional share-based compensation due primarily to stock options granted to our directors, an increase of $232,000 of additional personnel costs due primarily to increases in headcount, and an increase of $210,000 in employee relocation costs.

Other Income (Expense)

The following table summarizes our other income (expense) for the three months ended September 30, 2011 and 2010 (in thousands, except percentages):

	Three Months Ended September 30,					$ Change			% Change
	2011		2010
Interest income	$	5	$	1		$	4			400	%
Interest expense		—		(3,095	)		(3,095	)		(100	)%
Other income		—		1			(1	)		100	%
Other expense		—		—			—			0	%
Fair value adjustment of stock warrant liability		2,504		(9	)		2,513			27922	%
Total	$	2,509	$	(3,102	)	$	5,611			180	%

There was no interest expense recognized during the three months ended September 30, 2011 because we had no debt outstanding during the period. The interest expense recognized during the three months ended September 30, 2010 related to notes payable that were converted to common stock upon the closing of our IPO in August 2010. The conversion of the notes payable resulted in a $2.9 million non-cash conversion charge which was recognized as a component of interest expense in the third quarter of 2010.

Other income for the three months ended September 30, 2011 was $2.5 million and resulted from the remeasurement of the estimated fair value of the common stock warrant liability. This liability was recognized upon the issuance of warrants in connection with the Private Placement in May 2011 and is remeasured at each reporting date with changes in estimated fair value recorded as other income or expense.

Comparison of the Nine Months Ended September 30, 2011 and 2010

Revenues

The following table summarizes our revenues for the nine months ended September 30, 2011 and 2010 (in thousands, except percentages):

	Nine Months Ended September 30,				$ Change		% Change
	2011		2010
Contract research	$	8,568	$	5,511	$	3,057		55	%
License fees		25,708		—		25,708		100	%
Collaborations		1,733		—		1,733		100	%
Total	$	36,009	$	5,511	$	30,498		553	%

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Contract research revenues increased for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 primarily due to the additional research efforts performed under our DTRA and NIAID contracts and commencement of research under our LLNL contract which was entered into in April 2011.

License and collaboration revenues for the nine months ended September 30, 2011 relate to commencement of activities under our collaboration and license agreement with Bayer that we signed in July 2011. Upon entry into the license and collaboration agreement, Bayer paid us an upfront payment of $25.0 million. Approximately $24.9 million of the upfront payment was allocated to the License and was recorded as license revenue during the nine months ended September 30, 2011. The remaining $0.1 million was allocated to the Global Development Plan Services and was recorded as collaboration revenue during the nine months ended September 30, 2011. We also performed certain development and regulatory services under the Bayer collaboration and license agreement during the nine months ended September 30, 2011 for which we recognized $441,000 as collaboration revenues. In addition, we earned a $2.0 million payment that was contingent upon the first patient being dosed in our second Phase 3 clinical trial of tedizolid phosphate. We increased the allocable arrangement consideration when the contingent payment was earned and recognized $1.2 million of collaboration revenues and $0.8 million of license revenues during the nine months ended September 30, 2011.

Research and Development Expenses

The following table summarizes our research and development expenses for the nine months ended September 30, 2011 and 2010 (in thousands, except percentages):

	Nine Months Ended September 30,				$ Change		% Change
	2011		2010
Research and development expenses	$	35,722	$	13,675	$	22,047		161	%

During the nine months ended September 30, 2011, 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. During the nine months ended September 30, 2010, our research and development costs related primarily to preparation for the initiation of our first Phase 3 clinical trial for which the first patient was dosed in August 2010 and research under our NIAID, and DTRA contracts. Clinical trial expenses increased by $14.8 million during the nine months ended September 30, 2011 primarily due to additional development activities performed on our first Phase 3 trial of tedizolid phosphate which commenced in August 2010 and initiation of our second Phase 3 clinical trial of tedizolid phosphate for which the first patient was dosed in September 2011. In conjunction with the initiation of our second Phase 3 clinical trial, we began to manufacture drug product to support our registration activities. We incurred approximately $1.7 million in manufacturing costs for this purpose during the nine months ended September 30, 2011. In addition, our nonclinical research expenses increased by $3.1 million during the nine months ended September 30, 2011 when compared to the same period in 2010 primarily due to additional work performed under our DTRA contract which commenced during April 2010.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2011 and 2010 (in thousands, except percentages):

	Nine Months Ended September 30,				$ Change		% Change
	2011		2010
General and administrative expenses	$	8,550	$	3,527	$	5,023		142	%

The increase in general and administrative expenses was due primarily to an increase of $1,220,000 of costs related to partnering activities due to the negotiation of the collaboration and license agreement with Bayer, an increase of $800,000 of personnel costs due to additional headcount, $634,000 in additional share-based compensation, an increase of $536,000 due to commercial planning activities, $526,000 of costs related to operating as a publicly traded company in 2011, $311,000 of additional intellectual property costs, and $225,000 in additional employee relocation costs.

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Other Income (Expense)

The following table summarizes our other income (expense) for the nine months ended September 30, 2011 and 2010 (in thousands, except percentages):

	Nine Months Ended September 30,						$ Change			% Change
	2011			2010
Interest income	$	19		$	1		$	18			1800	%
Interest expense		—			(3,889	)		(3,888	)		(100	)%
Other income		2			—			2			100	%
Other expense		(1	)		(1	)		—			0	%
Fair value adjustment of stock warrant liability		2,504			467			2,037			436	%
Total Other Income (Expense)	$	2,524		$	(3,422	)	$	5,946			173	%

There was no interest expense recognized during the three months ended September 30, 2011 because we had no debt outstanding during the period. The interest expense recognized during the three months ended September 30, 2010 related to notes payable that were converted to common stock upon the closing of our IPO in August 2010. The conversion of the notes payable resulted in a $2.9 million non-cash conversion charge which was recognized as a component of interest expense in the third quarter of 2010.

Other income for the three months ended September 30, 2011 was $2.5 million and resulted from the remeasurement of the estimated fair value of the common stock warrant liability. This liability was recognized upon the issuance of warrants in connection with the Private Placement in May 2011 and is remeasured at each reporting date with changes in estimated fair value recorded as other income or expense.

Liquidity and Capital Resources

We have incurred losses since our inception and we anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may obtain from financings, research funding, collaborations, contract revenues or other sources.

Since our inception, we have funded our operations principally through the receipt of funds from the placement of equity securities and convertible notes payable, contract research funding under our NIAID, DTRA and LLNL contracts and research grants. As of September 30, 2011, we had cash and cash equivalents and short-term investments of approximately $69.5 million. Cash in excess of immediate requirements is invested in accordance with our investment policy primarily with a view to liquidity and capital preservation. As of September 30, 2011, our funds are held in cash, money market funds and United States Treasury securities.

	Nine Months Ended September 30,
	2011			2010
	(In thousands)
Cash Flows from Continuing Operations:
Net cash used in operating activities	$	(3,079	)	$	(9,969	)
Net cash used in investing activities		(7,309	)		(297	)
Net cash provided by financing activities		28,320			46,374
Net increase in cash and cash equivalents	$	17,932		$	36,108

During the nine months ended September 30, 2011 and 2010 our operating activities used cash of $3.1 million and $10.0 million, respectively, primarily resulting from our net losses and changes in our working capital accounts. The decrease in cash used in operations during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was primarily due to license and collaboration revenue recognized under the Bayer Agreement which was partially offset by increased expenses associated with our first Phase 3 clinical program for tedizolid phosphate which was initiated in August 2010 and our second Phase 3 clinical trial program for tedizolid phosphate which was initiated in September 2011. During the nine months ended September 30, 2011, our investing activities used cash of $7.3 million primarily due to purchases of short-term investments in excess of maturities of short-term investments. During the nine months ended September 30, 2011, financing activities provided cash of $28.3 million which was primarily derived from proceeds received from the Private Placement transaction which raised a total of $28.0 million in net proceeds after deducting underwriting discounts, commissions and offering expenses. During the nine months ended September 30, 2010, financing activities provided cash of $46.4 million which was primarily derived from proceeds received from our IPO.

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Operating Capital Requirements

We anticipate we will continue to incur net losses for the next several years as we incur expenses for our clinical and nonclinical studies of tedizolid phosphate, complete preclinical studies and initiate clinical development of our preclinical programs, build commercial capabilities and expand our corporate infrastructure. We may not be able to complete the development and initiate commercialization of these programs if, among other things, our preclinical research and clinical trials are not successful, the FDA does not approve tedizolid phosphate or any other product candidates arising out of our current preclinical programs when we expect, or at all, or funding under our NIAID, DTRA or LLNL contracts or collaboration and license agreement with Bayer is discontinued.

On August 6, 2010, we completed our IPO in which we sold 10,000,000 shares of our common stock, at a price of $5.00 per share. After deducting underwriting discounts and commissions of $1.6 million and offering expenses of $3.3 million, we raised a total of $45.1 million in net proceeds.

On May 31, 2011, we closed the Private Placement transaction with certain accredited investors in which we sold an aggregate of 4,750,000 units at a price of $6.35 per unit, with each unit consisting of one share of common stock and a warrant to purchase an additional 0.35 shares of common stock. As a result of the Private Placement, the Company raised a total of $28.0 million in net proceeds after deducting underwriting discounts and commissions of $1.9 million and offering expenses of $0.3 million.

On July 26, 2011, we signed our collaboration and license agreement with Bayer. In exchange for development and commercialization rights in the Bayer Licensed Territory, Bayer paid us $25.0 million upfront and agreed to support approximately 25% of the development and regulatory costs of tedizolid phosphate required for global approval in ABSSSI and pneumonia. In addition, Bayer agreed to support 100% of the development and regulatory costs required for local approval of tedizolid phosphate in the Bayer Licensed Territory. We are also eligible to receive up to $69.1 million upon the achievement of certain development and regulatory milestones and commercial milestones and are entitled to receive double-digit royalties on net sales of tedizolid phosphate in the Bayer Licensed Territory.

Including the funds received from our IPO, the Private Placement and $25 million upfront payment received from our Bayer collaboration and license agreement, we believe that we have sufficient cash and cash equivalents to fund our operations for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in Part II, Item 1A of this quarterly report, “Risk Factors.”

Our existing working capital, including the funds received from our IPO, the Private Placement and $25 million upfront payment received from our collaboration and license agreement with Bayer, alone will not be sufficient to fund our operations through the successful development and commercialization of tedizolid phosphate or any other products we develop. As a result, we will need to raise additional capital to fund our operations and continue to conduct clinical trials to support potential regulatory approval of tedizolid phosphate and any other product candidates. To raise additional capital, we may seek to sell additional equity or debt securities or incur indebtedness. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We also plan to seek funding through additional collaborations or other similar arrangements with third parties.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

• The progress of our tedizolid phosphate clinical program, including expenses to support the clinical trials;

• The costs and timing of regulatory approvals;

• Our progress in advancing our preclinical programs through preclinical development into clinical trials;

• The costs and timing of clinical and commercial manufacturing supply arrangements for our product candidates;

• The costs of establishing sales or distribution capabilities;

• The success of the commercialization of our products;

• Our ability to maintain existing, and be awarded new, government research contracts;

• Our ability to maintain our current collaboration and license agreement with Bayer and establish potential future strategic collaborations, including licensing and other arrangements; and

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• The costs involved in enforcing or defending patent claims or other intellectual property rights.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of payment due date by period at September 30, 2011:

	Payment by Period
	Total		Less Than 1 Year		1 - 3 Years		3-5 Years		More Than 5 Years
	(In thousands)
Operating leases	$	1,052	$	581	$	471	$	—	$	—

Under our license agreement with Dong-A, we may be required to make up to an aggregate of $13.0 million in additional payments to Dong-A upon the achievement of specified development and regulatory approval milestones. We are unable at this time to estimate with certainty the amount or timing of future costs we will incur under this agreement.

Recent Accounting Pronouncements

Occasionally, new accounting standards are issued or proposed by the Financial Accounting Standards Board, or FASB, or other standard-setting bodies that we adopt by the effective date specified within the standard. Unless otherwise discussed, standards that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, and change a principle or requirement for fair value measurements or disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its financial statements.

In June 2011, the FASB issued updated accounting guidance related to the presentation of comprehensive income. This guidance requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for interim and annual periods beginning after December 15, 2011. We do not believe the adoption of this guidance will have a material impact on our financial statements.

Item 3. Qualitative and Quantitative Disclosures About Market Risk

Our cash equivalents and short-term investments are classified as available-for-sale and consisted of money market funds and debt instruments of agencies of the U.S. government at September 30, 2011. The investments in these financial instruments are made in accordance with an investment policy approved by our board of directors which specifies the categories, allocations, and ratings of securities we may consider for investment. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Some of the financial instruments that we invest in could be subject to market risk. This means that a change in prevailing interest rates may cause the value of the instruments to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of that security will probably decline. To minimize this risk, we intend to maintain a portfolio which may include cash, cash equivalents and investment securities available-for-sale in a variety of securities which may include money market funds, government and non-government debt securities and commercial paper, all with various maturity dates. Based on our current investment portfolio, we do not believe that our results of operations would be materially impacted by an immediate change of 10% in interest rates.

We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash equivalents and investment securities have significant risk of default or illiquidity. We made this determination based on discussions with our investment advisors and a review of our holdings. While we believe our cash equivalents and investment securities do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. All of our investments are held at fair value.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control

As required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In connection with entering the Bayer collaboration agreement in July 2011, we have developed and will continue developing additional internal controls over our revenue recognition process. Except for the development of the additional internal controls over revenue recognition, there was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

You should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report and in our other public filings in evaluating our business. The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business previously disclosed in Item 1A. of our annual report on Form 10-K for the year ended December 31, 2010. Additional risks and uncertainties that we are unaware of may also become important factors that affect us. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.

Risks Related to Our Financial Condition and Capital Requirements

We have incurred significant operating losses since inception and anticipate that we will incur continued losses for the foreseeable future. We may never become profitable.*

As of September 30, 2011, we had an accumulated deficit of $82.9 million. Although we had net income of $14.3 million for the three months ended September 30, 2011, our net income was derived from one time payments under our collaboration agreement with Bayer that was signed in July 2011. We have and plan to continue to fund our operations from the sale of our securities, through research funding and from collaboration and license payments, including payments under the Bayer collaboration. However, we have generated no revenues from product sales to date and because the upfront and milestone based payments under our collaboration agreement with Bayer are non-recurring, we do not expect to remain profitable on a quarter to quarter basis for the foreseeable future. We expect that the uncertainty of our ability to achieve milestones under the Bayer collaboration and any other collaboration agreements we may enter into in the future and the timing of those payments will lead to significant fluctuations in our earnings and profitability. However, even with these funds, we expect to continue to incur substantial additional operating losses for the next several years as we advance tedizolid phosphate and our preclinical programs. In addition, if we obtain regulatory approval for tedizolid phosphate, we may incur significant sales, marketing, licensing and outsourced manufacturing expenses. As a result, we expect to continue to incur significant and increasing losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing and commercializing pharmaceutical drugs, we are unable to predict the extent of any future losses. We may never successfully commercialize any products and thus may never have any significant future revenues or achieve and sustain profitability.

We have limited sources of revenues and have not to date generated any revenues from product sales.*

We are a biopharmaceutical company with no products approved for commercial sale. To date, substantially all of our revenues have been derived from federal contract and grant revenues and fees for development and regulatory services from license or collaboration agreements, and we have not generated any revenues from product sales. We do not anticipate generating revenues, if any, from sales of tedizolid phosphate for at least four years from the date hereof. Our ability to generate future revenues from product sales depends heavily on our success in:

• Obtaining favorable results for and advancing the development of tedizolid phosphate for the treatment of ABSSSI, including successfully initiating and completing our Phase 3 clinical program;

• Obtaining United States and/or foreign regulatory approvals for tedizolid phosphate;

• Commercializing tedizolid phosphate and any other product candidates for which we obtain FDA approval, including by building a hospital-directed sales force and/or collaborating with third parties;

• Achieving broad market acceptance of tedizolid phosphate in the medical community and with third-party payors;

• Pursuing clinical development of tedizolid phosphate for the treatment of other indications, including pneumonia and bacteremia;

• Generating a pipeline of innovative product candidates using our drug discovery platform or through licensing strategies;

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• Maintaining our current federal contracts which support our current drug discovery efforts and obtaining new federal contracts to help pay for future drug discovery efforts; and

• Maintaining our collaboration and license agreement with Bayer to support our continuing development and regulatory efforts for tedizolid phosphate.

Tedizolid phosphate will require extensive additional clinical study and evaluation, regulatory approval in multiple jurisdictions, substantial investment and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote tedizolid phosphate, or any other antibiotic product candidates that we develop, before we obtain regulatory approval from the FDA or comparable foreign regulatory authorities. If we do not obtain regulatory approval for and successfully commercialize tedizolid phosphate, we may not generate any revenues from product sales, and we may not be able to continue our operations. Even if we successfully obtain regulatory approval to market tedizolid phosphate, our revenues are dependent upon the size of the markets in the territories for which we obtain regulatory approval and have commercial rights, as well as our ability to gain market acceptance and achieve commercial success. If we do not generate revenues, or the markets for the treatment of ABSSSI are not as significant as we estimate, our business and prospects will be materially harmed.

If we fail to obtain additional financing, we may not be able to complete the development and commercialization of tedizolid phosphate or any other product candidates.*

Our operations have consumed substantial amounts of cash since our inception. We expect to continue to spend substantial amounts to:

• Complete the clinical development of tedizolid phosphate, initially for treatment of ABSSSI, which will obligate us to pay substantial additional milestone payments to Dong-A;

• Launch and commercialize tedizolid phosphate and any other product candidates for which we obtain regulatory approval, including by building a hospital-directed sales force and/or collaborating with third parties;

• Pursue clinical development of tedizolid phosphate for the treatment of other indications, including pneumonia and bacteremia; and

• Continue our discovery and development programs to advance our preclinical product pipeline.

In August 2010, we completed our IPO raising $45.1 million in net proceeds. In May 2011, we completed the Private Placement raising $28.0 million in net proceeds. In July 2011, we signed a collaboration agreement with Bayer where they agreed to pay us $25.0 million in upfront fees, and agreed to support approximately 25% of our development costs of tedizolid phosphate for ABSSSI and pneumonia, pay us up to $69.1 million upon the achievement of certain milestones, and pay us royalties on net sales of tedizolid phosphate in the Bayer Licensed Territory. In addition, Bayer agreed to pay for 100% of the development efforts in the Bayer Licensed Territory. We expect that the net proceeds from our recent Private Placement, upfront payment from Bayer and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our capital requirements through at least the next twelve months. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. For example, our clinical trials may encounter technical, enrollment or other issues that could cause our development costs to increase more than we expected. We may also need to raise additional funds sooner if we choose to initiate clinical trials for indications in addition to ABSSSI more rapidly than we presently anticipate. In any event, we expect that we will require additional capital to obtain regulatory approval of and to commercialize tedizolid phosphate. Securing additional financing will require a substantial amount of time and attention from our management and may divert a disproportionate amount of its attention away from our day-to-day activities, which may adversely affect our management’s ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

• Significantly delay, scale back or discontinue the development or commercialization of tedizolid phosphate or our preclinical programs;

• Seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or

• Relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing discovery, development and commercialization efforts and our ability to generate revenues and achieve or sustain profitability will be substantially harmed. In addition, if the United States government stops funding our preclinical programs, we may not be able to continue our preclinical programs, and our business and prospects may be materially harmed.

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To raise additional funds to support our business operations, we may sell additional equity or convertible debt securities, which would result in dilution to our stockholders, or incur indebtedness which could result in restrictive covenants that adversely impact the operation of our business.

The sale of additional equity or convertible debt securities would result in the issuance of additional shares of our capital stock and dilution to our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.

The timing of the milestone and royalty payments we are required to make to Dong-A Pharmaceutical Co., Ltd., or Dong-A, is uncertain and could adversely affect our cash flows and results of operations.*

In January 2007, we entered into a license agreement with Dong-A pursuant to which we acquired an exclusive license to certain patent applications and other intellectual property related to the oral and injectable forms of tedizolid phosphate to develop and commercialize licensed products, including tedizolid phosphate, outside of Korea. In addition to milestone payments we have already made to Dong-A, we have an obligation to make up to an aggregate of $13.0 million in additional payments upon achievement of specified development and regulatory approval milestones. We are also required to pay Dong-A mid-single digit tiered royalties on net sales of tedizolid phosphate. The timing of our achievement of these events and corresponding milestone payments to Dong-A is subject to factors relating to the clinical and regulatory development and commercialization of tedizolid phosphate, many of which are beyond our control. We may become obligated to make a milestone payment when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our planned commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us. In addition, if we are unable to make any payment to Dong-A when due or if we fail to use commercially reasonable efforts to achieve certain development and commercialization milestones within the timeframes required by our license agreement with Dong-A, Dong-A has the right to terminate the license agreement and all of our rights to develop and commercialize tedizolid phosphate upon 90 days written notice of our failure to make any such payment or to timely achieve the specified development and commercialization milestones.

The timing of the milestone and royalty payments we are entitled to receive from Bayer under our collaboration and license agreement with Bayer, is uncertain and could adversely affect our cash flows and results of operations.*

The timing of the $69.1 million we are entitled to receive upon the achievement of certain milestones under our collaboration and license agreement with Bayer is inherently uncertain. The receipt of milestone payments under the Bayer collaboration and license agreement can have a significant impact on our cash flows and results of operations for the periods of time in which such payments are made. However, while receipt of milestone and royalty payments would result in significant income, the absence of collaboration revenues in subsequent quarters could result in significant reductions in net income and could cause our stock price to drop.

Our limited operating history makes it difficult to evaluate our business and prospects.

We were incorporated in 2004. Our operations to date have been limited to organizing and staffing our company, conducting product development activities for tedizolid phosphate and performing research and development with respect to our preclinical programs. We have not yet demonstrated an ability to obtain regulatory approval for or commercialize a product candidate. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products.

Risks Related to our Business

We are heavily dependent on the success of tedizolid phosphate, which is still under clinical development. We cannot assure you that we will obtain regulatory approval for tedizolid phosphate. If we fail to obtain regulatory approval for tedizolid phosphate, our business will be materially harmed.*

To date, we have not marketed, distributed or sold any products. Our near-term prospects are substantially dependent on our ability to develop and commercialize tedizolid phosphate. To date, we have completed one Phase 2 study and seven Phase 1 studies of tedizolid phosphate. In October 2009, we completed our end of Phase 2 meeting with the FDA. Based on the feedback and guidance we received from the FDA as well as the SPA agreement we reached with the FDA on the protocol for our first Phase 3 clinical trial of tedizolid phosphate for the treatment of ABSSSI, we conducted our first Phase 3 clinical trial of tedizolid phosphate.. We commenced our first Phase 3 clinical trial in August 2010 and completed enrollment in August 2011. In addition, we obtained a SPA agreement for our second Phase 3 clinical trial of tedizolid phosphate in August 2011 and commenced enrollment in September 2011. If our Phase 3 clinical trials of tedizolid phosphate are successful, we plan to use them as a basis for an NDA, seeking approval to commercialize the IV and oral dosage forms of tedizolid phosphate for treatment of ABSSSI. Additional clinical safety and special population Phase 1 clinical trials necessary for registration are also being performed. We cannot commercialize tedizolid phosphate prior to obtaining FDA approval. However, tedizolid phosphate is susceptible to the risks of failure inherent at any stage of drug development, including the appearance of adverse events, or AEs, failure to maintain efficacy across a broad population of patients and the FDA’s determination that a drug product is not approvable. We cannot assure you that our clinical trials for tedizolid phosphate will be completed timely or at all, or that we will be able to obtain FDA approval for this product. If we are not able to commercialize tedizolid phosphate for ABSSSI or for any other indications, we will not be able to generate product revenues in the foreseeable future, or at all. Tedizolid phosphate is the only product candidate for which we have conducted clinical trials, and we cannot be certain that we will advance any other product candidates into clinical trials. As a company, we have never obtained regulatory approval for or commercialized a drug. It is possible that the FDA may refuse to accept our NDA for substantive review or may conclude after review of our data that our application is insufficient to obtain regulatory approval of tedizolid phosphate. If the FDA does not accept or approve our NDA, it may require that we conduct additional clinical, preclinical or manufacturing validation studies and submit that data before it will reconsider our application. Depending on the extent of these or any other FDA required

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studies, approval of any NDA or application that we submit may be delayed by several years, or may require us to expend more resources than we have available. In addition, increased scrutiny by the United States Congress of the FDA’s approval process, particularly in our areas of focus, may significantly delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing and other requirements. Any delay in obtaining, or an inability to obtain, regulatory approvals would prevent us from commercializing tedizolid phosphate, generating revenues and achieving and sustaining profitability. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve our NDA. If any of these outcomes occur, we may be forced to abandon our NDA for tedizolid phosphate, which would materially adversely affect our business and could potentially cause us to cease operations.

Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.*

Clinical testing is expensive and can take many years to complete, and its outcome is highly uncertain. Failure can occur at any time during the clinical trial process due to inadequate performance of a drug or inadequate adherence by patients or investigators to clinical trial protocols, leading to poor data quality. The results of preclinical studies and early clinical trials of product candidates may not be predictive of the results of later-stage clinical trials. For example, the positive results we have seen to date in our Phase 2 clinical trial of tedizolid phosphate in patients with complicated skin and skin structure infections, or cSSSI, do not ensure that later clinical trials, such as our ongoing Phase 3 studies for the treatment of ABSSSI, will demonstrate similar results. Investigational drugs in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed satisfactorily through preclinical studies and initial clinical testing. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks in Phase 3 studies, even after seeing promising results in earlier clinical trials. Despite the results reported in earlier clinical trials for tedizolid phosphate, we do not know whether any Phase 3 or other clinical and nonclinical trials we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market tedizolid phosphate. In addition, based on our discussions and agreement with the FDA, the design of our ongoing and planned Phase 3 studies of tedizolid phosphate differ in certain ways from our Phase 2 study. Those design changes may lead to unexpected results in our Phase 3 studies. If future clinical or nonclinical trials do not produce favorable results, our ability to obtain regulatory approval for tedizolid phosphate or our preclinical programs may be adversely impacted.

The FDA regulatory approval process is lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for tedizolid phosphate, our business will be substantially harmed.*

The time required to obtain approval for commercialization from the FDA and similar foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials, depending upon numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to obtain regulatory approval may change during the course of a product’s clinical development.

We may fail to obtain regulatory approval for tedizolid phosphate or any other product candidates for many reasons, including the following:

• We may not be able to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for any indication;

• The results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;

• The FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

• We may not be able to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

• We may not be able to demonstrate that a product candidate provides an advantage over current standard of care, future competitive therapies in development, or over placebo in any indications for which the FDA requires a placebo-controlled trial;

• The FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

• The FDA or comparable foreign regulatory authorities may not accept data generated at our clinical trial sites;

• The data collected from clinical trials of any product candidates that we develop may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;

• The FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators enter into agreements for clinical and commercial supplies; and

• The approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

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This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market tedizolid phosphate or any future product candidates, which would significantly harm our business, results of operations and prospects.

We have previously applied to the FDA for Fast Track designation based on the results of our in vitro nonclinical data and Phase 1 study data from healthy volunteers. Fast track designation is a process designed to facilitate the development and expedite the review of drugs to treat serious diseases and fill an unmet medical need. The applications were denied as the FDA was unable to conclude based on the submitted data and our proposed development plan at that time whether tedizolid phosphate would meet an unmet medical need given that alternative therapies were available for cSSSI, including infections with MRSA as a pathogen. Based on future clinical trial data, or on other future data, we may consider submitting a new request for Fast Track designation. However, we cannot guarantee that we will ever receive Fast Track designation, or that tedizolid phosphate will qualify for other FDA programs for expediting the development, review or approval process.

Delays in clinical trials are common and have many causes, and any such delays could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales as currently contemplated.*

We may experience delays in clinical trials of our product candidates. To date, tedizolid phosphate has completed a Phase 2 study for the treatment of cSSSI. We plan to conduct two Phase 3 studies of tedizolid phosphate for the treatment of ABSSSI, the first of which completed enrollment in August 2011, and we anticipate receiving top-line data from this clinical trial by early 2012. The first patient was enrolled in our second Phase 3 study in September 2011. In parallel with the ongoing Phase 3 trial, we are conducting additional clinical safety, pharmacology and special population Phase 1 studies necessary for registration. If our Phase 3 studies are successful, we intend to use these trials as a basis to file an NDA for the approval of the IV and oral dosage forms of tedizolid phosphate for the treatment of ABSSSI. We do not know whether our planned clinical trials will begin on time, need to be redesigned, enroll a sufficient number of patients or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including the following:

• Delays in obtaining regulatory approval to commence a trial;

• Delays in reaching agreement with the FDA on any SPAs we submit;

• Imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;

• Delays in reaching agreement on acceptable terms with prospective Clinical Research Organizations, or CROs, and clinical trial sites;

• Delays in obtaining required institutional review board approval at each clinical trial site;

• Delays in recruiting suitable patients to participate in a clinical trial;

• Delays in having patients complete participation in a trial or return for post-treatment follow-up;

• Clinical trial sites dropping out of a trial to the detriment of enrollment;

• Time required to add new sites;

• Delays in obtaining sufficient supplies of clinical trial materials; or

• Delays resulting from negative or equivocal findings of a data safety monitoring board, or DSMB, for a clinical trial.

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, enrollment criteria imposed by the FDA, the proximity of patients to clinical sites, the eligibility criteria for participating in the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. For example, we could encounter delays in our clinical trials of tedizolid phosphate if participating physician investigators encounter unresolved ethical issues associated with enrolling patients in clinical trials of tedizolid phosphate in lieu of prescribing approved antibiotics that have established safety and efficacy profiles. In addition, because we are the first sponsor to enroll an ABSSSI Phase 3 study under new regulatory guidance, we do not have a reliable basis from which to project or otherwise predict enrollment rates or timing for our ongoing Phase 3 study. Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. Any of these delays in completing our clinical trials could increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues.

We may be required to suspend or discontinue clinical trials due to adverse side effects or other safety risks that could preclude approval of tedizolid phosphate or any of our future product candidates.

Our clinical trials may be suspended at any time for a number of reasons. A clinical trial may be suspended or terminated by us, our collaborators, the FDA or other regulatory authorities due to a failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, unforeseen safety issues including adverse side effects, failure to demonstrate a benefit from

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using the investigational drug, changes in governmental regulations or administrative actions, lack of adequate funding to continue the clinical trial, or negative or equivocal findings of a DSMB, an Institutional Review Board or an Independent Ethics Committee for a clinical trial. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate any clinical trial of any product candidates that we develop, the commercial prospects of such product candidates will be harmed and our ability to generate product revenues, if at all, from any of these product candidates will be delayed or eliminated. Any of these occurrences may harm our business, financial condition and prospects significantly.

To date, the drug-related adverse events experienced by patients while being treated with tedizolid phosphate were mostly mild or moderate side effects that included nausea, diarrhea, vomiting and headache. However, our future clinical trials will involve testing in larger patient populations, which could reveal a high prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. Any of these occurrences may harm our business and prospects significantly.

The SPAs for our two Phase 3 studies of tedizolid phosphate do not guarantee any particular outcome from regulatory review of our Phase 3 studies.*

The FDA’s SPA process creates a written agreement between the sponsoring company and the FDA regarding clinical trial design and other clinical trial issues that can be used to support approval of a product candidate. The SPA is intended to provide assurance that if the agreed upon clinical trial protocols are followed, the clinical trial endpoints are achieved, and there is a favorable risk-benefit profile, the data may serve as the primary basis for an efficacy claim in support of an NDA. However, SPA agreements are not a guarantee of an approval of a product candidate or any permissible claims about the product candidate. In particular, SPAs are not binding on the FDA if previously unrecognized public health concerns arise during the performance of the clinical trial, other new scientific concerns regarding product candidate safety or efficacy arise or if the sponsoring company fails to comply with the agreed upon clinical trial protocols. We do not know how the FDA will interpret the commitments under the agreed upon SPAs, how it will interpret the data and results or whether it will approve tedizolid phosphate for the treatment of ABSSSI. In addition, although the FDA has provided us with feedback as to the adequacy of the proposed size of our safety population to support an NDA, it may, based on the review of our initial Phase 3 study safety data, require us to conduct additional clinical trials or enroll additional patients in our Phase 3 clinical program. As a result, we cannot guarantee any particular outcome from regulatory review of these planned Phase 3 studies.

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed in obtaining or ultimately not be able to obtain regulatory approval for or commercialize tedizolid phosphate or any other product candidates.

We have relied and plan to continue to rely upon CROs to monitor and manage data for our on-going clinical programs for tedizolid phosphate as well as the execution of our preclinical and nonclinical studies, and control only certain aspects of our CROs’ activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with the FDA’s current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA for all of our products in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable, and the FDA may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials will require an adequately large number of test subjects to evaluate the safety and effectiveness of tedizolid phosphate. Accordingly, if our CROs fail to comply with these regulations or recruit a sufficient number of patients, the FDA may require us to repeat clinical trials, which would delay the regulatory approval process. In addition, our CROs are not our employees, and we cannot control whether or not they devote sufficient time and resources to our on-going clinical, nonclinical and preclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could harm our competitive position. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize tedizolid phosphate or any other product candidates that we develop. As a result, our financial results and the commercial prospects for tedizolid phosphate and any other product candidates that we develop would be harmed, our costs could increase and our ability to generate revenues could be delayed.

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We plan to maintain our relationships with existing CROs and enter into agreements with additional CROs to obtain additional resources and expertise in an attempt to accelerate our progress with regard to on-going clinical, nonclinical and preclinical programs and specifically, the compilation of clinical trial data for submission with an NDA for tedizolid phosphate. Switching or entering into new relationships with CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our operating results, financial condition or future prospects.

Our dependence upon third parties for the manufacture and supply of tedizolid phosphate and any future product candidates and products may cause delays in, or prevent us from, successfully developing and commercializing products.*

We do not currently have nor do we plan to implement the infrastructure or capability internally to manufacture tedizolid phosphate for use in the conduct of our clinical trials. We employ the services of Albany Molecular Research, Inc., or AMRI, to produce tedizolid phosphate active pharmaceutical ingredient, or API, and AAI Pharma Services, or AAI, and Patheon Inc., or Patheon, to produce the solid oral and sterile IV tedizolid phosphate finished products. We have entered into clinical supply master services agreements with AMRI, AAI and Patheon for our short-term clinical supply needs, but we do not have long-term or commercial agreements for the supply of tedizolid phosphate or any future product candidates with AMRI, AAI, Patheon or any other third party.

With respect to the manufacturing for our commercial scale product, we intend to eventually pursue long term agreements with our current manufacturers or transfer the manufacturing to other larger manufacturers. However, tedizolid phosphate is a new chemical entity that has never been produced at commercial scale, and, as such, there are underlying risks associated with its manufacture, which could include cost overruns, new impurities, difficulties in scaling up or reproducing manufacturing processes and lack of timely availability of raw materials. Any of these risks may prevent or delay us from successfully developing and commercializing tedizolid phosphate. If we are unable to arrange for third-party manufacturing sources, or do so on commercially reasonable terms, we may not be able to complete development of any product candidates or market them. Reliance on third-party manufacturers entails many risks, including regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us.

Our third-party manufacturers are required to comply with applicable FDA current good manufacturing practice, or cGMP, regulations. In addition, our manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. These cGMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating to our product candidates. We do not have control over our manufacturers’ compliance with these regulations and standards. Failure by any of our manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market our product candidates, delays, suspensions or withdrawals of approvals, operating restrictions, and interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect our business.

We could also experience manufacturing delays if our third-party manufacturers give greater priority to the supply of other products over our product candidates. If AMRI, AAI, Patheon or any alternate supplier of finished drug product, experiences any significant difficulties in its respective manufacturing processes for tedizolid phosphate API or finished drug product, we could experience significant interruptions in the supply of tedizolid phosphate. Our inability to coordinate the efforts of our third-party manufacturing partners, or the lack of capacity available at our third-party manufacturing partners, could impair our ability to supply tedizolid phosphate at the levels required for successful commercialization. If our current suppliers are unable or unwilling to perform under their agreements, we could experience significant interruptions in the supply of tedizolid phosphate because of the significant regulatory requirements that we would need to satisfy in order to qualify a new tedizolid phosphate API or finished drug product supplier.

If for any reason we are unable to use our currently available supply of tedizolid phosphate, the inability to acquire additional quantities of tedizolid phosphate in a timely manner from third parties could delay clinical trials of tedizolid phosphate or result in product shortages and prevent us from developing and commercializing tedizolid phosphate in a cost-effective manner or on a timely basis.

In addition, we do not currently have the capability to package tedizolid phosphate finished drug product for distribution to hospitals and other customers. Prior to commercial launch, we intend to enter into agreements for the commercial supply of tedizolid phosphate so that we can ensure proper supply chain management if and when we are authorized to make commercial sales of tedizolid phosphate. If we are unable to enter into an agreement with a commercial supplier on satisfactory terms, or at all, our commercialization of tedizolid phosphate may be significantly delayed.

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We are dependent on our collaboration agreement with Bayer to further develop and commercialize tedizolid phosphate in the Bayer Licensed Territory. The failure to maintain this agreement or the failure of Bayer to perform its obligations under this agreement, could negatively impact our business.*

Pursuant to the terms of our collaboration and license agreement with Bayer, we granted to Bayer exclusive rights to develop and commercialize tedizolid phosphate in the Bayer Licensed Territory. Consequently, our ability to generate any revenues from tedizolid phosphate in the Bayer Licensed Territory depends on Bayer’s ability to obtain regulatory approvals for and to successfully commercialize tedizolid phosphate in the Bayer Licensed Territory. We have limited control over the amount and timing of resources that Bayer will dedicate to these efforts.

We are subject to a number of other risks associated with our dependence on our collaboration and license agreement with Bayer, including:

• Bayer has the right to terminate the Agreement within 30 days of determining that either of the two Phase 3 ABSSSI studies has not been completed successfully or of becoming aware of any material toxicity and/or material drug safety event or issue concerning tedizolid.

• Bayer may not comply with applicable regulatory guidelines with respect to developing or commercializing tedizolid phosphate, which could adversely impact future development or sales of tedizolid phosphate in the Bayer Licensed Territory and elsewhere;

• We and Bayer could disagree as to future development plans and Bayer may delay future clinical trials or stop a future clinical trial;

• There may be disputes between us and Bayer, including disagreements regarding the collaboration and license agreement, that may result in (1) the delay of or failure to achieve regulatory and commercial objectives that would result in milestone or royalty payments, (2) the delay or termination of any future development or commercialization of tedizolid phosphate, and/or (3) costly litigation or arbitration that diverts our management’s attention and resources;

• Bayer may not provide us with timely and accurate information regarding supply forecasts, which could adversely impact our ability to comply with our supply obligations to Bayer and manage our own inventory of tedizolid phosphate, as well as our ability to generate accurate financial forecasts;

• Business combinations or significant changes in Bayer’s business strategy may adversely affect Bayer’s ability or willingness to perform its obligations under our collaboration agreement;

• The royalties we are eligible to receive from Bayer may be reduced or eliminated based upon Bayer’s and our ability to maintain or defend our intellectual property rights and the presence of generic competitors in the Bayer Licensed Territory;

• Limitations on our or an acquirer’s ability to maintain or pursue development or commercialization of products that are competitive with tedizolid phosphate could deter a potential acquisition of us that our stockholders may otherwise view as beneficial; and

• If Bayer is unsuccessful in obtaining regulatory approvals for or commercializing tedizolid phosphate in the Bayer Licensed Territory, we may not receive certain additional milestone payments or any royalty payments under the collaboration and license agreement and our business prospects and financial results may be materially harmed.

