10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

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 000-55133

ACUCELA INC.

(Exact name of registrant as specified in its charter)

Washington	02-0592619
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1301 SECOND AVENUE, SUITE 1900 SEATTLE, WASHINGTON	98101
(Address of principal executive offices)	(Zip Code)

(206) 805-8300

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant 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).    Yes  þ        No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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  þ        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. (Check one):

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

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

As of August 8, 2014, the registrant had outstanding 35,641,319 shares of common stock.

ACUCELA INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2014

INDEX

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements	3
	Condensed Balance Sheets as of June 30, 2014 and December 31, 2013 (unaudited)	3
	Condensed Statements of Operations for the three and six months ended June 30, 2014 and 2013 (unaudited)	4
	Condensed Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2014 and 2013 (unaudited)	5
	Condensed Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)	6
	Notes to Condensed Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
Signatures

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

ACUCELA INC.

CONDENSED BALANCE SHEETS

(in thousands)

	June 30, 2014			December 31, 2013
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	32,979		$	13,994
Investments	81,074			14,947
Accounts receivable from collaborations	11,813			10,262
Deferred tax asset	1,119			1,114
Prepaid expenses and other current assets	1,858			1,964
Total current assets	128,843			42,281
Property and equipment, net	861			1,112
Long-term investments	63,229			3,478
Long-term deferred tax asset	1,049			1,280
Deferred offering costs	—			5,548
Other assets	344			349
Total assets	$	194,326		$	54,048
Liabilities and shareholders’ equity
Current liabilities:
Current maturities of contingently convertible debt, related party	$	—		$	12,000
Accounts payable	375			754
Accrued liabilities	5,085			6,579
Accrued compensation	915			3,269
Deferred revenue from collaborations	2,119			—
Deferred rent and lease incentives	178			267
Total current liabilities	8,672			22,869
Commitments (Note 4)
Long-term deferred rent, lease incentives, and others	7			55
Total long-term liabilities	7			55
Shareholders’ equity:
Convertible preferred stock
Series A, no par value, no shares authorized as of June 30, 2014 and 2,734 shares authorized as of December 31, 2013; issued and outstanding, no shares as of June 30, 2014 and 2,734 shares as of December 31, 2013 (liquidation value of $2,051)	—			2,051
Series B, no par value, no shares authorized as of June 30, 2014 and 17,900 shares authorized as of December 31, 2013; issued and outstanding, no shares as of June 30, 2014 and 17,900 shares as of December 31, 2013 (liquidation value of $13,425)	—			13,387
Series C, no par value, no shares authorized as of June 30, 2014 and 31,818 shares authorized as of December 31, 2013; issued and outstanding, no shares as of June 30, 2014 and 11,807 shares as of December 31, 2013 (liquidation value of $12,988)	—			12,771
Common stock, no par value, 100,000 shares authorized as of June 30, 2014 and 60,000 shares authorized as of December 31, 2013; issued and outstanding, 35,641 shares as of June 30, 2014 and 11,971 shares as of December 31, 2013	185,976			3,654
Additional paid-in capital	3,111			2,728
Accumulated other comprehensive loss	(105		)	(7		)
Accumulated deficit	(3,335		)	(3,460		)
Total shareholders’ equity	185,647			31,124
Total liabilities and shareholders’ equity	$	194,326		$	54,048

See accompanying notes to condensed financial statements.

3

ACUCELA INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Revenue from collaborations	$	9,086		$	11,023		$	19,632		$	27,003
Expenses:
Research and development	6,501			7,845			14,471			15,973
General and administrative	2,481			3,255			4,842			5,387
Total expenses	8,982			11,100			19,313			21,360
Income (loss) from operations	104			(77		)	319			5,643
Other income (expense), net:
Interest income	120			2			164			20
Interest expense	(1		)	(30		)	(14		)	(60		)
Other income, net	39			76			35			72
Total other income, net	158			48			185			32
Income (loss) before income tax	262			(29		)	504			5,675
Income tax (expense) benefit	(191		)	9			(379		)	(1,984		)
Net income (loss)	71			(20		)	125			3,691
Net income attributable to participating securities	—			—			—			2,697
Net income (loss) attributable to common shareholders	$	71		$	(20	)	$	125		$	994
Net income (loss) per share attributable to common shareholders
Basic	$	—		$	—		$	—		$	0.08
Diluted	$	—		$	—		$	—		$	0.08
Weighted average shares used to compute net income (loss) per share attributable to common shareholders:
Basic	35,641			11,968			29,918			11,956
Diluted	35,867			11,968			30,199			12,315

See accompanying notes to condensed financial statements.

4

ACUCELA INC.

CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

	Three months ended June 30,					Six months ended June 30,
	2014		2013			2014			2013
	(unaudited)					(unaudited)
Net income (loss)	$	71	$	(20	)	$	125		$	3,691
Other comprehensive (loss) income:
Net unrealized gain (loss) on securities, net of income tax benefit of $5 and $0 for the three months ended June 30, 2014 and 2013, respectively, and income tax of $52 and $0 for the six months ended June 30, 2014 and 2013, respectively	10		(10		)	(98		)	(12		)
Comprehensive (loss) income	$	81	$	(30	)	$	27		$	3,679

See accompanying notes to condensed financial statements.

5

ACUCELA INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

	Six months ended June 30,
	2014			2013
	(unaudited)
Cash flows from operating activities
Net income	$	125		$	3,691
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	255			258
Stock-based compensation	383			841
Amortization of premium/discount on marketable securities	379			114
Deferred taxes	278			1,276
Changes in operating assets and liabilities:
Accounts receivable from collaborations	(1,551		)	(6,078		)
Prepaid expenses and other current assets	106			(548		)
Accounts payable	(379		)	(211		)
Accrued liabilities	(1,494		)	1,591
Accrued compensation	(2,354		)	(794		)
Deferred rent and lease incentives	(137		)	(129		)
Deferred revenue from collaborations	2,119			896
Other assets	5			14
Net cash provided by (used in) operating activities	(2,265		)	921
Cash flows from investing activities
Purchases of marketable securities available for sale	(141,312		)	(13,805		)
Maturities of marketable securities available for sale	14,905			7,306
Additions to property and equipment	(4		)	(435		)
Net cash used in investing activities	(126,411		)	(6,934		)
Cash flows from financing activities
Proceeds from issuance of common stock	149,206			6
Restricted investments income	—			(28		)
Payments for deferred offering costs	(1,545		)	(1,605		)
Excess tax benefit from stock-based compensation	—			123
Net cash provided by (used in) financing activities	147,661			(1,504		)
Increase (decrease) in cash and cash equivalents	18,985			(7,517		)
Cash and cash equivalents—beginning of period	13,994			16,639
Cash and cash equivalents—end of period	$	32,979		$	9,122
Supplemental disclosure
Deferred offering costs	$	5,548		$	—
Conversion of convertible preferred stock upon IPO	28,209			—
Conversion of contingently convertible debt, related party, upon IPO	12,000			—

See accompanying notes to condensed financial statements.

6

ACUCELA INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1. Description of Business

Acucela Inc. (“we,” “our” and “us”) is a clinical-stage biotechnology company that specializes in discovering and developing novel therapeutics to treat and slow the progression of sight-threatening ophthalmic diseases impacting millions of individuals worldwide. We focus on developing oral products based on our proprietary visual cycle modulation, or VCM, compounds to address a variety of retinal diseases, primarily age-related macular degeneration, or AMD, diabetic retinopathy, or DR, and diabetic macular edema, or DME, and potentially Stargardt disease, retinitis pigmentosa and retinopathy of prematurity. Our product candidates are designed to address the root cause of these diseases by reducing toxic by-products and oxidative damage as well as protecting the retina from light damage.

Note 2. Significant Accounting Policies

Unaudited Interim Financial Information

We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for fiscal year 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2013 Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 these estimates.

Segments

We operate in one segment, pharmaceutical product development. All of our significant assets are located in the United States. During the three and six months ended June 30, 2014 and 2013, all of our revenue was generated in the United States.

Initial Public Offering

On February 13, 2014, we completed our initial public offering ("IPO") whereby 9,200,000 shares of common stock were sold to the public at a price of $17.72 per share. We received aggregate proceeds of $142.0 million from the initial public offering ("IPO"), net of underwriters’ discounts and commissions, and offering expenses. Upon the closing of the IPO, all shares of our outstanding convertible preferred stock automatically converted into 10,813,867 shares of common stock and $12.0 million of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006, automatically converted into 3,636,365 shares of common stock.