The collaboration and license agreement is subject to early termination, including through Bayer’s right to terminate without cause upon advance notice to us. If the agreement is terminated early, we may not be able to find another collaborator for the further development and commercialization of tedizolid phosphate in the Bayer Licensed Territory on acceptable terms, or at all, and we may be unable to pursue continued development and commercialization of tedizolid phosphate in the Bayer Licensed Territory on our own.

We may enter into additional collaboration and license agreements for the development and commercialization of tedizolid phosphate or other of our drug candidates, and may be similarly dependent on the performance of third parties with similar risk.

Other than our collaboration and license agreement with Bayer, we may not be able to enter into acceptable agreements to develop and commercialize tedizolid phosphate or, if needed, adequately build our own marketing and sales capabilities.*

We intend to pursue the development and commercialization of tedizolid phosphate through collaboration and license arrangements with third parties, such as our collaboration and license agreement with Bayer. We may be unable to enter into additional collaboration and license arrangements outside of the Bayer territory. In addition, there can be no guarantee that Bayer or any other parties that we may enter into collaboration and license arrangements with will be successful or generate more revenues than we could obtain by developing and commercializing tedizolid phosphate on our own. If we are unable to enter into additional collaboration and license arrangements for tedizolid phosphate or develop an effective international sales force, our ability to generate product revenues would be limited, which would adversely affect our business, financial condition, results of operations and prospects. If we are unable to enter into such collaboration arrangements for development of tedizolid phosphate in areas outside of the Bayer Licensed Territory, we may need to develop our own marketing and sales force to market tedizolid phosphate in these

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territories, for which currently we do not have sufficient funds to develop an adequate sales force in these regions. There is no guarantee that we will be able to develop an effective international sales force to successfully commercialize tedizolid phosphate or any other future products in these markets. If we cannot commercialize tedizolid phosphate in any territory that represents a significant market opportunity, our ability to achieve and sustain profitability will be substantially limited.

If the FDA does not approve the manufacturing facilities of AMRI, Patheon or any future manufacturing partners for commercial production, we may not be able to commercialize tedizolid phosphate.*

After we submit our NDA to the FDA and before approval of tedizolid phosphate the facilities used by AMRI, Patheon and any of our future manufacturers to manufacture tedizolid phosphate must be approved by the FDA. We do not control the manufacturing process of tedizolid phosphate and are completely dependent on these third-party manufacturing partners for compliance with the FDA’s requirements for manufacture of tedizolid phosphate API and finished product. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the FDA’s strict regulatory requirements, they will not be able to secure FDA approval for their manufacturing facilities. If the FDA does not approve these facilities for the commercial manufacture of tedizolid phosphate, we may need to find alternative manufacturing facilities, which would result in significant delays of up to several years in obtaining FDA approval for tedizolid phosphate.

If approved, tedizolid phosphate will face competition from less expensive generic versions of branded antibiotics of competitors and, if we are unable to differentiate the benefits of tedizolid phosphate over these less expensive alternatives, we may never generate meaningful product revenues.

Generic antibiotic therapies are typically sold at lower prices than branded antibiotics and are generally preferred by hospital formularies and managed care providers of health services. We anticipate that, if approved, tedizolid phosphate will face increasing competition in the form of generic versions of branded products of competitors that have lost or will lose their patent exclusivity. For example, tedizolid phosphate, if approved, will initially face competition from the inexpensive generic forms of vancomycin that are currently available and, in the future, would face additional competition from a generic form of linezolid when the patents covering it are expected to expire in 2015, or earlier if the patents are successfully challenged. If we are unable to demonstrate to physicians and payors that the key differentiating features of tedizolid phosphate translate to overall clinical benefit or lower cost of care, we may not be able to compete with generic antibiotics.

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.*

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical and generic drug companies and universities and other research institutions. Many of our competitors have greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing organizations. As a result, these companies may obtain regulatory approval more rapidly than we are able and may be more effective in selling and marketing their products as well. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, technologies and drug products that are more effective or less costly than tedizolid phosphate or any other drug candidate that we are currently developing or that we may develop, which could render our products obsolete and noncompetitive.

The competition in the market for antibiotics is intense. If approved, tedizolid phosphate will face competition from commercially available antibiotics such as vancomycin, marketed as a generic by Abbott Laboratories and others; daptomycin, marketed by Cubist Pharmaceuticals, Inc. as Cubicin; linezolid, marketed by Pfizer Inc. as Zyvox; ceftaroline, marketed by Forest Laboratories, Inc. and AstraZeneca PLC as Teflaro; ceftobiprole, under development by Basilea Pharmaceutica AG; quinupristin/dalfopristin, marketed by sanofi-aventis and Monarch Pharmaceuticals, Inc. as Synercid; tigecycline, marketed by Pfizer as Tygacil; and telavancin, marketed by Theravance, Inc. and Astellas Pharma, Inc. as Vibativ. Vancomycin has been a widely used and well known antibiotic for over 40 years and is sold in a relatively inexpensive generic IV form. Vancomycin, daptomycin, linezolid, telavancin, tigecycline, quinupristin/dalfopristin and ceftaroline are all approved treatments for serious gram-positive infections such as cSSSI or ABSSSI. Additionally, daptomycin is an approved treatment for bacteremia, linezolid is an approved treatment for pneumonia and vancomycin is an approved treatment for both bacteremia and pneumonia. If we are unable to obtain regulatory approval of tedizolid phosphate for some or all of the indications for which our competitors are approved, we may not be able to compete effectively with such antibiotics. In addition, if approved, tedizolid phosphate may face additional competition from antibiotics currently in clinical development. Other antibiotics currently in development include CEM-102, under development by Cempra Pharmaceuticals, Inc., dalbavancin, under development by Durata Therapeutics, Inc., delafloxacin and radezolid, both under development by Rib-X Pharmaceuticals, Inc., NXL-103, under development by AstraZeneca PLC, oritavancin, under development by The Medicines Company, PTK 0796, under development by Paratek Pharmaceuticals, Inc., BC-3781, under development by Nabrivia, PMX-30063, under development by Polymedix, GSK1322322, under development by GlaxoSmithKlein, and JNJ-Q2, under development by Furiex Pharmaceuticals, Inc., which, if approved, would compete in the antibiotic market and would target indications such as ABSSSI. In addition, tedizolid phosphate may face competition from drug candidates currently in clinical development and

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drug candidates that could receive regulatory approval before tedizolid phosphate in countries outside the United States and the European Union, or EU. If we are unable to demonstrate the advantages of tedizolid phosphate over competing drugs and drug candidates, we will not be able to successfully commercialize tedizolid phosphate and our results of operations will suffer.

Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make tedizolid phosphate or any other product candidates that we develop obsolete. As a result of all of these factors, our competitors may succeed in obtaining patent protection and/or FDA approval or discovering, developing and commercializing antibiotics before we do.

Reimbursement may not be available for tedizolid phosphate or any other product candidates that we develop, which could make it difficult for us to sell our products profitably.

Market acceptance and sales of tedizolid phosphate or any other product candidates that we develop will depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities, hospital formularies and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for tedizolid phosphate or any other product candidates that we develop. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our products. In addition, third-party payors may implement prior authorizations which may lead to a decrease in sales of our future products. If reimbursement is not available or is available only to limited levels or extensive prior authorizations are introduced, we may not be able to successfully commercialize tedizolid phosphate or any other product candidates that we develop.

The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs.

In March 2010, the Patient Protection and Affordable Care Act, or PPACA, became law. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. Among the provisions of PPACA of greatest importance to the pharmaceutical industry are the following:

• An annual, nondeductible fee on the prescription drug and biologics industry, apportioned among manufacturers according to their market share in certain government health care programs;

• An increase in the rebates a manufacturer must pay to state Medicaid programs on utilization of the manufacturer’s products;

• A new program, funded primarily by manufacturers, to provide discounts on pharmacy prescription prices to Medicare Part D beneficiaries in the program’s coverage gap;

• Expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

• New requirements to report certain financial arrangements with physicians;

• A licensure framework for follow-on biologic products; and

• A new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical research.

We anticipate that this legislation will result in additional downward pressure on coverage and the price that we receive for any approved product, and could seriously harm our business. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors.

The availability of numerous generic antibiotics at lower prices than branded antibiotics, such as tedizolid phosphate if it were approved for commercial introduction, may also substantially reduce the likelihood of reimbursement for tedizolid phosphate. We expect to experience pricing pressures in connection with the sale of tedizolid phosphate and any other products that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. If we fail to successfully secure and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.

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The commercial success of tedizolid phosphate and any other product candidates that we develop, if approved in the future, will depend upon attaining significant market acceptance of these products among physicians and payors.

We have never commercialized a product candidate for any indication. Even if tedizolid phosphate or any other product candidates that we develop are approved by the appropriate regulatory authorities for marketing and sale, physicians may not prescribe our approved products, which would prevent us from generating revenues or becoming profitable. Market acceptance of tedizolid phosphate and any other product candidates that we develop by physicians and payors will depend on a number of factors, many of which are beyond our control, including:

• The clinical indications for which the product is approved;

• Acceptance by physicians and payors of each product as a safe and effective treatment;

• The cost of treatment in relation to alternative treatments, including numerous generic drug products, such as vancomycin;

• The relative convenience, ease of administration and acceptance by physicians and payors of tedizolid phosphate in the treatment of ABSSSI;

• The availability and efficacy of competitive drugs;

• The extent to which the product is approved for inclusion on formularies of hospitals and managed care organizations;

• The extent to which bacteria develop resistance to any antibiotic product candidates that we develop, thereby limiting its efficacy in treating or managing infections;

• Whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particular infections;

• The availability of adequate reimbursement by third parties, such as insurance companies and other healthcare payors, and/or by government healthcare programs, including Medicare and Medicaid;

• Limitations or warnings contained in a product’s FDA-approved labeling; and

• Prevalence and severity of adverse side effects.

Even if the medical community accepts that tedizolid phosphate is safe and efficacious for its approved indications, physicians may not immediately be receptive to the use of tedizolid phosphate or may be slow to adopt it as an accepted treatment for ABSSSI. In addition, even though we believe tedizolid phosphate has significant advantages, we cannot assure you that any labeling approved by the FDA will contain claims that tedizolid phosphate is safer or more effective than linezolid, or that will permit us to promote tedizolid phosphate as being superior to competing products. Moreover, in the future, as has happened with other antibiotics, infectious bacteria could develop resistance to tedizolid phosphate, particularly if it becomes widely used, which would render it less effective and therefore less appealing to physicians. If tedizolid phosphate is approved but does not achieve an adequate level of acceptance by physicians and payors, we may not generate sufficient or any revenues from this product candidate and we may not become profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of tedizolid phosphate may require significant resources and may never be successful.

We currently have limited marketing capabilities and no sales organization and have no experience in marketing drug products. If we are unable to establish effective marketing and sales capabilities or enter into agreements with third parties to market and sell our products after they are approved, we may not be able to generate product revenues.*

We currently have limited marketing capabilities and do not have a sales organization or distribution capabilities. In order to commercialize any products, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. Outside of Korea, we own exclusive rights to commercialize tedizolid phosphate worldwide, and we contemplate establishing our own sales force or seeking third-party partners to sell tedizolid phosphate in the United States and, in addition to our collaboration and license agreement with Bayer, will seek third-party partners outside the United States. We have partnered with Bayer in the Bayer Licensed Territory and will be reliant on them to develop and commercialize tedizolid phosphate in the Bayer Licensed Territory. The establishment and development of our own sales force to market any products we may develop will be expensive and time consuming and could delay any product launch, and we cannot be certain that we will be able to successfully develop this capability. We, Bayer for the Bayer Licensed Territory and any potential future third-party commercialization partners will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.

In addition, we may not be able to enter into collaboration and license arrangements with third parties to sell tedizolid phosphate in Europe on favorable terms or at all. If we fail to enter into marketing arrangements for our products and are unable to develop an effective international sales force, our ability to generate revenue would be limited as a significant portion of the market opportunity for tedizolid phosphate and any other product candidates we develop is likely to be in international markets. To the extent we rely on third parties to commercialize our approved products whether within or outside the United States, we will receive less revenues than if we commercialized these products ourselves. In international markets in particular, we would have little or no control over the sales efforts of any other third parties involved in our commercialization efforts. In the event we are unable to develop our own marketing and sales force or collaborate with a third-party marketing and sales organization, we would not be able to commercialize tedizolid phosphate or any other product candidates that we develop, which would negatively impact our ability to generate product revenues.

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Even if the FDA approves tedizolid phosphate for treatment of ABSSSI, adverse effects discovered after approval could limit the commercial profile of any approved label.

If we obtain regulatory approval for tedizolid phosphate or any other product candidate that we develop, and we or others later discover, after approval and use in an increasing number of patients for longer periods of time, that our products could have adverse effect profiles that limit their usefulness or require their withdrawal (whether or not the therapies showed the adverse effect profile in Phase 1 through Phase 3 clinical trials), a number of potentially significant negative consequences could result, including:

• Regulatory authorities may withdraw their approval of the product;

• Regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;

• We may be required to change the way the product is administered, conduct additional clinical studies, implement a burdensome risk evaluation and mitigation strategy, or REMS, or restrict the distribution of the product;

• We could be sued and held liable for harm caused to patients; and

• Our reputation may suffer.

Any of these events could prevent us from maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates.

If we are not successful in attracting and retaining highly qualified personnel, including our current senior executive team, we may not be able to successfully implement our business strategy.*

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends in large part upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our executive team. In order to induce these and other valuable employees to remain with us, we have provided stock options that vest over time. The value to employees of stock options is significantly affected by movements in our stock price that we cannot control and may at any time be insufficient to counteract more lucrative offers from other companies.

Our scientific team has expertise in many different aspects of drug discovery and development. We conduct our operations at our facility in San Diego, California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions and, as a result, competition for skilled personnel in our market is very intense and competition for experienced research scientists and development personnel may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

Despite our efforts to retain valuable employees, members of our management, scientific and medical teams may terminate their employment with us on short notice. While we have employment agreements with all of our employees, these employment arrangements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. The loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results or financial condition. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.

Other biotechnology and pharmaceutical companies with which we compete for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we have to offer. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can discover, develop and commercialize drug candidates will be limited.

We will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.*

As of November 1, 2011, we employed 70 full-time employees. As our development and commercialization plans and strategies develop, we expect to expand our employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize tedizolid phosphate and our other product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

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If we fail to develop tedizolid phosphate for additional indications, our commercial opportunity will be limited.*

To date, we have focused primarily on the development of tedizolid phosphate for the treatment of ABSSSI. A key element of our strategy is to pursue clinical development of tedizolid phosphate for other indications, including pneumonia and bacteremia. Although we believe there is large commercial opportunity for the treatment of ABSSSI alone, our ability to generate and grow revenues will be highly dependent on our ability to successfully develop and commercialize tedizolid phosphate for the treatment of these additional indications. The development of tedizolid phosphate for these additional indications is prone to the risks of failure inherent in drug development and we cannot provide you any assurance that we will be able to successfully advance any of these programs through the development process. Even if we receive FDA approval to market tedizolid phosphate for the treatment of any of these additional indications, we cannot assure you that any such additional indications will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and commercialize tedizolid phosphate for these additional indications, our commercial opportunity will be limited and our business prospects will suffer.

Even if we obtain FDA approval of tedizolid phosphate or any other product candidate we develop, we may never obtain approval or commercialize our products outside of the United States, which would limit our ability to realize their full market potential.*

In order to market any products outside of the United States, we and Bayer in the Bayer Licensed Territory must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us and require additional preclinical studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. Satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. In addition, our or Bayer’s failure to obtain regulatory approval in any country may delay or have negative effects on the process for regulatory approval in other countries. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we or Bayer fail to comply with regulatory requirements in our international markets or to obtain and maintain required approvals, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.

If we fail to develop and commercialize product candidates other than tedizolid phosphate, we may not be able to grow our business or sustain profitability.*

A key element of our strategy is to develop and commercialize a portfolio of new product candidates in addition to tedizolid phosphate. As a significant part of this strategy, we intend to develop and commercialize additional products and product candidates through our proprietary drug discovery platform. The success of this strategy depends upon our ability to leverage this platform to identify optimal bacterial targets and subsequently design small molecule inhibitors against these targets leading to the development of differentiated new antibiotics.

We cannot be certain that we will be successful in our efforts to identify and develop additional differentiated new antibiotics or that any of our product candidates we do identify will produce commercially viable drugs that safely and effectively treat infectious diseases or other diseases. To date, our proprietary discovery platform has not yielded any product candidates. Our research and discovery programs may initially show promise in identifying potential product leads, yet fail to yield product candidates for clinical development.

In addition, research and discovery programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates. To date, our discovery programs have been largely funded by United States government grants and research contracts with NIAID, DTRA and LLNL. If we are unable to maintain existing funding or secure additional funding for these programs and/or continue to devote the other technical and human resources to them, our ability to continue these programs will be adversely affected.

Any product candidate we do successfully identify may require substantial additional development efforts prior to commercial sale, including preclinical studies, extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are susceptible to the risks of failure that are inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, we cannot assure you that any such products that are approved will be manufactured or produced economically, successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives.

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If we are unable to develop suitable potential product candidates through internal research and discovery programs or otherwise by obtaining rights to novel therapeutics from third parties, our business and prospects will suffer.

A variety of risks associated with our international business relationships could materially adversely affect our business.*

We have entered into a collaboration and license agreement with Bayer in the Bayer Licensed Territory and intend to enter into other agreements with third parties who will market tedizolid phosphate in Europe. Consequently, we expect that we will be subject to additional risks related to entering into international business relationships, including:

• Differing regulatory requirements for drug approvals in foreign countries;

• Potentially reduced protection for intellectual property rights;

• The potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

• Unexpected changes in tariffs, trade barriers and regulatory requirements;

• Economic weakness, including inflation, or political instability in particular foreign economies and markets;

• Compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

• Foreign taxes, including withholding of payroll taxes;

• Foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

• Workforce uncertainty in countries where labor unrest is more common than in the United States;

• Production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

• Business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

These and other risks may materially adversely affect our ability to attain or sustain profitable operations.

Risks Related to Our Industry

We are subject to extensive and costly government regulation.*

Antibiotics, including those we are developing and plan to develop in the future, are subject to extensive and rigorous domestic government regulation including regulation by the FDA, the Centers for Medicare and Medicaid Services, other divisions of the United States Department of Health and Human Services, the United States Department of Justice, state and local governments and their respective foreign equivalents. The FDA regulates the research, development, preclinical and clinical testing, manufacture, safety, effectiveness, record-keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import and export of biopharmaceutical products. If any products we, or our partners develop are tested or marketed abroad, they will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its uses. Such foreign regulation may be equally or more demanding than corresponding United States regulation.

Government regulation substantially increases the cost and risk of researching, developing, manufacturing and selling the products that we are developing.

New and future legislation, and/or regulations and policies adopted by the FDA or other regulatory health authorities, in addition to findings in ongoing and future clinical and nonclinical studies, may increase the time and cost required for us to conduct and complete clinical trials for tedizolid phosphate or other product candidates that we develop.*

The FDA revised its existing guidance for industry entitled, “Uncomplicated and Complicated Skin and Skin Structure Infections—Developing Antimicrobial Drugs for Treatment” (Final July 1998) and issued “Guidance for Industry Acute Bacterial Skin and Skin Structure Infections: Developing Drugs for Treatment (Draft August 2010). It is not known when the FDA will issue its final guidance on ABSSSI. In addition in March 2010, the FDA released a draft guidance entitled “Guidance for Industry Non-Inferiority Clinical Trials.” This guidance document is relevant to our Phase 3 clinical program because our Phase 3 clinical trials use a non-inferiority trial design. It is not known when the FDA will issue a final guidance document or whether the final guidance will differ significantly from the draft guidance. In February 2010, the European Medicines Agency, or EMA, issued its draft revision to the “Guideline on the Evaluation of Medicinal Products Indicated for the Treatment of Bacterial Infections.” As with the FDA, the timing for the issuance of the EMA finalized guideline document, as well as its contents, is not known. In November 2010, the FDA issued draft guidance entitled “Guidance for Industry Hospital-Acquired Bacterial Pneumonia and Ventilator-Associated Bacterial Pneumonia: Developing Drugs for Treatment.” It is not known when the FDA will issue final HAP guidance.

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Along with the information in the draft guidance for ABSSSI, we have received input from the FDA regarding specific changes that are being contemplated. Based on this input, we know that the enrollment criteria for patients in our Phase 3 clinical trials for treatment of ABSSSI are different than those that were applicable under the July 1998 guidance regarding cSSSI. As a result, we need to enroll patients with a different proportion of infection types than we enrolled in our completed Phase 2 clinical trial for the treatment of cSSSI. In addition, the draft guidance recommends a change in the time at which the clinical cure is tested relative to the end of antibiotic therapy. As part of the SPA procedure, we have reached agreement with the FDA on the appropriate endpoints.

While we have received information from the FDA regarding certain aspects that have been incorporated into the draft guidance, we will not know the potential impact that any finalized guidance, should it be issued, may have on the design and conduct of our planned Phase 3 clinical trials and supportive studies or on the FDA’s approval of ABSSSI as the indication for which we are seeking approval, which could potentially significantly increase the time and cost required for us to conduct and complete these trials if size and scope were to be modified. Additionally, changes in regulatory requirements due to the adoption by FDA and/or foreign health authorities of new legislation, regulation, or policies may require us to amend clinical trial protocols or add new clinical trials to comply with these changes. Such amendments to existing protocols and/or clinical trial applications or the need for new ones, may impact the cost, timing and completion of the clinical trials.

Even if we obtain regulatory approval for tedizolid phosphate or any of our future product candidates, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.*

Even if regulatory approval in the United States is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the labeling ultimately approved for tedizolid phosphate, if any, may include restrictions on use. Tedizolid phosphate or any of our other product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is subject to obligations to monitor and report AEs and instances of the failure of a product to meet the specifications in the NDA. Application holders must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Application holders must also submit advertising and other promotional material to the FDA and report on ongoing clinical trials. New legal requirements have also been enacted to require disclosure of clinical trial results on publicly available databases.

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices regulations. If we or a regulatory agency discovers problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. The FDA and other regulatory authorities may also revisit the risk-benefit profile of an approved product if, for example, previously unknown problems with a product, such as AEs of unanticipated severity of frequency arise. In such circumstances, the FDA or other regulatory authorities may withdraw approval, require new warnings or other labeling changes to limit use of the drug, impose new study or monitoring requirements or require that we establish a REMS. Advertising and promotional materials must comply with FDA rules in addition to other potentially applicable federal and state laws. The distribution of product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act. Sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veteran’s Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws. If we or Bayer fail to comply with applicable regulatory requirements, a regulatory agency may:

• Issue warning letters or untitled letters asserting that we are in violation of the law;

• Seek an injunction or impose civil or criminal penalties or monetary fines;

• Suspend or withdraw regulatory approval;

• Suspend any ongoing clinical trials;

• Refuse to approve pending applications or supplements to applications filed by us;

• Suspend or impose restrictions on operations, including costly new manufacturing requirements;

• Seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall; or

• Refuse to allow us to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity.

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The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenues.

Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.

The risk that we may be sued on product liability claims is inherent in the development of pharmaceutical products. Our products and the clinical trials using our product candidates may expose us to product liability claims and possible adverse publicity. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forgo further development and commercialization of those products.

Although we maintain general liability and product liability insurance with limits of $2 million and $10 million, respectively, this insurance may not fully cover potential liabilities. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect our business, operating results and financial condition.

If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical, biological and radioactive materials and viruses. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations in the United States govern the use, manufacture, storage, handling and disposal of hazardous materials. Although we believe that our procedures for use, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. We also cannot predict the impact on our business of new or amended environmental laws or regulations, or any changes in the way existing and future laws and regulations are interpreted or enforced. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. If we fail to comply with applicable requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-up costs, or capital expenditures for control equipment or operational changes necessary to achieve or maintain compliance. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, operating results and financial condition.

Risks Related to our Intellectual Property

Our ability to pursue the development and commercialization of tedizolid phosphate depends upon the continuation of our license from Dong-A.

Our license agreement with Dong-A provides us with a worldwide exclusive license to develop and sell tedizolid phosphate outside of Korea. If we are unable to make the required milestone and royalty payments under the license agreement, if we do not continue to use commercially reasonable efforts to achieve certain development and commercialization milestones for tedizolid phosphate within the timeframes required by the license agreement or if we otherwise materially breach the license agreement, our rights to develop and commercialize tedizolid phosphate would terminate and revert to Dong-A. In addition, either we or Dong-A may terminate the license agreement upon an uncured material breach of the license agreement for 90 days. If our license agreement with Dong-A were terminated, we would lose our rights to develop and commercialize tedizolid phosphate, which would materially and adversely affect our business, results of operations and future prospects.

If our efforts to protect the proprietary nature of the intellectual property related to tedizolid phosphate and our other product candidates are not adequate, we may not be able to compete effectively in our market.*

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to tedizolid phosphate and our other product candidates. Any involuntary disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain and our commercial success will depend on our ability to obtain patents and maintain adequate protection for tedizolid phosphate and other product candidates in the United States and other countries. Through our license agreement with Dong-A, we currently hold an issued United States utility patent, a pending United States utility patent application and issued and pending foreign national and regional counterpart patent applications covering various aspects of tedizolid and tedizolid phosphate. In addition, we own pending United States utility and provisional patent applications and Patent Cooperation Treaty applications directed to aspects of tedizolid phosphate discovered by our scientists. The patent applications that we licensed or have filed on our own may fail to result in issued patents in the United States or in foreign countries. Even if the patents do successfully issue, third parties may challenge the

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patents. Further, the future patents to which we have rights based on our agreement with Dong-A, or that we file on our own, may be too narrow to prevent third parties from developing or designing around these patents. If the sufficiency of the breadth or strength of protection provided by the patent applications we licensed or own with respect to tedizolid phosphate or the patents we pursue related to any of our other product candidates is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, tedizolid phosphate and our other product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market our drug candidates under patent protection would be reduced. In addition, we do not know whether:

• We or Dong-A were the first to make the inventions covered by each of our licensed pending patent applications;

• We or Dong-A were the first to file patent applications for these inventions;

• Others will independently develop similar or alternative technologies or duplicate any of our technologies;

• Any of our or Dong-A’s pending patent applications will result in issued patents;

• Any of our or Dong-A’s patents, once issued, will be valid or enforceable;

• Any patents issued to us or Dong-A will provide us with any competitive advantages, or will be challenged by third parties;

• We will develop additional proprietary technologies that are patentable;

• The patents of others will have an adverse effect on our business; or.

• Our unissued patents in the Bayer Licensed Territory will ever issue. If they do not issue, this could adversely effect our collaboration and license agreement with Bayer.

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our drug discovery program that involve proprietary know-how, information and technology that is not covered by patents. Although we require all of our employees, consultants, advisors and third parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques.

The Leahy-Smith America Invents Act, or the Leahy-Smith Act, was recently signed into law and includes a number of significant changes to U.S. patent law. These include changes in the way patent applications will be prosecuted and may also affect patent litigation. The U.S. Patent and Trademark Office is currently developing regulations and procedures to administer the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until one year or 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the cost of prosecuting our patent applications, our ability to obtain patents based on our patent applications and our ability to enforce or defend our issued patents. An inability to obtain, enforce and defend patents covering our proprietary technologies would materially and adversely affect our business prospects and financial condition. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or, if established, maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the United States Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies in several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm, Computer Patent Annuities, to pay these fees due to foreign patent agencies. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.

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We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our business.*

The TRIUS THERAPEUTICS mark has been registered in the United States, Canada, Australia, European Community, India, Japan, China, New Zealand and Singapore for use in connection with pharmaceutical research and development services and for anti-infective and antibacterial pharmaceutical preparations for the treatment of infections. We are not aware of any third party opposition or cancellation proceedings against the TRIUS THERAPEUTICS mark.

Third-party claims of intellectual property infringement may prevent or delay our drug discovery and development efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents with claims to materials, methods of manufacture or methods for treatment related to the use or manufacture of tedizolid phosphate and/or our other product candidates. Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. If any third-party patents were held by a court of competent jurisdiction to cover the tedizolid phosphate manufacturing process, any molecules formed during the tedizolid phosphate manufacturing process or the final tedizolid phosphate product for any use thereof, the holders of any such patents may be able to block our ability to commercialize tedizolid phosphate unless we obtained a license under the applicable patent or patents, or until such patents expire. We cannot predict whether we would be able to obtain a license on commercially reasonable terms, if at all. Any inability to obtain such a license under the applicable patents on commercially reasonable terms, or at all, may have a material adverse effect on our ability to commercialize tedizolid phosphate until such patents expire.

In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third parties or pay royalties. In addition, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of tedizolid phosphate or any of our other product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would not be able to further develop and commercialize such product candidates, which could harm our business significantly.

We may be required to file lawsuits or take other actions to protect or enforce our patents or the patents of our licensors, which could be expensive and time consuming.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents, or those of Dong-A, do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents, or those of Dong-A, at risk of being invalidated, held unenforceable or interpreted narrowly and could put our patent applications, or those of Dong-A, at risk of not issuing.

Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patent applications or those of our collaborators or licensors. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management. We may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Issued patents may be challenged during reexamination proceedings brought by a third party or the USPTO, or in foreign countries, during post-grant opposition proceedings or invalidation appeal proceedings. These proceedings may result in loss of patent claims, adverse changes to the scope of the claims and may result in substantial costs and distract our management.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, if securities analysts or investors perceive public announcements of the results of hearings, motions or other interim proceedings or developments to be negative, the price of our common stock could drop.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

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Risks Related to Our United States Government Contracts and Grants

All of our immediately foreseeable future contract research revenues to support our ongoing preclinical programs are dependent upon our NIAID, DTRA and LLNL contracts and if we do not receive all of the funds under these contracts or are unable to generate additional revenues from additional contracts, we may be forced to suspend or terminate one or more of our preclinical programs.*

Substantially all of our contract research revenues that support our preclinical programs have been derived from United States government grants and our NIAID, DTRA and LLNL contracts. There can be no assurances that these contracts will continue or that we will be able to enter into new contracts with the United States government to support our preclinical programs. The process of obtaining government contracts is lengthy and uncertain and we will have to compete with other companies and institutions for each contract. Further, changes in government budgets and agendas may result in a decreased and de-prioritized emphasis on supporting the discovery and development of biodefense products in our preclinical programs. In such event, NIAID, DTRA and LLNL may not be required to continue funding our existing contracts.

Due to the decline of federal tax receipts and substantial increase in the federal deficit, the United States government may be forced or choose to reduce or delay spending in the biodefense field, which could decrease the likelihood of our receipt of future government contract revenues.

United States government agencies have special contracting requirements that give them the ability to unilaterally control our contracts.*

United States government contracts typically contain unfavorable termination provisions and are subject to audit and modification by the government at its sole discretion, which will subject us to additional risks. These risks include the ability of the United States government to unilaterally:

• Audit and object to our NIAID, DTRA or LLNL contract-related costs and fees, and require us to reimburse all such costs and fees;

• Suspend or prevent us for a set period of time from receiving new contracts or extending our existing contracts based on violations or suspected violations of laws or regulations;

• Cancel, terminate or suspend our contracts based on violations or suspected violations of laws or regulations;

• Terminate our contracts if in the government’s best interest, including if funds become unavailable to the applicable governmental agency;

• Reduce the scope and value of our NIAID, DTRA or LLNL contracts; and

• Change certain terms and conditions in our NIAID, DTRA or LLNL contracts.

The United States government will be able to terminate each of its contracts with us, either for its best interests or if we default by failing to perform in accordance with or to achieve the milestones set forth in the contract schedules and terms. Termination-for-convenience provisions generally enable us to recover only our costs incurred or committed and settlement expenses on the work completed prior to termination. Except for the amount of services received by the government, termination-for-default provisions do not permit these recoveries and would make us liable for excess costs incurred by the United States government in procuring undelivered items from another source.

The United States government’s determination to award any contracts may be challenged by an interested party, such as another bidder, at the United States Government Accountability Office, or the GAO or in federal court. If such a challenge is successful, our NIAID, DTRA or LLNL contracts or any future contract we may be awarded may be terminated.*

The laws and regulations governing the procurement of goods and services by the United States government provide procedures by which other bidders and interested parties may challenge the award of a government contract. If we are awarded a government contract, such challenges or protests could be filed even if there are not any valid legal grounds on which to base the protest. If any such protests are filed, the government agency may decide to suspend our performance under the contract while such protests are being considered by the GAO or the applicable federal court, thus potentially delaying delivery of payment. In addition, we could be forced to expend considerable funds to defend any potential award. If a protest is successful, the government may be ordered to terminate any one or more of our contracts and reselect bids. The government agencies with which we have contracts could even be directed to award a potential contract to one of the other bidders.

Our business is subject to audit by the United States government, including under our contracts with NIAID, DTRA and LLNL, and a negative audit could adversely affect our business.*

United States government agencies such as the Department of Health and Human Services, or DHHS, the Defense Contract Audit Agency, or the DCAA, routinely audit and investigate government contractors and recipients of Federal grants. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.

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The DHHS and the DCAA also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:

• Termination of contracts;

• Forfeiture of profits;

• Suspension of payments;

• Fines; and

• Suspension or prohibition from conducting business with the United States government.

For example, under our DTRA contract, the DCAA may conduct a post award audit of our indirect cost rates, and review of our accounting and purchasing systems. If we receive negative findings from the DCAA, the contract may be terminated.

In addition, we could suffer serious reputational harm if allegations of impropriety were made against us, which could cause our stock price to decrease.

Laws and regulations affecting government contracts make it more costly and difficult for us to successfully conduct our business.*

We must comply with numerous laws and regulations relating to the formation, administration and performance of government contracts, which can make it more difficult for us to retain our rights under our NIAID, DTRA and LLNL contracts. These laws and regulations affect how we conduct business with government agencies. Among the most significant government contracting regulations that affect our business are:

• The Federal Acquisition Regulations, or FAR, and agency-specific regulations supplemental to the FAR, which comprehensively regulate the procurement, formation, administration and performance of government contracts;

• The business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government employees, restrict the granting of gratuities and funding of lobbying activities and incorporate other requirements such as the Anti-Kickback Act and Foreign Corrupt Practices Act;

• Export and import control laws and regulations; and

• Laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

Foreign governments typically also have laws and regulations governing contracts with their respective agencies. These foreign laws and regulations affect how we and our customers conduct business and, in some instances, impose added costs on our business. Any changes in applicable laws and regulations could restrict our ability to maintain our existing NIAID, DTRA and LLNL contracts and obtain new contracts, which could limit our ability to conduct our business and materially adversely affect our revenues and results of operations.

Agreements with government agencies may lead to claims against us under the Federal False Claims Act, and these claims could result in substantial fines and other penalties.*

The biopharmaceutical industry is, and in recent years has been, under heightened scrutiny as the subject of government investigations and enforcement actions. Our NIAID, DTRA and LLNL contracts are subject to substantial financial penalties under the Federal Civil Monetary Penalties Act and the Federal Civil False Claims Act. Under the False Claims Act’s “whistleblower” provisions, private enforcement of fraud claims against businesses on behalf of the United States government has increased due in part to amendments to the False Claims Act that encourage private individuals to sue on behalf of the government. These whistleblower suits, known as qui tam actions, may be filed by private individuals, including present and former employees. The False Claims Act statute provides for treble damages and up to $11,000 per false claim. If our operations are found to be in violation of any of these laws, or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment, or restructuring of our operations could adversely affect our ability to operate our business and our financial results.

Risks Related to Ownership of Our Common Stock

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above your purchase price.*

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We cannot assure you that an active trading market for our common stock will develop or persist, and, as of November 4, 2011 our executive officers, directors, 5% shareholders and their affiliates own approximately 66% of our common stock, which may further reduce trading activity in our common stock. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active.

The trading price of our common stock is likely to be volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:

• Adverse results or delays in clinical trials;

• Any delay in filing our NDA for tedizolid phosphate and any adverse development or perceived adverse development with respect to the FDA’s review of the NDA, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

• Failure to successfully commercialize tedizolid phosphate, develop additional product candidates and commercialize additional product candidates;

• Changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;

• Unanticipated serious safety concerns related to the use of tedizolid phosphate or any of our other product candidates;

• A decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

• Inability to obtain adequate product supply for tedizolid phosphate or any other approved drug product, or the inability to do so at acceptable prices;

• Adverse regulatory decisions;

• Introduction of new products, services or technologies offered by us or our competitors;

• Failure to meet or exceed revenue and financial projections we provide to the public;

• Actual or anticipated variations in quarterly operating results;

• Failure to meet or exceed the estimates and projections of the investment community;

• The perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

• General market conditions and overall fluctuations in United States equity markets;

• Developments concerning our sources of manufacturing supply and our future international commercialization partners;

• Announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

• Disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

• Additions or departures of key scientific or management personnel;

• Issuances of debt or equity securities;

• Significant lawsuits, including patent or stockholder litigation;

• Changes in the market valuations of similar companies;

• Sales of our common stock by us or our stockholders in the future;

• Trading volume of our common stock; and

• Other events or factors, many of which are beyond our control.

In addition, the stock market in general, and the Nasdaq Global Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.*

As of November 4, 2011, our executive officers, directors, 5% stockholders and their affiliates own approximately 66% of our outstanding voting stock. Therefore, these stockholders may have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

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As a public company, we will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with Section 404 in a timely manner, it may affect the reliability of our internal control over financial reporting.*

Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. For the year ending December 31, 2011, pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. Under current SEC rules, our independent registered public accounting firm will also be required to deliver an attestation report on the operating effectiveness of our internal control over financial reporting beginning with the year ending December 31, 2011.

The process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot be certain at this time whether our current processes, and revisions as necessary to improve internal controls will be successful, that we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 or that we or our independent registered public accounting firm will not identify material weaknesses in our internal control over financial reporting. If we fail to comply with the requirements of Section 404, it may affect the reliability of our internal control over financial reporting. If we or our independent registered public accounting firm identify and report a material weakness, it could adversely affect our stock price.