Investments

Investments are composed of commercial paper, corporate debt securities, certificates of deposit, and government-backed securities. Investments with original maturities longer than three months and remaining maturities of less than one year are classified as short-term investments. We consider our investments as available-for-sale. Available-for-sale securities are stated at fair value as of each balance sheet date based on market quotes, and unrealized gains and losses are reflected as a net amount under the caption of accumulated other comprehensive loss. Premiums or discounts arising at acquisition are amortized into earnings.

7

We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as whether it is more likely than not that we will hold the investment until recovery of its amortized cost basis. Realized gains and losses are calculated using the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary are recorded within the statements of income under the caption other income (expense).

Concentration of Credit Risk

All of our accounts receivable, as of June 30, 2014 and December 31, 2013, consist of amounts due from our collaborations with Otsuka Pharmaceutical Co. Ltd., or Otsuka, a global pharmaceutical company based in Japan. There was no allowance for doubtful accounts for the periods presented, as we believe all outstanding amounts will be paid based on our contractual arrangements with Otsuka and history of successful collections thereunder and collateral is not required. As of the date of this filing, we have collected approximately $8.8 million in accounts receivable which were outstanding at June 30, 2014. Revenue recognized for the three and six month periods ended June 30, 2014 and 2013 consist of amounts derived from our collaboration agreements with Otsuka.

Deferred Offering Costs

External costs we incurred directly attributable our public offering were deferred and recorded as noncurrent assets as of December 31, 2013, and were offset against the proceeds of the 2014 IPO.

Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have already been recognized in the financial statements or tax returns. Excess tax benefits associated with stock option exercises and other equity awards are credited to shareholders' equity. Deferred tax liabilities and assets are based on the difference between financial statement carrying amounts and the tax basis of assets and liabilities, operating loss, and tax credit carryforwards and are measured using enacted tax rates expected to be in effect in the years the differences or carryforwards are anticipated to be recovered or settled. A valuation allowance is established when we believe that it is more likely than not that benefits of the deferred tax assets will not be realized. The Company had no uncertain tax positions as of June 30, 2014 and December 31, 2013.

Note 3. Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments at June 30, 2014 and December 31, 2013 include all cash, money market funds, municipal bonds, corporate debt securities, commercial paper and certificates of deposit. We consider our investments as available-for-sale. Available-for-sale securities are stated at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Quoted prices in active markets for identical assets and 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, and

Level 3—Unobservable inputs in which there is little or no market data available, which requires us to develop our own assumptions.

We measure the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. We did not hold any cash, cash equivalents, or investments categorized as Level 3 as of June 30, 2014 or December 31, 2013.

Cash and cash equivalents and investments as of June 30, 2014 and December 31, 2013 consisted of the following (in thousands):

8

	June 30, 2014
	Amortized Cost		Gross Unrealized					Fair Value
			Holding Gains		Holding Losses
Cash	$	407	$	—	$	—		$	407
Level 1 Securities:
Money market funds	32,572		—		—			32,572
Level 2 Securities:
Commercial paper	37,687		14		(9		)	37,692
Corporate debt securities	85,269		1		(146		)	85,124
Municipal bonds	—		—		—			—
Certificates of deposit	21,507		3		(23		)	21,487
	$	177,442	$	18	$	(178	)	$	177,282

	December 31, 2013
	Amortized Cost		Gross Unrealized					Fair Value
			Holding Gains		Holding Losses
Cash	$	868	$	—	$	—		$	868
Level 1 Securities:
Money market funds	12,501		—		—			12,501
Level 2 Securities:
Commercial paper	1,099		1		—			1,100
Corporate debt securities	12,101		—		(4		)	12,097
Municipal bonds	625		—		—			625
Certificates of deposit	5,235		2		(9		)	5,228
	$	32,429	$	3	$	(13	)	$	32,419

As of June 30, 2014, $58.1 million of corporate debt securities and $5.1 million of certificates of deposit mature in greater than one year, but less than two years. All other investment securities held at June 30, 2014 mature within 12 months.

Unrealized losses as of June 30, 2014 are related to changes in interest rates and it is more likely than not that we will hold these securities until a recovery of the cost basis occurs. No investments have been in a loss position for more than 12 months.

Note 4. Commitments

Upon the closing of the IPO, $12,000,000 of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006 automatically converted into 3,636,365 shares of common stock, after an intermediate conversion into Series C preferred shares.

On June 26, 2014, the Company entered into a new sublease agreement for the lease of approximately 38,723 square feet of office space. The term of the lease commences on January 1, 2015 and, subject to the terms of the lease, will expire on either November 30, 2021 or February 22, 2022. Future minimum payments under the lease are approximately $1.0 million per year.

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company is not currently a party to any material legal proceedings, and to its knowledge none is threatened. There can be no assurance that future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

9

Note 5. Net Income (Loss) Per Share

Net income (loss) per share attributable to common shareholders is presented in conformity with the two-class method required for participating securities for periods in which we have net income. Prior to the IPO, all series of convertible preferred stock were considered to be participating securities, as the holders were entitled to participate in any dividends prior and in preference to dividends declared or paid on the common stock. Undistributed earnings allocated to these participating securities were subtracted from net income in determining net income (loss) attributable to common shareholders.

Immediately prior to the closing of our IPO, all outstanding shares of preferred stock were converted to common. We issued 9,200,000 shares of common stock in the IPO. In addition, 3,636,365 shares of common stock were issued upon the conversion of the contingently convertible debt held by a related party. As a result, as of June 30, 2014, common stock is our only outstanding class of capital stock.

Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares outstanding for the period. Diluted net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of the common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock include the exercise of outstanding stock options that are dilutive.

The following tables reconcile the numerator and denominator used to calculate diluted net income (loss) per share for the periods presented (in thousands):

	Three months ended June 30,					Six months ended June 30,
	2014		2013			2014		2013
Numerator:
Net income (loss) attributable to common shareholders	$	71	$	(20	)	$	125	$	994
Denominator:
Weighted average shares outstanding—basic	35,641		11,968			29,918		11,956
Dilutive effect of stock options and RSUs	226		—			281		359
Weighted average shares outstanding—diluted	35,867		11,968			30,199		12,315

For the three months ended June 30, 2013, 463,506 stock options were excluded from the calculation of diluted net income (loss) per share because the impact was anti-dilutive.

Note 6. Collaboration and License Agreements

During the six months ended June 30, 2013, we received and recognized as revenue the $5.0 million milestone payment associated with the initiation of the Phase 2b/3 clinical trial related to emixustat. No development or net sales milestones were achieved during the three months ended June 30, 2014 or 2013. During the three and six months ended June 30, 2014 and 2013, we recognized $9.1 million and $19.6 million, respectively, and $7.7 million and $19.6 million, respectively, of revenue in performance of under our agreement with Otsuka Pharmaceutical Co., Ltd., or Otsuka, regarding emixustat (referred to as the Emixustat Agreement).

Under the Emixustat Agreement, Otsuka will fund the Company's share of the Phase 2 and Phase 3 development costs in the form of a secured promissory note. The promissory note provides that (a) interest will accrue daily and be calculated on the basis of 360 days per year and be payable on all amounts advanced to us from the date of advance until paid in full; (b) unpaid interest will compound annually; and (c) the applicable interest rate will be adjusted quarterly to reflect the then-effective rate equal to the three-month London InterBank Offered Rate (“LIBOR”) in the “Money Rates” column of The Wall Street Journal as of the first business day of each calendar quarter, plus 3%; and (d) all amounts are payable in U.S. dollars. The agreement includes a security interest agreement that grants Otsuka a first priority interest on the Company's interests in net profits and royalty payments, and on the Company's interests in ownership of the related collaboration compounds and collaboration products and the underlying intellectual property rights, both in the Shared Territory and the Acucela Territory (as such terms are defined in the Emixustat Agreement).

The promissory note is repayable only in the event that proceeds are generated by any future product sales under the Emixustat Agreement or by the sale or license of collaboration compounds and collaboration products developed under the Emixustat Agreement outside North America and Otsuka’s sole territory. During the three and six months ended June 30, 2014

10

and 2013, we have recognized revenue of approximately $4.5 million and $9.6 million, respectively, and $3.9 million and $7.2 million, respectively, under the Emixustat Agreement, which is contingently repayable as described above. As of June 30, 2014, the contingently repayable funding has accrued $1.7 million of interest, which is contingently repayable along with the above. In addition, we have received $2.1 million in advances from Otsuka, which we have recorded as deferred revenue from collaborations in the accompanying balance sheets as of June 30, 2014.

During the three and six months ended June 30, 2014, we recognized no revenue and during the three and six months ended June 30, 2013, we recognized $3.0 million and $6.1 million, respectively, of revenue associated with rebamipide clinical development activities. The Rebamipide Agreement was terminated in September 2013. During the three and six months ended June 30, 2014, we recognized no revenue and during the three and six months ended June 30, 2013 we recognized $0.4 million and $1.3 million, respectively, of revenue associated with OPA-6566 for glaucoma clinical development activities.

Continued Involvement of the CEO

The Company’s collaboration arrangements with Otsuka require the continuing involvement of our CEO, Dr. Ryo Kubota. In the event of the departure of Dr. Kubota from the Company or a change in his role or responsibilities with the Company, the arrangements are subject to termination, at the option of Otsuka. For each agreement, this provision expires upon the approval of the NDA for the first indication in the United States.

Note 7. Strategic Restructuring

In October 2013, we announced a plan to reduce expenses, including a workforce reduction, as a result of the termination of the Rebamipide Agreement. The plan resulted in a reduction in force of approximately 35% of our total workforce, or approximately 30 employees, effective January 1, 2014. As a result of this workforce reduction, we recorded a $1.0 million charge in 2013 in general and administrative expense, related to severance, other termination benefits, and outplacement services. The cash outlays related to this charge primarily took place in the first six months of 2014 and activities are complete as of June 30, 2014. The following table summarizes the utilization of the restructuring liability (in thousands):

	Severance and Other Termination Benefits
Balance, December 31, 2013	$	966
Cash payments	(808		)
Adjustments	(8		)
Balance, March 31, 2014	$	150
Cash payments	(150		)
Balance, June 30, 2014	$	—

Note 8. Shareholders’ Equity

Common Stock

Our certificate of incorporation, as amended and restated, authorizes us to issue 100,000,000 shares of common stock without par value.

In February 2014, upon the closing of our IPO, all shares of our outstanding convertible preferred stock automatically converted into 10,813,867 shares of common stock. We issued 9,200,000 shares of common stock for aggregate proceeds of $142.0 million from the IPO, net of underwriters’ discounts and commissions, and offering expenses. In addition, upon the closing of the IPO, $12,000,000 of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006 automatically converted into 3,636,365 shares of common stock, after an intermediate conversion into Series C preferred shares. The number of shares issued upon conversion was determined by dividing the principal of the note by $3.30.

Changes in Accumulated Other Comprehensive Loss (in thousands):

11

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Beginning balance	$	(115	)	$	(2	)	$	(7	)	$	—
Current period other comprehensive income (loss), net of tax	10			(10		)	(98		)	(12		)
Ending balance	$	(105	)	$	(12	)	$	(105	)	$	(12	)

The changes in accumulated other comprehensive loss relate to unrealized holding gains and losses in available-for-sale securities.

Note 9. Related-Party Transactions

Peter Kresel, M.B.A., a member of the Board, received payment from us for consulting services and reimbursement of direct expenses. Mr. Kresel’s payments for consulting services and expense reimbursements were $0 and $30,000 during the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, Mr. Kresel's payments for consulting services and expense reimbursements were $72,400 and $108,400, respectively.

SBI Holdings, Inc. (a related party), one of our shareholders, was the holder for our contingently convertible debt. In connection with our IPO, the contingently convertible debt automatically converted into 3,636,365 shares of common stock (see Note 8).

Note 10. Income Taxes

Effective tax rates were 73% and 75% in the three and six months ended June 30, 2014, respectively, and 31% and 35% for the three and six months ended June 30, 2013, respectively. The difference between the U.S. federal statutory rate of 34% and our effective tax rate in 2014 was due primarily to permanent differences in book and tax earnings for stock options, meals and entertainment, and other miscellaneous items. In 2013, there were no individual items representing a greater than 5% impact on the effective tax rate.

Note 11. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. This ASU amends the existing accounting standards for revenue recognition. Under the new revenue recognition model, a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The amendment may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating the transition alternatives and impact on the Company's financial statements.

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

Special Note Regarding Forward-Looking Statements

This Report, including the “Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are based on our current expectations, estimates, forecasts, and projections about our business, our results of operations, the industry in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “would,” “could,” “intends,” “plans,” “believes,” “seeks” and “estimates,” variations of these words, and similar expressions are intended to identify those forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” in Item 1A of Part I and elsewhere herein, and in other reports we file with the SEC. While forward-looking statements are based

12

on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, whether as a result of new information, future events or otherwise, except as may be required by law.

Overview

We are a clinical-stage biotechnology company that specializes in discovering and developing novel therapeutics to treat and slow the progression of sight-threatening ophthalmic diseases impacting millions of individuals worldwide. We focus on developing oral products based on our proprietary visual cycle modulation, or VCM, compounds to address a variety of retinal diseases, primarily age-related macular degeneration, or AMD, diabetic retinopathy, or DR, and diabetic macular edema, or DME, and potentially Stargardt disease, retinitis pigmentosa and retinopathy of prematurity. Our product candidates are designed to address the root cause of these diseases by reducing toxic by-products and oxidative damage as well as protecting the retina from light damage.

Our pipeline includes a clinical program in emixustat hydrochloride for AMD, which is currently in Phase 2b/3 as an oral therapy. In connection with our agreement, which we refer to as the Emixustat Agreement, our co-development partner, Otsuka Pharmaceutical Co. Ltd, or Otsuka, a global pharmaceutical company based in Japan, paid us a $5.0 million initial license fee and agreed, among other things, to fund up to $40.0 million of all development costs and provide us with a three-year $15.0 million cooperative research program relating to emixustat’s other potential indications and its backup compounds. Otsuka fulfilled its $40.0 million development funding commitment and its $15.0 million three-year cooperative research program commitment in 2011. Beginning in 2011, we have been sharing the development costs under the agreement, with Otsuka funding our share of these development costs, which are repayable from our share of the profits, if any, or sale or licensing proceeds, if any, from the commercialization of emixustat. We recognize revenue related to the receipt of the Otsuka funding as it is earned and, during the three and six months ended June 30, 2014 and 2013, have recognized revenue of approximately $4.5 million and $9.6 million, respectively, and $3.9 million and $7.2 million, respectively, under this arrangement. As of June 30, 2014, $1.7 million of accrued interest was contingently repayable under the arrangement. The Emixustat Agreement also provides for royalty payments between the parties, profit-and-loss sharing under certain conditions and the opportunity for us to earn up to $257.5 million in milestone payments from Otsuka based on the achievement of various development, regulatory and sales objectives. In the first quarter of 2013, we earned a $5.0 million milestone payment under this agreement related to the initiation of the Phase 2b/3 trial in the United States.

In addition, in 2012, we conducted Phase 1/2 clinical trials in the United States for OPA-6566, an adenosine A2a receptor agonist for the treatment of glaucoma, and we and our co-development partner, Otsuka, are currently evaluating next steps for the program.

In September 2013, Otsuka elected to terminate our agreement (the "Rebamipide Agreement") to co-develop rebamipide ophthalmic suspension, or rebamipide, due to the fact that the primary endpoints were not met in our Phase 3 clinical trial in the United States. The associated clinical trials were suspended and our development activities halted.

Our strategy is to continue to collaborate with Otsuka to successfully develop our product candidates; to educate the ophthalmic community on the benefits of VCM-based therapies by expanding our intellectual property portfolio, through the successful approval of our products in development, and the commercial launch of our products following approval; to continue to expand our ophthalmic product pipeline through internal research and additional partnering opportunities; and to drive the commercialization and development of our product candidates.

On May 8, 2014, we announced an update on our emixustat hydrochloride clinical development program. At our request, we held a formal meeting with the U.S. Food and Drug Administration (FDA) to discuss the ongoing Phase 2b/3 Safety and Efficacy Assessment Treatment Trials of Emixustat Hydrochloride, or "SEATTLE" study, in patients with geographic atrophy (GA) associated with dry AMD. The SEATTLE study of emixustat hydrochloride is designed as a Phase 2b/3 multicenter, randomized, double-masked, dose-ranging study comparing the efficacy and safety of emixustat hydrochloride with placebo for the treatment of GA associated with dry AMD. The study is ongoing as planned and achieved 100% patient enrollment in March 2014. Top-line 24-month clinical trial results are anticipated in mid-2016. Based on recommendations of the FDA, we intend to continue the SEATTLE study through the original 24-month treatment duration without access to interim results and, depending on the results of the SEATTLE study, conduct at least one additional confirmatory Phase 3 clinical trial in patients with GA associated with dry AMD. The FDA's recommendations are not based on any data reviews related to the emixustat program.