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended, or the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.*

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

Pursuant to our 2010 Equity Incentive Plan, or the 2010 Plan, and our 2010 Non-employee Directors’ Stock Option Plan, or the 2010 Directors’ Plan, our management is authorized to grant stock options to our employees, directors and consultants. The number of shares available for future grant under our 2010 Plan will automatically increase each year by an amount equal to the lesser of 800,000 shares or 3% of all shares of our capital stock outstanding as of January 1st of such year, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year. The number of shares available for future grant under our 2010 Directors’ Plan will automatically increase each year by an amount equal to the lesser of the aggregate number of shares of common stock subject to options granted during the immediately preceding calendar year or 150,000 shares, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year.

Pursuant to our 2010 Employee Stock Purchase Plan, or the 2010 Purchase Plan, rights to purchase common stock are granted to our employees. The number of shares reserved for issuance under our 2010 Purchase Plan will automatically increase each year by an amount equal to the least of 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year or 250,000 shares, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year.

Currently, we plan to register the increased number of shares available for issuance under our 2010 Plan each year. Unless our board of directors elects not to increase the number of shares available for future grant each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

48

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. After our IPO, we performed an analysis under Section 382 and determined that we did not trigger an “ownership change” limitation. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset United States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. These provisions include:

• Authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

• Limiting the removal of directors by the stockholders;

• Creating a staggered board of directors;

• Prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

• Eliminating the ability of stockholders to call a special meeting of stockholders;

• Permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; and

• Establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.

49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

In August 2011, we issued 6,431 shares of common stock upon the cashless exercise by VenCore Solutions LLC of a warrant to purchase 14,174 shares of common stock. The shares were not registered under the Securities Act and were sold pursuant to an exemption under Section 4(2) of the Securities Act and the rules of the SEC promulgated thereunder.

Use of Proceeds

Our IPO of common stock was effected through a Registration Statement on Form S-1 (File No. 333-162945) that was declared effective by the SEC on August 2, 2010, which registered an aggregate of 10,750,000 shares of our common stock, including 750,000 shares that the underwriters had the option to purchase to cover over-allotments. On August 6, 2010, 10,000,000 shares of common stock were sold on our behalf at an initial public offering price of $5.00 per share, for an aggregate gross offering price of $50 million to us. The over-allotment option was not exercised.

As of September 30, 2011, the funds remaining from our IPO as well as the funds we raised through the Private Placement were held in cash, cash equivalents, money market funds and government agency securities. We intend to invest these funds in the future in some combination of government agency and/or corporate securities with the balance of the net proceeds held in money market funds in accordance with our investment policy. We have used and plan to use the net proceeds from our IPO and the Private Placement to fund clinical and nonclinical research and development costs for tedizolid phosphate and for working capital and other general corporate purposes. We cannot specify with certainty all of the particular uses for the net proceeds from our IPO and the Private Placement. Accordingly, our management will have broad discretion in the application of the net proceeds.

50

Item 6. Exhibits

EXHIBIT INDEX

Exhibit No:	Description
3.1(1)	Amended and Restated Certificate of Incorporation.
3.2(1)	Amended and Restated Bylaws.
4.1(1)	Form of Common Stock Certificate.
4.2(1)	Warrant issued by Trius Therapeutics, Inc. on November 1, 2004 to Forsythe Biotechnology Group, Inc.
4.3(2)	Amended and Restated Investor Rights Agreement dated March 19, 2008, as amended, among Trius Therapeutics, Inc. and certain of its stockholders.
4.4(3)	Form of Warrant issued pursuant to the Securities Purchase Agreement dated May 24, 2011, among Trius Therapeutics, Inc. and the Purchasers listed therein. 4.5(3) Form of Registration Rights Agreement dated May 24, 2011, among Trius Therapeutics, Inc. and the Purchasers listed therein.
10.1*	Collaboration and License Agreement dated July 26, 2011, by and between the Registrant and Bayer Pharma AG.
10.2	Amended and Restated 2010 Non-Employee Directors’ Stock Option Plan
10.3	Trius Therapeutics, Inc. Severance Benefit Plan
31.1	Certification of Principal Executive Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act.
31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act.
32.1	Certification of Principal Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.
32.2	Certification of Principal Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

(1) Incorporated herein by reference to Trius Therapeutics, Inc.’s Registration Statement on Form S-1 (File No. 333-162945), as amended, filed with the Securities and Exchange Commission.

(2) Incorporated by reference to Trius Therapeutics, Inc.’s Registration Statement on Form S-1 (File No. 333-175050), filed with the Securities and Exchange Commission on June 21, 2011.

(3) Incorporated herein by reference to Trius Therapeutics, Inc.’s Current Report on Form 8-K (File No. 001-34828), filed with the Securities and Exchange Commission on May 25, 2011.

* Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

** Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

51

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Trius Therapeutics, Inc.
Date: November 10, 2011	By:	/s/    JEFFREY STEIN
		Jeffrey Stein, Ph.D. President, Chief Executive Officer and Director (Principal Executive Officer)
Date: November 10, 2011	By:	/s/    JOHN P. SCHMID
		John P. Schmid Chief Financial Officer (Principal Financial Officer)

52

EX-10.1

Exhibit 10.1

***Text Omitted and Filed Separately with the Securities and Exchange Commission.

Confidential Treatment Requested Under

17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

COLLABORATION AND LICENSE AGREEMENT

BETWEEN

TRIUS THERAPEUTICS, INC.

AND

BAYER PHARMA AG

July 26, 2011

Table of Contents

			Page
1.	DEFINITIONS			1
2.	LICENSE GRANTS			10
	2.1	Exclusive License		10
	2.2	Non-Exclusive Manufacturing License for Trius Territory		10
	2.3	Sublicenses		11
	2.4	Trius Reserved Rights		11
	2.5	Negative Covenants; License Exclusions		11
	2.6	[...***...]		11
	2.7	License Grant-Back to Trius		12
	2.8	No Implied Licenses		12
3.	GOVERNANCE			12
	3.1	Joint Steering Committee		12
	3.2	Operating Teams		15
4.	DEVELOPMENT, COMMERCIALIZATION AND SUPPLY			15
	4.1	Development		15
	4.2	Costs of Conducting Global Development Plan		19
	4.3	Diligence		20
	4.4	Technology Transfer; Exchange of Information		20
	4.5	Regulatory and HTA		21
	4.6	Use of Subcontractors		23
	4.7	Cooperation		24
	4.8	Commercialization		24
	4.9	Manufacturing and Supply		24
5.	FEES AND PAYMENTS			25
	5.1	Upfront Fee		25
	5.2	Milestone Payments		25
	5.3	Royalties		26
	5.4	Existing Third Party Payment Obligations		27
	5.5	Third Party Intellectual Property Rights		27

-i- ***Confidential Treatment Requested

Table of Contents

			Page
6.	PAYMENT; RECORDS; AUDITS			27
	6.1	Payment; Reports		27
	6.2	Invoicing		27
	6.3	Exchange Rate; Manner and Place of Payment		28
	6.4	Income Tax Withholding and Value Added Tax		28
	6.5	Audits		29
	6.6	Late Payments		29
7.	INTELLECTUAL PROPERTY			30
	7.1	Ownership of Inventions		30
	7.2	Patent Prosecution and Maintenance		30
	7.3	Cooperation of the Parties		32
	7.4	Infringement by Third Parties		32
	7.5	Infringement of Third Party Rights		34
	7.6	Trademarks		34
8.	REPRESENTATIONS AND WARRANTIES			35
	8.1	Mutual Representations and Warranties		35
	8.2	Trius Representations and Warranties		36
	8.3	Disclaimer		37
	8.4	Limitation of Liability		37
9.	CONFIDENTIALITY			38
	9.1	Confidential Information		38
	9.2	Exceptions		38
	9.3	Authorized Disclosure		38
	9.4	Confidentiality of this Agreement		39
	9.5	Public Announcements		39
	9.6	Publication		40
	9.7	Prior Non-Disclosure Agreements		40
10.	TERM AND TERMINATION			40
	10.1	Term		40
	10.2	Termination		41

-ii-

Table of Contents

(continued)

			Page
	10.3	Effect of Expiration or Termination		42
	10.4	Accrued Obligations; Survival		43
	10.5	Rights Upon Bankruptcy		44
11.	INDEMNIFICATION			44
	11.1	Indemnification by Bayer		44
	11.2	Indemnification by Trius		44
	11.3	Procedure		45
	11.4	Insurance		45
12.	DISPUTE RESOLUTION			45
	12.1	Dispute Resolution		45
	12.2	Arbitration		45
	12.3	Court Actions		47
13.	MISCELLANEOUS			47
	13.1	Standstill		47
	13.2	Governing Law		48
	13.3	Entire Agreement; Amendment		48
	13.4	Relationship Between the Parties		48
	13.5	Non-Waiver		48
	13.6	Assignment		48
	13.7	No Third Party Beneficiaries		49
	13.8	Severability		49
	13.9	Notices		49
	13.10	Force Majeure		50
	13.11	Interpretation		50
	13.12	Counterparts		51

-iii-

COLLABORATION AND LICENSE AGREEMENT

THIS COLLABORATION AND LICENSE AGREEMENT (the “Agreement”) is entered into as of July 26, 2011 (the “Effective Date”), by and between TRIUS THERAPEUTICS, INC., a corporation organized under the laws of the State of Delaware, USA (“Trius”), having an address of 6310 Nancy Ridge Drive, Suite 105, San Diego, CA 92121, USA, and BAYER PHARMA AG, a company organized under the laws of Germany (“Bayer”), having its principal offices at Muellerstraße 178, D-13353 Berlin, Germany.

RECITALS

WHEREAS, Trius owns or has licensed certain patent rights, know-how and other intellectual property relating to torezolid phosphate, or TR-701, and is developing TR-701 for the treatment or prevention of acute bacterial skin and skin structure infections and other gram-positive bacterial infections;

WHEREAS, Bayer is engaged in the research, development and commercialization of pharmaceutical products;

WHEREAS, Bayer desires to obtain from Trius, and Trius is willing to grant to Bayer, an exclusive license to develop and commercialize Product in the Field in the Bayer Territory (each as hereinafter defined), on the terms and subject to the conditions set forth in this Agreement;

WHEREAS, Trius is conducting, and plans to conduct in the future, Phase 3 Trials (defined below) and such other development activities with respect to Product as are necessary to complete and submit to the U.S. Food and Drug Administration a New Drug Application for Product in the United States of America for the Core Indications (defined below); and

WHEREAS, U.S. Food and Drug Administration approval of a New Drug Application for Product is or may be necessary for registration of Product in countries of the Bayer Territory, and, accordingly, the parties desire to collaborate in those development and registration activities with respect to Product in the United States of America as are necessary for registration of Product in countries of the Bayer Territory, in each case, on the terms and subject to the conditions set forth in this Agreement.

AGREEMENT

Now, Therefore, in consideration of the foregoing premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. DEFINITIONS

1.1 “ABSSSI” shall mean acute bacterial skin and skin structure infections (or the equivalent indication in any regulatory jurisdiction in the Bayer Territory).

1.2 “Additional Indication” shall mean any indication in the Field, other than the Core Indications.

1.

1.3 “Affiliate” shall mean any company or entity controlled by, controlling, or under common control with a party hereto. For the purpose of this definition, a business entity shall be deemed to “control” another business entity, if it (i) owns directly or indirectly, more than 50% of the outstanding voting securities, capital stock, or other comparable equity or ownership interest of such business entity having the power to vote on or direct the affairs of such business entity, as applicable (or such lesser percentage which is the maximum allowed to be owned by a foreign corporation in a particular jurisdiction), or (ii) possesses, directly or indirectly, the power to direct or cause the direction of the policies and management of such business entity, as applicable, whether by the ownership of stock, by contract or otherwise.

1.4 “Bacteremia” shall mean infectious endocarditis and/or bacteremia (or, in each case, the equivalent indication in any regulatory jurisdiction in the Bayer Territory).

1.5 “Bayer Development Plan” shall have the meaning set forth in Section 4.1(c).

1.6 “Bayer Domain Names” shall mean any domain name identical or similar with the Bayer Product Marks under any ccTLD (country code Top Level Domain) and gTLD (generic Top Level Domain) address area.

1.7 “Bayer FTE Rate” shall mean the rate for each FTE per year in such country or region as set out in Exhibit A hereto. Bayer shall adjust the relevant Bayer FTE Rate for each calendar year commencing with the year 2012 to reflect any year-to-year increase in the consumer price index applicable to the respective country or region (“Country CPI” – based on a cumulative index of Country CPI numbers starting on the Effective Date to the date of the calculation of the relevant Bayer FTE Rate). Bayer shall notify Trius of any adjustment of any of the Bayer FTE Rates for any year on or before December 1 of the preceding year.

1.8 “Bayer Global Development Costs” shall mean: (i) all internal costs, calculated on the basis of the Bayer FTE Rate, incurred by Bayer in conducting Global Development Plan activities contracted to Bayer pursuant to Section 4.1(b)(i) or 4.1(b)(ii); and (ii) all reasonable amounts paid by Bayer to Third Parties for JSC-approved subcontracting of such Global Development Plan activities contracted to Bayer, not to exceed the maximum amounts approved by the JSC pursuant to Section 4.1(b)(i) or 4.1(b)(ii).

1.9 “Bayer Invention” shall mean any Invention made solely by one or more employees or contractors of Bayer and/or its Affiliates.

1.10 “Bayer Know-How” shall mean all Information that: (a) is generated or acquired by or on behalf of Bayer, its Affiliates and Sublicensees during the Term pursuant to this Agreement in developing, obtaining or maintaining Regulatory Approval for, manufacturing or commercializing Compound or Product and thus comes within the Control of Bayer and/or its Affiliates; or (b) is otherwise Controlled by Bayer and/or its Affiliates during the Term and is used by Bayer or its Affiliate or Sublicensee in developing, obtaining or maintaining Regulatory Approval for, manufacturing or commercializing Compound or Product in the Field. For the avoidance of doubt, Bayer Know-How excludes Information regarding technologies that Bayer (or its Affiliate or Sublicensee) does not actually use in developing, obtaining or maintaining Regulatory Approval for, manufacturing or commercializing Compound or Product.

2.

1.11 “Bayer Patents” shall mean all Patents Controlled by Bayer and/or its Affiliates as of the Effective Date or during the Term that generally or specifically claim or cover Bayer Know-How. For the avoidance of doubt, Bayer Patents exclude Patents claiming or covering technologies that Bayer (or its Affiliate or Sublicensee) does not actually use in developing, obtaining or maintaining Regulatory Approval for, manufacturing or commercializing Compound or Product.

1.12 “Bayer Product Marks” shall mean any trademark Controlled by Bayer and used in connection with the marketing and sale or distribution of the Product in the Bayer Territory.

1.13 “Bayer Technology” shall mean the Bayer Know-How and Bayer Patents.

1.14 “Bayer Territory” shall mean the countries set forth on Exhibit B.

1.15 “Business Day” shall mean a day other than a Saturday, Sunday or any day on which commercial banks located in San Diego, California, Leverkusen, Germany, and/or Berlin, Germany, are authorized or obligated by law to be closed.

1.16 “CCDS” shall have the meaning provided in Section 4.5(a).

1.17 “C.F.R.” shall mean the United States Code of Federal Regulations.

1.18 “cGCP” shall mean current good clinical practices, as set forth in 21 C.F.R. Parts 50, 54, 56, 312 and 314 and as interpreted by relevant ICH guidelines; in each case, as amended from time to time.

1.19 “cGLP” shall mean current good laboratory practices, as set forth in 21 C.F.R. Part 58 and as interpreted by relevant ICH guidelines; in each case, as amended from time to time.

1.20 “cGMP” shall mean the current good manufacturing practices and standards for the production of drugs and finished pharmaceuticals, as set forth in 21 C.F.R. Parts 210 and 211 and as interpreted by relevant ICH guidelines; in each case, as amended from time to time.

1.21 “Clinical Material Cost” shall mean, with respect to Product or comparator drug for use in Global Development Plan activities or Bayer Development Plan activities, as applicable, reasonable and documented internal and external costs and expenses incurred by Trius or for its account on or after the Effective Date that are attributable to the purchase and blinding of comparator drug, and the packaging, labeling, shipping, importation and storage of Product and/or comparator drug, calculated in accordance with U.S. GAAP, consistently applied. For clarification, Clinical Material Cost excludes any and all costs included in Enabling Study Costs.

1.22 “CMC” shall mean chemistry, manufacturing and controls information.

1.23 “Commercially Reasonable Efforts” shall mean with respect to any obligation of the parties under this Agreement to perform any specified activity in connection with the

3.

development, registration, manufacture or commercialization of Compound and Product or otherwise, the level of efforts that a pharmaceutical company of similar size and situation in the exercise of its reasonable business judgment would commonly devote to compounds or products of similar market potential, resulting from their own research efforts, at a similar stage in development or product life taking into account issues of patent coverage, measures of relative safety and efficacy, Product profile, the competitiveness of the marketplace, the proprietary position of the Product, the regulatory structure involved, the relative profitability of the Product, and other relevant factors, including without limitation, comparative technical, legal, scientific, and/or medical factors.

1.24 […***…]

1.25 “Compound” shall mean: (a) torezolid, also known as TR-700, (b) Trius’ proprietary second-generation oxazolidinone, torezolid phosphate, also known as TR-701; or (c) any other oxazolidinone derivative, the composition of matter, manufacture, use, importation, sale or offer for sale of which is within the scope of the patent(s) and/or patent application(s) listed in Exhibit C hereto.

1.26 “Confidential Information” shall have the meaning provided in Section 9.1.

1.27 “Control” shall mean, with respect to any Information, Patents or other intellectual property rights, possession by a party of the right, power and authority (whether by ownership, license or otherwise) to grant access to, to grant use of, or to grant a license or a sublicense to such Information, Patents or intellectual property rights without violating the terms of any agreement or other arrangement with any Third Party.

1.28 “Core Indications” shall mean ABSSSI and Pneumonia.

1.29 “Cost of Goods Sold” or “COGS” shall mean, solely with respect to Product for commercial distribution: (i) in the case of bulk Compound or bulk or finished Product supplied by a Third Party, payments made by a party to such Third Party for such Compound or Product, plus reasonable internal (calculated at the Trius FTE Rate or Bayer FTE Rate(s), as applicable) and external costs and expenses of quality assurance, quality control and transportation of such Compound or Product; or (ii) in the case of bulk Compound or bulk or finished Product manufactured by a party or its Affiliate, such party’s or its Affiliate’s documented cost of goods sold, defined and calculated in accordance with U.S. GAAP or IFRS (as applicable), consistently applied, of Product shipped in either bulk or finished form (as applicable). These costs include:

(a) standard unit cost of Product, consisting of direct materials, direct labor, and production overhead directly attributable to Product, at standard. Production overhead means a party’s internal allocation, based on direct project headcount or other generally accepted activity based accounting methods, of indirect overhead costs associated with such party’s (or its operating unit’s(s’), as applicable) manufacture, formulation, filling, packaging, inspection, labeling, testing, release and shipping of Product. For clarification, Exhibit G (Definition of

4. *** Confidential Treatment Requested

Cost of Goods) attached hereto provides additional detail regarding the calculation of “standard unit cost” for Product supplied by or on behalf of Trius; and

(b) cost variances, consisting of direct materials variances, including material usage variances and purchase price variances, direct labor variances, and production overhead variances, including variable and fixed production overhead spending variances.

For clarification, COGS shall exclude costs and charges related to or caused by (1) unused manufacturing capacity, (2) amortization of property, plant, and equipment not specifically related to manufacturing of Product and (3) allocation of general corporate overhead. All defined and undefined terms used in this definition will be construed in accordance with, U.S. GAAP or IFRS, as applicable, consistently applied throughout the organization of a party or its Affiliate, and consistent with generally accepted methods for activity-based accounting.

1.30 “CPP” shall have the meaning provided in Section 4.1(b)(i) below.

1.31 “Current Formulations” shall mean the oral and intravenous formulations of Product to be evaluated in the Trius Clinical Protocol No. TR701-113 referred to in Section 1.76 below.

1.32 “Data” shall mean any and all results of research, preclinical studies, including in vitro and in vivo studies, clinical trials and other testing of any Compound or Product conducted by or on behalf of a party either before or during the Term, and any and all other data generated by or on behalf of a party related to the development, manufacture or commercialization of any Compound or Product, including biological, chemical, pharmacological, toxicological, pharmacokinetic, clinical, CMC, analytical, quality control, and other data, results and descriptions.

1.33 “Dong-A” shall mean Dong-A Pharmaceutical Co., Ltd., a company organized under the laws of Korea, having an address of 252, Yongdu-dong, Dongdaemun-ku, Seoul 130-708, Korea, or its successors in interest.

1.34 “Dong-A Agreement” shall mean that certain License Agreement relating to Compound between Trius (f/k/a Rx3 Pharmaceuticals, Inc.) and Dong-A dated as of January 31, 2007, as amended.

1.35 “EMA” shall mean the European Medicines Agency, or any successor agency thereto in the European Union.

1.36 “Enabling Studies” shall mean the non-clinical studies, Phase 1 Trials and CMC work contemplated by the Global Development Plan.

1.37 “Enabling Study Costs” shall mean the internal and external costs and expenses incurred by Trius or for its account on or after the Effective Date that are attributable to the performance of Enabling Studies pursuant to the Global Development Plan. Enabling Study Costs shall include the following, in each case to the extent attributable to Enabling Studies: (i) […***…]

5. *** Confidential Treatment Requested

[…***…]; and (ii) […***…].

1.38 “Exclusive License” shall have the meaning provided in Section 2.1.

1.39 “FDA” shall mean the United States Food and Drug Administration, or any successor agency thereto in the U.S.

1.40 “Field” shall mean the treatment and/or prevention of any disease or disorder.

1.41 “First Commercial Sale” shall mean, with respect to any Product, the first sale by Bayer, an Affiliate or Sublicensee for end use or consumption of such Product in a country after the governing Regulatory Authority of such country has granted Regulatory Approval. Furthermore, sales of Product for compassionate use, named patient use, clinical trial purposes or other similar uses will not constitute a First Commercial Sale.

1.42 “FTE” shall mean the equivalent of a full-time employee’s work time over a 12-month period (including normal vacations, sick days and holidays), expressed as a total number of labor hours per year, which, in the case of either party, shall be the number used by such party throughout its accounting system.

1.43 “Generic Version” shall mean, with respect to a Product containing a particular Compound being sold by Bayer, its Affiliate and/or a Sublicensee in a country, a product sold by a Third Party (excluding a Sublicensee) that: (a) contains such Compound; and (b) has received marketing approval from the Regulatory Authority in such country by reference to Bayer’s, its Affiliate’s or a Sublicensee’s Regulatory Approval for such Product in such country.

1.44 “Global Development Costs” shall mean Trius Global Development Costs and/or Bayer Global Development Costs, as applicable.

1.45 “Global Development Plan” shall have the meaning provided in Section 4.1(b)(i).

1.46 “Global Trial” shall mean any clinical trial (excluding any Phase 1 Trial) of a Product, which is described in the Global Development Plan, including, without limitation, the Trius 113 Trial.

1.47 “HTA Authority” shall mean any country, federal, supranational, state or local health technology assessment agency, department, bureau or other governmental authority in any country or other jurisdiction.

1.48 “ICH” shall mean the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use.

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1.49 “Information” shall mean all tangible and intangible (a) information, techniques, technology, practices, trade secrets, inventions (whether patentable or not), methods (including any analytical methods and other quality control and assurance methods), processes, procedures, knowledge, know-how, skill, experience, Data, results (including pharmacological, toxicological and clinical test data and results), analytical and quality control data, results or descriptions, software and algorithms and (b) compositions of matter, cells, cell lines, assays, animal models and physical, biological or chemical material.

1.50 “Invention” shall mean any invention, whether or not patentable, made in the course and as a result of the conduct of the activities expressly contemplated by this Agreement.

1.51 “Joint Invention” shall mean any Invention made jointly by one or more employees or contractors of Trius and one or more employees or contractors of Bayer.

1.52 “Joint Patents” shall mean all Patents that claim a Joint Invention.

1.53 “JPT” shall have the meaning provided in Section 3.2.

1.54 “JSC” shall have the meaning provided in Section 3.1.

1.55 “License” shall have the meaning provided in Section 2.2.

1.56 “Major Bayer Market” shall mean any of […***…].

1.57 “Manufacturing License” shall have the meaning provided in Section 2.2.

1.58 “NDA” shall mean (a) a New Drug Application, as more fully defined in 21 C.F.R. 314.5 et seq., and all amendments and supplements thereto, or (b) the equivalent application filed with any equivalent Regulatory Authority outside the U.S., and all amendments and supplements thereto.

1.59 “Net Sales” shall mean the gross amounts received by Bayer, its Affiliates and its direct and indirect Sublicensees through all tiers of sublicense for sales of Products to Third Parties that are not Affiliates or Sublicensees of the selling party (provided that if such Affiliates or Sublicensees of the selling party are the end users of such Products, the amount billed therefor shall be deemed to be the amount that would be billed to a Third Party end user in an arm’s length transaction and such amount shall be added to the Net Sales); less the following items, as allocable to such Product: (i) trade discounts, credits or allowances; (ii) credits or allowances additionally granted upon returns, rejections or recalls; (iii) freight, shipping and insurance charges; (iv) taxes, duties or other governmental tariffs, other than income taxes; and (v) government mandated rebates.

1.60 “Operating Team” shall mean the JPT or any potential sub-team such as, for example, a joint commercial sub-team or a joint manufacturing committee.

1.61 […***…]

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1.62 “Patents” shall mean patents and patent applications, including provisional applications, continuations, continuations-in-part, continued prosecution applications, divisions, substitutions, reissues, additions, renewals, reexaminations, extensions, term restorations, confirmations, registrations, revalidations, revisions, priority rights, requests for continued examination and supplementary protection certificates granted in relation thereto, as well as utility models, innovation patents, petty patents, patents of addition, inventor’s certificates, and equivalents in any country or jurisdiction.

1.63 “Phase 1 Trial” shall mean a human clinical trial that would satisfy the requirements for a Phase 1 study as defined in either 21 C.F.R. § 312.21(a) (or its successor regulation).

1.64 “Phase 3 Trial” shall mean a human clinical trial that would satisfy the requirements for a Phase 3 study as defined in either 21 C.F.R. § 312.21(c) (or its successor regulation) or in the ICH E8 Guideline (or its successor regulation), or an equivalent registration trial in the Bayer Territory.

1.65 “Pneumonia” shall mean hospital-acquired pneumonia and/or ventilator-acquired pneumonia (or, in each case, the equivalent indication in any regulatory jurisdiction in the Bayer Territory).

1.66 “Product” shall mean any pharmaceutical product that contains Compound […***…] all formulations and line extensions thereof.

1.67 “Product Marks” shall mean any Bayer Product Marks and/or Trius Product Marks controlled and used by the parties in connection with the marketing and sale or distribution of the Product in their respective Territories.

1.68 “Regulatory Approval” shall mean any and all approvals (including price and reimbursement approvals, if required), licenses, registrations, or authorizations of any Regulatory Authority in any country or other jurisdiction that are necessary to market and sell Product in the Field in such country or jurisdiction.

1.69 “Regulatory Authority” shall mean any country, federal, supranational, state or local regulatory agency, department, bureau or other governmental or regulatory authority having the administrative authority to regulate the development or marketing of pharmaceutical products in any country or other jurisdiction.

1.70 “Royalty Term” shall mean, in the case of any Product, in any country, on a Product-by-Product and country-by-country basis, the period of time commencing on the First Commercial Sale of such Product in such country and ending upon the latest of: (a) […***…] years after the date of First Commercial Sale of such Product in such country; (b) expiration of any data or other regulatory exclusivity period for such Product in such country; and (c) expiration of the last-to-expire Valid Claim of […***…].

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1.71 “SFDA” shall mean China’s State Food and Drug Administration, or any successor agency thereto in China.

1.72 “Sublicensee” shall mean any Third Party to whom Bayer or its Affiliate has directly or indirectly granted a sublicense under all or any portion of the License.

1.73 “Term” shall have the meaning provided in Section 10.1.

1.74 “Third Party” shall mean any entity other than Trius or Bayer or an Affiliate of Trius or Bayer.

1.75 “Trius 112 Trial” shall mean the Phase 3 Trial described in Trius Clinical Protocol No. TR701-112, entitled “A Phase 3 Randomized, Double-Blind, Multicenter Study Comparing the Efficacy and Safety of 6-Day Oral TR-701 FA and 10-Day Oral Linezolid for the Treatment of Acute Bacterial Skin and Skin Structure Infections,” which is ongoing as of the Effective Date.

1.76 “Trius 113 Trial” shall mean the Phase 3 Trial described in Trius Clinical Protocol No. TR701-113, entitled “A Phase 3 Randomized, Double-Blind, Multicenter Study Comparing the Efficacy and Safety of Intravenous to Oral 6-Day TR701 Free Acid and Intravenous to Oral 10-Day Linezolid for the Treatment of Acute Bacterial Skin and Skin Structure Infections,” which is proposed to be conducted after the Effective Date.

1.77 “Trius Domain Names” shall mean any domain name identical or similar with the Trius Product Marks under any ccTLD (country code Top Level Domain) and gTLD (generic Top Level Domain) address area.

1.78 “Trius FTE Rate” shall mean the rate of […***…] for each FTE per year. Trius shall adjust the Trius FTE Rate for each calendar year commencing with the year 2012 to reflect any year-to-year increase in the Consumer Price Index for the San Diego Region (“CPI” – based on a cumulative index of CPI numbers starting on the Effective Date to the date of the calculation of such Trius FTE Rate). Trius shall notify Bayer of any adjustment of the Trius FTE Rate for any year on or before December 1 of the preceding year.

1.79 “Trius Global Development Costs” shall mean the internal and external costs and expenses incurred by Trius or for its account on or after the Effective Date that are attributable to the performance of Global Trials pursuant to the Global Development Plan excluding, however, the costs for the Trius 112 Trial and the Trius 113 Trial. Global Development Costs shall include the following, in each case to the extent attributable to Global Trials other than the Trius 112 Trial and the Trius 113 Trial: (i) […***…]; (ii) […***…]; and (iii) […***…]. For clarification, Trius Global Development Costs exclude any and all costs included in Enabling Study Costs.

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1.80 “Trius Invention” shall mean any Invention made solely by one or more employees or contractors of Trius and/or its Affiliates.

1.81 “Trius Know-How” shall mean all Information that is within the Control of Trius and/or its Affiliates as of the Effective Date or which comes within the Control of Trius and/or its Affiliates during the Term and that is necessary or useful to develop, obtain Regulatory Approval for, manufacture or commercialize Compound and Product in the Field.

1.82 “Trius Patents” shall mean all Patents within the Control of Trius and/or its Affiliates as of the Effective Date or which come within the Control of Trius and/or its Affiliates during the Term that generally or specifically claim or cover the development, manufacture, use, sale, offering for sale and import of Compound or Product in the Field. The Trius Patents as of the Effective Date are set forth on Exhibit C.

1.83 “Trius Product Marks” shall mean any trademark Controlled by Trius and used in connection with the marketing and sale or distribution of the Product in the Trius Territory.

1.84 “Trius Technology” shall mean the Trius Know-How and Trius Patents.

1.85 “Trius Territory” shall mean the entire world, excluding the Bayer Territory.

1.86 “U.S.” shall mean the United States of America.

1.87 “Valid Claim” shall mean a claim contained in (a) an issued and unexpired patent, which claim has not been held unenforceable, unpatentable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and has not been admitted to be invalid or unenforceable through abandonment, reissue, disclaimer or otherwise, or (b) a patent application that […***…].

1.88 “Work Plan” shall have the meaning provided in Section 4.2(c).

2. LICENSE GRANTS

2.1 Exclusive License. Subject to the terms and conditions of this Agreement, Trius hereby grants to Bayer, during the Term, an exclusive (even as to Trius, except as described below), royalty bearing license, with the right to grant sublicenses through multiple tiers of sublicense, under the Trius Technology and Trius’ interest in Joint Patents, in each case, solely to develop, make, have made, use, sell, have sold, offer for sale and import Compound and Product in the Field in the Bayer Territory (the “Exclusive License”).

2.2 Non-Exclusive Manufacturing License for Trius Territory. Subject to the terms and conditions of this Agreement, Trius hereby grants to Bayer, during the Term, a non exclusive, royalty bearing (with royalties being fully included in and covered by payment of agreed royalties on Net Sales of Products in the Bayer Territory) license, with the right to grant sublicenses through multiple tiers of sublicense, under the Trius Technology and Trius’ interest in the Joint Patents, solely to make and have made Compound and Product in the Trius Territory

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for the sole purpose of use, sale, offer for sale and import of such Compound and Product in the Field in the Bayer Territory (the “Manufacturing License” and together with the Exclusive License, the “License”). […***…]

2.3 Sublicenses. Any and all sublicenses granted under the License shall be in writing and shall be subject to, and consistent with, the terms and conditions of this Agreement. Bayer shall be fully responsible for the compliance of its Affiliates and Sublicensees with the terms and conditions of this Agreement. Within 30 days after execution, Bayer shall provide Trius with a full and complete copy of each sublicense agreement (provided that Bayer may redact any confidential information contained therein that is not necessary to ascertain compliance with this Agreement).

2.4 Trius Reserved Rights. Trius hereby expressly reserves the right to practice, and to grant licenses under, the Trius Technology for any and all purposes other than the development, manufacture and commercialization of Compound and Products in the Field in the Bayer Territory. Without limiting the generality of the foregoing, Trius shall at all times have the exclusive right to develop, manufacture and commercialize, and to grant licenses to Third Parties to develop, manufacture and commercialize, Compound and Product in the Trius Territory. In addition, and notwithstanding the first sentence of this Section 2.4, Trius shall retain (a) such non exclusive rights under the Trius Technology and Joint Patents in the Bayer Territory as are necessary to conduct activities under the Global Development Plan and to perform Trius’ manufacturing and supply obligations under Section 4.9; and (b) the non-exclusive right to practice and license the Trius Technology and Joint Patents to make and have made Compound and Product in the Bayer Territory solely for the purpose of use, sale, offer for sale and import of such Compound and Product in the Trius Territory.

2.5 Negative Covenants; License Exclusions. Bayer hereby covenants not to practice, and not to permit or cause any Affiliate, Sublicensee or other Third Party to practice, any Trius Technology for any purpose other than as expressly authorized in this Agreement. Trius hereby covenants not to practice, and not to permit or cause any Affiliate, licensee or other Third Party to practice any Bayer Technology for any purpose other than as expressly authorized in this Agreement. For the avoidance of doubt, neither party grants to the other party any license or other right with respect to any active pharmaceutical ingredient other than Compound.

2.6 […***…]

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2.7 License Grant-Back to Trius. Subject to the terms and conditions of this Agreement, Bayer hereby grants to Trius an exclusive (even as to Bayer, except as expressly set forth below), royalty free, fully paid, irrevocable, perpetual license, with the right to sublicense through multiple tiers of sublicense, under the Bayer Technology and Bayer’s interest in the Joint Patents, solely: (a) to develop, make, have made, use, sell, have sold, offer for sale and import Compound and Product in the Trius Territory in the Field; and (b) to make and have made Compound and Product in the Bayer Territory for the sole purpose of use, sale, offer for sale and import of such Compound and Product in the Trius Territory in the Field (collectively, the “Grant Back License”); provided, however, that the Grant-Back License shall not be construed to grant any license or other right to Trius under Bayer Technology or Bayer’s interest in Joint Patents to develop, make, have made, use, sell, have sold, offer for sale or import any composition of matter other than Compound or Product; and provided, further, that the exclusivity of the Grant Back License will be subject to Bayer’s retained right under the Bayer Technology and the Joint Patents to develop as necessary to conduct activities under the Global Development Plan and/or the Bayer Development Plan make and have made Compound and Product in the Trius Territory for the sole purpose of use, sale, offer for sale and import of such Compound and Product in the Field in the Bayer Territory.

2.8 No Implied Licenses. No right or license under any Patents or Information of either party is granted or shall be granted by implication. All such rights or licenses are or shall be granted only as expressly provided in this Agreement.

3. GOVERNANCE

3.1 Joint Steering Committee. As of the Effective Date, the parties hereby establish the Joint Steering Committee (“JSC”).

(a) Composition. The JSC shall be composed of three (3) representatives of each of Trius and Bayer, each of whom shall have appropriate experience, knowledge and authority within such party’s organization to carry out the duties and obligations of the JSC. The initial representatives of the parties are as follows:

Trius	Bayer
[...***...]	[...***...]
[...***...]	[...***...]
[...***...]	[...***...]

Each party shall designate one of its representatives as the primary contact for that party with respect to JSC-related matters. Each party may change its representatives to the JSC or its primary contact from time to time in its sole discretion, effective upon notice to the other party of such change. These representatives shall have appropriate technical credentials, experience and knowledge. A reasonable number of additional representatives of a party may attend meetings of the JSC in a non-voting capacity.

(b) Responsibilities. The JSC’s overall responsibility shall be to facilitate information sharing and coordination between the parties in the worldwide development,

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registration and commercialization of Product in the Field. The specific responsibilities of the JSC shall be:

(i) to serve as the primary means by which the parties review, discuss and, subject to Section 4.1(b)(iii), agree on amendments or updates of the Global Development Plan, including, but not limited to, the development budget;

(ii) to serve as the primary means by which the parties review and discuss amendments or updates of the Bayer Development Plan, in accordance with Section 4.1(c);

(iii) to facilitate the exchange of Trius Know-How and Bayer Know-How;

(iv) to serve as the principal means by which Trius keeps Bayer reasonably informed regarding Trius’ development, registration and commercialization plans, efforts and results with respect to Compound and Product in the Field in the Trius Territory, and by which Bayer keeps Trius reasonably informed regarding Bayer’s development, registration and commercialization plans, efforts and results with respect to Compound and Product in the Field in the Bayer Territory;

(v) to seek harmonization in global development, regulatory approval, marketing, promotion and commercialization efforts with respect to Compound and Product in the Field;

(vi) to delegate to Operating Teams such of the JSC’s responsibilities (excluding its responsibilities under Section 3.1(b)(vii)) as the JSC deems appropriate, subject to the limitations set forth in Section 3.1(f);

(vii) to resolve disputes referred to it by Operating Teams; and

(viii) to carry out such other obligations as are expressly delegated to it under this Agreement.

The JSC’s responsibilities and authority shall be limited to those matters expressly delegated to it in this Agreement. Similarly, each Operating Team’s responsibilities and authority shall be limited to those matters within the JSC’s responsibilities and authority that are expressly delegated to such Operating Team by the JSC. For the avoidance of doubt, it is set forth herein that neither the JSC nor any Operating Team shall have the right to amend this Agreement. For further clarification, the parties acknowledge and agree that, subject to Trius’ compliance with its obligations under Article 4 and the Global Development Plan, Trius has the right to operate independently of Bayer and the JSC in the development, registration and commercialization of Compound and Product in the Trius Territory.

(c) Meetings. The JSC shall meet as deemed necessary by the JSC members, but at least quarterly, with the location for such meetings alternating between Trius and Bayer facilities (or such other location as is mutually agreed by the parties). Alternatively, the JSC may

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meet by means of teleconference, videoconference or other similar communications equipment. Each party shall be responsible for all of its own expenses of participating in JSC meetings.