Strategic Restructuring

13

In October 2013, we announced a plan to reduce expenses, including a workforce reduction, as a result of the termination of the Rebamipide Agreement. The plan resulted in a reduction in force of approximately 35% of our total workforce, or approximately 30 employees, effective January 1, 2014.

As a result of this workforce reduction, we recorded a charge of $1.0 million related to severance, other termination benefits, and outplacement services, cumulative through the six months ending June 30, 2014. The cash outlays related to this charge primarily took place in the first six months of 2014 and activities are complete as of June 30, 2014.

Description of Operating Accounts

Revenue to date has been generated primarily by our research and development activities based on the collaboration and license agreements with Otsuka. Our revenue primarily consists of reimbursement from Otsuka for our fees paid to external service providers in connection with the collaboration agreements, Otsuka’s funding of our portion of development costs under the Emixustat Agreement, payment from Otsuka for our development services provided by our personnel, for services rendered as part of our collaborative research program, an initial license fee as part of the Emixustat Agreement, and milestone payments. We expect any revenue we generate will fluctuate from quarter to quarter as a result of the nature and timing of the compounds under development.

Research and development expenses incurred to date have substantially focused on developing therapies for sight-threatening diseases. Since entering into our collaboration agreements with Otsuka, our efforts have been principally directed towards fulfilling our commitments thereunder. We recognize research and development expenses as they are incurred and these costs primarily consist of fees paid to consultants, contract research organizations, independent monitors of our clinical trials, and parties acquiring and evaluating data in conjunction with our clinical trials, including all related fees such as investigator grants, patient screening, lab work and data compilation and statistical analysis; costs related to production of clinical materials, including fees paid to contract manufacturers; costs related to compliance with FDA regulatory requirements; consulting fees paid to third parties involved in research and development activities; compensation and related expenses for personnel in research and development functions; and an allocated portion of certain general and administrative costs. We expect our research and development expenses to increase in absolute dollars as we continue to develop our product candidates and as we continue with our discovery research activities.

General and administrative expenses consist primarily of compensation for employees in executive and administrative functions, including finance, accounting, and human resources. Other significant costs include facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We expect other general and administrative expenses to increase in absolute dollars as we incur additional costs related to the growth of our business, including our intellectual property portfolio, and as we assume the reporting requirements and compliance obligations of a public company.

Interest income consists primarily of interest earned on our cash, cash equivalents and short-term and long-term investments.

Interest expense consists primarily of interest expense incurred on our contingently convertible debt.

Other income (expense) consists primarily of foreign exchange gains/losses incurred on transactions occurring in Japan, gain or losses from the disposal of fixed assets or other miscellaneous items.

Income tax (expense) benefit consists primarily of taxes incurred on income, partially offset by the utilization of our carryforwards including our NOL or R&D tax credit, less taxes incurred on income.

Results of Operations

The following tables set forth our results of operations for the periods presented as a percentage of our total revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. Percentage variances have been omitted where they are not meaningful.

14

	Three months ended June 30,				2013 to 2014 % Change		Six months ended June 30,				2013 to 2014 % Change
	2014		2013				2014		2013
Revenue from collaborations	100.0	%	100.0	%	(17.6	)%	100.0	%	100.0	%	(27.3	)%
Expenses:
Research and development	71.5	%	71.2	%	(17.1	)%	73.7	%	59.2	%	(9.4	)%
General and administrative	27.3	%	29.5	%	(23.8	)%	24.7	%	19.9	%	(10.1	)%
Total expenses	98.9	%	100.7	%	(19.1	)%	98.4	%	79.1	%	(9.6	)%
Income (loss) from operations	1.1	%	(0.7	)%	1.5	%	1.6	%	20.9	%	(94.3	)%
Interest income	1.3	%	—	%	NA		0.8	%	0.1	%	720.0	%
Interest expense	—	%	(0.3	)%	(96.7	)%	(0.1	)%	(0.2	)%	(76.7	)%
Other income, net	0.4	%	0.7	%	(48.7	)%	0.2	%	0.3	%	(51.4	)%
Total other income, net	1.7	%	0.4	%	229.2	%	0.9	%	0.1	%	478.1	%
Income (loss) before income tax	2.9	%	(0.3	)%	NA		2.6	%	21.0	%	(91.1	)%
Income tax (expense) benefit	(2.1	)%	0.1	%	NA		(1.9	)%	(7.3	)%	(80.9	)%
Net income (loss)	0.8	%	(0.2	)%	455.0	%	0.6	%	13.7	%	(96.6	)%

Comparison of Three and Six Months Ended June 30, 2014 to Three and Six Months Ended June 30, 2013

Revenue from collaborations. Revenue from collaborations totaled approximately $9.1 million and $19.6 million in the three and six months ended June 30, 2014, representing a decrease of approximately $1.9 million and $7.4 million, or 17.6% and 27.3%, respectively, as compared to the prior year. We incurred a $3.0 million and a $6.1 milliondecrease in revenue under the Rebamipide Agreement in the three and six months ended June 30, 2014, respectively, due to termination of the Rebamipide Agreement in September 2013, as well as a $0.4 million and $1.3 milliondecrease in revenue related to the completion of the Phase 1/2 study for OPA-6566. These decreases were partially offset by increased activity under our Emixustat Agreement associated with the Phase 2b/3 clinical trial during 2014. Revenue under the Emixustat Agreement increased $1.2 million in the three months ended June 30, 2014. Although there was increased activity under the Emixustat Agreement, there was a net $0.4 milliondecrease in current year-to-date revenue related to emixustat due to the receipt in the prior year six-month period of a $5.0 million milestone payment associated with the initiation of the Phase 2b/3 clinical trial.

In addition to the foregoing presentation, we also prepare financial information related to clinical programs for various purposes. Our clinical programs consist of the following categories: Proprietary, which includes emixustat (program under the Emixustat Agreement); and In-Licensed, which includes rebamipide (program under the terminated Rebamipide Agreement) and OPA-6566 (program under the Glaucoma Agreement).

The following table presents revenue for clinical programs (in thousands, except percentages):

	Three months ended June 30,				2013 to 2014 $ Change			2013 to 2014 % Change		Six months ended June 30,				2013 to 2014 $ Change			2013 to 2014 % Change
	2014		2013							2014		2013
Proprietary	$	9,084	$	7,713	$	1,371		17.8	%	$	19,622	$	19,628	$	(6	)	—	%
In-Licensed(1)	2		3,310		(3,308		)	(99.9	)%	10		7,375		(7,365		)	(99.9	)%
Total	$	9,086	$	11,023	$	(1,937	)	(17.6	)%	$	19,632	$	27,003	$	(7,371	)	(27.3	)%

(1) For the three and six months ended June 30, 2014 and 2013, the majority of In-Licensed revenue was attributable to the Rebamipide Agreement.

Proprietary. Revenue from clinical programs under the Emixustat Agreement increased by $1.4 million for the three months ended June 30, 2014, or 17.8%, as compared to the prior year, due to increased activity associated with the Phase 2b/3 clinical trial during 2014. Revenues from clinical programs under the Emixustat Agreement remained consistent for the six months ended June 30, 2014, as compared to the prior year, since the receipt of a milestone payment of $5.0 million associated with the initiation of the Phase 2b/3 clinical trial in the prior year period was offset by increased activity under our Emixustat Agreement associated with the clinical trial in the current year period.

15

In-Licensed. Revenue from In-Licensed clinical programs decreased by $3.3 million and $7.4 million for the three and six months ended June 30, 2014, or 99.9% and 99.9%, respectively, as compared to the prior year. The decrease was due to termination of the Rebamipide Agreement in September 2013. In September 2013, Otsuka terminated the Rebamipide Agreement for the reason that the primary end points were not met in the Phase 3 clinical trial. Accordingly, for the foreseeable future, we expect that our revenue from In-Licensed clinical programs will be materially lower than 2013 levels as a result of the termination of this agreement.