(d) Minutes. Responsibility for preparing definitive minutes of each JSC meeting shall alternate between the parties, with Trius having responsibility for preparing minutes of the first JSC meeting. The responsible party shall circulate a draft of the minutes of each meeting to all members of the JSC for comments within 10 Business Days after such meeting. Such minutes shall provide a description, in reasonable detail, of the discussions at the meeting and shall document all actions and determinations approved by the JSC at such meeting. In addition, in the event of approval at any JSC meeting of (i) any amendment or update to the Global Development Plan, (ii) the initial Bayer Development Plan, or (iii) any amendment or update to the Bayer Development Plan, the applicable document shall be attached to the minutes as an exhibit. The parties shall promptly discuss any comments on such minutes and finalize the minutes no later than the date of the next JSC meeting.

(e) Decision-Making. Decisions of the JSC shall be made by unanimous vote, with each party’s representatives on the JSC collectively having one vote. No vote of the JSC may be taken unless at least one of each party’s representatives is present for the JSC vote.

(f) Dispute Resolution. If the JSC is unable to decide or resolve unanimously any matter properly presented to it for action, at the written request of either party, the issue shall be referred to the Chief Executive Officer of Trius and the Bayer’s Head Strategic Marketing General Medicine who shall promptly meet and attempt in good faith to resolve such issue within 30 days. Notwithstanding the foregoing, if such officers cannot resolve such matter within 30 days of the date such matter is first referred to them, then, subject to Sections 4.1(b)(i), 4.1(b)(iii), 4.1(c) and 4.1(d) below:

(i) Trius’ Chief Executive Officer shall have the final decision-making authority with respect to any matter relating to the development, registration, marketing, promotion and commercialization of Product in the Field within the Trius Territory; and

(ii) Bayer’s Head Strategic Marketing General Medicine shall have the final decision-making authority with respect to any matter relating to the development, registration, marketing, promotion and commercialization of Product in the Field within the Bayer Territory.

However, in the event of a fundamental difference of opinion between the parties regarding any of the matters described in Sections 3.1(f)(i) and 3.1(f)(ii), the applicable officer of the party having final decision-making authority shall give good faith consideration to the other party’s position and make reasonable efforts to take the other party’s position into account in making his or her decision. Notwithstanding the foregoing or any other provision of this Agreement to the contrary, neither the JSC nor any individual with dispute-resolution authority under this Section 3.1(f) shall have any power to: (A) determine any issue in a manner that would conflict with the express terms and conditions of this Agreement; or (B) modify or amend the terms and conditions of this Agreement other than the Global Development Plan or the Bayer Development Plan.

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(g) Term of Existence of JSC. The parties acknowledge that the JSC’s activities relate solely to governance, communication and coordination under this Agreement and, in particular, do not involve the delivery of services by either party. The parties anticipate that the JSC will continue to exist until completion of all Global Development Plan activities […***…]. The JSC may be disbanded earlier or later than that as mutually agreed by the parties. In addition, at any time after completion or termination of all Global Development Plan activities, a party may provide written notice to the other party of its intention to disband and no longer participate in the JSC. Once a party has provided such written notice, or the parties mutually agree to disband the JSC, the JSC shall cease to exist, and each party shall thereafter have the right to solely decide, without consultation, any matters relating to activities in its territory that were previously subject to review and/or approval by the JSC, provided that neither party may decide any such matter in a way that would conflict with the express terms and conditions of this Agreement (other than those relating to the JSC). In the case that the JSC is disbanded, then all discussions and sharing of information required under this Agreement that would otherwise occur through the JSC shall continue to be carried out between the parties, including, without limitation, the discussions and sharing of information under Sections 4.1, 4.2, 4.4, 4.5 and 4.7.

3.2 Operating Teams. The parties hereby establish a Joint Project Team (“JPT”) which shall be composed of representatives of each of Trius and Bayer, each of whom shall have appropriate experience, knowledge and authority within such party’s organization to carry out the duties and obligations of the JPT. The initial representatives of the parties on the JPT are as follows:

Trius	Bayer
[...***...]	[...***...]
[...***...]	[...***...]
[...***...]	[...***...]

The JSC may delegate to the JPT one or more of the JSC’s responsibilities relating to those portions of Global Development Plan activities that are to be conducted in the Bayer Territory or relating generally to the development and registration of Product in the Field in the Bayer Territory and/or the harmonization of global marketing, promotion and commercialization strategy with respect to Product in the Field as the JSC deems appropriate. The JSC may also establish one or more other Operating Teams, to which it may delegate one or more of its responsibilities. Matters relating to the composition, meetings, minutes and decision-making authority of each Operating Team shall be as set forth in Sections 3.1(a), 3.1(c), 3.1(d) and 3.1(e), respectively, mutatis mutandis.

4. DEVELOPMENT, COMMERCIALIZATION AND SUPPLY

4.1 Development.

(a) Trius 112 Trial. Trius shall use Commercially Reasonable Efforts to complete the Trius 112 Trial, at Trius’ sole expense.

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(b) Global Development Plan.

(i) Global Development Program. Subject to Section 4.2, Trius shall use Commercially Reasonable Efforts to conduct, or have conducted, those development and registration activities with respect to Product as are necessary to obtain Regulatory Approval for Product in the U.S. in the Core Indications, including, without limitation, the completion of the Trius 113 Trial and the activities necessary to generate the information required for the CMC section of the U.S. NDA for Product and the issuance of a Certificate of Pharmaceutical Product (CPP) for each of the Core Indications by the FDA or EMA whichever can be obtained first, all as set forth in a written plan (the “Global Development Plan”), the initial form of which has been agreed upon in writing by the parties by letter agreement dated as of the Effective Date. For clarification, although the Trius 113 Trial is part of the Global Development Plan, the costs of the Trius 113 Trial shall not be included in Global Development Costs, and Trius shall be solely responsible for such costs. As part of this Global Development Plan, Trius shall undertake to complete the CMC activities as required for obtaining the clinical trial application (CTA) for China as set out in detail in Exhibit D hereto. Bayer shall provide reasonable cooperation and informal assistance to Trius in connection with that portion of any Global Development Plan activity that Trius conducts in the Bayer Territory as provided for in the Global Development Plan. In addition, Trius shall […***…], subject to JSC approval, on a case-by-case basis, of (1) […***…], (2) […***…], and (3) […***…]. The parties shall use Commercially Reasonable Efforts to design the Global Trial in Pneumonia, as such Global Trial is described in the initial Global Development Plan, in a manner calculated to be acceptable to each of FDA, EMA and SFDA, within the timelines set out in the Global Development Plan, and to amend or update the Global Development Plan from time to time as reasonably required (as determined in good faith by the JSC) to meet the requirements of FDA, EMA and SFDA.

(ii) Conduct of Global Trials. Trius shall be the sponsor of the Global Trials in the Core Indications, and shall be responsible for conducting or having conducted, and shall use Commercially Reasonable Efforts to conduct, or have conducted, each Global Trial in accordance with the Global Development Plan. Without limiting the foregoing, Trius shall use Commercially Reasonable Efforts to […***…] (as specified in the Global Development Plan), and Bayer shall use Commercially Reasonable Efforts to assist Trius in the management and execution of such Global Trial in each country of the Bayer Territory in which such Global Trial is conducted (as specified in the Global Development Plan), […***…]. Each party shall keep the JSC and JPT regularly informed of the status, progress and results of all Global Development Plan activities conducted by it or on its behalf.

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(iii) Amendments to Global Development Plan. The Global Development Plan shall be subject to amendment and update from time to time upon approval by the JSC in accordance with Article 3, except as expressly set forth below in this Section 4.1(b)(iii). To the extent practicable under the circumstances, a party proposing any amendment or update to the Global Development Plan shall provide the details of such proposed amendment or update to the other party at least 30 days prior to a JSC meeting. The parties shall discuss in good faith and attempt to reach mutual agreement regarding any and all amendments and updates to the Global Development Plan, including, without limitation, any such amendment or update regarding the design of any Global Trial. However, […***…]:

(1) […***…]:

a. […***…]

b. […***…]

c. […***…]

d. […***…]

e. […***…]

[…***…]

(2) […***…]

References to the “Global Development Plan” in this Agreement shall be construed to refer to the Global Development Plan, as then in effect (including all amendments thereto).

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(c) Bayer Development Plan. Bayer shall be solely responsible for conducting, at Bayer’s sole expense, such development and registration activities as may be required by Regulatory Authorities in the Bayer Territory to support NDA filing and Regulatory Approval in the Bayer Territory, except that Trius shall supply, or have supplied, to Bayer bulk or finished Product (as agreed by the parties) and comparator drug for use in Bayer Development Plan activities, […***…]. Without limiting the generality of the foregoing, Bayer shall use Commercially Reasonable Efforts to conduct, or have conducted, the Bayer Territory-specific clinical trials, non-clinical studies and other development and registration activities with respect to Product in the Core Indications in each of the Major Bayer Markets set forth in a written plan (the “Bayer Development Plan”), the initial form of which has been agreed upon in writing by the parties by letter agreement dated as of the Effective Date. Trius shall provide reasonable cooperation and informal assistance to Bayer in connection with the Bayer Development Plan. Bayer shall have the right to amend or update the Bayer Development Plan from time to time; provided, however, that any such amendment or update shall be submitted for discussion in the JSC at least 30 days prior to a JSC meeting, and not be inconsistent with the Global Development Plan. References to the “Bayer Development Plan” in this Agreement shall be construed to refer to the Bayer Development Plan, as then in effect (including all amendments thereto). Bayer shall keep the JSC and JDC regularly informed of the status, progress and results of all Bayer Development Plan activities.

(d) Additional Development; Additional Indications. The parties acknowledge and agree that, unless otherwise mutually agreed by the parties in writing, the scope of the Global Development Plan is limited to development and registration of […***…] Product in the Core Indications […***…]. If a party wishes to develop and register […***…] and/or develop and register Product for any Additional Indication or […***…], such party shall notify the other party in writing at least 30 days prior to a JSC meeting, and the JSC shall promptly discuss in good faith whether to expand the scope of the Global Development Plan to cover such activities and what the cost sharing between the parties should be for that indication; provided, however, that, if the parties agree through the JSC to jointly develop Product in the indication Bacteremia, Bayer shall bear […***…] of the cost and Trius shall bear […***…] of the cost of any related Global Trial. Any such expansion shall require the unanimous approval of both parties’ JSC representatives. If a party proposes that the scope of the Global Development Plan be expanded to cover any such activities, but the other party’s JSC representatives do not approve such expansion, the proposing party shall be free to conduct the proposed activities independently for its respective territory; provided, however, that […***…], unless mutually agreed by the parties in writing.

(e) Performance Standards. In conducting any activity pursuant to this Section 4.1, each party shall: (i) comply with all applicable laws, rules and regulations and applicable regulatory standards, including, as applicable, cGLP, cGMP and cGCP; and

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(ii) prepare and maintain, or shall cause to be prepared and maintained, complete and accurate written records, accounts, notes and reports in good scientific manner and in sufficient detail for patent and regulatory purposes, which shall fully and properly reflect all work done, results achieved, Data generated, and Inventions made in whole or in part, by such party. Each party shall, upon the reasonable request of the other party, make such records available to the other party for inspection or copying.

4.2 Costs of Conducting Global Development Plan.

(a) Global Trial Costs. Trius and Bayer shall share the Global Development Costs to the effect that Trius shall bear 75% and Bayer shall bear 25% of such Global Development Costs.

(b) Enabling Study Costs. In addition to the sharing of Global Development Costs set out in Section 4.2(a) above, Bayer shall reimburse Trius for 25% of Enabling Study Costs, provided that Bayer’s total share of all Enabling Study Costs shall not exceed […***…], except: (i) […***…]; and (ii) […***…].

(c) Cost Estimate. The specific development activities to be performed by each party in connection with the Global Development Plan and the applicable timelines and budgets for such activities shall be defined for each calendar year in a detailed work plan (the “Work Plan”) approved by the JSC which shall be consistent with the version of the Global Development Plan that has most recently been unanimously approved by both parties’ JSC representatives, and, upon such approval, shall become an integral part of the Global Development Plan. The JPT shall be responsible for the development and implementation of the Work Plan. The initial Work Plan shall be submitted by the JPT for approval by the JSC no later than by August 31, 2011, and the JSC shall approve the initial Work Plan including potential adjustments thereto no later than by September 30, 2011. Thereafter, no later than by June 15 of each calendar year, the JPT shall submit for approval by the JSC the proposed Work Plan for the following calendar year, and the JSC shall approve the respective Work Plan including potential adjustments thereto no later than by October 31 of such calendar year. The Work Plan for each calendar year shall be reviewed and adjusted by the JPT on a quarterly basis during the term of the year to determine if any changes are necessary given the progress and results of the work as of such date. Changes to the Work Plan (except for changes triggering a cost increase of less than […***…] to the cost estimate portion of the Work Plan) shall be subject to review and written approval by the JSC.

(d) Statements; Invoicing.

(i) Within 60 days after the end of each calendar quarter during the performance of the Global Development Plan, Bayer shall provide to Trius an invoice for Trius’ 75% share of Bayer Global Development Costs incurred by Bayer during such calendar quarter pursuant to Section 4.2(a), which invoice shall include a reasonably detailed breakdown of the

19. *** Confidential Treatment Requested

components of such Bayer Global Development Costs and the Global Trials to which the Bayer Global Development Costs are attributable, including, but not limited to, a list of hours worked by Bayer FTEs on the project and the applicable Bayer FTE Rates. Unless set-off against any payment to be made by Bayer to Trius pursuant to Section 4.2(d)(ii) below, Trius shall make payment to Bayer by the later of (x) 60 days from the end of such calendar quarter, and (y) 45 days from receipt of invoice.

(ii) Within 30 days after the end of each calendar quarter during the performance of the Global Development Plan, Trius shall provide to Bayer an invoice, substantially in the form attached hereto as Exhibit G, for (i) Bayer’s 25% share of the total Enabling Study Costs and Trius Global Development Costs incurred by Trius during such calendar quarter pursuant to Section 4.2(a) and 4.2(b), which invoice shall include a reasonably detailed breakdown of the components of such Enabling Study Costs and the Enabling Studies to which such Enabling Study Costs are attributable, and of Trius Global Development Costs and the Global Trials to which such Trius Global Development Costs are attributable, including, but not limited to, a list of hours worked by Trius FTEs on the project and the applicable Trius FTE Rates, and appropriate supporting documentation for amounts paid to Third Parties. Bayer shall pay Trius the invoiced amount, less Trius’ 75% share of Bayer Global Development Costs (if any) for such calendar quarter as invoiced to Trius pursuant to Section 4.2(d)(i). Payment shall be made by the later of (x) 60 days from the end of such calendar quarter, and (y) 45 days from receipt of the invoice. Notwithstanding the foregoing, if Trius’ aggregate payment obligations to Third Parties for Global Development Plan activities for any quarter exceed […***…], Trius may invoice Bayer for a portion (not to exceed 25%) of such payment obligations in advance, and Bayer shall pay such invoiced amount as promptly as practicable (and in any event within 45 days) from receipt of the invoice and supporting documentation. The full amount of any such advance payment for a calendar quarter shall be deducted from the invoiced amount for Bayer’s share of actual aggregate Global Development Costs and Enabling Study Costs for such calendar quarter.

(e) Currency Conversion. If any costs included in the calculation of Enabling Study Costs are incurred by Trius, or any costs included in the calculation of Global Development Costs are incurred by either party, in any currency other than U.S. dollars, such costs shall be converted into U.S. dollars using the exchange reference rate of the European Central Bank Frankfurt/Main, Germany, quoted on the third Business Day prior to the invoice date, as published, in the absence of manifest error, by the European Central Bank on its website (http://www.ecb.int).

4.3 Diligence. Bayer shall use Commercially Reasonable Efforts to develop, register and commercialize Product for the Core Indications in […***…] the Bayer Territory […***…].

4.4 Technology Transfer; Exchange of Information.

(a) Commencing promptly after the Effective Date, Trius shall disclose to Bayer all existing and available (in recorded form) Trius Know-How as reasonably required for the development, manufacture or commercialization of Product in the Bayer Territory.

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Thereafter, on an ongoing basis, Trius shall also disclose to Bayer any and all additional Trius Know-How generated after the Effective Date. Without limiting the generality of the foregoing, Trius shall provide to Bayer true and complete copies of all written, graphic or electronic embodiments of Data within the Trius Know-How, including all draft and final reports of any preclinical study or clinical trial of, and all CMC, pharmacology, toxicology and pharmacokinetic data with respect to, Compound or Product in the Field, and shall promptly disclose to Bayer in writing each Trius Invention within the Trius Know-How and each Joint Invention. The Trius Know-How shall be transferred to Bayer in a format that shall be agreed upon between the parties.

(b) On an ongoing basis during the Term, Bayer shall disclose to Trius all Bayer Know-How as reasonably required for the development, manufacture or commercialization of Product in the Trius Territory. Without limiting the generality of the foregoing, Bayer shall provide to Trius true and complete copies of all written, graphic or electronic embodiments of Data within the Bayer Know-How, including all draft and final reports of any preclinical study or clinical trial of, and all CMC, pharmacology, toxicology and pharmacokinetic data with respect to, Compound or Product in the Field, and shall promptly disclose to Trius in writing each Bayer Invention within the Trius Know-How and each Joint Invention. With respect to any of the foregoing that is in a language other than English, Bayer shall also provide Trius with English translations thereof.

(c) During the Term, each party shall provide the other party with reasonable technical assistance relating to the use of the Trius Know-How or Bayer Know-How, as applicable, to the extent permitted under the licenses granted to such other party under Article 2.

4.5 Regulatory and HTA.

(a) Regulatory Responsibility in the Bayer Territory. Bayer shall be solely responsible for preparing, filing, obtaining and maintaining Regulatory Approvals for Products in the Field in the Bayer Territory. Bayer shall be the holder of all Regulatory Approvals for Products in the Field in the Bayer Territory and shall have responsibility for all interactions with Regulatory Authorities with respect to Products in the Field in the Bayer Territory. Notwithstanding the foregoing, if Bayer does not receive a CPP from the FDA or the EMA, Trius shall prepare, file, obtain, maintain and be the holder of the Regulatory Approval for Product in the Field in China and those other countries of the Bayer Territory which require CPP ownership for obtaining Regulatory Approval for each of the Core Indications. Bayer shall bear all costs and expenses incurred in connection with regulatory activities with respect to Compound and Product in the Field in the Bayer Territory. Trius shall create and maintain a company core data sheet which shall serve as the global reference labeling document used to direct the content of local labeling (the “CCDS”). The initial CCDS as well as any proposed update thereof shall be discussed between the parties in the JSC, and Trius shall take into account any comments made by Bayer on the CCDS or any proposed update.

(b) Access to Regulatory and HTA Authority Filings.

(i) Trius Filings. Trius shall in a timely manner provide to Bayer:

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(1) drafts of all proposed U.S. IND and NDA filings for Product for review and comment reasonably in advance of submission to the FDA, copies of any other documents, reports and communications to be submitted to or received from the FDA and all information relating to any FDA contact by or on behalf of Trius;

(2) true and complete copies of: (i) all U.S. INDs, NDAs, Regulatory Approvals (collectively, “Approvals”) for Compound or Product; and (ii) other major correspondence with the FDA regarding Compound or Product; and

(3) upon Bayer’s request, true and complete copies of such other Approvals for Compound or Product in the Trius Territory, and such other filings, submissions and correspondence with Regulatory Authorities in the Trius Territory regarding Compound or Product, as, in each case, may be necessary to obtain or maintain Approvals for Compound or Product in the Bayer Territory or to comply with applicable pharmacovigilance and other regulatory requirements in the Bayer Territory.

Trius hereby grants to Bayer the right to access and cross-reference the Approvals, filings, submissions and correspondence described in Sections 4.5(b)(i)(2) and 4.5(b)(i)(3) above for the purposes of obtaining and maintaining Approvals for Compound or Product in the Bayer Territory and complying with applicable pharmacovigilance and other regulatory requirements in the Bayer Territory. CMC regulatory documents shall be made available to Bayer in TRD format. […***…]

(ii) Bayer Filings. Bayer shall in a timely manner provide to Trius:

(1) drafts of all proposed IND and NDA filings for Product in each of the Major Bayer Markets for review and comment reasonably in advance of submission to any Regulatory Authority in such Major Bayer Market, together with summary English translations of any such draft INDs and NDAs that are not in English;

(2) true and complete copies of: (i) all INDs and Approvals for Compound or Product in the Major Bayer Markets, together with summary English translations of any such Approvals that are not in English; and (ii) other major correspondence with Regulatory Authorities in the Major Bayer Markets regarding Compound or Product, together with English summary translations of any such correspondence that is not in English; and

(3) upon Trius’ request, true and complete copies of such other Approvals for Compound or Product in the Bayer Territory, and such other filings, submissions and correspondence with Regulatory Authorities and HTA Authorities in the Bayer Territory regarding Compound or Product, as, in each case, may be necessary to obtain or maintain Approvals for Compound or Product in the Trius Territory or to comply with applicable pharmacovigilance and other regulatory requirements in the Trius Territory, together with English summary translations of any of the foregoing that are not in English.

Bayer hereby grants to Trius the right to access and cross-reference the Approvals, filings, submissions and correspondence described in Sections 4.5(b)(ii)(2) and 4.5(b)(ii)(3) above for the purposes of obtaining and maintaining Approvals for Compound or Product in the

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Trius Territory and complying with applicable pharmacovigilance and other regulatory requirements in the Trius Territory.

(iii) […***…]

(iv) Each party shall, promptly upon request of the other party, file with applicable Regulatory Authorities and HTA Authorities such letters of access or cross-reference as may be necessary to accomplish the intent of this Section 4.5(b).

(c) Safety Data Exchange. Within three (3) months following the Effective Date, the parties shall negotiate in good faith and enter into a safety data exchange agreement regarding Compound and Products, which shall set forth standard operating procedures governing the collection, investigation, reporting, and exchange of information concerning adverse drug reactions/experiences sufficient to permit each party to comply with its regulatory and other legal obligations within the applicable timeframes. In this safety data exchange agreement, it shall be provided which party shall be responsible for the timely reporting of all relevant adverse drug reactions/experiences, Product quality, Product complaints and safety data relating to Compound and Product to the appropriate Regulatory Authorities in the Bayer Territory in accordance with all applicable laws, rules and regulations. Such agreement’s terms and conditions shall be no less stringent than the ICH guidelines, such that each party shall be able to comply with all regulatory and legal requirements regarding the management of safety data by providing for the exchange of relevant information in appropriate format within applicable timeframes. Unless otherwise mutually agreed by the parties, Trius shall maintain a global safety database for Product. Bayer may, in its discretion, maintain its own parallel global safety database for Product and/or a regional safety database for Product in the Bayer Territory.

(d) […***…]. Each of Bayer and Trius shall share with the other party, to the extent permissible (i.e., within the Control of such party and legally appropriate) and relevant, the following materials relating to Product in their respective territories: […***…].

4.6 Use of Subcontractors. Either party may perform any activity for which it is responsible under this Article 4 through a subcontractor, provided that (a) none of the other party’s rights hereunder are diminished or otherwise adversely affected as a result of such subcontracting, (b) the subcontractor undertakes in writing obligations of confidentiality and non-use regarding Confidential Information and ownership of Inventions which are substantially the same as those undertaken by the parties pursuant to Article 9 and Section 7.1, and (c) […***…]

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[…***…]. For the sake of clarity, it is set forth herein that […***…]. In the event a party performs any of its development activities hereunder through a subcontractor, then such party shall at all times be fully responsible for the performance and, subject to Section 4.2, payment of such subcontractor.

4.7 Cooperation. Bayer shall use Commercially Reasonable Efforts to provide Trius with all reasonable assistance and take all actions reasonably requested by Trius, without changing the allocation of responsibilities set forth in this Article 4, that are necessary or desirable to enable Trius to obtain and maintain Regulatory Approvals for Product in the Field in the Trius Territory. Trius shall use Commercially Reasonable Efforts to provide Bayer with all reasonable assistance and take all actions reasonably requested by Bayer, without changing the allocation of responsibilities set forth in this Article 4, that are necessary or desirable to enable Bayer to obtain and maintain Regulatory Approvals for Product in the Field in the Bayer Territory. Each party further agrees to cooperate with any inspection by the FDA or other Regulatory Authority relating to Product, including, but not limited to, any inspection prior to approval of an application for Regulatory Approval for any Product.

4.8 Commercialization. Subject to the terms and conditions of this Agreement, Bayer shall be solely responsible for marketing, promotion and commercialization of Product in the Field in the Bayer Territory, at Bayer’s sole expense. In marketing, promoting and commercializing Product in the Field in the Bayer Territory, Bayer shall comply with all applicable laws, rules and regulations.

4.9 Manufacturing and Supply.

(a) No later than the Effective Date, Trius shall enter, or shall have entered, into (i) a master services agreement with a contract manufacturer for the conduct of such manufacturing- and supply-related services as are necessary and suitable for the conduct of the Global Development Plan, including the CMC activities specified therein and in Exhibit D hereto, and (ii) that certain letter agreement between Trius and its contract manufacturer regarding the future engagement of such contract manufacturer by Trius for commercial manufacturing services relating to Product, the form of which has been agreed upon in writing by the parties by letter agreement dated as of the Effective Date. Bayer shall have the right to audit such contract manufacturer. Trius shall make available to Bayer all documentation of development and manufacturing activities conducted by such contract manufacturer necessary for development and registration and/or commercialization of Product in the Field in the Bayer Territory.

(b) Promptly following the Effective Date, each party shall perform any and all CMC activities specified as being such party’s responsibility as set out […***…] set out in Exhibit D hereto.

(c) Within six (6) months after the Effective Date, the parties shall negotiate in good faith and enter into a separate written manufacturing and supply agreement within the

24. *** Confidential Treatment Requested

framework outlined in Exhibit E hereto and a quality assurance agreement, each on commercially reasonable terms, pursuant to which Trius shall have bulk Compound and/or bulk or finished Product (as agreed by the parties) manufactured and supplied to Bayer for commercialization in the Field in the Bayer Territory. Bayer shall have the right to audit any such contract manufacturer. Trius shall make available, or cause such contract manufacturer to make available, to Bayer all documentation of development and manufacturing activities conducted by the contract manufacturer necessary for development and registration and/or commercialization of Product in the Field in the Bayer Territory. With respect to this manufacture and supply by Trius, Trius shall provide Bayer […***…].

5. FEES AND PAYMENTS

5.1 Upfront Fee. In consideration of the license under Article 2 above, within ten (10) Business Days after receipt of an invoice from Trius, Bayer shall pay to Trius a non-refundable, non-creditable, one-time upfront fee of US $25,000,000.

5.2 Milestone Payments.

(a) Development Milestones. Upon or after the first achievement by or on behalf of Trius of each of Milestone Events 2 and 6 set forth in the table below, Trius shall notify Bayer in writing of such achievement and invoice Bayer for the corresponding non-refundable, non-creditable milestone payment, and Bayer shall pay such milestone payment to Trius within […***…] days after receipt of invoice. Bayer shall notify Trius in writing of the first achievement of each of Milestone Events 1, 3-5 and 7-10 set forth in the table below by Bayer or any of its Affiliates or Sublicensees within […***…] days after such achievement, Trius shall promptly invoice Bayer for the corresponding non-refundable, non-creditable milestone payment, and Bayer shall pay such milestone payment to Trius within […***…] days after receipt of invoice.

Milestone Event		Payment (USD)
1.	Initiation* of Trius 113 Trial	$	2.0 million
2.	[...***...]	$	[...***...]
3.	[...***...]	$	[...***...]
4.	[...***...]	$	[...***...]
5.	[...***...]	$	[...***...]
6.	[...***...]	$	[...***...]
7.	[...***...]	$	[...***...]
8.	[...***...]	$	[...***...]
9.	[...***...]	$	[...***...]
10.	[...***...]	$	[...***...]
Total Development Milestones		$	34.1 million

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[…***…]

* “Initiation” of a clinical trial shall mean the first dosing of the first patient in such trial.

[…***…]

(b) Sales Milestones. Bayer shall notify Trius in writing of the first achievement of each of milestone events set forth in the table below and pay to Trius the corresponding non-refundable, non-creditable milestone payment within 45 days after the end of the first calendar year in which such milestone event is achieved:

Milestone Event	Payment (USD)
Aggregate annual Net Sales of all Products in the Bayer Territory equal or exceed $[…***…]	$	[…***…]
Aggregate annual Net Sales of all Products in the Bayer Territory equal or exceed $[…***…]	$	[…***…]
Aggregate annual Net Sales of all Products in the Bayer Territory equal or exceed $[…***…]	$	[…***…]
Total Sales Milestones	$	35.0 million

Each of the milestone payments set forth in this Section 5.2 shall be payable only one time, for the first achievement of the applicable milestone, regardless of the number of indications for which a Product is developed or approved in the Bayer Territory or the number of Products developed or approved in the Bayer Territory.

5.3 Royalties. Bayer shall pay to Trius a royalty equal to […***…] of Net Sales of Products by Bayer and its Affiliates and Sublicensees in the Bayer Territory. Royalties shall be payable on a Product-by-Product and country-by-country basis on Net Sales occurring during the applicable Royalty Term for a Product in a country. […***…]

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[…***…]. On a Product-by-Product and country-by-country basis, upon expiration of the Royalty Term for a Product in a country, Bayer’s License with respect to such Product in such country shall become fully-paid, irrevocable and perpetual.

5.4 Existing Third Party Payment Obligations. Trius shall be responsible for all license fee, maintenance fee, royalty, milestone, sublicensing revenue or similar payment obligations accruing with respect to the practice by Bayer, its Affiliates and Sublicensees of the Trius Technology under any agreement between Trius and a Third Party entered into prior to the Effective Date, including, without limitation, all payment obligations to Dong-A under the Dong-A Agreement.

5.5 Third Party Intellectual Property Rights. Except as expressly set forth in Section 5.4, Bayer shall be solely responsible for performing, or having performed on its behalf, such freedom-to-operate searches with respect to the manufacture, use, sale, offer for sale or import of Compound and Product in the Bayer Territory as Bayer deems appropriate, for securing any licenses under Patents or other intellectual property rights of Third Parties as Bayer deems necessary or useful for the manufacture, use, sale offer for sale or import of Products in the Bayer Territory. If, during the Term, Bayer obtains a license under Third Party Patents in any country which […***…], then Bayer may offset […***…] of the royalties actually paid to such Third Party under such patent license with respect to sales of Product in such country against the royalties due under Section 5.3 with respect to Net Sales of Product in such country; provided, however, that the royalty payable by Bayer to Trius pursuant to this Section 5.3 with respect to Net Sales of such Product in such country shall not be reduced […***…].

6. PAYMENT; RECORDS; AUDITS

6.1 Payment; Reports. Royalties under Section 5.3 shall be calculated and reported for each calendar quarter and shall be paid within 45 days of the end of the calendar quarter. The parties agree that the calculation of Net Sales, including permitted deductions from gross amounts received, shall be made in a manner consistent with usual and customary standards and practices in the pharmaceutical industry, as well as the applicable generally-accepted accounting and financial reporting standards (e.g., GAAP or IFRS). Each report of Net Sales of Products by Bayer, its Affiliates and Sublicensees shall include, on a country-by-country basis, the number of Products sold, the gross sales (i.e., number of packages sold multiplied by the applicable list price) and Net Sales of such Products, the royalty payable and the exchange rates used. Bayer shall keep, and shall cause its Affiliates and Sublicensees to keep, complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit Trius to confirm the accuracy of all sales milestone payments and royalty payments due hereunder.

6.2 Invoicing. With respect to all payments required to be made by Bayer under this Agreement, other than royalties under Section 5.3 (for which no invoice shall be required), Trius shall send invoices to the following address: Financial Operations, […***…] c/o

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Euroservices Bayer GmbH, Building E 60, D-51368 Leverkusen, Germany. Invoices shall be in substantially the form attached hereto as Exhibit H.

6.3 Exchange Rate; Manner and Place of Payment. All payments hereunder shall be payable in U.S. dollars regardless of the countries in which Net Sales are made. When conversion of payments from any foreign currency is required because Net Sales are made in currencies other than U.S. dollars, such conversion into U.S. dollars shall be made using the average of the daily exchange rates for the applicable calendar quarter used for Bayer’s internal accounting and reporting process consistently applied. All payments owed under this Agreement shall be made by electronic funds or wire transfer in immediately available funds to a bank and account designated in writing by Trius, unless otherwise specified in writing by Trius.

6.4 Income Tax Withholding and Value Added Tax. Trius shall pay any and all taxes levied on account of any payments made to it under this Agreement. If Bayer is legally required to withhold any taxes from payments due hereunder as far as Trius itself is subject to resident or non-resident taxation, Bayer shall be entitled to (a) deduct and withhold such taxes from the amount payable to Trius, and (b) timely pay the taxes to the proper taxing authority. Notwithstanding the aforementioned, Bayer shall have no right to withhold any taxes as far as Bayer and/or its Affiliates and/or subsidiaries are subject to resident or non-resident taxation. In case of assignment of this Agreement pursuant to Section 13.6 below, both parties will make reasonable efforts to avoid or reduce any such taxes.

Either no withholding tax shall be withheld, or the amount withheld shall be reduced by Bayer according to the regulations in the Double Tax Treaty, when Bayer is timely furnished with necessary documents (Freistellungsbescheid) by Trius issued by the German Tax Authority (Bundeszentralamt für Steuern), certifying that the payment is exempt from tax or subject to a reduced tax rate.

Any withheld tax shall be treated as having been paid by Bayer to Trius for all purposes of this Agreement.

Bayer shall timely forward the tax receipts certifying the payments of withholding tax on behalf of Trius.

In case Bayer cannot deduct the withholding tax due to fulfillment of payment obligation by settlement or set-off, Trius will pay the withholding tax to Bayer separately.

If Bayer missed to deduct withholding tax but is still required by tax law to pay withholding tax on account of Trius to the tax authorities, Trius shall assist Bayer with regard to all procedures required in order to obtain reimbursement by tax authorities or, in case tax authorities will not reimburse withholding tax to Bayer, Trius will immediately refund the tax amount. If Bayer withholds tax from any payments to Trius, it shall reasonably assist Trius with regard to all procedures required in order for Trius to obtain a refund by tax authorities in Germany under the Double Tax Treaty.

All remunerations mentioned in this Agreement are net values. Value added tax, sales tax or similar taxes will be charged and invoice additionally with the appropriate rate if legally required.

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6.5 Audits.

(a) Until three years after the completion or termination of all Global Development Plan activities, Trius shall keep complete and accurate records pertaining to Enabling Study Costs and Trius Global Development Costs in sufficient detail to permit Bayer to confirm the accuracy of Trius’ statements and invoices delivered pursuant to Section 4.2. Bayer shall have the right to cause an independent, certified public accountant reasonably acceptable to Trius to audit such records to confirm Enabling Study Costs and Trius Global Development Costs and for a period covering not more than the preceding three years. Such audits may be exercised no more than once per year during normal business hours upon reasonable prior written notice to Trius. Such records for a given year shall be subject to audit hereunder only one time. Prompt adjustments shall be made by the parties to reflect the results of such audit. Bayer shall bear the full cost of such audit unless such audit discloses an overpayment by Bayer of more than 5% of Bayer’s share of Enabling Study Costs or Trius Global Development Costs due under Section 4.2, in which case Trius shall bear the full cost of such audit and shall, at Trius’ option, either promptly refund to Bayer the amount of any overpayment or grant Bayer a credit in the amount of any overpayment, which Bayer may apply towards any payment obligation accruing hereunder.

(b) During the Term and for a period of three years thereafter, Bayer shall keep, and shall cause its Affiliates and Sublicensees to keep, complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit Trius to confirm the accuracy of all payments due hereunder. Trius shall have the right to cause an independent, certified public accountant reasonably acceptable to Bayer to audit such records to confirm Net Sales and royalties for a period covering not more than the preceding three years. Such audits may be exercised no more than once per year during normal business hours upon reasonable prior written notice to Bayer. Such records for a given year shall be subject to audit hereunder only one time. Prompt adjustments shall be made by the parties to reflect the results of such audit. Trius shall bear the full cost of such audit unless such audit discloses an underpayment by Bayer of more than 5% of the amount of payments due under this Agreement, in which case, Bayer shall bear the full cost of such audit and shall promptly remit to Trius the amount of any underpayment. Any overpayments by Bayer will, at Bayer’s option, be refunded to Bayer or credited to future royalties.

(c) Results of any such audit shall be provided to both parties. Any records or accounting information received by either party from the other in exercising its rights under this Agreement as well as the results of any such audit shall constitute Confidential Information.

6.6 Late Payments. Any payments due under this Agreement shall be due on such date as specified in this Agreement and, in the event such date is not a Business Day, then the next succeeding Business Day. Any failure by Bayer to make a payment within […***…] days after the date when due shall obligate Bayer to pay computed interest, the interest period commencing on the due date and ending on the payment date, to Trius at a rate per annum equal to […***…], or at an interest rate according to local legal provisions, whatever is lesser. […***…]. Interests shall be paid using

29. *** Confidential Treatment Requested

the modified following payment convention and calculated based on the actual/360 adjusted day count convention. The payment of such interest shall not limit Trius from exercising any other rights it may have as a consequence of the lateness of any payment.

7. INTELLECTUAL PROPERTY

7.1 Ownership of Inventions. Inventorship of Inventions shall be determined in accordance with the rules of inventorship under U.S. patent laws. Trius shall solely own all Trius Inventions. Bayer shall solely own all Bayer Inventions. The parties shall jointly own all Joint Inventions.

7.2 Patent Prosecution and Maintenance.

(a) Trius Patents. Trius shall have the sole right, but not the obligation, to control and manage the preparation, filing, prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of all Trius Patents in the Trius Territory, at its sole cost and expense and by counsel of its own choice. Trius shall keep Bayer reasonably informed of the status of filing, prosecution and maintenance of the Trius Patents in the Trius Territory, including, without limitation, by providing Bayer with copies of all significant communications received from or filed in patent office(s) in the Trius Territory with respect to Trius Patents, provided that in the event that the Trius Patents include any Patents owned by a Third Party to which Trius grants a license to commercialize Products in the Trius Territory, Trius will not be obligated to provide Bayer with copies of communications with patent office(s) in the Trius Territory relating to such Third Party licensee’s Patents to the extent it would constitute a breach of Trius’ confidentiality obligations to such Third Party licensee.

Trius shall have the first right, but not the obligation (except as expressly set forth in the penultimate paragraph of this Section 7.2(a) with respect to Trius Patents in the Bayer Territory that are owned by Dong-A), to control and manage the preparation, filing, prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of all Trius Patents in the Bayer Territory, using the same outside patent counsel used by Trius for Trius Patents in the Bayer Territory prior to the Effective Date, provided that if Bayer reasonably requests that, in any country of the Bayer Territory, Trius shall use Bayer’s preferred local patent counsel in such country instead of Trius’ current local patent counsel (if any) in such country.