Research and development expense.Research and development expense for the three and six months ended June 30, 2014 totaled approximately $6.5 million and $14.5 million, respectively, representing a decrease of approximately 17.1% and 9.4%, respectively, as compared to the prior year. The overall decrease in research and development expense compared to the prior year period was due to a $1.0 million decrease in expenses related to clinical programs under the Glaucoma Agreement compared to the prior year period due to the completion of the Phase 1/2 study for OPA-6566, and a decrease of $3.7 million compared to the prior year period due to the termination of the Rebamipide Agreement in September 2013. The decrease was partially offset by a $3.9 million increase in expenses associated with emixustat due to the initiation and conduct of the Phase 2b/3 clinical trial. The expenses related to internal research decreased $0.7 million primarily due to our strategic restructuring.

In addition to the foregoing presentation, we also prepare financial information related to our clinical programs and internal research program for various purposes. Our clinical programs consist of the following categories: Proprietary, which includes emixustat (program under the Emixustat Agreement); In-Licensed, which includes rebamipide (program under the recently terminated Rebamipide Agreement) and OPA-6566 (program under the Glaucoma Agreement); and Internal Research, which consists of costs and expenses associated with our discovery research activities related primarily to our VCM compounds.

The following table presents our research and development expenses for clinical programs and internal research programs (in thousands, except percentages):

	Three months ended June 30,				2013 to 2014 $ Change			2013 to 2014 % Change		Six months ended June 30,				2013 to 2014 $ Change			2013 to 2014 % Change
	2014		2013							2014		2013
Proprietary	$	6,263	$	5,329	$	934		17.5	%	$	13,943	$	10,019	$	3,924		39.2	%
In-Licensed(1)	—		1,938		(1,938		)	(100.0	)%	22		4,715		(4,693		)	(99.5	)%
Internal Research	238		578		(340		)	(58.8	)%	506		1,239		(733		)	(59.2	)%
Total	$	6,501	$	7,845	$	(1,344	)	(17.1	)%	$	14,471	$	15,973	$	(1,502	)	(9.4	)%

(1) For the three and six months ended June 30, 2014 and 2013, respectively, the majority of In-Licensed expenses were attributable to the Rebamipide Agreement.

Proprietary. Research and development expense related to clinical programs under the Emixustat Agreement increased$0.9 million and $3.9 million for the three and six months ended June 30, 2014, respectively, or 17.5% and 39.2%, respectively, as compared to the prior year. The increase was due primarily to development activity associated with the initiation and conduct of the Phase 2b/3 study for emixustat.

In-Licensed. Research and development expense related to In-Licensed clinical programs decreased$1.9 million and $4.7 million in the three and six months ended June 30, 2014, respectively, or 100.0% and 99.5%, respectively, as compared to the prior year, due to the termination of the Rebamipide Agreement in September 2013.

Internal Research. Research and development expense under our discovery research activities for the three and six months ended June 30, 2014decreased$0.3 million and $0.7 million due to our strategic restructuring in January 2014.

General and administrative expense. General and administrative expenses for the three and six months ended June 30, 2014 totaled approximately $2.5 million and $4.8 million, respectively, representing a decrease of approximately 23.8% and 10.1%, respectively, as compared to the prior year. The decrease was due primarily to $0.8 million in prior year expense related to stock and related compensation granted to our CEO pursuant to his pre-IPO employment agreement, and to a lesser extent on our cost-saving efforts and restructuring.

Income tax (expense) benefit. Income tax expense for the three and six months ended June 30, 2014 totaled approximately $0.2 million and $0.4 million, respectively. Income tax expense was approximately $0.0 million and $2.0 million for the three and six months ended June 30, 2013, respectively. This represented effective tax rates of 73% and 75% for the three and six months ended June 30, 2014, respectively, and 31% and 35% for the three and six months ended June 30, 2013, respectively. The difference between the U.S. federal statutory rate of 34% and our effective tax rates in 2014 was due primarily to

16

permanent differences in book and tax earnings for stock options, meals and entertainment, and other miscellaneous items. In 2013, there were no individual items representing a greater than 5% impact on the effective tax rate.

Liquidity and Capital Resources

Prior to our IPO, we funded our operations primarily from the issuance of convertible preferred stock and contingently convertible debt and, since 2009, from cash generated from operations. Our need for cash has been limited due to Otsuka’s funding of development activities and our receipt of milestone payments from Otsuka. On February 13, 2014, upon the closing of our IPO, we issued and sold 9,200,000 shares of common stock at approximately $17.72 per share and received net proceeds of $142.0 million (after underwriting discounts and commissions and offering costs). As a result of the IPO, all preferred stock and contingently convertible debt converted to common stock.

As of June 30, 2014 and December 31, 2013, we had cash, cash equivalents and investments of $177.3 million and $32.4 million, respectively. Cash and cash equivalents include all short-term, highly liquid investments with an original maturity of three months or less at the date of purchase. Cash equivalents consist of money market funds, municipal bonds, and corporate debt securities. Short-term investments as of June 30, 2014 and December 31, 2013 were comprised of corporate debt securities, commercial paper, and certificates of deposit. Investments with maturities between three months and one year at the date of purchase are classified as short-term investments. Amounts on deposit with third-party financial institutions may exceed the applicable Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable.

The following table shows a summary of our cash flows for the six months ended June 30, 2014 and 2013 (in thousands):

	Six months ended June 30,
	2014			2013
Cash flows provided by (used in) operating activities	$	(2,265	)	$	921
Cash flows used in investing activities	(126,411		)	(6,934		)
Cash flows provided by (used in) financing activities	147,661			(1,504		)

Cash Flows From Operating Activities

Operating activities used $2.3 million and generated $0.9 million of cash and cash equivalents for the six months ended June 30, 2014 and 2013, respectively. In 2014, cash outflow was primarily the result of increases in accounts receivable of $1.6 million due to amounts earned but not yet paid, a $2.4 million decrease in accrued compensation primarily related to payments of accrued bonuses, and decreases in accrued liabilities of $1.5 million, partially offset by an increase in deferred revenue from collaborations of $2.1 million. In 2013, cash inflow was the result of $3.7 million of net income, $1.6 million increase in accrued liabilities, and $1.3 million decrease in deferred taxes, offset by a $6.1 million increase in accounts receivable.

Cash Flows From Investing Activities

Net cash used in investing activities in the six months ended June 30, 2014 and 2013 was $126.4 million and $6.9 million, respectively. These changes were primarily the result of net purchases of marketable securities.

Cash Flows From Financing Activities

Net cash provided by financing activities in the six months ended June 30, 2014 was $147.7 million and net cash used in financing activities in the six months ended June 30, 2013 was $1.5 million, respectively. In 2014, cash inflow consisted of net proceeds from our IPO. In 2013, the changes were primarily the result of deferred costs associated with our IPO.

Due to the inherent uncertainty of product development, it is difficult to accurately estimate the cash needed to complete development of our product candidates. However, we expect these costs to continue to be funded by Otsuka pursuant to our development agreements.

We believe that cash from operations and our existing cash and investment balances will be sufficient to fund our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our research and development activities, the timing and extent of our elections to co-promote product candidates under our collaboration agreements with Otsuka, and the timing of achievement of milestones under our collaboration agreements with

17

Otsuka. Although we are not currently a party to any agreement or letter of intent regarding potential investments in, or acquisitions of, complementary businesses, applications or technologies, we may enter into these types of arrangements, which could require us to seek additional equity or debt financing.

Contractual Obligations and Commitments

Upon the closing of the IPO, $12,000,000 of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006 automatically converted into 3,636,365 shares of common stock, after an intermediate conversion into Series C preferred shares.

On June 26, 2014, we entered into a new sublease agreement for the lease of approximately 38,723 square feet of office space. The term of the lease commences on January 1, 2015 and, subject to the terms of the lease, will expire on either November 30, 2021 or February 22, 2022. Future minimum payments under the lease are approximately $1.0 million per year.

Co-Development and Co-Promotion Options

The Emixustat Agreement provides us the right to co-promote with Otsuka in countries within our shared territory of North America. If we elect to co-promote, we will be responsible for a specified portion, ranging from 25% to 50%, of certain obligations in accordance with the agreement. The Glaucoma Agreement provides us the right to co-develop and co-promote OPA-6566. If we elect to co-develop and co-promote OPA-6566, we are obligated to pay an opt-in fee ranging from $10 million to $55 million depending on the timing and participation level of co-development and co-promotion.

We currently intend to exercise our co-promotion rights with respect to emixustat. We are unable to estimate with certainty the timing or future costs we will incur if we exercise our co-promotion option. The Glaucoma Agreement also provides for potential milestone payments to Otsuka of up to $75 million, based upon various clinical and sales objectives for the treatment of glaucoma.