Bayer shall reimburse Trius for all external patent fees and costs incurred with respect to preparation, filing, prosecution and maintenance of Trius Patents in the Bayer Territory. Trius shall keep Bayer reasonably informed of progress with regard to the preparation, filing, prosecution and maintenance of Trius Patents in the Bayer Territory, including, without limitation, content, timing and jurisdiction of the filing of such Trius Patents, and shall consult with, and consider in good faith the requests and suggestions of, Bayer with respect to filing and prosecuting Trius Patents in the Bayer Territory. Without limiting the generality of the foregoing, Trius shall, or shall instruct its outside patent counsel to, promptly inform Bayer of all actions taken by any patent office in the Bayer Territory with respect to any Trius Patent and all actions taken by Trius’ outside patent counsel with regard to prosecution of any patent application included within the Trius Patents and/or containing Trius Know-How. Furthermore, Trius shall, or shall instruct its outside patent counsel to:

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(i) provide Bayer with a copy of any proposed patent application within the Trius Patents and/or containing Trius Know-How for review and comment reasonably in advance of filing with any patent office in the Bayer Territory; and

(ii) keep Bayer reasonably informed of the status of such patent application filing, prosecution and maintenance, including, without limitation, by providing Bayer with copies of all significant communications received from or filed in patent office(s) in the Bayer Territory with respect to such filings. Bayer shall have the right, at its discretion, to consult with Trius’ outside patent counsel regarding the preparation and prosecution of the Trius Patents in the Bayer Territory, including, without limitation, content, timing and jurisdiction of the filing of such Trius Patents.

Any and all decisions in connection with the prosecution and/or extension in the Bayer Territory shall be taken by Trius; provided, however, that Trius shall consider in good faith any reasonable comments provided by Bayer with respect to the Trius Patents.

In the event that Trius desires to abandon or cease prosecution or maintenance of any Trius Patent in the Bayer Territory, Trius shall provide reasonable prior written notice to Bayer of such intention to abandon (which notice shall, to the extent possible, be given no later than 60 days prior to the next deadline for any action that must be taken with respect to any such Trius Patent in the relevant patent office), provided that Trius shall not abandon or cease prosecution or maintenance of any Trius Patent in the Bayer Territory that is owned by Dong-A without Bayer’s prior written consent. In such case, subject to the rights of Dong-A in the case of Trius Patents owned by Dong-A, and at Bayer’s sole discretion, upon written notice to Trius from Bayer, Bayer may elect to continue prosecution and/or maintenance of any such Trius Patent, at its sole cost and expense and by counsel of its own choice. In this case, Trius shall, at its expense, execute all documents necessary and otherwise reasonably support Bayer to enable Bayer to take over the prosecution or maintenance of the Trius Patents.

Bayer shall have the right upon at least 90 days’ prior written notice to Trius, on a country-by-country basis in the Bayer Territory, to assume primary responsibility for the preparation, filing, prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of Trius Patents in any country of the Bayer Territory, at Bayer’s sole cost and expense and by outside patent counsel selected by Bayer and reasonably acceptable to Trius. If Bayer exercises such right with respect to Trius Patents in any country of the Bayer Territory, Bayer shall keep Trius reasonably informed of progress with regard to the preparation, filing, prosecution and maintenance of such Trius Patents in such country, and shall consult with, and consider in good faith the requests and suggestions of, Trius with respect thereto. In the event that Bayer desires to abandon or cease prosecution or maintenance of any such Trius Patent, Bayer shall provide reasonable prior written notice to Trius of such intention to abandon (which notice shall, to the extent possible, be given no later than 60 days prior to the next deadline for any action that must be taken with respect to any such Trius Patent in the relevant patent office). In such case, at Trius’ sole discretion, upon written notice to Bayer, Trius may elect to continue prosecution and/or maintenance of any such Trius Patent, in which event the foregoing provisions of this Section 7.2(a) regarding prosecution and maintenance of Trius Patents in the Bayer Territory by Trius shall again apply.

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(b) Joint Patents. Trius shall have the first right, but not the obligation, to control and manage the preparation, filing, prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of all Joint Patents in the Trius Territory, at its sole cost and expense and by counsel of its own choice. Bayer shall have the first right, but not the obligation, to control and manage the preparation, filing, prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of all Joint Patents in the Bayer Territory, at its sole cost and expense and by counsel of its own choice. Each party shall keep the other party reasonably informed of progress with regard to the preparation, filing, prosecution and maintenance of Joint Patents for which such party (the “Responsible Party”) is responsible, and shall consult with, and consider in good faith the requests and suggestions of, the other party with respect to strategies for filing and prosecuting Joint Patents worldwide. In the event that the Responsible Party desires to abandon or cease prosecution or maintenance of any Joint Patent in any country, the Responsible Party shall provide reasonable prior written notice to the other party of such intention to abandon (which notice shall, to the extent possible, be given no later than 60 days prior to the next deadline for any action that must be taken with respect to any such Joint Patent in the relevant patent office). In such case, at the other party’s sole discretion, upon written notice to the Responsible Party from the other party, the other party may elect to continue prosecution and/or maintenance of any such Joint Patent, at its sole cost and expense and by counsel of its own choice.

(c) Bayer Patents. Bayer shall have the sole right, but not the obligation, to control and manage the preparation, filing, prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of all Bayer Patents in the Bayer Territory and in the Trius Territory, at its sole cost and expense and by counsel of its own choice. Bayer shall keep Trius reasonably informed of the status of filing, prosecution and maintenance of the Bayer Patents in the Trius Territory, including, without limitation, by providing Trius with copies of all significant communications received from or filed in patent office(s) in the Trius Territory with respect to Bayer Patents.

7.3 Cooperation of the Parties. Each party agrees to cooperate fully in the preparation, filing, prosecution and maintenance of Patents under Section 7.2 and in the obtaining and maintenance of any patent extensions, supplementary protection certificates and the like with respect thereto respectively at its own costs. Such cooperation includes, but is not limited to: (a) executing all papers and instruments, or requiring its employees or contractors, to execute such papers and instruments, so as to effectuate the ownership of Inventions set forth in Section 7.1, and Patents claiming or disclosing such Inventions, and to enable the other party to apply for and to prosecute patent applications in any country as permitted by Section 7.2; and (b) promptly informing the other party of any matters coming to such party’s attention that may affect the preparation, filing, prosecution or maintenance of any such patent applications.

7.4 Infringement by Third Parties.

(a) Notice. In the event that either Trius or Bayer becomes aware of any infringement or threatened infringement by a Third Party of any Trius Patents, Bayer Patents or Joint Patents, it shall notify the other party in writing to that effect.

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(b) Trius Patents.

(i) Subject to the rights of Dong-A under the Dong-A Agreement, Bayer shall have the first right, but not the obligation, to bring and control any action or proceeding against a Third Party with respect to infringement of any Trius Patent in the Field in the Bayer Territory, at its own expense and by counsel of its own choice, and Trius shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. If Bayer fails to bring any such action or proceeding within (A) 120 days following the notice of alleged infringement, or (B) 30 days before the time limit, if any, set forth in the appropriate laws and regulations for the filing of such actions, whichever comes first, then Trius shall have the right to bring and control any such action, at its own expense and by counsel of its own choice, and Bayer shall have the right, but not the obligation, at its own expense, to be represented in any such action by counsel of its own choice.

(ii) Trius shall have the sole right, but not the obligation, to bring and control any action or proceeding with respect to infringement of any Trius Patent: (A) in the Bayer Territory with respect to any infringing activity that is outside the Field; and (B) in the Trius Territory; in each case, at its own expense and by counsel of its own choice.

(c) Joint Patents.

(i) Bayer shall have the first right, but not the obligation, to bring and control any action or proceeding with respect to infringement of any Joint Patent in the Field in the Bayer Territory, at its own expense and by counsel of its own choice, and Trius shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. Trius shall have the first right, but not the obligation, to bring and control any action or proceeding with respect to infringement of any Joint Patent in the Field in the Trius Territory, at its own expense and by counsel of its own choice, and Bayer shall have the right, but not the obligation, at its own expense, to be represented in any such action by counsel of its own choice. If the party with the first right to bring and control any such action or proceeding fails to do so within (A) 120 days following the notice of alleged infringement, or (B) 30 days before the time limit, if any, set forth in the appropriate laws and regulations for the filing of such actions, whichever comes first, then the other party shall have the right, but not the obligation, to bring and control any such action, at its own expense and by counsel of its own choice, and the first party shall have the right, at its own expense, to be represented in any such action by counsel of its own choice.

(ii) With respect to any infringement of a Joint Patent by infringing activity other than that described in Section 7.4(c)(i), the parties shall mutually agree on a case-by-case basis whether to initiate and prosecute any legal action to enforce any such Joint Patent and, if the parties agree to initiate and prosecute any such action, which party will be responsible for initiating and prosecuting such action, and how costs and recoveries will be allocated between the parties.

(d) Bayer Patents. Bayer shall have the sole right, but not the obligation, to bring and control any action or proceeding against a Third Party with respect to infringement of

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any Bayer Patent in the Bayer Territory or in the Trius Territory, at its own expense and by counsel of its own choice.

(e) Cooperation; Award. In the event a party brings an infringement action in accordance with this Section 7.4, the other party shall cooperate fully, including, if required to bring such action, the furnishing of a power of attorney or being named as a party. Neither party shall enter into any settlement or compromise of any action under this Section 7.4 which would in any manner alter, diminish, or be in derogation of the other party’s rights under this Agreement without the prior written consent of such other party, which, except in the case of Trius Patents owned by Dong-A, shall not be unreasonably withheld. Except as otherwise agreed by the parties in connection with a cost-sharing arrangement, any recovery realized by a party as a result of any action or proceeding pursuant to this Section 7.4, whether by way of settlement or otherwise, shall be retained by the party that brought and controlled such action for purposes of this Agreement; provided, however, that each party shall be reimbursed for any of its litigation expenses and any recovery realized by Bayer as a result of any action pursuant to Section 7.4(b) or Section 7.4(c) (after reimbursement of the parties’ litigation expenses) […***…].

7.5 Infringement of Third Party Rights. Each party shall promptly notify the other in writing of any allegation by a Third Party that the activity of either of the parties pursuant to this Agreement infringes or may infringe the intellectual property rights of such Third Party. Trius shall have the sole right to control any defense of any such claim involving alleged infringement of Third Party rights by Trius’ activities at its own expense and by counsel of its own choice, and Bayer shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. Bayer shall have the sole right to control any defense of any such claim involving alleged infringement of Third Party rights by Bayer’s activities at its own expense and by counsel of its own choice, and Trius shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. Neither party shall have the right to settle any patent infringement litigation under this Section 7.5 in a manner that diminishes the rights or interests of the other party without the written consent of such other party (which shall not be unreasonably withheld); provided, however, that Bayer shall have the right to obtain a license under the Third Party’s Patents in connection with settlement of any alleged infringement claim pursuant to this Section 7.5, and shall be entitled to deduct royalties paid to such Third Party to the extent Section 5.5 sentence 2 applies.

7.6 Trademarks.

(a) The parties shall, via the JSC or JPT or any joint commercial sub-team, as applicable, closely coordinate with respect to the selection and use of the Product Marks in the parties’ respective territories.

(b) Trius shall have the sole right to select the Trius Product Marks and shall own and retain all right, title and interest in and to such Trius Product Marks, and all goodwill associated with or attached to the Trius Product Marks arising out of the use thereof by Trius, its Affiliates and Third Party licensees shall inure to the benefit of Trius. Only Trius will be

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authorized to initiate at its own discretion legal proceedings against any infringement or threatened infringement of the Trius Product Marks.

(c) Trius shall be responsible for the registration, hosting, maintenance and defense of the Trius Domain Names. For the avoidance of doubts, Trius is allowed to register such Domain Names in its own name, to host on its servers, maintain and defend these Domain Names and use them for websites.

(d) Bayer shall have the sole right to select the Bayer Product Marks and shall own and retain all right, title and interest in and to the Bayer Product Marks, and all goodwill associated with or attached to the Bayer Product Marks arising out of the use thereof by Bayer, its Affiliates and Sublicensees shall inure to the benefit of Bayer. Only Bayer will be authorized to initiate at its own discretion legal proceedings against any infringement or threatened infringement of the Bayer Product Marks.

(e) Bayer shall be responsible for the registration, hosting, maintenance and defense of the Bayer Domain Names. For the avoidance of doubts, Bayer is allowed to register such Domain Names in its own name, to host on its servers, maintain and defend these Domain Names and use them for websites.

(f) The parties recognize the exclusive ownership of each other party’s Product Mark, logotype or trade dress furnished by such party (e.g., the name “Bayer” and the “Bayer Cross”) for use in connection with the marketing, sale or distribution of the Product as defined in this Agreement. The parties shall not, either while this Agreement is in effect, or at any time thereafter, register, use or challenge or assist others to challenge the Product Mark, logotype and trade dress furnished by each party for use in connection with the marketing of the products as defined in this Agreement or attempt to obtain any right in or to any such name, logotype, trademarks or trade dress confusingly similar for the marketing of the products as defined in this Agreement or any other goods and products, notwithstanding that such goods or products have a different use or are dissimilar to the products as defined in this Agreement.

(g) If the parties wish to use the same or similar Product Mark in the Trius Territory and the Bayer Territory, any such use shall be on terms and conditions to be mutually agreed by the parties in writing.

8. REPRESENTATIONS AND WARRANTIES

8.1 Mutual Representations and Warranties. Each party represents and warrants to the other that: (a) it is duly organized and validly existing under the laws of its jurisdiction of incorporation or formation, and has full corporate or other power and authority to enter into this Agreement and to carry out the provisions hereof; (b) it is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder, and the person or persons executing this Agreement on its behalf has been duly authorized to do so by all requisite corporate or partnership action; and (c) this Agreement is legally binding upon it, enforceable in accordance with its terms, and does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any material law or

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regulation of any court, governmental body or administrative or other agency having jurisdiction over it.

8.2 Trius Representations and Warranties. Trius represents and warrants to Bayer that, as of the Effective Date:

(a) Trius has not granted to any Third Party any license or other right with respect to Compound, Products or Trius Technology that conflicts with the rights granted to Bayer herein;

(b) other than the Dong-A Agreement, there are no agreements in effect as of the Effective Date between Trius and a Third Party under which rights with respect to the Trius Technology are being licensed to Trius;

(c) Trius is the sole and exclusive owner of all right, title and interest in and to the Trius Patents in existence on the Effective Date, other than the Trius Patents licensed to Trius pursuant to the Dong-A Agreement, […***…], and Trius has the right to license the Trius Patents to Bayer as contemplated by this Agreement;

(d) to the knowledge of Trius, […***…];

(e) to the knowledge of Trius, the pending applications within the Trius Patents in existence on the Effective Date (excluding any such application identified in Exhibit C as having been cancelled, withdrawn or abandoned prior to the Effective Date) are […***…], and the issued and unexpired patents within the Trius Patents existing on the Effective Date (excluding any such patent identified in Exhibit C as having been abandoned or held unenforceable, unpatentable or invalid prior to the Effective Date) have been […***…], and all applicable fees have been paid on or before the due date for payment;

(f) to the knowledge of Trius, no reexamination, interference, invalidity, opposition, nullity or similar claim or proceeding is pending or threatened with respect to any Trius Patent;

(g) Trius has the right to license and disclose the Trius Know-How to Bayer as contemplated by this Agreement;

(h) Exhibit C attached hereto accurately and completely identifies all Trius Patents as of the Effective Date;

(i) Trius […***…];

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(j) to the knowledge of Trius, […***…];

(k) Trius is not a party to any legal action, suit or proceeding relating to the Trius Technology or any Compound or Product, nor has Trius received any written communication from any Third Party, including, without limitation, any Regulatory Authority or other government agency, threatening such action, suit or proceeding;

(l) […***…];

(m) to Trius’ knowledge, […***…]; and

(n) the Dong-A Agreement is effective and has not been terminated by either party to it, and neither Trius nor Dong-A has threatened to terminate the Dong-A Agreement.

During the Term, Trius shall not grant any Third Party any license, right or interest in any of the Trius Patents or its portion in the Joint Patents relating to the Bayer Territory in derogation of the licenses and rights granted to Bayer hereunder, or otherwise encumber any Trius Patent or its portion in the Joint Patents relating to the Bayer Territory in derogation of the licenses and rights granted to Bayer hereunder. […***…]

8.3 Disclaimer. Except as expressly set forth herein, THE TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS PROVIDED BY EACH PARTY HEREUNDER ARE PROVIDED “AS IS,” AND EACH PARTY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICES.

8.4 Limitation of Liability. Except in the case of material breach of Article 9, NEITHER PARTY SHALL BE ENTITLED TO RECOVER FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL, INDIRECT OR PUNITIVE DAMAGES OR ANY LOST PROFITS, HOWEVER CAUSED, UNDER ANY THEORY OF LIABILITY, IN CONNECTION WITH THIS AGREEMENT OR ANY LICENSE GRANTED HEREUNDER; provided, however, that this limitation of liability shall not apply to the extent that it would be invalid by the applicable law and this Section 8.4 shall not be construed to limit either party’s indemnification obligations under Article 11.

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9. CONFIDENTIALITY

9.1 Confidential Information. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing by the parties, each party agrees that, during the Term and for five years thereafter, such party (the “Receiving Party”) shall keep confidential and shall not publish or otherwise disclose and shall not use for any purpose, other than as expressly provided for in this Agreement, any Information furnished to it by or on behalf of the other party (the “Disclosing Party”) and/or any results of the development and other work pursuant to this Agreement (collectively, “Confidential Information”). The Receiving Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. The Receiving Party shall use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its, and its Affiliates’, employees, agents, consultants and other representatives do not disclose or make any unauthorized use of the Confidential Information. The Receiving Party shall promptly notify the Disclosing Party upon discovery of any unauthorized use or disclosure of the Disclosing Party’s Confidential Information.

9.2 Exceptions. Confidential Information shall not include any information which the Receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the Receiving Party, generally known or available; (b) is known by the Receiving Party and/or any of its Affiliates at the time of receiving such information, as evidenced by its records; (c) is hereafter furnished to the Receiving Party and/or any of its Affiliates by a Third Party, as a matter of right and without restriction on disclosure; or (d) is independently discovered or developed by the Receiving Party and/or any of its Affiliates, without the use of Confidential Information of the Disclosing Party.

9.3 Authorized Disclosure. Each party may disclose Confidential Information of the other party as expressly permitted by this Agreement, or if and to the extent such disclosure is reasonably necessary in the following instances:

(a) filing or prosecuting Patents as permitted by this Agreement;

(b) enforcing such party’s rights under this Agreement;

(c) prosecuting or defending litigation as permitted by this Agreement;

(d) complying with applicable court orders or governmental regulations;

(e) in the case of Trius, disclosure to Dong-A as necessary for compliance with the Dong-A Agreement;

(f) disclosure to Affiliates, licensees and Sublicensees, potential licensees and Sublicensees, contractors, employees and consultants who need to know such information for the development, manufacture and commercialization of Products in accordance with this Agreement, on the condition that any such Third Parties agree to be bound by confidentiality and non-use obligations that are no less stringent than the terms of this Agreement; and

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(g) disclosure to Third Parties in connection with due diligence or similar investigations by such Third Parties, and disclosure to potential Third Party investors in confidential financing documents, provided, in each case, that any such Third Party agrees to be bound by reasonable obligations of confidentiality and non-use.

Notwithstanding the foregoing, in the event a party is required to make a disclosure of the other party’s Confidential Information pursuant to Section 9.3(c) or Section 9.3(d), it shall, except where impracticable, give reasonable advance notice to the other party of such disclosure and use efforts to secure confidential treatment of such information at least as diligent as such party would use to protect its own confidential information, but in no event less than reasonable efforts. In any event, the parties agree to take all reasonable action to avoid disclosure of Confidential Information hereunder.

9.4 Confidentiality of this Agreement. Except as otherwise provided in this Article 9, each party agrees not to disclose to any Third Party the terms of this Agreement without the prior written consent of the other party hereto, except that each party may disclose the terms of this Agreement that are otherwise made public as contemplated by Section 9.5 or to the extent such disclosure is permitted under Section 9.3.

9.5 Public Announcements.

(a) No later than the Business Day immediately following the Effective Date, the parties shall each issue a press release announcing the execution of this Agreement in the form attached hereto as Exhibit F. It is further acknowledged that each party may desire or be required to issue subsequent press releases relating to this Agreement or activities hereunder. The parties agree that any such subsequent press releases shall be subject to the other party’s prior consent and that the parties shall consult with each other reasonably and in good faith with respect to the text and timing of subsequent press releases prior to the issuance thereof, provided that a party may not unreasonably withhold consent to such releases, and that either party may issue such press releases as it determines, based on advice of counsel, are reasonably necessary to comply with applicable law (including disclosure requirements of the U.S. Securities and Exchange Commission (“SEC”)) or with the requirements of any stock exchange on which securities issued by a party or its Affiliates are traded. In the event of a required public announcement, to the extent practicable under the circumstances, the party making such announcement shall use Commercially Reasonable Efforts to provide the other party with a copy of the proposed text of such announcement sufficiently in advance of the scheduled release to afford such other party a reasonable opportunity to review and comment upon the proposed text. Each party may make public statements regarding this Agreement in response to questions by the press, analysts, investors or those attending industry conferences or financial analyst calls, or issue press releases, so long as any such public statement or press release is not inconsistent with prior public disclosures or public statements approved by the other party pursuant to this Section 9.5 or permitted by Section 9.3 and does not reveal non-public information about the other party.

(b) The parties shall coordinate in advance with each other in connection with the filing of this Agreement (including redaction of certain provisions of this Agreement) with the SEC or other governmental agency or any stock exchange on which securities issued by a

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party or its Affiliate are traded, and each party shall use reasonable efforts to seek confidential treatment for the terms proposed to be redacted; provided that each party shall ultimately retain control over what information to disclose to the SEC or any stock exchange or other governmental agency, as the case may be, and provided further that the parties shall use their reasonable efforts to file redacted versions with any governmental agencies which are consistent with redacted versions previously filed with any other governmental agencies. Other than such obligation, neither party (or its Affiliates) shall be obligated to consult with or obtain approval from the other party with respect to any filings to the SEC or any stock exchange or other governmental agency.

9.6 Publication. Each party to this Agreement recognizes that the publication of papers regarding results of research and development of Compound and Product, including oral presentations and abstracts, may be beneficial to both parties provided such publications are subject to reasonable controls to protect Confidential Information and to preserve patentability of inventions. Accordingly, a party shall have the right to review and comment on any material proposed for publication or public presentation by the other party, such as by oral presentation, manuscript or abstract, which includes Data generated from research and development of Compound and Product and/or includes Confidential Information of the other party. Before any such material is submitted for publication, the party proposing publication shall deliver a complete copy to the other party at least 45 days prior to submitting the material to a publisher or initiating any other disclosure. Such other party shall review any such material and give its comments to the party proposing publication within 30 days of the delivery of such material to such other party. With respect to oral presentation materials and abstracts, such other party shall make reasonable efforts to expedite review of such materials and abstracts, and shall return such items as soon as practicable to the party proposing publication with appropriate comments, if any, but in no event later than 30 days from the date of delivery to the non-publishing party. The publishing party shall comply with the other party’s request to delete references to the other party’s Confidential Information in any such material and agrees to delay any submission for publication or other public disclosure for a period of up to an additional 90 days for the purpose of preparing and filing appropriate patent applications.

9.7 Prior Non-Disclosure Agreements. As of the Effective Date, the terms of this Article 9 shall supersede any prior non-disclosure, secrecy or confidentiality agreement between the parties (or their Affiliates) dealing with the subject of this Agreement. Any information disclosed under such prior agreements shall be deemed disclosed under this Agreement.

10. TERM AND TERMINATION

10.1 Term. The term of this Agreement (the “Term”) shall commence on the Effective Date and, unless earlier terminated pursuant to this Article 10, continue until the final cessation of all development, manufacturing and commercialization activities relating to Compound and Product by Bayer and its Affiliates and Sublicensees at any time after expiration of the last-to-expire of all royalty payment obligations of Bayer hereunder.

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10.2 Termination.

(a) Material Breach. A party shall have the right to terminate this Agreement before the end of the Term upon written notice to the other party if such other party is in material breach of this Agreement and has not cured such breach within 90 days (or 30 days with respect to any payment breach) after notice from the terminating party requesting cure of the breach. Any such termination shall become effective at the end of such 90-day (or 30-day with respect to any payment breach) period unless the breaching party has cured such breach prior to the end of such period. […***…]

(b) […***…]

(c) Bayer Termination At Will. Bayer shall have the right to terminate this Agreement with immediate effect in its entirety upon written notice to Trius given within 30 days after: (i) determination regarding the Trius 112 Trial and/or the Trius 113 Trial that such trial has not been completed successfully (primary FDA efficacy endpoint and safety outcome as described for the Trius 112 Trial in Section 5.2(a) above), or (ii) becoming aware of any material toxicity and/or material drug safety event or issue concerning Compound and/or Product. Bayer shall also have the right to terminate this Agreement […***…].

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Furthermore, Bayer shall have the right to terminate this Agreement in its entirety, or on a country-by-country basis in the Bayer Territory, for any reason or no reason: (i) prior to the second anniversary of the Effective Date, upon at least six (6) months’ prior written notice to Trius, and (ii) after the second anniversary of the Effective Date, upon at least ninety (90) days’ prior written notice to Trius.

In the event of Bayer’s termination of this Agreement in its entirety or in any country pursuant to this Section 10.2(c) prior to completion of all Global Development Plan activities, Bayer shall be responsible for applicable fees and costs that are incurred in accordance with the Global Development Plan during the applicable notice period.

10.3 Effect of Expiration or Termination.

(a) Expiration. Upon expiration (but not earlier termination) of this Agreement, the License shall survive on a fully paid, royalty free, irrevocable, perpetual basis, and all other rights and obligations of the parties under this Agreement shall terminate, except as provided elsewhere in this Section 10.3 or in Section 10.4.

(b) Any Termination. Upon any termination of this Agreement, the License shall automatically terminate and revert to Trius, and all other rights and obligations of the parties under this Agreement shall terminate, except as provided elsewhere in this Section 10.3 or in Section 10.4.

(c) Termination Other Than For Trius Breach. Solely in the event of termination of this Agreement by Trius pursuant to Section 10.2(a) or Section 10.2(b), or termination of this Agreement by Bayer pursuant to Section 10.2(c), the following provisions shall apply:

(i) […***…]

(ii) […***…]

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[…***…]

(iii) Bayer shall, as directed by Trius, either wind-down any ongoing development activities with respect to Compound and Product in the Bayer Territory in an orderly fashion or promptly transition such development activities to Trius or its designee, with due regard for patient safety and in compliance with all applicable laws, rules and regulations and international guidelines.

(iv) Trius shall have the right, but not the obligation, to purchase from Bayer any or all usable clinical and/or commercial inventory of Compound and Product in Bayer’s or its Affiliates’ possession as of the date of termination. Clinical and commercial inventory shall be provided at a transfer price […***…].

(v) If Bayer was, prior to termination, manufacturing, or having manufactured on its behalf, any clinical or commercial quantities of Compound or Product for use or distribution in the Bayer Territory, then at Trius’ request, until the earlier of (A) such time as Trius has secured another source of Compound or Product that is able to meet Trius’ Compound and Product quality and quantity requirements in the Bayer Territory, and (B) […***…] after such termination, Bayer shall use Commercially Reasonable Efforts to supply, or cause to be supplied, to Trius such quantities of Compound or Product as Trius may reasonably require for the development and commercialization of Compound and Products in the Field in the Bayer Territory; provided that Trius shall use Commercially Reasonable Efforts to secure another source of supply of such Compound and Product as soon as reasonably practicable. Clinical and commercial material supplied pursuant to this Section 10.3(c)(v) shall be provided at a transfer price […***…].

10.4 Accrued Obligations; Survival. Neither expiration nor any termination of this Agreement shall relieve either party of any obligation or liability accruing prior to such expiration or termination, nor shall expiration or any termination of this Agreement preclude either party from pursuing all rights and remedies it may have under this Agreement, at law or in equity, with respect to breach of this Agreement; provided, however, that the use by either party of a termination right provided for under the Agreement shall not give rise to the payment of damages or any other form of compensation or relief to the other party with respect thereto. In addition, the parties’ rights and obligations under Sections 2.7, 6.5, 7.1, 7.6(f), 8.4, 9.1, 9.2, 9.3, 9.4, 9.7, 10.3, 10.4, 10.5, 13.2, 13.3, 13.4, 13.5, 13.6, 13.7, 13.8, 13.9, 13.10, 13.11 and Articles 8, 11 and 12 of this Agreement shall survive expiration or any termination of this Agreement. In addition, if this Agreement is terminated before expiration of the Standstill Period, Section 13.1 shall survive such termination until […***…].

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10.5 Rights Upon Bankruptcy. All rights and licenses granted under or pursuant to this Agreement are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11 of the United States Code and other similar laws in any jurisdiction outside the U.S. (collectively, the “Bankruptcy Laws”), licenses of rights to be “intellectual property” as defined under the Bankruptcy Laws. If a case is commenced during the Term by or against a party under Bankruptcy Laws then, unless and until this Agreement is rejected as provided in such Bankruptcy Laws, such party (in any capacity, including debtor-in-possession) and its successors and assigns (including a trustee) shall perform all of the obligations provided in this Agreement to be performed by such party. If a case is commenced during the Term by or against a party under the Bankruptcy Laws, this Agreement is rejected as provided in the Bankruptcy Laws and the other party elects to retain its rights hereunder as provided in the Bankruptcy Laws, then the party subject to such case under the Bankruptcy Laws (in any capacity, including debtor-in-possession) and its successors and assigns (including a Title 11 trustee), shall provide to the other party copies of all Information necessary for such other party to prosecute, maintain and enjoy its rights under the terms of this Agreement promptly upon such other party’s written request therefor. All rights, powers and remedies of the non-bankrupt party as provided herein are in addition to and not in substitution for any and all other rights, powers and remedies now or hereafter existing at law or in equity (including, without limitation, the Bankruptcy Laws) in the event of the commencement of a case by or against a party under the Bankruptcy Laws.

11. INDEMNIFICATION

11.1 Indemnification by Bayer. Bayer hereby agrees to save, defend, indemnify and hold harmless Trius, its Affiliates and their respective officers, directors, employees, consultants and agents (the “Trius Indemnitees”), from and against any and all losses, damages, liabilities, expenses and costs, including reasonable legal expense and attorneys’ fees (“Losses”), to which any Trius Indemnitee may become subject as a result of any claim, demand, action or other proceeding by any Third Party to the extent such Losses arise directly or indirectly out of: (a) the development, manufacture, use, handling, storage, sale or other disposition of Compound or Product by or on behalf of Bayer or any of its Affiliates or Sublicensees; (b) the gross negligence or willful misconduct of any Bayer Indemnitee (defined below); or (c) the breach by Bayer of any warranty, representation, covenant or agreement made by it in this Agreement; except, in each case, to the extent such Losses result from the gross negligence or willful misconduct of any Trius Indemnitee or the breach by Trius of any warranty, representation, covenant or agreement made by it in this Agreement.

11.2 Indemnification by Trius. Trius hereby agrees to save, defend, indemnify and hold harmless Bayer, its Affiliates and their respective officers, directors, employees, consultants and agents (the “Bayer Indemnitees”), from and against any and all Losses to which any Bayer Indemnitee may become subject as a result of any claim, demand, action or other proceeding by any Third Party to the extent such Losses arise directly or indirectly out of: (a) the development, manufacture, use, handling, storage, sale or other disposition of Compound or Product by or on behalf of Trius or any of its Affiliates or licensees (excluding Bayer, its Affiliates and Sublicensees); (b) the gross negligence or willful misconduct of any Trius Indemnitee; or (c) the breach by Trius of any warranty, representation, covenant or agreement made by it in this Agreement; except, in each case, to the extent such Losses result from the gross negligence or

44.

willful misconduct of any Bayer Indemnitee or the breach by Bayer of any warranty, representation, covenant or agreement made by it in this Agreement.

11.3 Procedure. In the event a party seeks indemnification under Section 11.1 or 11.2, it shall inform the other party (the “Indemnifying Party”) of a claim as soon as reasonably practicable after such party (the “Indemnified Party”) receives notice of the claim (it being understood and agreed, however, that the failure by an Indemnified Party to give notice of a claim as provided in this Section 11.3 shall not relieve the Indemnifying Party of its indemnification obligation under this Agreement except and only to the extent that such Indemnifying Party is actually damaged as a result of such failure to give notice), shall permit the Indemnifying Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperate as requested (at the expense of the Indemnifying Party) in the defense of the claim. The Indemnified Party shall not agree to any settlement of such action, suit, proceeding or claim without the prior written consent of the Indemnifying Party. The Indemnifying Party shall not agree to any settlement of such action, suit, proceeding or claim or consent to any judgment in respect thereof that does not include a complete and unconditional release of the Indemnified Party from all liability with respect thereto, that imposes any liability or obligation on the Indemnified Party or that acknowledges fault by the Indemnified Party; in each case, without the prior written consent of the Indemnified Party.

11.4 Insurance. Each party, at its own expense, shall maintain product liability and other appropriate insurance (or self-insure) in an amount consistent with industry standards during the Term, as reasonably possible. Each party shall provide a certificate of insurance (or evidence of self-insurance) evidencing such coverage to the other party upon request (if any).

12. DISPUTE RESOLUTION

12.1 Dispute Resolution. Except as expressly set forth in Article 3 or in any provision of Article 4 that gives a party decision-making authority with respect to Global Development Plan or Bayer Development Plan matters, any dispute arising under or relating to the parties’ rights and obligations under this Agreement shall be referred to the Chief Executive Officer of Trius and the Chief Executive Officer of Bayer for resolution. In the event such individuals are unable to resolve such dispute within 30 days of such dispute being referred to them, then, upon the written request of either party to the other party, the dispute shall be subject to arbitration in accordance with Section 12.2, except as set forth in Section 12.3 below.

12.2 Arbitration.

(a) Claims. Subject to Section 12.3 below, any claim, dispute, or controversy of whatever nature arising out of or relating to this Agreement that is not resolved under Section 12.1 within the required 30-day period, including, without limitation, any action or claim based on tort, contract, or statute, or concerning the interpretation, effect, termination, validity, performance and/or breach of this Agreement (“Claim”), shall be resolved by final and binding arbitration administered by JAMS (the “Administrator”) in accordance with its then-effective Comprehensive Arbitration Rules and Procedures (the “Rules”), except to the extent any such Rule conflicts with the express provisions of this Section 12.2. The arbitration shall be

45.

conducted by three (3) neutral arbitrators. Each party shall appoint one arbitrator, and the two so-appointed arbitrators shall jointly nominate the third arbitrator who shall become the chairman. If such nomination of the chairman did not take place within 30 days from the nomination of the last co-arbitrator, the chairman shall be selected in accordance with the Rules. The arbitration and all associated discovery proceedings and communications shall be conducted in English, and the arbitration shall be held in New York, New York, USA.

(b) Discovery. Within 45 days after selection of the Arbitrators, the Arbitrators shall conduct the Preliminary Conference. In addressing any of the subjects within the scope of the Preliminary Conference, the Arbitrators shall take into account both the needs of the parties for an understanding of any legitimate issue raised in the Arbitration and the desirability of making discovery efficient and cost-effective. In that regard, the parties agree to the application of the E-Discovery procedures set forth in Rule 16.2(c) of JAMS’ Expedited Procedures. In addition, each party shall have the right to take up to 40 hours of deposition testimony, including expert deposition testimony. The parties agree that the Arbitrators shall set a discovery cutoff not to exceed 90 (rather than 75) calendar days after the Preliminary Conference for percipient discovery and not to exceed 120 (rather than 105) calendar days after the Preliminary Conference for expert discovery. These dates may be extended by the Arbitrators for good cause shown.

(c) Arbitrators’ Award.

(i) The arbitrators’ award shall include a written statement describing the essential findings and conclusions on which the award is based, including the calculation of any damages awarded. The arbitrators shall, in rendering their decision, apply the substantive laws of the State of New York, without giving effect to its conflicts of laws principles, and without giving effect to any rules or laws relating to arbitration. The arbitrators’ authority to award special, incidental, consequential, indirect or punitive damages or any lost profits shall be subject to the limitation set forth in Section 8.4. The award rendered by the arbitrators shall be final, binding and non-appealable, and judgment may be entered upon it in any court of competent jurisdiction.

(ii) […***…]

(d) Costs. Each party shall bear its own attorney’s fees, costs, and disbursements arising out of the arbitration, and shall pay an equal share of the fees and costs of

46. *** Confidential Treatment Requested

the arbitrators; provided, however, that the arbitrators shall be authorized to determine whether a party is the prevailing party, and if so, to award to that prevailing party reimbursement for any or all of its reasonable attorneys’ fees, costs and disbursements (including, for example, expert witness fees and expenses, photocopy charges, travel expenses, etc.), and/or the fees and costs of the Administrator and the arbitrators.

12.3 Court Actions. Nothing contained in this Agreement shall deny either party the right to seek injunctive relief from a court of competent jurisdiction in the context of a bona fide emergency or prospective irreparable harm, and such an action may be filed and maintained notwithstanding any ongoing discussions between the parties or any ongoing arbitration proceeding. In addition, either party may bring an action in any court of competent jurisdiction to resolve disputes solely pertaining to the validity, construction, scope, enforceability, infringement or other violations of Patents or other intellectual property rights, and no such claim shall be subject to arbitration pursuant to Section 12.2.

13. MISCELLANEOUS

13.1 Standstill. Bayer hereby agrees that, until […***…] (the “Standstill Period”), it will not directly or indirectly (including through any Affiliate) acquire beneficial ownership of any equity securities of Trius or securities convertible into or exchangeable for such equity securities, or rights or options to purchase such securities, or acquire the right to control directly or indirectly voting with respect to any other voting securities of Trius, without the prior written consent of Trius, if the effect of such acquisition would be to entitle Bayer to cast directly or indirectly […***…] or more of the voting power in any election of directors of Trius. […***…]. Bayer will not be deemed to have breached this Section 13.1 by reason of (a) Bayer’s acquisition of or merger with a Third Party that already owns such securities, rights or options or (b) an acquisition of or merger with Bayer by a Third Party that already owns such securities, rights or options. In such event, however, this Section 13.1 shall still apply to activities by Bayer and its Affiliates after such event.

[…***…]

[…***…]

47. *** Confidential Treatment Requested

[…***…]

13.2 Governing Law. This Agreement and any disputes, claims, or actions related thereto shall be governed by and construed in accordance with the laws of the State of New York, USA, without regard to the conflicts of law provisions thereof.