Contingently Repayable Advances

Under the Emixustat Agreement, Otsuka will advance funds to us, which are secured by our interest in net profits and royalty payments and in our entire interests in ownership of the related emixustat compound and its backup compounds, certain pharmaceutical formulations developed under the Emixustat Agreement that contain one of those compounds, and the underlying intellectual property rights. Amounts may be advanced under this arrangement only to fund our share of development costs under the Emixustat Agreement. Any advances bear interest at the three month LIBOR rate plus three percent. These advances are exclusively payable out of:

• 50% of either our share of net profits, as described in the Emixustat Agreement, generated from collaboration product sales in North America or, if applicable, 50% of the royalty payable to us for those sales;

• 50% of the net profits, as described in the Emixustat Agreement, we generate from collaboration product sales outside North America and Otsuka’s sole territory; and

• 50% of the consideration, as described in the Emixustat Agreement, we receive from the sale or license of collaboration compounds and collaboration products developed under the agreement outside North America and Otsuka’s sole territory.

The percentages above will increase to 75% if we have not repaid the advances within five years of the first commercial sale of a product based on emixustat in North America. There are no financial covenant requirements under our arrangement with Otsuka. There were outstanding advances, including accrued interest, of $45.8 million and $32.9 million under this arrangement as of June 30, 2014 and December 31, 2013, respectively.

18

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk and credit quality risk. As of June 30, 2014, we are exposed to market risk related to changes in interest rates and credit quality risk on our cash and cash equivalents, which had a balance of $33.0 million, and our short-term investments, which had a balance of $81.1 million, and our long-term investments which had a balance of $63.2 million. As of June 30, 2014, all of the debt securities we held were fixed-rate earning instruments that carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. As of June 30, 2014, our cash and cash equivalents and short-term investments were primarily held in money market funds, commercial paper, corporate debt securities, and certificates of deposit, and our long-term investments were primarily held in corporate debt securities and certificates of deposit. We consider the interest rate risk for our cash equivalents and marketable securities held at June 30, 2014 to be low. For further detail on our cash, cash equivalents, and investment holdings, see Note 3, "Cash, Cash Equivalents and Investments" in Part I, Item 1 of this quarterly report. Our investment policy is designed to minimize the risks related to credit quality through restricting investments to those with high credit ratings. We do not hold or issue financial instruments for trading purposes.

Item 4.    Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report, or the “Evaluation Date”. In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

19

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material legal proceedings, and to our knowledge none is threatened. There can be no assurance that future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A.    Risk Factors

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all other information contained in this quarterly report on Form 10-Q, including our consolidated financial statements and the related notes, before making a decision to invest in our common stock. Our business, operating results, financial condition or prospects could be materially and adversely affected by any of these risks and uncertainties. In that case, the trading price of our common stock could decline and you might lose all or part of your investment. In addition, the risks and uncertainties discussed below are not the only ones we face. Our business, operating results, financial performance or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. In assessing the risks and uncertainties described below, you should also refer to the other information contained in this Form 10-Q before making a decision to invest in our common stock.

Risks Related to Our Business and Industry

We do not have any products that are approved for commercial sale.

To date, we have not generated any product revenue and have funded our operations through private sales of our equity and debt securities and from our various collaboration agreements with Otsuka, primarily the co-development and collaboration agreement relating to the development and commercialization of emixustat which we refer to as the Emixustat Agreement. We will not receive revenues from sales of our product candidates unless we succeed, either independently or with third parties, in developing and obtaining regulatory approval and marketing drugs with commercial potential. We may never succeed in these activities, and may not generate sufficient revenues to continue our business operations.

Revenues from research and development activities in collaboration with Otsuka and Otsuka’s funding of our portion of development costs under the Emixustat Agreement represented all of our revenues during the three and six months ended June 30, 2014 and 2013, and the loss of these revenues would adversely affect our business.

Revenues from research and development activities under our collaboration agreements with Otsuka have been our only source of revenues in 2014 and 2013 and we expect they will continue to have a significant impact on our results of operations in future years. As explained further below, Otsuka recently terminated a co-development agreement with us under which we derived significant revenues from in-licensed clinical programs in 2013. It would be difficult to replace Otsuka as a collaboration partner, and the revenues derived from research and development activities on behalf of Otsuka and Otsuka’s funding of our portion of development costs under the Emixustat Agreement. Accordingly, the loss of Otsuka as a collaboration partner or revenues from other programs would have a material adverse effect on our business. In addition, any publicity associated with the loss of Otsuka as a collaboration partner could harm our reputation. This, as well as our obligation to repay development expenses funded by Otsuka if we succeed in commercializing emixustat independently of Otsuka, may make it more difficult to attract and retain other collaboration partners, and could lessen our negotiating power with prospective collaboration partners. Otsuka can terminate its collaboration agreements with us on relatively short notice in various circumstances, such as our material breach or insolvency, Dr. Kubota no longer serving as our chief executive officer, changes in control of us or, in the case of the Emixustat Agreement, a decision by Otsuka to discontinue funding development costs after considering the results of a Phase 2 or Phase 3 clinical trial, and also for any reason upon six months’ prior notice. For more information regarding the termination rights under each of our collaboration agreements with Otsuka, see “Business—Collaborations with Otsuka” in Part I, Item 1 of our 2013 Annual Report on Form 10-K.

In addition, Otsuka’s interests may differ from ours in relation to development of our product candidates due to changes in management, priorities or its strategic focus. For example, in September 2013, Otsuka terminated its agreement with us to co-develop rebamipide for the treatment of dry eye syndrome in the United States due to the fact that the primary endpoints were not met in the Phase 3 clinical trial in the United States. As a result, the associated clinical trials were suspended and our development activities halted. Losing the support and focus of Otsuka would adversely affect the development and commercialization of our product candidates. Our revenues and operating results would suffer and we may

20

need to curtail or cease operations if, among other things, Otsuka terminates its other collaboration agreements with us or otherwise fails to fund development costs or continue to develop our other product candidates.

Our long-term prospects are dependent on our product candidates and we cannot be certain that they will achieve success in clinical trials, regulatory approval or be successfully commercialized.

We have two primary product candidates in development for ophthalmic indications and have invested a significant portion of our time and financial resources in the development of emixustat, the lead product candidate emerging from our internally-developed VCM compounds. VCM is an emerging technology and its long-term effect is unknown, and thus, there can be no assurance that our product candidates will achieve regulatory approval. Clinical development is a long, expensive and uncertain process and subject to delays or additional requirements. For instance, based on guidance from the FDA in April 2014, we now expect to conduct at least one additional confirmatory Phase 3 clinical trial in patients with GA associated with dry AMD after we complete our current 24-month emixustat study. We may also encounter delays or rejections based on our inability to enroll enough patients to complete our clinical trials in a timely manner. It may take several years and require the expenditure of substantial resources to complete the testing of a product candidate, and failure can occur at any stage of testing. For example:

• interim results of clinical or non-clinical studies may not necessarily predict their final results, and acceptable results in early studies might not be seen in later studies, in large part because earlier phases of studies are often conducted in smaller groups of patients than later studies, and without the same trial design features, such as randomized controls and long-term patient follow-up and analysis;

• product candidates that appear promising at early stages of development may ultimately fail for a number of reasons, including the possibility that the product candidates may be ineffective, less effective than products or product candidates of our competitors or cause harmful side effects;

• any clinical or non-clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities;

• clinical and non-clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval;

• negative or inconclusive results from a non-clinical study or clinical trial or adverse medical events during a clinical trial could cause a non-clinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful;

• the FDA can place a clinical hold on a trial if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury;

• we may encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a drug or the period required for review of any application for regulatory agency approval; and

• our clinical trials may not demonstrate the safety and efficacy of any product candidates or result in marketable products.

Even if clinical trials and testing are successful in the future, we believe the process of completing clinical trials and submitting NDAs to the FDA for approval will take several years and require the expenditure of substantial resources. If we are required to conduct additional clinical trials or other studies of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other studies or if the results of these trials or studies are not positive or are only modestly positive, we may be delayed or unsuccessful in obtaining marketing approval for our product candidates. Additionally, we may not be able to obtain marketing approval or we may obtain approval for indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize products.

Even if clinical trials are successful in the future, our growth prospects could be adversely affected and we may need to curtail or cease operations if we do not pursue the optimal commercialization strategy for us under our collaboration agreements.