13.3 Entire Agreement; Amendment. This Agreement, including the Exhibits hereto, together with that certain letter agreement between the parties dated as of the Effective Date (the “Letter Agreement”), is both a final expression of the parties’ agreement and a complete and exclusive statement with respect to all of its terms. This Agreement supersedes all prior and contemporaneous agreements and communications, whether oral, written or otherwise, concerning any and all matters contained herein, except for the Letter Agreement. This Agreement may only be modified or supplemented in a writing expressly stated for such purpose and signed by the parties to this Agreement.

13.4 Relationship Between the Parties. The parties’ relationship, as established by this Agreement, is solely that of independent contractors. This Agreement does not create any partnership, joint venture or similar business relationship between the parties. Neither party is a legal representative of the other party, and neither party can assume or create any obligation, representation, warranty or guarantee, express or implied, on behalf of the other party for any purpose whatsoever.

13.5 Non-Waiver. The failure of a party to insist upon strict performance of any provision of this Agreement or to exercise any right arising out of this Agreement shall neither impair that provision or right nor constitute a waiver of that provision or right, in whole or in part, in that instance or in any other instance. Any waiver by a party of a particular provision or right shall be in writing, shall be as to a particular matter and, if applicable, for a particular period of time and shall be signed by such party.

13.6 Assignment. Except as expressly provided hereunder, neither this Agreement nor any rights or obligations hereunder may be assigned or otherwise transferred by either party without the prior written consent of the other party (which consent shall not be unreasonably withheld); provided, however, that either party may assign this Agreement and its rights and obligations hereunder without the other party’s consent:

(a) in connection with the transfer or sale of all or substantially all of the business of such party to which this Agreement relates to a Third Party, whether by merger, sale of stock, sale of assets or otherwise, provided that in the event of a transaction (whether this Agreement is actually assigned or is assumed by the acquiring party by operation of law (e.g., in the context of a reverse triangular merger)):

(i) intellectual property rights of the acquiring party to such transaction (if other than one of the parties to this Agreement) shall not be included in the technology licensed hereunder or otherwise subject to this Agreement;

48. *** Confidential Treatment Requested

(ii) […***…]; and

(iii) […***…]; or

(b) to an Affiliate, provided that the assigning party shall remain liable and responsible to the non-assigning party hereto for the performance and observance of all such duties and obligations by such Affiliate.

The rights and obligations of the parties under this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties, and the name of a party appearing herein shall be deemed to include the name of such party’s successors and permitted assigns to the extent necessary to carry out the intent of this section. Any assignment not in accordance with this Agreement shall be void.

13.7 No Third Party Beneficiaries. This Agreement is neither expressly nor impliedly made for the benefit of any party other than those executing it.

13.8 Severability. If, for any reason, any part of this Agreement is adjudicated invalid, unenforceable or illegal by a court of competent jurisdiction, such adjudication shall not affect or impair, in whole or in part, the validity, enforceability or legality of any remaining portions of this Agreement. All remaining portions shall remain in full force and effect as if the original Agreement had been executed without the invalidated, unenforceable or illegal part.

13.9 Notices. Any notice to be given under this Agreement must be in writing and delivered either in person, by any method of mail (postage prepaid) requiring return receipt, or by overnight courier or facsimile confirmed thereafter by any of the foregoing, to the party to be notified at its address(es) given below, or at any address such party has previously designated by prior written notice to the other. Notice shall be deemed sufficiently given for all purposes upon the earliest of: (a) the date of actual receipt; (b) if mailed, the date of delivery set forth in the

49. *** Confidential Treatment Requested

return receipt; or (c) if delivered by express courier, the date of recipient’s signature acknowledging receipt from such courier.

If to Trius:	Trius Therapeutics, Inc.
	6310 Nancy Ridge Drive, Suite 105
	San Diego, CA 92121
	USA
	Attention: Chief Executive Officer
	Facsimile: +1 (858) 677-9975
With a copy to:	Trius Therapeutics, Inc.
	6310 Nancy Ridge Drive, Suite 105
	San Diego, CA 92121
	USA
	Attention: Chief Financial Officer
	Facsimile: +1 (858) 677-9975
If to Bayer:	Bayer Pharma AG
	Muellerstrasse 178
	D-13353 Berlin
	Germany
	Attention: Head Business Unit General Medicine
	Facsimile: +49 30 468 95415
With a copy to:	Bayer Pharma AG
	Muellerstrasse 178
	D-13353 Berlin
	Germany
	Attention: Head of Law & Patents
	Facsimile: +49 30 468 14086

13.10 Force Majeure. Each party shall be excused from liability for the failure or delay in performance of any obligation under this Agreement by reason of any event beyond such party’s reasonable control including but not limited to Acts of God, fire, flood, explosion, earthquake, or other natural forces, war, civil unrest, acts of terrorism, accident, destruction or other casualty, any lack or failure of transportation facilities, any lack or failure of supply of raw materials, any strike or labor disturbance, or any other event similar to those enumerated above. Such excuse from liability shall be effective only to the extent and duration of the event(s) causing the failure or delay in performance and provided that the party has not caused such event(s) to occur. Notice of a party’s failure or delay in performance due to force majeure must be given to the other party within 10 days after its occurrence. All delivery dates under this Agreement that have been affected by force majeure shall be tolled for the duration of such force majeure. In no event shall any party be required to prevent or settle any labor disturbance or dispute.

13.11 Interpretation. The headings of clauses contained in this Agreement preceding the text of the sections, subsections and paragraphs hereof are inserted solely for convenience

50.

and ease of reference only and shall not constitute any part of this Agreement, or have any effect on its interpretation or construction. All references in this Agreement to the singular shall include the plural where applicable. Unless otherwise specified, references in this Agreement to any Article shall include all Sections, subsections and paragraphs in such Article, references to any Section shall include all subsections and paragraphs in such Section, and references in this Agreement to any subsection shall include all paragraphs in such subsection. All references to days in this Agreement shall mean calendar days, unless otherwise specified. Ambiguities and uncertainties in this Agreement, if any, shall not be interpreted against either party, irrespective of which party may be deemed to have caused the ambiguity or uncertainty to exist. This Agreement has been prepared in the English language and the English language shall control its interpretation. In addition, all notices required or permitted to be given hereunder, and all written, electronic, oral or other communications between the parties regarding this Agreement shall be in the English language.

13.12 Counterparts. This Agreement may be executed in counterparts, including by transmission of facsimile or PDF copies of signature pages to the parties or their representative legal counsel, each of which shall be deemed an original document, and all of which, together with this writing, shall be deemed one instrument.

[Remainder of this page intentionally left blank.]

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IN WITNESS WHEREOF, the parties hereto have duly executed this COLLABORATION AND LICENSE AGREEMENT as of the Effective Date.

TRIUS THERAPEUTICS, INC.	BAYER PHARMA AG
By: /s/ Jeffrey Stein	By: /s/ Manfred Vehreschild
Name: Jeffrey Stein	Name: Manfred Vehreschild
Title: CEO	Title: CFO, Member of the Board of Management
	By: /s/ Flemming Ornskov
	Name: Flemming Ornskov
	Title: CMO, GM, Strategic Marketing

EXHIBIT A

BAYER FTE RATES

[…***…]

*** Confidential Treatment Requested

EXHIBIT B

BAYER TERRITORY

Asia-Pacific	Latin America	Other Countries
Afghanistan Australia Bangladesh Brunei Daresalaam Cambodia China (includes Hong Kong) Fiji Islands India Indonesia Japan Malaysia Maldive Islands Myanmar (Burma) Nepal New Zealand Pakistan People’s Dem. Republic of Laos Philippines Singapore Sri Lanka Taiwan Thailand Vietnam	Argentina Aruba Bahamas Barbados Belize Bermuda Bolivia Brazil Chile Colombia Costa Rica Cuba Curacao Dominicana Ecuador El Salvador Grand Cayman Islands Guatemala Guyana Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Trinidad & Tobago Uruguay Venezuela	Algeria Angola Azerbaijan Bahrain Belarus Cameroon Cape Verde Congo Egypt Ethiopia Georgia Ghana Iran Iraq Ivory Coast/Cote d’Ivoire Jordan Kazakhstan Kenya Kingdom of Saudi Arabia Kuwait Lebanon Libya Mauritius Morocco Mozambique Nigeria Oman Qatar Russia Senegal Syria Tanzania Tunisia United Arab Emirates Uganda Ukraine Uzbekistan Yemen

EXHIBIT C

TRIUS PATENTS

[…***…]

C-1. *** Confidential Treatment Requested

EXHIBIT D

[…***…]

*** Confidential Treatment Requested

EXHIBIT E

CORNERSTONES OF MANUFACTURING AND SUPPLY AGREEMENT

The manufacturing and supply agreement between Trius and Bayer (“MSA”) or the commercial quality assurance agreement (“QAA”), as applicable, to be entered into within six months after the Effective Date pursuant to Section 4.9, shall include the following terms:

[…***…]

E-1. *** Confidential Treatment Requested

EXHIBIT F

TRIUS PRESS RELEASE AND BAYER PRESS RELEASE

[TRIUS LOGO]

TRIUS THERAPEUTICS AND BAYER FORM STRATEGIC COLLABORATION

TO DEVELOP AND COMMERCIALIZE TOREZOLID PHOSPHATE IN ASIA-

PACIFIC AND EMERGING MARKETS

Trius to host a conference call today at 7:00 a.m. Pacific Time (10:00 a.m. Eastern Time) to discuss this announcement

SAN DIEGO, July 27, 2011 (GLOBE NEWSWIRE) — Trius Therapeutics, Inc. (Nasdaq:TSRX) and Bayer Pharma AG today announced that they have signed an exclusive agreement to develop and commercialize Trius’ lead Phase 3 antibiotic, torezolid phosphate (torezolid), in China, Japan and all other countries in Asia, Africa, Latin America and the Middle East, excluding North and South Korea. Under the collaboration agreement Trius retains full development and commercialization rights outside the licensed territory including the United States, Canada and the European Union.

In exchange for development and commercialization rights in its licensed territory, Bayer will pay Trius $25 million upfront and will support approximately 25% of the future development costs of torezolid required for global approval in acute bacterial skin and skin structure infections (ABSSSI) and pneumonia. In addition, Trius is eligible to receive up to $69 million upon the achievement of certain development, regulatory and commercial milestones and will receive double-digit royalties on net sales of torezolid in the licensed territory.

“Bacterial infectious diseases represent one of the largest therapeutic areas in China and continue to grow rapidly there and in other emerging markets. This collaboration is a key element in our strategy of bringing innovative medicines to patients, especially in emerging markets,” said Dr. Jorg Reinhardt, Chairman of the Board of Management of Bayer HealthCare.

“Bayer’s commitment to the infectious disease area and their depth and breadth of experience in these markets makes them an ideal partner for Trius,” said Jeffrey Stein, Ph.D., President and CEO of Trius. “At the same time, consistent with our strategy, we have retained rights to the U.S. and E.U. markets where life-threatening infections from MRSA and other gram positive pathogens continue to be a significant concern.”

Conference Call

Trius will host a conference call today at 7:00 a.m. Pacific Time (10:00 a.m. Eastern Time) to discuss this announcement. The conference call may be accessed by dialing (877) 845-0779 for domestic callers and (760) 298-5087 for international callers. Please specify to the operator that you would like to join the “Trius Collaboration Call.” The conference call will be webcast live under the Investors section of Trius’ website at http://investor.triusrx.com/, where it will be archived for 30 days following the call. Please connect to Trius’ website several minutes prior to the start of the broadcast to ensure adequate time for any software download that may be necessary.

About Trius Therapeutics

Trius Therapeutics is a biopharmaceutical company focused on the discovery, development and commercialization of innovative antibiotics for life-threatening infections. The company’s lead investigational drug, torezolid phosphate, is an IV and orally administered second generation oxazolidinone in Phase 3 clinical development for the treatment of ABSSSI, the first such trial to be initiated under a Special Protocol Assessment (SPA). Trius holds an exclusive license to torezolid phosphate for territories outside of North and South Korea from Dong-A Pharmaceuticals. In addition to the company’s torezolid phosphate clinical program, it is currently conducting three preclinical programs using its proprietary discovery platform to develop antibiotics to treat infections caused by gram-negative bacteria. For more information, visit www.triusrx.com.

About Bayer HealthCare

The Bayer Group is a global enterprise with core competencies in the fields of health care, nutrition and high-tech materials. Bayer HealthCare, a subgroup of Bayer AG with annual sales of EUR 16.913 billion (2010), is one of the world’s leading, innovative companies in the healthcare and medical products industry and is based in Leverkusen, Germany. The company combines the global activities of the Animal Health, Consumer Care, Medical Care and Pharmaceuticals divisions. Bayer HealthCare’s aim is to discover and manufacture products that will improve human and animal health worldwide. Bayer HealthCare has a global workforce of 55,700 employees (Dec 31, 2010) and is represented in more than 100 countries. Find more information at www.bayerhealthcare.com.

Forward-Looking Statements

Statements contained in this press release regarding matters that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Such statements include, but are not limited to, statements regarding potential future payments to Trius under the agreement with Bayer, the development of torezolid phosphate for additional indications, expected growth of antibiotics in certain markets and anticipated benefits of Trius’ strategic collaboration with Bayer. Risks that contribute to the uncertain nature of the forward-looking statements include: Trius’ ability to obtain additional financing; the success and timing of Trius’ preclinical studies and clinical trials; regulatory developments in the United States and foreign countries; the performance of third-party manufacturers; changes in Trius’ plans to develop and commercialize its product candidates; Trius’ ability to obtain and maintain intellectual property protection for its product candidates; and the loss of key scientific or management personnel. These and other risks and uncertainties are described more fully in Trius’ most recently filed SEC documents, including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, including those factors discussed under the caption “Risk Factors” in such filings. All forward-looking statements contained in this press release speak only as of the date on which they were made. Trius undertakes no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they were made.

# # # #

Public Relations Contact:	Investor Relations Contact:
Jason Spark at Canale Communications, Inc.	Stefan Loren at Westwicke Partners, LLC
jason@canalecomm.com	sloren@westwicke.com
619-849-6005	443-213-0507
Transaction Advisor:
Burrill Merchant Banking

[BAYER LOGO]

News Release

Not intended for U.S. and UK media

Bayer and Trius Therapeutics to develop and commercialize new antibiotic for specific skin infections and pneumonia

Berlin, Germany, July 27, 2011 – Bayer HealthCare and Trius Therapeutics, Inc., San Diego, California, today announced that they have signed an exclusive agreement to develop and commercialize Trius’ lead antibiotic, torezolid phosphate (torezolid), in China, Japan and all other countries in Asia, Africa, Latin America and the Middle East, excluding North and South Korea. The companies agreed to collaborate on the development of the compound, which is already in Phase III clinical development in the US and the EU, in acute bacterial skin and skin structure infections (ABSSSI) and pneumonia caused by Gram-positive bacteria both globally and in the Bayer territory. Trius retains full development and commercialization rights for the United States, Canada and the European Union.

Bayer will pay Trius 25 million US Dollar upfront and will partly bear future development costs required for global approval in ABSSSI and pneumonia. In addition, Trius is eligible to receive up to 69 million US Dollar upon the achievement of certain development, regulatory and commercial milestones and will receive double-digit royalties on net sales of torezolid in the licensed territory.

“Bacterial infectious diseases represent one of the largest therapeutic areas in China and continue to grow rapidly there and in other emerging markets. This collaboration is a key element in our strategy of bringing innovative medicines to patients, especially in emerging markets”, said Dr. Jörg Reinhardt, Chairman of the Board of Management of Bayer HealthCare.

“Bayer’s commitment to the infectious disease area and their depth and breadth of experience in these markets makes them an ideal partner for Trius”, said Jeffrey Stein, Ph.D., President and CEO of Trius.

About Torezolid Phosphate (Torezolid)

Torezolid phosphate is an IV and orally administered second generation oxazolidinone in Phase III clinical development in the US and the EU for the treatment of acute bacterial skin and skin structure infections, the first such trial to be initiated under a Special Protocol Assessment (SPA).

Acute bacterial skin and skin structure infections (ABSSSI), a new FDA classification for complicated skin and skin structure infections (cSSSI), are a significant and growing problem throughout the world. ABSSSI are infections that involve deeper tissue or require surgical intervention (e.g. cellulitis, major cutaneous abscesses, and infected wounds) or are associated with a significant underlying disease (e.g. diabetes or systemic immunosuppression) that complicates response to therapy. A variety of pathogens may be identified in ABSSSI but the two most common Gram-positive pathogens are Staphylococcus aureus and Streptococcus pyogenes. The significant increase in the incidence of methicillin-resistant Staphylococcus aureus (MRSA) in community as well as hospital acquired infections has resulted in a need for therapy of ABSSSI that is effective against MRSA.

About Trius Therapeutics

Trius Therapeutics is a biopharmaceutical company focused on the discovery, development and commercialization of innovative antibiotics for life-threatening infections. Trius holds an exclusive license to torezolid phosphate for territories outside of North and South Korea from Dong-A Pharmaceuticals. In addition to the company’s torezolid phosphate clinical program, it is currently conducting three preclinical programs using its proprietary discovery platform to develop antibiotics to treat infections caused by Gram-negative bacteria. For more information, visit www.triusrx.com.

About Bayer HealthCare

The Bayer Group is a global enterprise with core competencies in the fields of health care, nutrition and high-tech materials. Bayer HealthCare, a subgroup of Bayer AG with annual sales of EUR 16.913 billion (2010), is one of the world’s leading, innovative companies in the healthcare and medical products industry and is based in Leverkusen, Germany. The company combines the global activities of the Animal Health, Consumer Care, Medical Care and Pharmaceuticals divisions. Bayer HealthCare’s aim is to discover and manufacture products that will improve human and animal health worldwide. Bayer HealthCare has a global workforce of 55,700 employees (Dec 31, 2010) and is represented in more than 100 countries. Find more information at www.bayerhealthcare.com.

Contact:

Astrid Kranz, Tel. +49 30 468-12057

E-Mail: astrid.kranz@bayer.com

Stephanie Prate, Tel. +49 30 468-196053

E-Mail: stephanie.prate@bayer.com

Find more information at www.bayerpharma.com.

sp      (2011-0392E)

Forward-Looking Statements

This release may contain forward-looking statements based on current assumptions and forecasts made by Bayer Group or subgroup management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments.

EXHIBIT G

DEFINITION OF COST OF GOODS SOLD

[…***…]

*** Confidential Treatment Requested

EXHIBIT H

FORM OF INVOICE

Bayer Pharma AG
Financial Operations, Dieter Raida
c/o Euroservices Bayer GmbH
Building E 60, D-51368	SAMPLE - NOT TO BE PAID
Leverkusen, Germany

Re:	Collaboration and License Agreement dated July __, 2011 between Trius Therapeutics, Inc. and Bayer Pharma AG (the “Agreement”)
	Invoice for Enabling Study Costs and Trius Global Development Costs

Invoice number:	2011-2 (sample)
Invoice date:	October 15, 2011
Invoicing party:	Trius Therapeutics, Inc.
	6310 Nancy Ridge Drive, Suite 105
	San Diego, CA 92121
	USA

Period to which invoice applies: Quarter ended September 30, 2011

Reverse charge pursuant to Section 13b UStG applies.

Pursuant to Section 4.2 of the Agreement, for the period from the Effective Date (as defined in the Agreement) through September 30, 2011, an amount equal to the sum of: (i) 25% of the Enabling Study Costs incurred by Trius; and (ii) 25% of the Global Development Costs incurred by Trius, which sum is due to Trius by the later of November 30, 2011, and 45 days from Bayer’s receipt of this invoice.

Enabling Study and Global Development Costs to be paid by Bayer Pharma AG for the Quarter Ended September 30, 2011 are as follows (in US $):

	Enabling Study Costs	Global Development Costs	Total
Direct Labor	$	$	$
Direct Travel	$	$	$
Direct Material	$	$	$
Consultants	$	$	$
Outside Services	$	$	$
Other Direct Costs	$	$	$
Total	$	$	$

Total Amount Due: US $            

Please wire funds on or before the due date as follows:

[…***…]

TRIUS THERAPEUTICS, INC.

[Name]

[Title]

*** Confidential Treatment Requested

EX-10.2

Exhibit 10.2

TRIUS THERAPEUTICS, INC.

AMENDED AND RESTATED 2010 NON-EMPLOYEE DIRECTORS’

STOCK OPTION PLAN

AMENDED AND RESTATED ON AUGUST 11, 2011

1. GENERAL.

(a) Eligible Option Recipients. The persons eligible to receive Options are the Non-Employee Directors of the Company.

(b) Purpose. The Company, by means of the Plan, seeks to retain the services of its Non-Employee Directors, to secure and retain the services of new Non-Employee Directors and to provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate by giving them an opportunity to benefit from increases in value of the Common Stock through the automatic grant of Nonstatutory Stock Options.

2. ADMINISTRATION.

(a) Administration by Board. The Board shall administer the Plan. The Board may not delegate administration of the Plan.

(b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(i) To determine the provisions of each Option to the extent not specified in the Plan.

(ii) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

(iii) To effect, at any time and from time to time, with the consent of any adversely affected Optionholder, (A) the reduction of the exercise price (or strike price) of any outstanding Option under the Plan; (B) the cancellation of any outstanding Option under the Plan and the grant in substitution therefor of (1) a new Option under the Plan or another equity plan of the Company covering the same or a different number of shares of Common Stock, (2) cash and/or (3) other valuable consideration (as determined by the Board, in its sole discretion); or (C) any other action that is treated as a repricing under generally accepted accounting principles.

(iv) To amend the Plan or an Option as provided in Section 10.

(v) To terminate or suspend the Plan as provided in Section 11.

1.

(vi) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan.

(c) Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.

3. SHARES SUBJECT TO THE PLAN.

(a) Share Reserve. Subject to Section 9(a) relating to Capitalization Adjustments, the aggregate number of shares of Common Stock of the Company that may be issued pursuant to Options after the Effective Date shall not exceed 300,000 shares, plus an annual increase to be added on January 1st of each year for a period of nine years commencing on January 1, 2011 and ending on (and including) January 1, 2020, in an amount equal to the lesser of (i) the aggregate number of shares of Common Stock subject to Options granted pursuant to Section 5 of Plan during the immediately preceding calendar year or (ii) 150,000 shares as determined by the Board. Notwithstanding the foregoing, the Board may act prior to the first day of any calendar year, to provide that there shall be no increase in the share reserve for such calendar year or that the increase in the share reserve for such calendar year shall be a lesser number of shares of Common Stock than would otherwise occur pursuant to the preceding sentence. For clarity, the limitation in this Section 3(a) is a limitation in the number of shares of Common Stock that may be issued pursuant to the Plan. Accordingly, this Section 3(a) does not limit the granting of Options except as provided in Section 7(a). Shares may be issued in connection with a merger or acquisition as permitted by, as applicable, NASDAQ Listing Rule 5635(c), NYSE Listed Company Manual Section 303A.08, AMEX Company Guide Section 711 or other applicable stock exchange rules, and such issuance shall not reduce the number of shares available for issuance under the Plan. Furthermore, if an Option or any portion thereof (i) expires or otherwise terminates without all of the shares covered by such Option having been issued or (ii) is settled in cash (i.e., the Optionholder receives cash rather than stock), such expiration, termination or settlement shall not reduce (or otherwise offset) the number of shares Common Stock that may be available for issuance under the Plan.

(b) Reversion of Shares to the Share Reserve. If any shares of Common Stock issued pursuant to an Option are forfeited back to the Company because of the failure to meet a contingency or condition required to vest such shares in the Optionholder, then the shares that are forfeited shall revert to and again become available for issuance under the Plan. Any shares reacquired by the Company pursuant to Section 8(e) or as consideration for the exercise of an Option shall again become available for issuance under the Plan.

(c) Source of Shares. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market or otherwise.

2.

4. ELIGIBILITY.

The Options shall automatically be granted under the Plan as set forth in Section 5 to all Non-Employee Directors who meet the specified criteria.

5. NON-DISCRETIONARY GRANTS.

(a) Initial Grants. Without any further action of the Board, each person who after the IPO Date is elected or appointed for the first time to be a Non-Employee Director automatically shall, upon the date of his or her initial election or appointment to be a Non-Employee Director, be granted an Option (the “Initial Grant”) to purchase 24,000 shares of Common Stock on the terms and conditions set forth herein.

(b) Annual Grants. Without any further action of the Board, on the date of each Annual Meeting, commencing with the first Annual Meeting following the IPO Date, each person who is then a Non-Employee Director automatically shall be granted an Option (the “Annual Grant”) to purchase 12,000 shares of Common Stock on the terms and conditions set forth herein; provided, however, that the number of shares subject to such Annual Grant shall be reduced on a pro rata basis for each full month that the recipient thereof did not serve as a member of the Board during the 12 month period prior to the date of grant.

(c) Chairperson Grants. In addition to the Initial Grant, without any further action of the Board, each person who after the IPO Date is elected or appointed for the first time to be the chairperson of the Board automatically shall, upon the date of his or her initial election or appointment to such position, be granted an Option (the “Initial Chairperson Grant”) to purchase 12,000 shares of Common Stock on the terms and conditions set forth herein. Further, in addition to the Annual Grants, without any further action of the Board, on the date of each Annual Meeting, commencing with the first Annual Meeting following the IPO Date, each person who is then the chairperson of the Board automatically shall be granted an Option (the “Annual Chairperson Grant”) to purchase 6,000 shares of Common Stock on the terms and conditions set forth herein; provided, however, that the number of shares subject to such Annual Chairperson Grant shall be reduced on a pro rata basis for each full month that the recipient thereof did not serve as chairperson of the Board during the 12 month period prior to the date of grant.

6. OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and conditions as required by the Plan. Each Option shall contain such additional terms and conditions, not inconsistent with the Plan, as the Board shall deem appropriate. Each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:

(a) Term. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted.

3.

(b) Exercise Price. The exercise price of each Option shall be one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted.

(c) Purchase Price. The purchase price of Common Stock acquired pursuant to the exercise of an Option shall be paid, to the extent permitted by applicable law, by any combination of the following methods of payment:

(i) by cash, check, bank draft or money order payable to the Company;

(ii) to the extent permitted by law, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;

(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock; or

(iv) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company shall accept a cash or other payment from the Optionholder to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued; provided, further, that shares of Common Stock will no longer be subject to an Option and will not be exercisable thereafter to the extent that (A) shares issuable upon exercise are reduced to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Optionholder as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations.

(d) Transferability. An Option shall not be transferable except by will or by the laws of descent and distribution and to such further extent as permitted by the Rule as to Use of Form S-8 specified in the General Instructions of the Form S-8 Registration Statement under the Securities Act, and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.

(e) Vesting Generally. Options shall vest as follows:

(i) Initial Grant and Initial Chairperson Grant. The Initial Grant and the Initial Chairperson Grant shall vest in a series of thirty-six (36) successive equal monthly installments during the Optionholder’s Continuous Service over the three (3)-year period measured from the date of grant.

(ii) Annual Grant and Annual Chairperson Grant. The Annual Grant and Annual Chairperson Grant shall vest in a series of twelve (12) successive equal monthly installments during the Optionholder’s Continuous Service over the one (1)-year period measured from the date of grant.

4.

(f) Termination of Continuous Service. In the event that an Optionholder’s Continuous Service terminates (other than upon the Optionholder’s death or Disability), the Optionholder may exercise his or her Option but only within such period of time ending on the earlier of (i) the date twelve (12) months following the termination of the Optionholder’s Continuous Service (or such longer or shorter period specified in the applicable Option Agreement, which period shall not be less than 30 days), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(g) Extension of Termination Date. In the event that the exercise of an Option following the termination of the Optionholder’s Continuous Service (other than upon the Optionholder’s death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of a total period of twelve (12) months (that need not be consecutive) after the termination of the Optionholder’s Continuous Service during which the exercise of the Option would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option as set forth in the applicable Option Agreement. In addition, unless otherwise provided in an Optionholder’s Option Agreement, if the sale of any Common Stock received upon exercise of an Option following the termination of the Optionholder’s Continuous Service would violate the Company’s insider trading policy, then the Option shall terminate on the earlier of (i) the expiration of a period equal to the applicable post-termination exercise period after the termination of the Optionholder’s Continuous Service during which the exercise of the Option would not be in violation of the Company’s insider trading policy, or (ii) the expiration of the term of the Option as set forth in the applicable Option Agreement.

(h) Disability of Optionholder. In the event that an Optionholder’s Continuous Service terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination of Continuous Service or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(i) Death of Optionholder. In the event that (i) an Optionholder’s Continuous Service terminates as a result of the Optionholder’s death, or (ii) the Optionholder dies within the twelve (12) month period after the termination of the Optionholder’s Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder’s death, but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death, or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, after the Optionholder’s death, the Option is not exercised within the time specified herein, the Option shall terminate.

5.

7. COVENANTS OF THE COMPANY.

(a) Availability of Shares. During the terms of the Options, the Company shall keep available at all times the number of shares of Common Stock reasonably required to satisfy such Options.

(b) Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Options and to issue and sell shares of Common Stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Option or any Common Stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Options unless and until such authority is obtained. A Optionholder shall not be eligible for the grant of an Option or the subsequent issuance of Common Stock pursuant to the Option if such grant or issuance would be in violation of any applicable securities law.

(c) No Obligation to Notify or Minimize Taxes. The Company shall have no duty or obligation to any Optionholder to advise such holder as to the time or manner of exercising such Option. Furthermore, the Company shall have no duty or obligation to warn or otherwise advise such holder of a pending termination or expiration of an Option or a possible period in which the Option may not be exercised. The Company has no duty or obligation to minimize the tax consequences of an Option to the holder of such Option.

8. MISCELLANEOUS.

(a) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock pursuant to Options shall constitute general funds of the Company.

(b) Stockholder Rights. No Optionholder shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Option unless and until (i) such Optionholder has satisfied all requirements for exercise of the Option pursuant to its terms, if applicable, and (ii) the issuance of the Common Stock subject to such Option has been entered into the books and records of the Company.

(c) No Service Rights. Nothing in the Plan, any instrument executed, or Option granted pursuant thereto shall confer upon any Optionholder any right to continue to serve the Company or an Affiliate as a Non-Employee Director or shall affect the right of the Company or an Affiliate to terminate the service of a Director pursuant to the Bylaws of the Company or an Affliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.

6.

(d) Investment Assurances. The Company may require an Optionholder, as a condition of exercising or acquiring Common Stock under any Option, (i) to give written assurances satisfactory to the Company as to the Optionholder’s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (ii) to give written assurances satisfactory to the Company stating that the Optionholder is acquiring Common Stock subject to the Option for the Optionholder’s own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (A) the issuance of the shares upon the exercise or acquisition of Common Stock under the Option has been registered under a then currently effective registration statement under the Securities Act, or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.

(e) Withholding Obligations. The Optionholder may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under an Option by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Optionholder by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares from the shares of Common Stock issued or otherwise issuable to the Optionholder as a result of the exercise or acquisition of Common Stock under the Option; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of the Option as a liability for financial accounting purposes); (iii) authorizing the Company to withhold payment from any amounts otherwise payable to the Optionholder; or (iv) by such other method as may be set forth in the Option Agreement.

(f) Electronic Delivery. Any reference herein to a “written” agreement or document shall include any agreement or document delivered electronically or posted on the Company’s intranet.

9. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.

(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board shall appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities by which the share reserve is to increase automatically each year pursuant to Section 3(a), (iii) the class(es) and number of securities for which the nondiscretionary grants of Options are made pursuant to Section 5, and (iv) the class(es) and number of securities and price per share of stock subject to outstanding Options. The Board shall make such adjustments, and its determination shall be final, binding and conclusive.

7.

(b) Dissolution or Liquidation. In the event of a dissolution or liquidation of the Company, all outstanding Options shall terminate immediately prior to the completion of such dissolution or liquidation.

(c) Corporate Transaction. In the event of a Corporate Transaction, then, notwithstanding any other provision of the Plan, the Board shall take one or more of the following actions with respect to Options, contingent upon the closing or completion of the Corporate Transaction:

(i) arrange for the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) to assume or continue the Option or to substitute a similar Option for the Option (including, but not limited to, an Option to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction);

(ii) arrange for the assignment of any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to the Option to the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company);

(iii) accelerate the vesting of the Option (and, if applicable, the time at which the Option may be exercised) to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five (5) days prior to the effective date of the Corporate Transaction), with such Option terminating if not exercised (if applicable) at or prior to the effective time of the Corporate Transaction;

(iv) arrange for the lapse of any reacquisition or repurchase rights held by the Company with respect to the Option;

(v) cancel or arrange for the cancellation of the Option, to the extent not vested or not exercised prior to the effective time of the Corporate Transaction, in exchange for such cash consideration, if any, as the Board, in its sole discretion, may consider appropriate; and

(vi) make a payment, in such form as may be determined by the Board equal to the excess, if any, of (A) the value of the property the Optionholder would have received upon the exercise of the Option, over (B) any exercise price payable by such holder in connection with such exercise.

The Board need not take the same action or actions with respect to all Options or portions thereof or with respect to all Optionholders.

(d) Change in Control. A Option may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Option Agreement for such Option or as may be provided in any other written agreement between the Company or any Affiliate and the Optionholder, but in the absence of such provision, no such acceleration shall occur.

8.

10. AMENDMENT OF THE PLAN AND OPTIONS.

(a) Amendment of Plan. Subject to the limitations, if any, of applicable law, the Board, at any time and from time to time, may amend the Plan. However, except as provided in Section 9(a) relating to Capitalization Adjustments, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy applicable law.

(b) Stockholder Approval. The Board, in its sole discretion, may submit any other amendment to the Plan for stockholder approval.

(c) No Impairment of Rights. Rights under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the affected Optionholder, and (ii) such Optionholder consents in writing.

(d) Amendment of Options. The Board, at any time and from time to time, may amend the terms of any one or more Options; provided, however, that the rights under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the Optionholder, and (ii) the Optionholder consents in writing.

11. TERMINATION OR SUSPENSION OF THE PLAN

(a) Plan Term. The Board may suspend or terminate the Plan at any time. No Options may be granted under the Plan while the Plan is suspended or after it is terminated.

(b) No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations under any Option granted while the Plan is in effect except with the written consent of the Optionholder.

12. EFFECTIVE DATE OF PLAN.

The Plan shall become effective on the IPO Date, but no Option shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board.

13. CHOICE OF LAW.

The law of the state of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to that state’s conflict of laws rules.

14. DEFINITIONS. As used in the Plan, the following definitions shall apply to the capitalized terms indicated below:

(a) “Affiliate” means, at the time of determination, any “parent” or “subsidiary” of the Company as such terms are defined in Rule 405 of the Securities Act. The Board shall have the authority to determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing definition.

9.

(b) “Annual Chairperson Grant” means an Option granted annually to the chairperson of the Board who meet the specified criteria pursuant to Section 5(c).

(c) “Annual Grant” means an Option granted annually to all Non-Employee Directors who meet the specified criteria pursuant to Section 5(b).

(d) “Annual Meeting” means the first annual meeting of the stockholders of the Company held each calendar year at which the Directors are selected.

(e) “Board” means the Board of Directors of the Company.

(f) “Capitalization Adjustment” means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Option after the Effective Date without the receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or any similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards No. 123 (revised). Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a Capitalization Adjustment.

(g) “Change in Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Company directly from the Company, (B) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person that acquires the Company’s securities in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities, or (C) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur;

(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing

10.

more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction;

(iii) the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company shall otherwise occur, except for a liquidation into a parent corporation;

(iv) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or

(v) individuals who, on the date the Plan is adopted by the Board, are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board.

Notwithstanding the foregoing or any other provision of this Plan, (A) the term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company, and (B) the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Optionholder shall supersede the foregoing definition with respect to Options subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply.

In the event that a Change in Control affects any Option that is deferred, then “Change in Control” shall conform to the definition of Change of Control under Section 409A of the Code, as amended, and the Treasury Department or Internal Revenue Service Regulations or Guidance issued thereunder.

(h) “Code” means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.

(i) “Common Stock” means the common stock of the Company.

(j) “Company” means Trius Therapeutics, Inc., a Delaware corporation.

11.

(k) “Consultant” means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such service, shall not cause a Director to be considered a “Consultant” for purposes of the Plan. Notwithstanding the foregoing, a person is treated as a Consultant under this Plan only if a Form S-8 Registration Statement under the Securities Act is available to register either the offer or the sale of the Company’s securities to such person.

(l) “Continuous Service” means that the Optionholder’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Optionholder renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Optionholder renders such service, provided that there is no interruption or termination of the Optionholder’s service with the Company or an Affiliate, shall not terminate an Optionholder’s Continuous Service; provided, however, if the Entity for which an Optionholder is rendering services ceases to qualify as an Affiliate, as determined by the Board, in its sole discretion, such Optionholder’s Continuous Service shall be considered to have terminated on the date such Entity ceases to qualify as an Affiliate. To the extent permitted by law, the Board, in that party’s sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of (i) any leave of absence approved by the Board, including sick leave, military leave or any other personal leave, or (ii) transfers between the Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in an Option only to such extent as may be provided in the Company’s leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Optionholder, or as otherwise required by law.

(m) “Corporate Transaction” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i) the consummation of a sale or other disposition of all or substantially all, as determined by the Board, in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;

(ii) the consummation of a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;

(iii) the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or

(iv) the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.

(n) “Director” means a member of the Board.

12.

(o) “Disability” means, with respect to a Optionholder, the inability of such Optionholder to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months, as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code.

(p) “Effective Date” means the effective date of this Plan document, as set forth in Section 12.

(q) “Employee” means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered an “Employee” for purposes of the Plan.

(r) “Entity” means a corporation, partnership, limited liability company or other entity.

(s) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

(t) “Exchange Act Person” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to a registered public offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date, is the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities.

(u) “Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or traded on any established market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of determination, as reported in a source the Board deems reliable.

(ii) Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock on the date of determination, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(iii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined by the Board in good faith and in a manner that complies with Sections 409A and 422 of the Code.

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(v) “Initial Chairperson Grant” means an Option granted to a Non-Employee Director who meets the specified criteria pursuant to Section 5(c).

(w) “Initial Grant” means an Option granted to a Non-Employee Director who meets the specified criteria pursuant to Section 5(a).

(x) “IPO Date” means the date of the underwriting agreement between the Company and the underwriter(s) managing the initial public offering of the Common Stock, pursuant to which the Common Stock is priced for the initial public offering.

(y) “Non-Employee Director” means a Director who is not an Employee.

(z) “Nonstatutory Stock Option” means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(aa) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act.

(bb) “Option” means a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.

(cc) “Option Agreement” means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.

(dd) “Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.

(ee) “Own,” “Owned,” “Owner,” “Ownership” A person or Entity shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.

(ff) “Plan” means this Trius Therapeutics, Inc. Amended and Restated 2010 Non-Employee Directors’ Stock Option Plan.

(gg) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.

(hh) “Securities Act” means the Securities Act of 1933, as amended.

(ii) “Subsidiary” means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%).

14.

EX-10.3

Exhibit 10.3

TRUIS THERAPEUTICS, INC.

SEVERANCE BENEFIT PLAN

Section 1.     INTRODUCTION.