As a part of our collaboration strategy, we seek to retain an option to choose either to obtain commercialization rights once our product candidates reach a later stage of development or to receive royalties from future product sales. Under our collaboration agreements with Otsuka, we have exclusive co-promotion rights in certain regions of the world. If we choose to not exercise these rights, we would be entitled to receive royalties on net sales of emixustat and we would not be entitled to any royalties or other payments based on the commercialization of OPA-6566. In general, we must make the decision to exercise these rights before the completion of clinical trials, based on our prediction of future sales and costs and other

21

information. It is possible that the commercialization strategy we choose to pursue will ultimately be less beneficial to us than the other commercialization strategies available to us, which could harm our prospects for growth and could cause us to curtail or cease operations. We may choose a commercialization strategy that results in a less optimal outcome for a variety of reasons, including our failure to accurately predict future sales and costs or our inability to pay the exercise fees and milestone payments.

Our decision to license emixustat to Otsuka means that we no longer have complete control over how emixustat is developed and commercialized and how it may be perceived in the marketplace, and we may lose an even greater degree of control over how it is commercialized if we fail to make our co-promotion election under the terms of the Emixustat Agreement. In addition, unless and until we exercise co-promotion rights with respect to OPA-6566, we will have limited or no control over how the product candidate is developed and commercialized. Even if we exercise commercialization rights for these product candidates, we will depend, in part, on the efforts of Otsuka to commercialize our product candidates and will not have control over a number of key elements relating to the commercialization of these product candidates. Otsuka may fail to effectively commercialize our product candidates for a variety of reasons, including because it may not regard our programs as significant for its own businesses, because it does have sufficient resources or decides not to devote necessary resources.

The pharmaceutical market is intensely competitive. Even if we are successful in obtaining approval of any of our product candidates, we may be unable to compete effectively with existing drugs, new treatment methods and new technologies.

The pharmaceutical market is intensely competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel therapies for the same indications that we are targeting or expect to target.

If emixustat is approved for DR/DME, we anticipate that it would compete with Genentech’s Lucentis, which currently is the only FDA-approved treatment for DR/DME. Many drugs and other therapies have been approved for the treatment of glaucoma and would compete with OPA-6566 if it is approved. We are also aware of a number of new drugs and other therapies under development for the treatment of AMD (including dry AMD), DR/DME and glaucoma, including several for each of these disease categories by some of the largest pharmaceutical companies.

Many of our competitors have:

• much greater financial, technical and human resources than we have at every stage of discovery, development, manufacture and commercialization of products;

• more extensive experience in non-clinical testing, conducting clinical trials, obtaining regulatory approvals, manufacturing and marketing pharmaceutical products;

• product candidates that are based on previously tested or accepted technologies;

• products that have been approved or are in late stages of development; and

• collaboration arrangements in our target markets with leading companies and research institutions.

Our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing drugs for the same indications before we do. Any competing drugs may be more effective or marketed and sold more effectively than any products we develop. Moreover, physicians frequently prescribe therapies for uses that are not described in the product’s labeling and that differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries. These unapproved, or “off-label,” uses are common across medical specialties and may represent a potential source of competition to our product candidates. Competitive therapies, including surgical procedures and medical devices, may make any drug products we develop obsolete or noncompetitive before we can recover the expenses of developing and commercializing them.

Market acceptance of emixustat and other products we develop in the future may be limited.

The commercial success of the products for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community and third-party payors as clinically useful, cost-effective and safe. Even if a potential product displays a favorable efficacy and safety profile in clinical trials, market acceptance of the product will not be known until after it is commercially launched. We expect that many of the products we develop will be based upon mechanisms new to the market. For example, emixustat is a small-molecule compound within the phenylalkylamine chemical family. To date, no such small-molecule compound has been approved as a pharmaceutical by the FDA. As a result, it may be more difficult for us to achieve market acceptance of our products, particularly the first products that we introduce to the market. Our efforts to educate the medical community about these potentially novel approaches may require greater resources than would be typically required for products based on previously tested or accepted technologies.

22

Our historical results of operations may not be indicative of our future profitability or growth, and we may not be able to continue to maintain or increase our profitability or growth.

As of June 30, 2014, we had an accumulated deficit of $3.3 million, which was attributable to net losses incurred from our inception in 2002 through the end of 2008 when we entered into our first two collaboration agreements with Otsuka. Since September 2008, revenues from research and development activities under our collaboration agreements with Otsuka have been our only source of revenues. In the second half of 2011, Otsuka began funding our portion of the development costs under the Emixustat Agreement and we record these advances as revenues in our financial statements. We are contingently obligated to repay these advances, plus interest, with a portion of any revenues we generate, if any, from the commercialization of products under the Emixustat Agreement in future periods. For a detailed discussion of our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In future periods, we may not succeed in maintaining recently achieved profitability and could incur additional losses. We expect to incur significant additional operating expenses associated with being a public company. We also expect that our operating expenses will continue to increase in all areas as we seek to grow our business. If revenue does not increase, our operating results will be negatively affected. You should not consider our recent growth rates of revenue and net income as indicative of our future growth.

Our operating results may fluctuate in the future, which could cause our stock price to decline.

Our quarterly and annual results of operations may fluctuate in the future due to a variety of factors, many of which are outside of our control. The revenues we generate, if any, and our operating results will be affected by numerous factors, including, but not limited to:

• the development status of our product candidates and, particularly, the timing of any milestone payments to be paid or received by us under our collaboration agreements;

• the incurrence of clinical expenses that could fluctuate significantly from period to period;

• the unpredictable effects of collaborations during these periods;

• the timing of our satisfaction of applicable regulatory requirements;

• the rate of expansion of our clinical development and other internal development efforts;

• the effect of competing technologies and products and market developments; and

• general and industry-specific economic conditions.

If our operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any fluctuations in our operating results and cash flows may, in turn, cause the price of our stock to fluctuate substantially. We believe that comparisons of our historical financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

Our planned investment in building a sales and marketing capability will require significant resources and may not generate the return we anticipate.

In order to exploit our commercialization opportunities under our agreements with Otsuka and as part of our long-term strategy, we intend to hire sales and marketing personnel to establish our own specialized sales and marketing infrastructure for the commercialization of our product candidates. We would rely on this direct sales force to, among other things, provide access to, or persuade, adequate numbers of ophthalmic specialists to prescribe our products. If we are unsuccessful in hiring and retaining sales and marketing personnel with appropriate technical and sales expertise or in developing an adequate distribution capability to support them, our ability to generate product revenues will be adversely affected. Unforeseen costs and expenses associated with creating independent sales, marketing and distribution capabilities could adversely impact the marketing and commercialization of our product candidates, which would adversely affect our business, operating results and financial condition. There can be no assurance that we will establish our sales, marketing and distribution capabilities in a cost-effective manner or realize a positive return on this investment, or that establishing these capabilities independently would be better than utilizing third-party providers. To the extent we cannot or choose not to use internal resources for the marketing, sales or distribution of any product candidates in the United States or elsewhere, we intend to rely on collaboration partners, such as Otsuka, or licensees. We may not be able to establish or maintain such relationships. To the extent that we depend on collaboration partners or other third parties for marketing, sales and distribution, any revenues we receive will depend upon their efforts. Such efforts may not be successful, and we will not be able to control the amount and timing of resources that our licensees or collaborators or other third parties devote to our products.

In addition, to the extent we utilize such relationships for marketing, sales or distribution of any approved products outside of the United States, we will be subject to additional risks related to entering into international business relationships, such as reduced protection for intellectual property rights; unexpected changes in tariffs, trade barriers and regulatory

23

requirements; economic weakness, including inflation, or political instability in particular foreign economies and markets; foreign taxes, including withholding of payroll taxes; and foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country.

We may not be successful in our efforts to expand our portfolio of product candidates.

We are seeking to expand our portfolio of product candidates through internal development and by partnering with other pharmaceutical or biotechnology companies.

A significant portion of our internal research program involves unproven technologies. Research programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including without limitation:

• the research methodology used may not be successful in identifying potential product candidates;

• potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate they are unlikely to be effective drugs; or

• we may fail to obtain intellectual property protection for our product candidates and technologies.

We may attempt to license or acquire product candidates and be unable to do so for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is a competitive area. A number of more established companies are also pursuing strategies to license or acquire products in the ophthalmic field. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. Other factors that may prevent us from licensing or otherwise acquiring suitable product candidates include the following:

• we may be unable to license or acquire the relevant intellectual property rights on terms that would allow us to make an appropriate return from the product;

• companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or

• we may be unable to identify suitable products or product candidates within our areas of expertise.

Relying on third-party manufacturers may result in delays in our clinical trials and product introductions.