The Truis Therapeutics, Inc. Severance Benefit Plan (the “Plan”) was established effective August 11, 2011 (the “Effective Date”). The purpose of the Plan is to provide for the payment of severance benefits to certain eligible employees of Truis Therapeutics, Inc. (the “Company”) whose employment with the Company is involuntarily or constructively terminated and who meet the additional criteria set forth in Section 3 of the Plan. In consideration for the benefits set forth in this Plan, this Plan shall supersede and replace any severance provisions contained in any individually negotiated employment contract or other agreement, or any written plans, and, except as set forth in the Participation Notice (as defined below), each Eligible Employee’s severance benefits shall be governed by the terms of this Plan.

This Plan document also is the Summary Plan Description for the Plan.

Section 2.     DEFINITIONS.

For purposes of this Plan, except as set forth in an Eligible Employee’s Participation Notice, the following terms shall have the meanings set forth below:

(a) “Base Salary” means the Eligible Employee’s base pay (excluding incentive pay, premium pay, commissions, overtime, bonuses and other forms of variable compensation), at the rate in effect during the last regularly scheduled payroll period immediately preceding the date of the Eligible Employee’s Covered Termination, and prior to any reduction in base pay that would permit such Eligible Employee to voluntarily resign employment for Good Reason.

(b) “Board” means the Company’s board of directors.

(c) “Cause” for the Company to terminate an Eligible Employee’s employment shall mean the occurrence of any of the following events, as determined reasonably and in good faith by the Board or a committee designated by the Board:

(1) the Eligible Employee’s repeated failure satisfactorily to perform the Eligible Employee’s job duties as set forth by the Board; provided that the Eligible Employee is provided written notice of such failure and provided a reasonable period to cure such failure by the Company;

(2) the Eligible Employee’s commission of an act that materially injures the business of the Company;

(3) the Eligible Employee’s commission of any felony or any crime involving fraud, dishonesty or moral turpitude that is likely to inflict or has inflicted material injury on the business of the Company; or

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(4) the Eligible Employee’s material violation of the Eligible Employee’s Proprietary Information and Inventions Agreement with the Company.

(d) “Change in Control” For purposes of this Plan, “Change in Control” shall have the meaning ascribed to such term in the Company’s 2010 Equity Incentive Plan, as such plan may be amended from time to time.

(e) “Change in Control Related Termination” with respect to an Eligible Employee means such Eligible Employee’s Covered Termination that occurs during the period beginning three (3) months before and ending twelve (12) months after a Change in Control of the Company.

(f) “Covered Termination” with respect to an Eligible Employee means such Eligible Employee’s resignation for Good Reason or Involuntary Termination Without Cause.

(g) “Good Reason” for an Eligible Employee to resign employment shall mean the occurrence of any of the following events without the Eligible Employee’s consent:

(1) a material reduction in the Eligible Employee’s duties, authority, or responsibilities relative to the duties, authority, or responsibilities in effect immediately prior to such reduction;

(2) the relocation of the Eligible Employee’s primary work location to a point more than fifty (50) miles from the Eligible Employee’s work location as of the Effective Date that requires a material increase in Eligible Employee’s one-way driving distance; and

(3) a material reduction by the Company of the Eligible Employee’s base salary as in effect on the Effective Date.

Provided, however that, such resignation by the Eligible Employee shall only be deemed for Good Reason pursuant to the foregoing definition if (i) the Company is given written notice from the Eligible Employee within ninety (90) days following the first occurrence of the condition that the Eligible Employee considers to constitute Good Reason describing the condition and the Company fails to satisfactorily remedy such condition within thirty (30) days following such written notice, and (ii) the Eligible Employee terminates employment within ninety (90) days following the end of the period within which the Company was entitled to remedy the condition constituting Good Reason but failed to do so.

(h) “Involuntary Termination Without Cause” means with respect to an Eligible Employee, such Eligible Employee’s dismissal or discharge by the Company for a reason other than for Cause. The termination of a Eligible Employee’s employment will not be deemed to be an “Involuntary Termination Without Cause” if such Eligible Employee’s termination occurs as a result of such Eligible Employee’s death or disability.

(i) “Participation Notice” means the latest notice delivered by the Company to an Eligible Employee substantially in the form of Annex I hereto.

(j) “Plan Administrator” has the meaning set forth in Section 12(a).

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(k) “Target Bonus” means the target bonus (i.e., the annual bonus amount payable to an Eligible Employee in cash, common stock or other property if exactly 100% of all performance goals are achieved) most recently approved by the Compensation Committee or the Board for such Eligible Employee.

Section 3.     ELIGIBILITY FOR BENEFITS.

(a) General Rules. Subject to the requirements set forth in this Section 3, the Company will grant severance benefits under the Plan to Eligible Employees.

(1) Definition of “Eligible Employee.” A person is eligible to participate in the Plan (an “Eligible Employee”) if (i) such person is designated by the Company as entitled to participate on Appendix A; (ii) such person has received a Participation Notice from the Company and executed and returned such Participation Notice to the Company, and (iii) such person’s employment with the Company terminates due to a Covered Termination. The determination of whether a person is an Eligible Employee shall be made by the Board, in its sole discretion, and such determination shall be binding and conclusive on all persons.

(2) In order to be eligible to receive benefits under the Plan, an Eligible Employee must remain on the job until, in the case of an Involuntary Termination Without Cause, his or her date of termination as scheduled by the Company and, in the case of a resignation with Good Reason, the effective date of his or her resignation.

(3) In order to be eligible to receive benefits under the Plan, an Eligible Employee also must execute a general waiver and release in substantially the form attached hereto as Exhibit A, Exhibit B or Exhibit C, as appropriate, within the time period set forth therein, but in no event later than forty-five (45) days following the date of such Covered Termination, and such release must become effective in accordance with its terms. The Plan Administrator, in its sole discretion, may modify the form of the required release to comply with applicable law and shall determine the form of the required release, which may be incorporated into a termination agreement or other agreement with the Eligible Employee.

(b) Exceptions to Benefit Entitlement. An employee, including an employee who otherwise is an Eligible Employee, will not receive benefits under the Plan (or will receive reduced benefits under the Plan) in the following circumstances, as determined by the Plan Administrator in its sole discretion:

(1) The employee has executed an individually negotiated employment contract or agreement with the Company that includes severance benefits that is in effect on his or her Covered Termination date and such employee has not executed and returned a Participation Notice to the Company.

(2) The employee voluntarily terminates employment with the Company without Good Reason. Such voluntary terminations include, but are not limited to, resignation without Good Reason, retirement or failure to return from a leave of absence on the scheduled date.

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(3) The employee terminates employment due to death or disability.

(4) The employee terminates employment with the Company in order to accept employment with another entity that is wholly or partly owned (directly or indirectly) by the Company.

(5) The employee is offered an identical or substantially equivalent or comparable position with the Company. For purposes of the foregoing, a “substantially equivalent or comparable position” is one that offers the employee substantially the same level of responsibility and compensation.

(6) The employee is offered immediate reemployment by a successor to the Company or by a purchaser of its assets, as the case may be, following a change in ownership of the Company or a sale of substantially all of the assets of a division or business unit of the Company. For purposes of the foregoing, “immediate reemployment” means that the employee’s employment with the successor to the Company or the purchaser of its assets, as the case may be, results in uninterrupted employment such that the employee does not incur a lapse in pay as a result of the change in ownership of the Company or the sale of its assets.

(7) The employee is rehired by the Company prior to the date benefits under the Plan are scheduled to commence.

(8) Benefits under this Plan shall terminate immediately if the employee, at any time, violates any provision of the Company’s Proprietary Information and Inventions Agreement or any other proprietary information, confidentiality or non-solicitation obligation to the Company.

Section 4.     AMOUNT OF BENEFIT.

(a) Severance Benefits. Severance benefits under the Plan, if any, shall be provided to Eligible Employees described in Section 3 in the amount provided in Appendix B, as such Appendix B may be revised by the Board, in its sole discretion, from time to time. Notwithstanding the foregoing, the Board may not amend or revise Appendix B in a manner that would impair the rights of an Eligible Employee, without such Eligible Employee’s written consent. The amount of benefits paid to one Eligible Employee shall not determine the amount of benefits payable to any other Eligible Employee, whether or not similarly situated.

(b) Additional Benefits. The Board may, in its sole discretion, provide benefits (i) in addition to those pursuant to Section 4(a) to Eligible Employees or (ii) to employees who are not Eligible Employees (“Non-Eligible Employees”) chosen by the Board, in its sole discretion, and the provision of any such benefits to an Eligible Employee or a Non-Eligible Employee shall in no way obligate the Company or the Board to provide such benefits to any other Eligible Employee or to any other Non-Eligible Employee, even if similarly situated. If benefits under the Plan are provided to a Non-Eligible Employee, references in the Plan to “Eligible Employee” (with the exception of Section 4(a)) shall be deemed to refer to such Non-Eligible Employee.

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(c) Certain Reductions. The Company, in its sole discretion, shall have the authority to reduce an Eligible Employee’s severance benefits, in whole or in part, by any other severance benefits, pay and benefits provided during a period following written notice of a plant closing or mass layoff, pay and benefits in lieu of such notice, or other similar benefits payable to the Eligible Employee by the Company that become payable in connection with the Eligible Employee’s termination of employment pursuant to (i) any applicable legal requirement, including, without limitation, the Worker Adjustment and Retraining Notification Act, the California Plant Closing Act, or any other similar state law, (ii) a written employment or severance agreement with the Company, or (iii) any Company policy or practice providing for the Eligible Employee to remain on the payroll for a limited period of time after being given notice of the termination of the Eligible Employee’s employment, and the Plan Administrator shall so construe and implement the terms of the Plan. Any such reductions that the Company determines to make pursuant to this Section 4(c) shall be made such that any benefit under the Plan shall be reduced solely by any similar type of benefit under such legal requirement, agreement, policy or practice (e.g., any cash severance benefits under the Plan shall be reduced solely by any cash payments or severance benefits under such legal requirement, agreement, policy or practice, and any continued insurance benefits under the Plan shall be reduced solely by any continued insurance benefits under such legal requirement, agreement, policy or practice). The Company’s decision to apply such reductions to the severance benefits of one Eligible Employee and the amount of such reductions shall in no way obligate the Company to apply the same reductions in the same amounts to the severance benefits of any other Eligible Employee, even if similarly situated. In the Company’s sole discretion, such reductions may be applied on a retroactive basis, with severance benefits previously paid being re-characterized as payments pursuant to the Company’s obligation.

(d) Non-Duplication of Benefits. No Eligible Employee is eligible to receive benefits under this Plan more than one time.

Section 5.     RETURN OF COMPANY PROPERTY.

An Eligible Employee will not be entitled to any severance benefit under the Plan unless and until the Eligible Employee returns all Company Property. For this purpose, “Company Property” means all Company documents (and all copies thereof) and other Company property which the Eligible Employee had in his or her possession at any time, including, but not limited to, Company files, notes, drawings, records, plans, forecasts, reports, studies, analyses, proposals, agreements, financial information, research and development information, sales and marketing information, operational and personnel information, specifications, code, software, databases, computer-recorded information, tangible property and equipment (including, but not limited to, computers, facsimile machines, mobile telephones, servers), credit cards, entry cards, identification badges and keys; and any materials of any kind which contain or embody any proprietary or confidential information of the Company (and all reproductions thereof in whole or in part).

Section 6.     TIME OF PAYMENT AND FORM OF BENEFIT.

The timing of payment of severance benefits will be as set forth on Appendix B, subject to the provisions of this Section 6.

5.

Notwithstanding anything to the contrary set forth herein or on Appendix B, any payments and benefits provided under the Plan that constitute “deferred compensation” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A”) shall not commence in connection with an Eligible Employee’s termination of employment unless and until the Eligible Employee has also incurred a “separation from service,” as such term is defined in Treasury Regulations Section 1.409A-1(h) (“Separation from Service”), unless the Company reasonably determines that such amounts may be provided to the Eligible Employee without causing the Eligible Employee to incur the adverse personal tax consequences under Section 409A.

It is intended that (i) each installment of any benefits payable under the Plan to an Eligible Employee be regarded as a separate “payment” for purposes of Treasury Regulations Section 1.409A-2(b)(2)(i), (ii) all payments of any such benefits under the Plan satisfy, to the greatest extent possible, the exemptions from the application of Section 409A provided under Treasury Regulations Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9)(iii), and (iii) any such benefits consisting of COBRA premiums also satisfy, to the greatest extent possible, the exemption from the application of Section 409A provided under Treasury Regulations Section 1.409A-1(b)(9)(v). However, if the Company determines that any such benefits payable under the Plan constitute “deferred compensation” under Section 409A and the Eligible Employee is a “specified employee” of the Company, as such term is defined in Section 409A(a)(2)(B)(i), then, solely to the extent necessary to avoid the imposition of the adverse personal tax consequences under Section 409A, (A) the timing of such benefit payments shall be delayed until the earlier of (1) the date that is six (6) months and one (1) day after the Eligible Employee’s Separation from Service and (2) the date of the Eligible Employee’s death (such applicable date, the “Delayed Initial Payment Date”), and (B) the Company shall (1) pay the Eligible Employee a lump sum amount equal to the sum of the benefit payments that the Eligible Employee would otherwise have received through the Delayed Initial Payment Date if the commencement of the payment of the benefits had not been delayed pursuant to this paragraph and (2) commence paying the balance, if any, of the benefits in accordance with the applicable payment schedule.

In no event shall payment of any benefits under the Plan be made prior to an Eligible Employee’s termination date or prior to the effective date of the release described in Section 3(a)(3). If the Company determines that any payments or benefits provided under the Plan constitute “deferred compensation” under Section 409A, and the Eligible Employee’s Separation from Service occurs at a time during the calendar year when the release described in Section 3(a)(3) could become effective in the calendar year following the calendar year in which the Eligible Employee’s Separation from Service occurs, then regardless of when the release is returned to the Company and becomes effective, the release will not be deemed effective any earlier than the latest permitted effective date.

All severance payments under the Plan shall be subject to applicable withholding for federal, state and local taxes. If an Eligible Employee is indebted to the Company at his or her termination date, the Company reserves the right to offset any severance payments under the Plan by the amount of such indebtedness.

6.

Section 7.     APPLICATION OF INTERNAL REVENUE CODE SECTION 280G.

If any payment or benefit an Eligible Employee would receive under the Plan from the Company pursuant to a Change in Control or otherwise (“Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment shall be equal to the Reduced Amount. The “Reduced Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in the Eligible Employee’s receipt, on an after-tax basis, of the greater economic benefit notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting “parachute payments” is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the manner that results in the greatest economic benefit for the Eligible Employee. If more than one method of reduction will result in the same economic benefit, the items so reduced will be reduced pro rata.

In the event it is subsequently determined by the Internal Revenue Service that some portion of the Reduced Amount as determined pursuant to clause (x) in the preceding paragraph is subject to the Excise Tax, the Eligible Employee agrees to promptly return to the Company a sufficient amount of the Payment so that no portion of the Reduced Amount is subject to the Excise Tax. For the avoidance of doubt, if the Reduced Amount is determined pursuant to clause (y) in the preceding paragraph, the Eligible Employee will have no obligation to return any portion of the Payment pursuant to the preceding sentence.

The accounting firm engaged by the Company for general tax compliance purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations unless otherwise determined by the Company. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.

The Company shall use commercially reasonable efforts to cause the accounting firm engaged to make the determinations hereunder to provide its calculations, together with detailed supporting documentation, within fifteen (15) calendar days after the date on which the Eligible Employee’s right to a Payment is triggered or such other time as requested by the Company.

Section 8.     REEMPLOYMENT.

In the event of an Eligible Employee’s reemployment by the Company during the period of time in respect of which severance benefits provided under the Plan have been paid, the Company, in its sole and absolute discretion, may require such Eligible Employee to repay to the Company all or a portion of such severance benefits as a condition of reemployment.

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Section 9.     RIGHT TO INTERPRET PLAN; AMENDMENT AND TERMINATION.

(a) Exclusive Discretion. The Plan Administrator shall have the exclusive discretion and authority to establish rules, forms, and procedures for the administration of the Plan and to construe and interpret the Plan and to decide any and all questions of fact, interpretation, definition, computation or administration arising in connection with the operation of the Plan, including, but not limited to, the eligibility to participate in the Plan and amount of benefits paid under the Plan. The rules, interpretations, computations and other actions of the Plan Administrator shall be binding and conclusive on all persons.

(b) Amendment or Termination. The Company reserves the right to amend or terminate this Plan (including Appendix A and Appendix B) or the benefits provided hereunder at any time; provided, however, that no such amendment or termination shall affect the right to any unpaid benefit of any Eligible Employee whose termination date has occurred prior to amendment or termination of the Plan. Any action amending or terminating the Plan shall be in writing and executed by the Chief Executive Officer or Chief Financial Officer of the Company.

Section 10.     NO IMPLIED EMPLOYMENT CONTRACT.

The Plan shall not be deemed (i) to give any employee or other person any right to be retained in the employ of the Company or (ii) to interfere with the right of the Company to discharge any employee or other person at any time, with or without cause, which right is hereby reserved.

Section 11.     LEGAL CONSTRUCTION.

This Plan is intended to be governed by and shall be construed in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”) and, to the extent not preempted by ERISA, the laws of the State of California.

Section 12.     CLAIMS, INQUIRIES AND APPEALS.

(a) Applications for Benefits and Inquiries. Any application for benefits, inquiries about the Plan or inquiries about present or future rights under the Plan must be submitted to the Plan Administrator in writing by an applicant (or his or her authorized representative). The Plan Administrator is:

Truis Therapeutics, Inc.

6310 Nancy Ridge Dr., Suite 101

San Diego, California 92121

(b) Denial of Claims. In the event that any application for benefits is denied in whole or in part, the Plan Administrator must provide the applicant with written or electronic notice of the denial of the application, and of the applicant’s right to review the denial. Any electronic notice will comply with the regulations of the U.S. Department of Labor. The notice of denial will be set forth in a manner designed to be understood by the applicant and will include the following:

(1) the specific reason or reasons for the denial;

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(2) references to the specific Plan provisions upon which the denial is based;

(3) a description of any additional information or material that the Plan Administrator needs to complete the review and an explanation of why such information or material is necessary; and

(4) an explanation of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the applicant’s right to bring a civil action under Section 502(a) of ERISA following a denial on review of the claim, as described in Section 10(d) below.

This notice of denial will be given to the applicant within ninety (90) days after the Plan Administrator receives the application, unless special circumstances require an extension of time, in which case, the Plan Administrator has up to an additional ninety (90) days for processing the application. If an extension of time for processing is required, written notice of the extension will be furnished to the applicant before the end of the initial ninety (90) day period.

This notice of extension will describe the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render its decision on the application.

(c) Request for a Review. Any person (or that person’s authorized representative) for whom an application for benefits is denied, in whole or in part, may appeal the denial by submitting a request for a review to the Plan Administrator within sixty (60) days after the application is denied. A request for a review shall be in writing and shall be addressed to:

Truis Therapeutics, Inc.

6310 Nancy Ridge Dr., Suite 101

San Diego, California 92121

A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the applicant feels are pertinent. The applicant (or his or her representative) shall have the opportunity to submit (or the Plan Administrator may require the applicant to submit) written comments, documents, records, and other information relating to his or her claim. The applicant (or his or her representative) shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to his or her claim. The review shall take into account all comments, documents, records and other information submitted by the applicant (or his or her representative) relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

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(d) Decision on Review. The Plan Administrator will act on each request for review within sixty (60) days after receipt of the request, unless special circumstances require an extension of time (not to exceed an additional sixty (60) days), for processing the request for a review. If an extension for review is required, written notice of the extension will be furnished to the applicant within the initial sixty (60) day period. This notice of extension will describe the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render its decision on the review. The Plan Administrator will give prompt, written or electronic notice of its decision to the applicant. Any electronic notice will comply with the regulations of the U.S. Department of Labor. In the event that the Plan Administrator confirms the denial of the application for benefits in whole or in part, the notice will set forth, in a manner calculated to be understood by the applicant, the following:

(1) the specific reason or reasons for the denial;

(2) references to the specific Plan provisions upon which the denial is based;

(3) a statement that the applicant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to his or her claim; and

(4) a statement of the applicant’s right to bring a civil action under Section 502(a) of ERISA.

(e) Rules and Procedures. The Plan Administrator will establish rules and procedures, consistent with the Plan and with ERISA, as necessary and appropriate in carrying out its responsibilities in reviewing benefit claims. The Plan Administrator may require an applicant who wishes to submit additional information in connection with an appeal from the denial of benefits to do so at the applicant’s own expense.

(f) Exhaustion of Remedies. No legal action for benefits under the Plan may be brought until the applicant (i) has submitted a written application for benefits in accordance with the procedures described by Section 12(a) above, (ii) has been notified by the Plan Administrator that the application is denied, (iii) has filed a written request for a review of the application in accordance with the appeal procedure described in Section 12(c) above, and (iv) has been notified that the Plan Administrator has denied the appeal. Notwithstanding the foregoing, if the Plan Administrator does not respond to an Eligible Employee’s claim or appeal within the relevant time limits specified in this Section 12, the Eligible Employee may bring legal action for benefits under the Plan pursuant to Section 502(a) of ERISA.

Section 13.     BASIS OF PAYMENTS TO AND FROM PLAN.

The Plan shall be unfunded, and all cash payments under the Plan shall be paid only from the general assets of the Company.

10.

Section 14.     OTHER PLAN INFORMATION.

(a) Employer and Plan Identification Numbers. The Employer Identification Number assigned to the Company (which is the “Plan Sponsor” as that term is used in ERISA) by the Internal Revenue Service is 20-1320630. The Plan Number assigned to the Plan by the Plan Sponsor pursuant to the instructions of the Internal Revenue Service is 510.

(b) Ending Date for Plan’s Fiscal Year. The date of the end of the fiscal year for the purpose of maintaining the Plan’s records is December 31.

(c) Agent for the Service of Legal Process. The agent for the service of legal process with respect to the Plan is:

Chief Accounting Officer

Truis Therapeutics, Inc.

6310 Nancy Ridge Dr., Suite 101

San Diego, California 92121

In addition, service of legal process may be made upon the Plan Administrator.

(d) Plan Sponsor and Administrator. The “Plan Sponsor” and the “Plan Administrator” of the Plan is:

Truis Therapeutics, Inc.

6310 Nancy Ridge Dr., Suite 101

San Diego, California 92121

The Plan Sponsor’s and Plan Administrator’s telephone number is (858) 452-0370. The Plan Administrator is the named fiduciary charged with the responsibility for administering the Plan.

Section 15.     STATEMENT OF ERISA RIGHTS.

Eligible Employees under this Plan (which is a welfare benefit plan sponsored by Truis Therapeutics, Inc.) are entitled to certain rights and protections under ERISA. If you are an Eligible Employee participating in this Plan, under ERISA, you are entitled to:

(a) Receive Information About Your Plan and Benefits

(1) Examine, without charge, at the Plan Administrator’s office and at other specified locations, such as worksites, all documents governing the Plan and a copy of the latest annual report (Form 5500 Series), if applicable, filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration;

(2) Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan and copies of the latest annual report (Form 5500 Series), if applicable, and an updated (as necessary) Summary Plan Description. The Administrator may make a reasonable charge for the copies; and

11.

(3) Receive a summary of the Plan’s annual financial report, if applicable. The Plan Administrator is required by law to furnish each Eligible Employee with a copy of this summary annual report.

(b) Prudent Actions by Plan Fiduciaries. In addition to creating rights for Eligible Employees, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other Eligible Employees and beneficiaries. No one, including your employer, your union or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a Plan benefit or exercising your rights under ERISA.

(c) Enforce Your Rights. If your claim for a Plan benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of Plan documents or the latest annual report from the Plan, if applicable, and do not receive them within 30 days, you may file suit in a Federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator.

If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or Federal court.

If you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.

(d) Assistance with Your Questions. If you have any questions about the Plan, you should contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

12.

Section 16.     EXECUTION.

To record the adoption of the Plan as set forth herein, effective as of August 11, 2011, Truis Therapeutics, Inc. has caused its duly authorized officer to execute the same this      day of August, 2011.

TRUIS THERAPEUTICS, INC.

By:

Title:

13.

ANNEX I

TRIUS THERAPEUTICS, INC.

EXECUTIVE SEVERANCE BENEFIT PLAN

PARTICIPATION NOTICE

To:                                                                                  

Date:                                                                                

Truis Therapeutics, Inc. (the “Company”) has adopted the Trius Therapeutics, Inc. Severance Benefit Plan (the “Plan”). The Company is providing you with this Participation Notice to inform you that you have been designated as a [Tier I][Tier II][Tier III] Eligible Employee under the Plan.

A copy of the Plan document is attached to this Participation Notice. The terms and conditions of your participation in the Plan are as set forth in the Plan and this Participation Notice, which together also constitute a summary plan description of the Plan.

In consideration for the benefits set forth in the Plan, each Eligible Employee’s severance benefits shall be governed by the terms of the Plan and the Plan shall supersede and replace any and all severance or change in control benefits payable to you as set forth in any individually negotiated employment contract or agreement, including offer letters, with the Company entered into prior to the date hereof.

If you choose to participate in the Plan, please return to the Company’s Chief Accounting Officer a copy of this Participation Notice signed by you and retain a copy of this Participation Notice, along with the Plan document, for your records. Please note that you are not an Eligible Employee under the Plan until you execute and return this Participation Notice and attached Acknowledgement to the Company.

TRIUS THERAPEUTICS, INC.
By:
	Eligible Employee
Its: [Chief Executive Officer]
[Chairman of the Compensation Committee]
	Print Name

1.

For Employees Age 40 or Older

Individual Termination

EXHIBIT A

RELEASE AGREEMENT

I understand and agree completely to the terms set forth in the Truis Therapeutics, Inc. Severance Benefit Plan (the “Plan”).

I understand that this Release Agreement (the “Release”), together with the Plan, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company, affiliates of the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated therein. Certain capitalized terms used in this Release are defined in the Plan.

I hereby confirm my obligations under my proprietary information and inventions agreement with the Company.

In consideration of the severance benefits and other consideration provided to me under the Plan that I am not otherwise entitled to receive, I hereby generally and completely release the Company and its parent, subsidiaries, successors, predecessors and affiliates, and their current and former partners, members, directors, officers, employees, stockholders, shareholders, agents, attorneys, predecessors, successors, insurers, affiliates and assigns, from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring at any time prior to and including the date I sign this Release (collectively, the “Released Claims”). The Released Claims include, but are not limited to: (a) all claims arising out of or in any way related to my employment with the Company or its affiliates, or the termination of that employment; (b) all claims related to my compensation or benefits, including salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership, equity, or profits interests in the Company and its affiliates; (c) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (d) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (e) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990 (as amended), the federal Age Discrimination in Employment Act (as amended) (“ADEA”), the federal Employee Retirement Income Security Act of 1974 (as amended), the Federal Family and Medical Leave Act (“FMLA”)and the California Fair Employment and Housing Act (as amended) and the California Labor Code.

Notwithstanding the foregoing, I understand that the following rights or claims are not included in the Released Claims: (a) any rights or claims for indemnification I may have pursuant to any written indemnification agreement with the Company or its affiliates to which I am a party; the charter, bylaws, or operating agreements of he Company or its affiliates; or under applicable law; or (b) any rights that cannot be waived as a matter of law. In addition, I understand that nothing in this Release prevents me from filing, cooperating with, or participating in any proceeding before the Equal Employment Opportunity Commission, the

1.

For Employees Age 40 or Older

Individual Termination

Department of Labor, the California Department of Fair Employment and Housing, or any other government agency, except that I hereby waive my right to any monetary benefits in connection with any such claim, charge or proceeding. I hereby represent and warrant that, other than the claims identified in this paragraph, I am not aware of any claims I have or might have that are not included in the Released Claims.

I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA, and that the consideration given under the Plan for the waiver and release in this paragraph is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (a) my waiver and release do not apply to any rights or claims that may arise after the date I sign this Release; (b) I should consult with an attorney prior to signing this Release (although I may choose voluntarily not do so); (c) I have twenty-one (21) days to consider this Release (although I may choose voluntarily to sign this Release earlier); (d) I have seven (7) days following the date I sign this Release to revoke the Release by providing written notice to an officer of the Company; and (e) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after I sign this Release provided I have not revoked it.

I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims hereunder.

I hereby represent that I have been paid all compensation owed and for all hours worked; I have received all the leave and leave benefits and protections for which I am eligible pursuant to the FMLA, the California Family Rights Act, or otherwise; and I have not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.

I acknowledge that to become effective, I must sign and return this Release to the Company so that it is received not later than twenty-one (21) days following the date it is provided to me or such other date as specified by the Company.

EMPLOYEE

Printed Name:

Signature:

Date:

2.

For Employees Age 40 and Older

Group Termination

EXHIBIT B

RELEASE AGREEMENT

I understand and agree completely to the terms set forth in the Truis Therapeutics, Inc. Severance Benefit Plan (the “Plan”).

I understand that this Release Agreement (the “Release”), together with the Plan, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company, affiliates of the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated therein. Certain capitalized terms used in this Release are defined in the Plan.

I hereby confirm my obligations under my proprietary information and inventions agreement with the Company.

In consideration of the severance benefits and other consideration provided to me under the Plan that I am not otherwise entitled to receive, I hereby generally and completely release the Company and its parent, subsidiaries, successors, predecessors and affiliates, and their current and former partners, members, directors, officers, employees, stockholders, shareholders, agents, attorneys, predecessors, successors, insurers, affiliates and assigns, from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring at any time prior to and including the date I sign this Release (collectively, the “Released Claims”). The Released Claims include, but are not limited to: (a) all claims arising out of or in any way related to my employment with the Company or its affiliates, or the termination of that employment; (b) all claims related to my compensation or benefits, including salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership, equity, or profits interests in the Company and its affiliates; (c) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (d) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (e) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990 (as amended), the federal Age Discrimination in Employment Act (as amended) (“ADEA”), the federal Employee Retirement Income Security Act of 1974 (as amended), the Federal Family and Medical Leave Act (“FMLA”)and the California Fair Employment and Housing Act (as amended) and the California Labor Code.

Notwithstanding the foregoing, I understand that the following rights or claims are not included in the Released Claims: (a) any rights or claims for indemnification I may have pursuant to any written indemnification agreement with the Company or its affiliates to which I am a party; the charter, bylaws, or operating agreements of he Company or its affiliates; or under applicable law; or (b) any rights that cannot be waived as a matter of law. In addition, I understand that nothing in this Release prevents me from filing, cooperating with, or participating in any proceeding before the Equal Employment Opportunity Commission, the

1.

For Employees Age 40 and Older

Group Termination

Department of Labor, the California Department of Fair Employment and Housing, or any other government agency, except that I hereby waive my right to any monetary benefits in connection with any such claim, charge or proceeding. I hereby represent and warrant that, other than the claims identified in this paragraph, I am not aware of any claims I have or might have that are not included in the Released Claims..

I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA, and that the consideration given under the Plan for the waiver and release in this paragraph is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (a) my waiver and release do not apply to any rights or claims that may arise after the date I sign this Release; (b) I should consult with an attorney prior to signing this Release (although I may choose voluntarily not to do so); (c) I have forty-five (45) days to consider this Release (although I may choose voluntarily to sign this Release earlier); (d) I have seven (7) days following the date I sign this Release to revoke the Release by providing written notice to an office of the Company; (e) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after I sign this Release provided I have not revoked it; and (f) I have received with this Release all of the information required by the ADEA, including without limitation a detailed list of the job titles and ages of all employees who were terminated in this group termination and the ages of all employees of the Company in the same job classification or organizational unit who were not terminated.

I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims hereunder.

I hereby represent that I have been paid all compensation owed and for all hours worked; I have received all the leave and leave benefits and protections for which I am eligible pursuant to the FMLA, the California Family Rights Act, or otherwise; and I have not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.

I acknowledge that to become effective, I must sign and return this Release to the Company so that it is received not later than forty-five (45) days following the date it is provided to me or such other date as specified by the Company.

EMPLOYEE

Printed Name:

Signature:

Date:

2.

For Employees Under Age 40

Individual or Group Termination

EXHIBIT C

RELEASE AGREEMENT

I understand and agree completely to the terms set forth in the Truis Therapeutics, Inc. Severance Benefit Plan (the “Plan”).

I understand that this Release Agreement (the “Release”), together with the Plan, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company, affiliates of the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated therein. Certain capitalized terms used in this Release are defined in the Plan.

I hereby confirm my obligations under my proprietary information and inventions agreement with the Company.

In consideration of the severance benefits and other consideration provided to me under the Plan that I am not otherwise entitled to receive, I hereby generally and completely release the Company and its parent, subsidiaries, successors, predecessors and affiliates, and their current and former partners, members, directors, officers, employees, stockholders, shareholders, agents, attorneys, predecessors, successors, insurers, affiliates and assigns, from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring at any time prior to and including the date I sign this Release (collectively, the “Released Claims”). The Released Claims include, but are not limited to: (a) all claims arising out of or in any way related to my employment with the Company or its affiliates, or the termination of that employment; (b) all claims related to my compensation or benefits, including salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership, equity, or profits interests in the Company and its affiliates; (c) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (d) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (e) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990 (as amended), the Federal Family and Medical Leave Act (“FMLA”), the California Fair Employment and Housing Act (as amended) and the California Labor Code..

Notwithstanding the foregoing, I understand that the following rights or claims are not included in the Released Claims: (a) any rights or claims for indemnification I may have pursuant to any written indemnification agreement with the Company or its affiliates to which I am a party; the charter, bylaws, or operating agreements of he Company or its affiliates; or under applicable law; or (b) any rights that cannot be waived as a matter of law. In addition, I understand that nothing in this Release prevents me from filing, cooperating with, or participating in any proceeding before the Equal Employment Opportunity Commission, the Department of Labor, the California Department of Fair Employment and Housing, or any other government agency, except that I hereby waive my right to any monetary benefits in connection

1.

For Employees Under Age 40

Individual or Group Termination

with any such claim, charge or proceeding. I hereby represent and warrant that, other than the claims identified in this paragraph, I am not aware of any claims I have or might have that are not included in the Released Claims.

I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims hereunder.

I hereby represent that I have been paid all compensation owed and for all hours worked; I have received all the leave and leave benefits and protections for which I am eligible pursuant to the FMLA, the California Family Rights Act, or otherwise; and I have not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.

I acknowledge that to become effective, I must sign and return this Release to the Company so that it is received not later than fourteen (14) days following the date it is provided to me or such other date as specified by the Company.

EMPLOYEE

Printed Name:

Signature:

Date:

2.

APPENDIX A

TRUIS THERAPEUTICS, INC.

SEVERANCE BENEFIT PLAN

Eligible Employees of the Company who are eligible to participate in the Truis Therapeutics, Inc. Severance Benefit Plan (each an “Eligible Employee”), and the level of benefit entitlement as provided in Appendix B are as follows:

Title		Tier Level
Chief Executive Officer	–	Tier I
Chief Commercial Officer	–	Tier II
Chief Financial Officer	–	Tier III
Chief Development Officer	–	Tier III
Chief Scientific Officer	–	Tier III
Chief Medical Officer	–	Tier III

The foregoing list of Eligible Employees is subject to such change as the Company, pursuant to Section 3(a)(1) and 4(a) of the Plan, may determine in its sole and absolute discretion. Any such change to the list of Eligible Employees shall be set forth in a revised version of this Appendix A.

Appendix A Adopted: August     , 2011

TRUIS THERAPEUTICS, INC.

By:

Title:

1.

APPENDIX B

TRUIS THERAPEUTICS, INC.

SEVERANCE BENEFIT PLAN

Severance benefits provided to Eligible Employees under the Truis Therapeutics, Inc. Severance Benefit Plan (the “Plan”) are as follows. Capitalized terms used herein have the definitions set forth in the Plan.

1. Severance Benefits. Subject to the exceptions set forth in Section 3(b) of the Plan, each Eligible Employee who meets all the requirements set forth in Sections 3(a) and 5 of the Plan, including, without limitation, executing a general waiver and release in substantially the form attached to the Plan as Exhibit A, Exhibit B or Exhibit C, as appropriate, within the applicable time period set forth therein and provided that such release becomes effective in accordance with its terms, shall receive severance benefits as set forth in this Appendix B. The Company, in its sole discretion, may modify the form of the required general waiver and release to comply with applicable law, and may incorporate such waiver and release into a termination agreement or other agreement with the Eligible Employee.

(a) Cash Severance Benefit. An Eligible Employee who suffers a Covered Termination shall be entitled to receive a cash severance benefit equal to the number of months of Base Salary set forth below next to his or her Tier Level (as indicated on Appendix A) at the time of termination. Such cash severance benefits will be paid in a lump sum following the date of a Covered Termination, subject to any delay in payment required by Section 6 of the Plan including any delay necessary so that no payments are made prior to the effectiveness of the release and waiver.

Tier Level	Months of Base Salary for Covered Termination	Months of Base Salary for Change in Control Related Termination
Tier I	12 months	18
Tier II	6 months	12
Tier III	6 months	12

(b) Bonus Payment. An Eligible Employee who suffers a Covered Termination that is not a Change in Control Related Termination shall not be entitled to receive a portion of his or her annual Target Bonus pursuant to the terms of this Plan.

2.

An Eligible Employee who suffers a Covered Termination that is a Change in Control Related Termination shall be entitled to receive a pro-rata portion of his or her annual Target Bonus pursuant to the terms of this Plan, based on the number of days during the calendar year before the Covered Termination divided by 365. Such pro-rata Target Bonus payment will be paid in a lump sum following the date of such Covered Termination, subject to any delay in payment required by Section 6 of the Plan including any delay necessary so that no payments are made prior to the effectiveness of the release and waiver.

(c) Continued Group Health Plan Benefits. Each Eligible Employee who is enrolled in a health, dental, or vision plan sponsored by the Company may be eligible to continue coverage under such health, dental, or vision plan (or to convert to an individual policy), at the time of the Eligible Employee’s termination of employment, under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”). The Company will notify the Eligible Employee of any such right to continue such coverage at the time of termination pursuant to COBRA. No provision of this Plan will affect the continuation coverage rules under COBRA, except that the Company’s payment, if any, of applicable insurance premiums will be credited, except for purposes of the American Recovery and Reinvestment Act of 2009, as amended (“ARRA”), as payment by the Eligible Employee for purposes of the Eligible Employee’s payment required under COBRA. Therefore, the period during which an Eligible Employee may elect to continue the Company’s or its affiliate’s health, dental, or vision plan coverage at his or her own expense under COBRA, the length of time during which COBRA coverage will be made available to the Eligible Employee, and all other rights and obligations of the Eligible Employee under COBRA (except the obligation to pay insurance premiums) will be applied in the same manner that such rules would apply in the absence of this Plan.

If an Eligible Employee timely elects continued coverage under COBRA, the Company shall pay the full amount of the Eligible Employee’s COBRA premiums, or shall provide coverage under any self-funded plan, on behalf of the Eligible Employee for the Eligible Employee’s continued coverage under the Company’s group health plans, including coverage for the Eligible Employee’s eligible dependents, the number of months following the Eligible Employee’s termination of employment as set forth in the table below next to his or her Tier Level; provided, however, that no such premium payments shall be made, and no coverage shall be provided under any self-funded group health plan, following the Eligible Employee’s death or the effective date of the Eligible Employee’s coverage by a group health plan of a subsequent employer. Each Eligible Employee shall be required to notify the Company immediately if the Eligible Employee becomes covered by a group health plan of a subsequent employer. Upon the conclusion of such period of insurance premium payments made by the Company, or the provision of coverage under a self-funded group health plan, the Eligible Employee will be responsible for the entire payment of premiums required under COBRA for the duration of the COBRA period, except to the extent that the Eligible Employee qualifies under ARRA as an “assistance eligible individual” who is entitled to COBRA premium assistance without recapture.

3.

For purposes of this Section 1(c), (i) references to COBRA shall be deemed to refer also to analogous provisions of state law and (ii) any applicable insurance premiums that are paid by the Company shall not include any amounts payable by the Eligible Employee under an Internal Revenue Code Section 125 health care reimbursement plan, which amounts, if any, are the sole responsibility of the Eligible Employee.

Tier Level	Months of COBRA Continuation Coverage for Covered Termination	Months of COBRA Continuation Coverage for Change in Control Related Termination
Tier I	12 months	18
Tier II	6 months	12
Tier III	6 months	12

(d) Equity Compensation Vesting Acceleration.

(i) Covered Termination that is not a Change in Control Related Termination. For each Eligible Employee who is a Tier I or Tier II employee (i) the vesting and exercisability of all outstanding options to purchase the Company’s common stock that are held by the Eligible Employee on the date of a Covered Termination shall be accelerated with respect to the number of shares that would have vested had the Eligible Employee remained employed by the Company for an additional six months following the date of the Covered Termination, (ii) any reacquisition or repurchase rights held by the Company in respect of common stock issued pursuant to any other stock award granted to the Eligible Employee by the Company shall lapse to the same extent such rights would have lapsed had the Eligible Employee remained employed by the Company for an additional six months following the date of the Covered Termination, and (iii) the vesting of any other stock awards granted to the Eligible Employee by the Company, and any issuance of shares triggered by the vesting of such stock awards, shall be accelerated with respect to the number of shares that would have vested had the Eligible Employee remained employed by the Company for an additional six months following the date of the Covered Termination.

4.

(ii) Covered Termination that is a Change in Control Related Termination. If the Eligible Employee’s Covered Termination is a Change in Control Related Termination, then: (i) the vesting and exercisability of all outstanding options to purchase the Company’s common stock that are held by the Eligible Employee on such date shall be accelerated in full as of the date of such Change in Control Related Termination, (ii) any reacquisition or repurchase rights held by the Company in respect of common stock issued pursuant to any other stock award granted to the Eligible Employee by the Company shall lapse in full as of the date of such Change in Control Related Termination, and (iii) the vesting of any other stock awards granted to the Eligible Employee by the Company, and any issuance of shares triggered by the vesting of such stock awards, shall be accelerated in full as of the date of such Change in Control Related Termination.

Notwithstanding the foregoing, this Section 1(d) shall not apply to stock awards issued under or held in any Qualified Plan. “Qualified Plan” means a plan sponsored by the Company that is intended to be qualified under Section 401(a) of the Internal Revenue Code.

2. Other Employee Benefits. All other benefits (such as life insurance, disability coverage, and 401(k) plan coverage) terminate as of the Eligible Employee’s termination date (except to the extent that a conversion privilege may be available thereunder).

3. Reductions Pursuant to Section 4(c) of the Plan. The severance benefits set forth in this Appendix B are subject to certain reductions under Section 4(c) of the Plan.

The foregoing severance benefits are subject to such change as the Company, pursuant to Section 4(a) and 4(b) of the Plan, may determine in its sole and absolute discretion. Any such change in severance benefits made pursuant to Section 4(a) of the Plan shall be set forth in a revised version of this Appendix B.

Appendix B Adopted: August     , 2011

TRUIS THERAPEUTICS, INC.

By:

Title:

5.

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT

TO RULE 13a-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934

I, Jeffrey Stein, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Trius Therapeutics, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2011

/s/    JEFFREY STEIN

Jeffrey Stein, Ph.D.

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT

TO RULE 13a-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934

I, John P. Schmid, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Trius Therapeutics, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2011

/s/    JOHN P. SCHMID

John P. Schmid

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Trius Therapeutics, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey Stein, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    JEFFREY STEIN

Jeffrey Stein, Ph.D.

Chief Executive Officer

(Principal Executive Officer)

November 10, 2011

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Trius Therapeutics, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John P. Schmid, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    JOHN P. SCHMID

John P. Schmid

Chief Financial Officer

(Principal Financial Officer)

November 10, 2011

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2011	Dec. 31, 2010
Balance Sheets [Abstract]
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	28,549,789	23,648,646
Common stock, shares outstanding	28,549,789	23,648,646

XML

Statements Of Operations (USD $) In Thousands, except Per Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Revenues:
Contract research	$ 2,995	$ 1,940	$ 8,568	$ 5,511
License fees	25,708		25,708
Collaborations	1,733		1,733
Total revenues	30,436	1,940	36,009	5,511
Operating expenses:
Research and development	14,903	6,039	35,722	13,675
General and administrative	3,731	1,296	8,550	3,527
Total operating expenses	18,634	7,335	44,272	17,202
Income (Loss) from operations	11,802	(5,395)	(8,263)	(11,691)
Other income (expense):
Interest income	5	1	19	1
Interest expense		(3,095)		(3,889)
Fair value adjustment of stock warrant liability	2,504	(9)	2,504	467
Other income (expense)		1	1	(1)
Total other income (expense)	2,509	(3,102)	2,524	(3,422)
Net income (loss)	14,311	(8,497)	(5,739)	(15,113)
Accretion of deferred financing costs on redeemable convertible preferred stock		(3)		(17)
Net income (loss) attributable to common stockholders	$ 14,311	$ (8,500)	$ (5,739)	$ (15,130)
Net income (loss) per share, basic	$ 0.50	$ (0.57)	$ (0.22)	$ (2.71)
Weighted-average shares outstanding, basic	28,527	14,834	25,816	5,568
Net income (loss) per share, diluted	$ 0.49	$ (0.57)	$ (0.22)	$ (2.71)
Weighted-average shares outstanding, diluted	29,477	14,834	25,816	5,568

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 04, 2011
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2011
Trading Symbol	tsrx
Entity Registrant Name	Trius Therapeutics Inc
Entity Central Index Key	0001356857
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		28,555,800

XML

Common Stock Reserved For Issuance

9 Months Ended

Sep. 30, 2011

Common Stock Reserved For Issuance [Abstract]

Common Stock Reserved For Issuance

Note 7. Common Stock Reserved for Issuance

The following table summarizes shares of common stock reserved for future issuance:

	September 30, 2011		December 31, 2010
Common stock warrants		1,678,884		66,075
Shares available for purchase under the 2010 Employee Stock Purchase Plan		619,133		465,835
Common stock options outstanding		2,469,079		1,992,078
Common stock options available for future grant		1,876,139		1,666,076
Total common shares reserved for issuance		6,643,235		4,190,064

XML

Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 3. Fair Value Measurements

The Company's financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and certain warrants to purchase common stock. Fair value measurements are classified and disclosed in one of the following three categories:

Level 1 —Quoted prices in active markets for identical assets or liabilities.

Level 2 —Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company measures its marketable securities at fair value on a recurring basis. The fair value of cash equivalents and marketable securities is determined based on "Level 1" inputs, which consist of quoted prices in active markets for identical assets. The fair value of the common stock warrant liability was determined based on "Level 3" inputs and the Black-Scholes option pricing model. Financial instruments measured at fair value as of September 30, 2011 and December 31, 2010 are classified below based on the three fair value hierarchy tiers described above (in thousands):

				Fair Value Measurements at Reporting Date Using
	Total			Level 1		Level 2		Level 3
September 30, 2011
Money Market funds, included in cash equivalents	$	5,307		$	5,307	$	—	$	—
U.S. Treasury securities, available-for-sale		37,079			37,079		—		—
Common stock warrant liability		(6,178	)		—		—		(6,178	)
Total	$	36,208		$	42,386	$	—	$	(6,178	)
December 31, 2010
Money Market funds, included in cash equivalents	$	4,039		$	4,039	$	—	$	—
U.S. Treasury securities, included in cash equivalents		9,500			9,500		—		—
U.S. Treasury securities, available-for-sale		30,823			30,823		—		—
Total	$	44,362		$	44,362	$	—	$	—

Activity for financial instruments measured at fair value using significant unobservable inputs (Level 3) during the three and nine month periods ended September 30, 2011 and 2010 is presented in the table below (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Beginning balance	$	(8,682	)	$	(185	)	$	—		$	(661	)
Purchases		—			—			—			—
Issuances		—			—			(8,682	)		—
Settlements		—			—			—			—
Gains (losses) included in other income (expense)		2,504			(9	)		2,504			467
Transfers (to) from Level 3		—			194			—			194
Ending balance	$	(6,178	)	$	—		$	(6,178	)	$	—

XML

Significant Collaborative Agreements

9 Months Ended

Sep. 30, 2011

Significant Collaborative Agreements [Abstract]

Significant Collaborative Agreements

Note 9. Significant Collaborative Agreements

On July 26, 2011, the Company entered into the Bayer Agreement which is an exclusive agreement to develop and commercialize the Company's lead antibiotic, tedizolid in the Bayer Licensed Territory. Under the Bayer Agreement, the Company retains full development and commercialization rights outside the Bayer Licensed Territory, including the United States, Canada and the European Union. In exchange for development and commercialization rights in the Bayer Licensed Territory, Bayer paid the Company $25.0 million upfront and agreed to support approximately 25% of the future development costs of tedizolid required for global approval for the treatment of ABSSSI and pneumonia, subject to certain adjustments and limitations. In addition, Bayer agreed to support 100% of the future development costs required for local approval in the Bayer Licensed Territory. The Company is also eligible to receive up to $69.1 million upon the achievement of certain development, regulatory and commercial milestones and will receive double-digit royalties on net sales of tedizolid in the Bayer Licensed Territory.

Pursuant to the accounting guidance under Accounting Standards Codification 605-25 or ("ASC 605-25"), which governs revenue recognition for multiple element arrangements, the Company has evaluated the two material non-contingent deliverables under the Agreement and determined that each meets the criteria for separation and therefore both will be treated as separate units of accounting, as follows:

• The License ("License") to develop and commercialize tedizolid in the Bayer Licensed Territory; and

• Certain Global Development Plan Services ("Global Development Plan Services") which will be conducted by the Company through an expected date of December 2017.

The Bayer Agreement requires that the Company manufacture and supply bulk drug product for commercial use for up to five years from the first commercial sale of tedizolid in the Bayer Licensed Territory. Since these manufacturing efforts are contingent upon regulatory approvals for commercialization and there were no firm orders for commercial supply at or near the execution of the agreement, this obligation is deemed a contingent deliverable and was not valued at the inception of the arrangement.

The Company allocated the estimated arrangement consideration based on the percentage of the relative selling price of each unit of accounting. The Company estimated the selling price of the License using the relief from royalty method income approach. The Company estimated the selling prices of the Global Development Plan Services using estimated third party costs.

Since the delivery of the License occurred upon the execution of the Agreement and there was no general right of return, approximately $24.9 million of the upfront payment was allocated to the License and was recorded as License revenue during the three and nine months ended September 30, 2011. The remaining $0.1 million was allocated to the Global Development Plan Services and was recorded as Collaboration revenue during the three and nine months ended September 30, 2011.

The Global Development Plan Services are expected to be performed through December 2017, with no general right of return. Therefore, all allocated arrangement consideration related to the Global Development Plan Services will be recognized as revenue in proportion to the percentage of actual costs incurred during the period to estimated total Global Plan Services expected throughout the collaboration. On September 28, 2011 the Company dosed its first patient in its second global Phase 3 study of tedizolid for the treatment of ABSSSI. This event triggered a $2.0 million payment to the Company under the Bayer Agreement. The Company reallocated the new expected arrangement consideration and added $0.8 million to the license and $1.2 million to the Global Development Plan Services. The $0.8 million was recorded as license revenues immediately, as there are no ongoing services to be provided for the license. The amount recognizable as revenue for the Global Development Plan Services is equal to the percentage calculated by dividing the cumulative costs completed as of the time of earning the payment divided by the total expected costs to be incurred by the Company during the Global Development Plan Service period and then multiplying this percentage by the new updated arrangement consideration for the Global Development Plan Services. From this amount, the previous cumulative amount recognized for Global Development Plan Service revenues is subtracted in order to calculate the amount of Global Development Plan Service revenues to record for the period. The revenue to be recorded, however, is the lower of this amount or the actual amount of Global Development Plan Service billings for the period. For the three and nine months ended September 30, 2011, the calculation of Global Development Plan Services was equal to the billings for the quarter which included the $1.2 million allocated to the Global Development Plan Services related to the $2.0 million payment plus the $0.4 million billed during the quarter related to actual Global Development Plan services performed.

Revenues recognized in the Statement of Operations related to the Bayer Agreement were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
License fees	$	25,708	$	—	$	25,708	$	—
Collaborations		1,733		—		1,733		—
Total	$	27,441	$	—	$	27,441	$	—

As of September 30, 2011, the Company had $193,000 of short-term deferred revenue related to the Bayer Agreement.

Development expenses incurred by Trius that pertain to the Global Development Plan Services are being charged to research and development expense.

The Company may receive up to an additional $67.1 million upon the achievement of certain development, regulatory and commercial events. The Company has elected the milestone method for recognizing milestone payments into revenue. In order for milestone consideration to be deemed substantive, it should:

1. Be commensurate with either the vendor's performance to achieve the milestone or the enhancement of value of the item delivered as a result of the specific outcome resulting from the vendor's performance to achieve the milestone

2. Relate solely to past performance; and

3. Be reasonable relative to all deliverables and payment terms in the arrangement.

Approximately $34.1 million of the future payments that the Company may receive are related to the achievement of certain development and regulatory events and $35.0 million if certain commercial sales thresholds are met. The Company has determined that $19.1 million of the development and regulatory payments are based upon its efforts. The remaining $15.0 million of the development and regulatory payments and all $35.0 million of potential payments for the achievement of the commercial sales thresholds are based upon the efforts of the collaborator.

Bayer has the ability to terminate the Bayer Agreement in its entirety by providing at least six months notice to the Company within the first two years of the Agreement. After two years, Bayer must provide at least 90 days notice. In addition, Bayer has the right to terminate the Agreement within 30 days of determining that either of the Company's two ongoing Phase 3 clinical trials of tedizolid phosphate for the treatment of ABSSSI has not been completed successfully or of becoming aware of any material toxicity and/or material drug safety event or issue concerning tedizolid.

XML

Commitments

9 Months Ended

Sep. 30, 2011

Commitments [Abstract]

Commitments

Note 10. Commitments

The Company's amended facility lease will expire on June 30, 2013 and the Company has options to extend the lease through June 30, 2014. In addition to the minimum lease payments, the Company is required to pay a pro-rata share of certain building expenses. Rent expense for the three months ended September 30, 2011 and 2010 was $163,000 and $107,000, respectively. Rent expense for the nine months ended September 30, 2011 and 2010 was $449,000 and $340,000, respectively.

XML

Comprehensive Income (Loss)

9 Months Ended

Sep. 30, 2011

Comprehensive Income (Loss) [Abstract]

Comprehensive Income (Loss)

Note 8. Comprehensive Income (Loss)

Comprehensive income (loss) was comprised of the following for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011			2010
Net income (loss)	$	14,311	$	(8,497	)	$	(5,739	)	$	(15,113	)
Unrealized gain on available-for-sale investments		1		—			10			—
Comprehensive income (loss)	$	14,312	$	(8,497	)	$	(5,729	)	$	(15,113	)

XML

Organization And Summary Of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Organization And Summary Of Significant Accounting Policies [Abstract]

Organization And Summary Of Significant Accounting Policies

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Trius Therapeutics, Inc. (the "Company") was originally incorporated in California in June 2004 as RexC Pharmaceuticals, Inc. and changed its name to Rx³ Pharmaceuticals, Inc. in September 2004. In February 2007, the Company changed its name to Trius Therapeutics, Inc. and reincorporated in Delaware in December 2007. The Company is a biopharmaceutical company focused on the discovery, development and commercialization of innovative antibiotics for life-threatening infections.

Initial Public Offering

On August 6, 2010, the Company completed its Initial Public Offering ("IPO") of common stock pursuant to a registration statement that was declared effective on August 2, 2010. In the IPO, the Company sold 10,000,000 shares of its common stock, at a price of $5.00 per share. As a result of the IPO, the Company raised a total of $45.1 million in net proceeds after deducting underwriting discounts and commissions of $1.6 million and offering expenses of $3.3 million. Costs directly associated with the Company's IPO were capitalized and recorded as deferred IPO costs prior to the closing of the IPO. These costs were recorded as a reduction of the proceeds received in arriving at the amount to be recorded in additional paid-in capital.

Upon the closing of the IPO, 1,454,545 shares of the Company's convertible preferred stock and 66,863,641 shares of the Company's redeemable convertible preferred stock automatically converted into a total of 7,943,959 shares of the Company's common stock. Also upon the closing of the IPO, $19.2 million of secured convertible notes (including accrued interest thereon) converted into 4,643,227 shares of the Company's common stock, a non-cash charge of $2.9 million related to such conversion was recorded, and the preferred stock warrant liability was reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock.

Private Placement

On May 31, 2011, the Company closed a Private Placement ("Private Placement") transaction with certain accredited investors pursuant to which an aggregate of 4,750,000 units were sold at a purchase price of $6.35 per unit, with each unit consisting of one share of common stock and a warrant to purchase an additional 0.35 shares of common stock. Each warrant is exercisable in whole or in part for a period of five years commencing on November 27, 2011 at a per share exercise price of $8.50, subject to certain adjustments as specified in the warrant. As a result of the Private Placement, the Company raised a total of $28.0 million in net proceeds after deducting underwriting discounts and commissions of $1.9 million and offering expenses of $0.3 million.

Collaboration and License Agreement

On July 26, 2011, the Company entered into a Collaboration and License Agreement (the "Bayer Agreement") with Bayer Pharma AG ("Bayer") which is an exclusive agreement to develop and commercialize the Company's lead antibiotic, tedizolid phosphate ("tedizolid"), in China, Japan and substantially all other countries in Asia, Africa, Latin America and the Middle East, excluding North and South Korea (the "Bayer Licensed Territory"). Under the Bayer Agreement, the Company retains full development and commercialization rights outside the Bayer Licensed Territory, including the United States, Canada and the European Union. In exchange for development and commercialization rights in the Bayer Licensed Territory, Bayer paid the Company $25.0 million upfront and agreed to support approximately 25% of the future development costs of tedizolid required for global approval for treatment of acute bacterial skin and skin structure infections ("ABSSSI") and pneumonia, subject to certain adjustments and limitations. In addition, Bayer agreed to support 100% of the future development costs required for local approval in the Bayer Licensed Territory. The Company is also eligible to receive up to $69.1 million upon the achievement of certain development and regulatory milestones and commercial milestones and will receive double-digit royalties on net sales of tedizolid in the Bayer Licensed Territory. None of the payments that the Company has received from Bayer to date, whether recognized as revenue or deferred, are refundable even if the related program is not successful.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents.

Short-term Investments Available-for-Sale

Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums and accretion of discounts is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income (expense). The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Accounts Receivable

Accounts receivable at September 30, 2011 represent amounts due under the Bayer Agreement and from federal funding sources based upon federal contracts with the National Institute of Allergy and Infectious Diseases ("NIAID"), a part of the National Institutes of Health ("NIH"), the Defense Threat Reduction Agency ("DTRA"), an agency within the U.S. Department of Defense, and the Lawrence Livermore National Laboratory ("LLNL"), a part of the U.S. Department of Energy's National Nuclear Security Administration. Accounts receivable at December 31, 2010 represent amounts due from NIAID and DTRA.

Property and Equipment, Net

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful economic lives of the related assets.

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment. The Company will record impairment losses on long-lived assets used in operations when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. While the Company's current and historical operating losses and cash flows are indicators of impairment, the Company believes the future cash flows to be received support the carrying value of its long-lived assets and, accordingly, the Company has not recognized any impairment losses through September 30, 2011.

Preferred Stock Warrant Liability and Common Stock Warrants

Warrants to purchase the Company's convertible preferred stock were classified as liabilities and, through the date of the IPO, were recorded at estimated fair value with changes in market value recorded as other income (expense). Upon the closing of the IPO on August 6, 2010, all preferred stock converted into common stock and warrants to purchase preferred stock converted into warrants to purchase common stock. The fair value of the preferred stock warrants was estimated on the date of the IPO and recorded to additional paid-in capital upon conversion to common stock warrants. The Company reassessed the accounting treatment for the warrants as of the IPO date and deemed that accounting for the warrants within additional paid-in capital was appropriate.

The Company evaluated the accounting treatment for the warrants to purchase the Company's common stock that were issued in conjunction with the Private Placement and determined that liability classification was appropriate. Upon closing of the Private Placement, the warrants were classified as a liability and are marked to estimated fair value at each reporting date with changes in estimated fair value recorded as other income (expense).

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued liabilities and warrants to purchase common stock. Fair value estimates of these instruments are made at a specific point in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. The fair value of marketable securities is based upon market prices quoted on the last day of the fiscal period. The fair value of the common stock warrants is determined using a Black-Scholes model.

Revenue Recognition

The Company's revenues are derived from the Bayer Agreement and federal contracts with NIAID, DTRA and LLNL. The Company recognizes revenues when all four of the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

The Company's license and collaboration agreements contain multiple elements, including non-refundable upfront fees, payments for reimbursement of internal and third-party development and regulatory costs, payments associated with achieving specific milestones and royalties based on specified percentages of net product sales, if any. The Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

Revenue recognition for agreements with multiple deliverables is based on the individual units of accounting determined to exist in the agreement. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.

For agreements entered into after December 31, 2010 with multiple deliverables, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence, or VSOE, of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.

The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under an agreement.

Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement.

When a payment is specifically tied to a separate earnings process, revenues are recognized when the specific performance obligation associated with the payment is completed. Performance obligations typically consist of significant and substantive milestones pursuant to the related agreement. Revenues from milestone payments may be considered separable from funding for development and regulatory services because of the uncertainty surrounding the achievement of milestones for products in early stages of development. Accordingly, these payments are allowed to be recognized as revenue if and when the performance milestone is achieved if they represent a separate earnings process. Milestones do not include events that occur solely upon the passage of time or as a result of a counterparty's performance.

When determining whether or not to account for transactions under the milestone method, the Company makes a determination at the inception of the agreement of whether or not each milestone is considered substantive. During this assessment process, the Company considers if achievement of the milestone is based in whole or in part on the Company's performance or on the occurrence of a separate outcome resulting from the Company's performance, if there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and if achievement will result in additional payments being due.

With respect to revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with federal contracts, where the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, the Company records revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the consolidated statements of operations.

Research and Development Expenses

Research and development expenses include related salaries, benefits, license fees paid to third parties for use of their intellectual property, stock-based compensation, costs to third-party contractors to perform research, conduct clinical trials and develop drug materials, research supplies, associated overhead expenses and facilities costs. Research and development costs are expensed as incurred.

Patent Costs

Costs related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain.

Share-Based Compensation

The Company accounts for share-based compensation by measuring and recognizing compensation expense for all share-based payments made to employees and directors based on estimated grant date fair values. The Company uses the straight-line method to allocate compensation cost to reporting periods over each optionee's requisite service period, which is generally the vesting period, and estimates the fair value of share-based awards to employees and directors using the Black-Scholes option valuation model. The Black-Scholes model requires the input of subjective assumptions, including volatility, the expected term and the fair value of the underlying common stock on the date of grant, among other inputs.

Stock options granted to non-employees are accounted for using the fair value approach. Stock options granted to non-employees are subject to periodic revaluation over their vesting terms.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income or loss and changes in equity during a period from transactions and other events and circumstances generated from non-owner sources. The Company's comprehensive loss consisted of the net loss and unrealized gains and losses on the changes in fair value of investments.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. The Company has evaluated available evidence and concluded that the Company may not realize the benefit of its deferred tax assets; therefore a valuation allowance has been established for the full amount of the deferred tax assets at September 30, 2011 and December 31, 2010. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

Unaudited Interim Financial Data

The accompanying balance sheet as of September 30, 2011, statements of operations for the three months and nine months ended September 30, 2011 and 2010 and cash flows for the three months and nine months ended September 30, 2011 and 2010 are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2010 contained in the Company's Annual Report on Form 10-K. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company's financial position as of September 30, 2011 and the results of operations for the three months and nine months ended September 30, 2011 and 2010 and cash flows for the three months and nine months ended September 30, 2011 and 2010. The December 31, 2010 balance sheet included herein was derived from audited financial statements, but does not include all disclosures including notes required by GAAP for complete financial statements.

The financial data and other information disclosed in these notes to the financial statements related to the three months and nine months ended September 30, 2011 and 2010 are unaudited. Interim results are not necessarily indicative of results for an entire year.

Net Income (Loss) per Common Share

Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, preferred stock, stock options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive.

The following table presents the computation of basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net income (loss) per share
Numerator
Net income (loss) attributable to common stockholders	$	14,311		$	(8,500	)	$	(5,739	)	$	(15,130	)
Denominator
Weighted-average common shares outstanding		28,536			14,906			25,840			5,665
Less: Weighted-average shares subject to repurchase		(9	)		(72	)		(24	)		(97	)
Denominator for basic net income (loss) per share		28,527			14,834			25,816			5,568
Basic net income (loss) per share	$	0.50		$	(0.57	)	$	(0.22	)	$	(2.71	)
Denominator for diluted net income (loss) per share		29,477			14,834			25,816			5,568
Diluted net income (loss) per share	$	0.49		$	(0.57	)	$	(0.22	)	$	(2.71	)

Potentially dilutive securities not included in the calculation of diluted net loss per common share in the table above for the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010 because to do so would be anti-dilutive are as follows (in common equivalent shares):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Common stock warrants		—		22,985		12,200		37,683
Common stock options		354,192		688,705		1,107,508		774,141
		354,192		711,690		1,119,708		811,824

Segments

The Company operates in only one segment. Management uses cash flows as the primary measure to manage its business and does not segment its business for internal reporting or decision making.

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Preferred And Common Stock Warrants

9 Months Ended

Sep. 30, 2011

Preferred And Common Stock Warrants [Abstract]

Preferred And Common Stock Warrants

Note 4. Preferred and Common Stock Warrants

Equity-classified warrants

During 2004, 2005 and 2006, in conjunction with its financing arrangements, the Company issued warrants to purchase 140,909, 40,909 and 40,090, respectively, of shares of Series A-1 convertible preferred stock at $0.55 per share and in 2007, issued warrants to purchase an aggregate of 346,363 shares of Series A-2 redeemable convertible preferred stock at $0.55 per share.

The preferred stock warrants were accounted for as a liability and recorded at fair value with increases or decreases in the fair value of such warrants recorded as other income (expense) in the Statement of Operations. Upon the closing of the IPO on August 6, 2010, all preferred stock converted into common stock and warrants to purchase preferred stock converted into warrants to purchase common stock. The Company reassessed the fair value accounting for the preferred stock warrants due to their conversion on August 6, 2010 to common stock warrants and determined that fair value measurement was no longer appropriate and that recognition as a component of additional paid-in capital was proper. The fair value of these formerly preferred stock warrants increased by $9,000 during the three months ended September 30, 2010 and decreased by approximately $467,000 during the nine months ended September 30, 2010.

Liability-classified warrants

In conjunction with the Private Placement that closed on May 31, 2011, the Company issued warrants to purchase 1,662,500 shares of common stock at $8.50 per share. These warrants become exercisable on November 27, 2011 and expire five years thereafter. The Company valued the warrants as derivative financial instruments as of the date of issuance and recorded them as a liability. The Company will continue to value the warrants at each reporting date, with any changes in fair value being recorded as other income (expense) in the Statement of Operations. The fair value of the warrants decreased by $2.5 million during the three and nine months ended September 30, 2011.

The determination that the warrants should be recorded as a liability is due to the fact that the warrants contain a net cash settlement provision under which the warrant holders may require the Company to purchase the warrants in exchange for a cash payment following the announcement of specified events defined as Fundamental Transactions ("Fundamental Transactions") involving the Company (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 net cash settlement provision requires use of the Black-Scholes model in calculating the cash payment value in the event of a Fundamental Transaction or a Delisting.

The net 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 the Company's common stock, the volatility of the Company's common stock, the expected term of the warrant, the risk-free interest rate based on U.S. Treasury security yields, and the Company's dividend yield. The warrant requires use of a volatility assumption equal to the greater of (i) 100%, (ii) the 30-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting, or (iii) the arithmetic average of the 10, 30, and 50-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting.

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 the Company's common stock, the historical volatility of the stock prices of the Company's peer group, risk-free rates based on U.S. Treasury security yields, the expected term of the warrants and the Company's dividend yield. Changes in these assumptions can materially affect the fair value estimate. The Company could ultimately incur amounts to settle the warrant under the net cash settlement value that is significantly different than the carrying value of the liability in the financial statements. The Company 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.

During the three months ended September 30, 2011, 14,174 equity-classified warrants were net exercised resulting in the issuance of 6,431 shares of common stock. During the nine months ended September 30, 2011, 49,691 equity-classified warrants were net exercised resulting in the issuance of 21,560 shares of common stock. At September 30, 2011, there were 1,678,884 common stock warrants outstanding of which 16,384 were exercisable. The common stock warrants outstanding will expire between three years and six years from September 30, 2011. At December 31, 2010, there were 66,075 common stock warrants outstanding and exercisable.

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Convertible Notes Payable

9 Months Ended

Sep. 30, 2011

Convertible Notes Payable [Abstract]

Convertible Notes Payable

Note 5. Convertible Notes Payable

In November 2009, the Company sold $19.2 million in aggregate principal amount of secured convertible promissory notes (the "2009 Notes") in a private placement to certain existing investors and other parties with whom it had substantive, pre-existing relationships. The 2009 Notes were secured by a first priority security interest in all of the Company's assets and were convertible into equity upon the occurrence of certain events. The 2009 Notes accrued interest at a rate of 8% per annum and had a maturity date of the earlier of (1) January 31, 2011 or (2) the sale of the company, or all or substantially all of its assets. The 2009 Notes (including interest thereon) were automatically converted into 4,643,227 shares of common stock upon the closing of the IPO on August 6, 2010 (representing a conversion at a 12.5% discount to the IPO price) and the Company recognized a $2.9 million non-cash charge as a component of interest expense as a result of the conversion. Interest expense related to the 2009 Notes for the three months and nine months ended September 30, 2010 was $155,000 and $912,000, respectively. There was no interest expense incurred related to the 2009 Notes for the three months or nine months ended September 30, 2011 due to their conversion upon the IPO in August 2010.

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Share-Based Compensation

9 Months Ended

Sep. 30, 2011

Share-Based Compensation [Abstract]

Share-Based Compensation

Note 6. Share-based Compensation

The Company granted 524,000 stock options to certain employees and consultants of the Company with a weighted average exercise price of $6.53 per share during the nine months ended September 30, 2011. The stock options granted by the Company had an exercise price equal to the closing market price of the Company's common stock on the date of grant. There were 241,750 stock options granted to employees and consultants during the nine months ended September 30, 2010.

The following table summarizes stock option activity during the nine months ended September 30, 2011:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2010		1,992,078		$	2.60		8.69
Granted		524,000			6.53
Exercised		(46,395	)		1.19
Canceled		(604	)		1.29
Options outstanding at September 30, 2011		2,469,079		$	3.46		8.31	$	7,550
Options vested or expected to vest at September 30, 2011		2,461,692		$	3.46		8.31	$	7,537
Options exercisable at September 30, 2011		1,159,543		$	2.19		7.42	$	4,839

At September 30, 2011 and December 31, 2010, there was approximately $3.8 million and $3.2 million, respectively, of total unrecognized compensation costs related to outstanding options which is expected to be recognized over a weighted average period of 2.73 and 2.84 years, respectively.

Compensation cost for stock options granted to employees is based on the estimated grant date fair value and is recognized over the vesting period of the applicable option on a straight-line basis. The estimated weighted average grant date fair value of stock options granted to employees during the three months and nine months ended September 30, 2011 was $4.83 and $4.21, respectively.

As stock-based compensation expense recognized is based on options ultimately expected to vest, the expense has been reduced for estimated forfeitures. The fair value of each employee option grant during the nine months ended September 30, 2011 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Nine months ended September 30, 2011
Expected volatility	75%
Expected term (in years)	5.27-6.08
Risk-free interest rate	1.02%-2.71%
Expected dividend yield	0%

Expected Volatility. The expected volatility rate used to value stock option grants is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the pharmaceutical and biotechnology industry in a similar stage of development.

Expected Term. The Company elected to utilize the "simplified" method for "plain vanilla" options to value stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option.

Risk-free Interest Rate. The risk-free interest rate assumption was based on zero-coupon U.S. Treasury instruments that had terms consistent with the expected term of the stock option grants.

Expected Dividend Yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on its historical experience. Groups of employees that have similar historical forfeiture behavior are considered separately for expense recognition.

Stock options granted to non-employees are accounted for using the fair value approach. The fair value of non-employee option grants are estimated using the Black-Scholes option-pricing model and are remeasured over the vesting term as earned. The estimated fair value is expensed over the applicable service period. The Company granted 5,000 stock options to non-employees during the nine months ended September 30, 2011. There were no stock options granted to non-employees during the nine months ended September 30, 2010. The Company recognized expense related to non-employee options of $(3,000) and $(11,000) during the three months ended September 30, 2011 and 2010, respectively, and $9,000 and $18,000 during the nine months ended September 30, 2011 and 2010, respectively.

Share-Based Compensation Summary. Share-based compensation expense includes stock options granted to employees and non-employees and has been reported in the Company's statements of operations as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Research and development	$	336	$	75	$	967	$	238
General and administrative		416		160		1,027		393
Total	$	752	$	235	$	1,994	$	631

Since the Company had a net operating loss carryforward as of September 30, 2011, no excess tax benefits for the tax deductions related to share-based awards were recognized in the statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised during the nine months ended September 30, 2011 and 2010 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities.

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Statements Of Cash Flows (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Operating activities
Net loss	$ (5,739)	$ (15,113)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization	372	306
Share-based compensation	1,994	631
Amortization of investment premiums	462	1
Gain on fair value adjustment of stock warrant liability	(2,504)	(467)
Interest accrual on convertible notes payable		912
Beneficial conversion charge on convertible notes payable		2,902
Deferred revenue	193	72
Changes in operating assets and liabilities:
Accounts receivable	(2,889)	(667)
Prepaid expenses and other current assets	(435)	(234)
Accounts payable	1,710	1,116
Accrued liabilities	3,541	734
Other assets	216	(162)
Net cash used in operating activities	(3,079)	(9,969)
Investing activities
Purchases of short-term investments	(40,995)
Maturities of short-term investments	34,287
Purchases of property and equipment	(601)	(297)
Net cash used in investing activities	(7,309)	(297)
Financing activities
Proceeds from issuance of common stock and warrants, net of underwriting discounts and offering costs	28,013	48,350
Proceeds from exercise of stock options and stock issuances under employee stock purchase plans	307	1
Initial public offering costs		(1,907)
Payments on capital lease obligation		(69)
Repurchase of common stock		(1)
Net cash provided by financing activities	28,320	46,374
Net increase in cash and cash equivalents	17,932	36,108
Cash and cash equivalents at beginning of period	14,515	18,259
Cash and cash equivalents at end of period	32,447	54,367
Supplemental cash flow information
Cash paid for interest		$ 2

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Investments In Marketable Securities

9 Months Ended

Sep. 30, 2011

Investments In Marketable Securities [Abstract]

Investments In Marketable Securities

Note 2. Investments in Marketable Securities

The following is a summary of investments classified as available-for-sale securities (in thousands):

	Amortized Cost		Gross Unrealized Gains(1)		Gross Unrealized Losses(1)			Aggregate Estimated Fair Value
September 30, 2011
U.S. Treasury securities	$	37,069	$	11	$	(1	)	$	37,079
Total available-for-sale securities	$	37,069	$	11	$	(1	)	$	37,079
December 31, 2010
U.S. Treasury securities	$	30,823	$	2	$	(2	)	$	30,823
Total available-for-sale securities	$	30,823	$	2	$	(2	)	$	30,823

⁽¹⁾  Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. No securities in unrealized loss positions have been in a continuous unrealized loss position for 12 months or longer. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases.

The amortized cost and estimated fair value of debt securities classified as available-for-sale by contractual maturity at September 30, 2011 and December 31, 2010 are presented below (in thousands):

	Maturing in 12 months or less				Maturing in more than 12 months
	Amortized Cost		Estimated Fair  Value		Amortized Cost		Estimated Fair Value
September 30, 2011
U.S. Treasury securities	$	37,069	$	37,079	$	—	$	—
Total available-for-sale securities	$	37,069	$	37,079	$	—	$	—
December 31, 2010
U.S. Treasury securities	$	30,823	$	30,823	$	—	$	—
Total available-for-sale securities	$	30,823	$	30,823	$	—	$	—

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2011

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note 11. Recent Accounting Pronouncements

Occasionally, new accounting standards are issued or proposed by the Financial Accounting Standards Board, or other standard-setting bodies that the Company adopts by the effective date specified within the standard. Unless otherwise discussed, standards that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, and change a principle or requirement for fair value measurements or disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its financial statements.

In June 2011, the FASB issued updated accounting guidance related to the presentation of comprehensive income. This guidance requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its financial statements.

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Balance Sheets (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and cash equivalents	$ 32,447	$ 14,515
Short-term investments, available-for-sale	37,079	30,823
Accounts receivable	4,721	1,832
Prepaid expenses and other current assets	1,824	1,389
Total current assets	76,071	48,559
Property and equipment, net	930	701
Other assets	25	240
Total assets	77,026	49,500
Liabilities and stockholders' equity
Accounts payable	3,857	2,147
Accrued liabilities	5,176	1,661
Common stock warrant liability	6,178
Current portion of deferred revenue	431
Total current liabilities	15,642	3,808
Deferred revenue		238
Total liabilities	15,642	4,046
Stockholders' equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at September 30, 2011 and December 31, 2010; no shares issued and outstanding at September 30, 2011 and December 31, 2010
Common stock, $0.0001 par value; 200,000,000 shares authorized at September 30, 2011 and December 31, 2010; 28,549,789 and 23,648,646 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively	4	3
Additional paid-in capital	144,251	122,593
Accumulated other comprehensive income	10
Accumulated deficit	(82,881)	(77,142)
Total stockholders' equity	61,384	45,454
Total liabilities and stockholders' equity	$ 77,026	$ 49,500