We have limited experience in, and we do not own facilities for, manufacturing any product candidates, and we do not intend to develop facilities for the manufacture of product candidates for clinical trials or commercial purposes in the foreseeable future. We will depend on Otsuka for the manufacture and supply of product candidates subject to our collaboration agreements. Otsuka is contracting with third-party manufacturers to produce, in collaboration with Otsuka and us, our product candidates for clinical trials. While there are likely competitive sources available to manufacture our product candidates, entering into new arrangements may cause delays and additional expenditures, which we cannot estimate with certainty.

There are risks inherent in pharmaceutical manufacturing that could affect the ability of our third-party manufacturers to meet our requirements, which could result in unusable products and cause delays in our development process and our clinical trials. We need to contract with manufacturers who can comply with FDA-mandated current good manufacturing practices, or cGMPs, and comparable requirements of foreign regulatory bodies on an on-going basis. If we receive necessary regulatory approval for any product candidate, we also expect to rely on third parties, including our collaboration partners, to produce materials required for commercial production. Should we experience difficulties in obtaining and maintaining adequate manufacturing capacity, our ability to successfully develop and commercialize our products could be adversely impacted.

A failure of any of our third-party manufacturers to perform their obligations in a timely manner or establish and follow cGMPs with proper documentation may result in significant delays in clinical trials or in obtaining regulatory approval of product candidates or the ultimate launch of our products into the market. These failures could cause delays and other problems resulting in a material adverse effect on our business, financial condition and results of operations. If we are required to change manufacturers for any reason, we may incur significant costs and be required to devote significant time to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines.

We are dependent on our management team, particularly Ryo Kubota, M.D., Ph.D., our founder and chief executive officer, and if we are unable to retain and motivate our key management and scientific staff, our drug development programs may be delayed and we may be unable to successfully develop or commercialize our product candidates.

24

We are dependent upon the continued services of our executive officers and other key personnel, particularly Ryo Kubota, M.D., Ph.D., our founder and chief executive officer, who is critical to our ability to continue collaborating with Otsuka and secure financing from Japanese institutions. The relationships that our collaboration team members have cultivated with Otsuka make us particularly dependent upon a significant number of them, including Dr. Kubota and many of our collaboration team leaders, remaining employed by us. In addition, our collaboration agreements with Otsuka can be terminated by Otsuka if Dr. Kubota ceases serving as our chief executive officer or, among other things, fails to be actively involved in our collaborations with Otsuka.

As we acquire or obtain rights to develop and commercialize new product candidates, our success will depend on our ability to attract, retain and motivate highly qualified management and scientific personnel to manage the development of these new product candidates. We face competition for experienced scientists and other technical and professional personnel from numerous companies and academic and other research institutions. Competition for qualified personnel is particularly intense in the Seattle, Washington area, where very few people possess the skills and expertise we need to develop and commercialize our product candidates. Our operating history and the uncertainties attendant to being a clinical-stage biotechnology company with limited capital resources could limit our ability to attract and retain personnel.

Dr. Kubota and each of our key management and scientific personnel may terminate his or her employment at any time. If we lose any of our key management personnel, we may not be able to find replacements suitable to us or Otsuka, and our business would be harmed as a result. In addition, if we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

Our workforce reduction may impact the performance of our continuing personnel, and make it more difficult to retain the services of key personnel.

In October 2013, we elected to restructure our operations, resulting in a substantial workforce reduction beginning in January 2014. This reduction has had and will continue to have an impact on all functional areas of the business. This reduction in our workforce may create concerns about job security or lower productivity, which may, in turn, lead some of our remaining employees to seek new employment and require us to hire replacements. This workforce reduction may also make the management of our business more difficult and may make it harder for us to attract employees in the future.

If any products we develop become subject to third-party reimbursement practices, unfavorable pricing regulations or healthcare reform initiatives, our business could be harmed.

The availability and levels of reimbursement by governmental and other third-party payors of healthcare services affect the market for our potential products. These payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. In the United States, we will need to obtain approvals for payment for our potential products from private insurers, including managed care organizations, and from the Medicare program. We cannot be sure that reimbursement will be available for any future product candidates and reimbursement amounts, if any, may reduce the demand for, or the price of, our future products.

Obtaining approvals from governmental and other third-party payors of healthcare services can be a time-consuming and expensive process. Because our product candidates are under development, we are unable at this time to determine the level or method of reimbursement. Our business would be materially adversely affected if we do not receive approval for reimbursement of our product candidates from Medicare or private insurers on a timely or satisfactory basis. The Medicare program can deny coverage of a particular drug on the basis of the drug not being “reasonable and necessary” for Medicare beneficiaries. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Our business could be materially adversely affected if the Medicare program, local Medicare carriers or fiscal intermediaries were to make such a determination and deny or limit the reimbursement of our potential products, including the procedures under which they are administered, if any. Our business could also be adversely affected if private insurers, including managed care organizations, the Medicare program or other reimbursing bodies or payors limit the indications for which our potential products will be reimbursed.

There have been, and likely will continue to be, legislative and regulatory proposals in the United States and in some foreign jurisdictions directed at broadening the availability of health care and containing or lowering the cost of health care. We cannot predict the initiatives that may be adopted in the future. These legislative and/or regulatory changes may negatively impact the reimbursement for drug products, following approval, and thus affect our ability to sell our products profitably. The continuing efforts of government and other third-party payors of healthcare services to contain or reduce costs of health care may adversely affect:

• the demand for any drug products for which we may obtain regulatory approval;

25

• our ability to set a price or achieve a rate of reimbursement that we believe is fair for our product candidates;

• our ability to generate revenue and achieve or maintain profitability;

• the level of taxes that we are required to pay; and

• our access to capital.

In order to achieve our commercialization goals, we will need to grow the size of our organization, and we may experience difficulties in managing this growth.

As our commercialization plans and strategies develop, we will need to expand the size of our employee base for managerial, operational, sales, marketing, financial, human resources and other functional areas. Competition for these employees is intense and we may not be able to hire additional qualified personnel in a timely manner and on reasonable terms. Future growth would impose significant added responsibilities on members of management, including the need to recruit, hire, retain, motivate and integrate additional employees. Also, our management may have 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. Our future financial performance and our ability to commercialize our product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

We face the risk of product liability claims and may not be able to obtain insurance, and we may have exposure to significant contingent liabilities.

Our business exposes us to the risk of product liability claims that are inherent in the development, manufacturing, testing and marketing of drugs and related products. If the use of one or more of our products harms people, we may be subject to costly and damaging product liability claims. We have product liability insurance that covers our clinical trials up to a $10 million annual aggregate limit. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of the products that we may develop. Insurance coverage is increasingly expensive and may not be available on reasonable terms, if at all. We may not be able to obtain or maintain adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position.

We may need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or doing so on unattractive terms could adversely affect our development programs and other operations.

As of June 30, 2014, we had cash, cash equivalents and investments of $177.3 million and working capital of $120.2 million. We currently believe that our available cash, cash equivalents and investments, together with our net proceeds of our initial public offering, Otsuka’s funding of our share of development costs under the Emixustat Agreement, and interest income, will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. However, our future working capital and capital expenditure requirements will depend on many factors, including:

• the success of our collaborations with Otsuka to develop and commercialize product candidates;

• the scope and results of our clinical trials;

• advancement of other product candidates into development;

• potential acquisition or licensing of other products or technologies;

• the timing of, and the costs involved in, obtaining regulatory approvals;

• the cost of manufacturing activities;

• the cost of commercialization activities, including product marketing, sales and distribution;

• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation; and

• our ability to establish and maintain additional collaborative arrangements.

Additional financing may not be available to us when we need it or it may not be available on favorable terms. If we are unable to obtain adequate financing on a timely basis, we may be required to significantly curtail one or more of our development, licensing or acquisition programs. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products which we would otherwise pursue on our own. If we raise additional funds by issuing equity securities, our then-existing shareholders will experience dilution and the terms of any new equity securities may have preferences over our common stock.

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

26

We are an emerging growth company, as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before the end of that five-year period, we would cease to be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

Regulatory Risks

We may not be able to obtain regulatory approval for any of the products resulting from our development efforts, including emixustat and OPA-6566. Failure to obtain these approvals could materially harm our business.

All of the products we are developing or may develop in the future will require additional research or development. We have two product candidates that have advanced to the point that they are undergoing clinical trials. None of our product candidates have received regulatory approval for marketing in the United States and failure to receive such approvals on one or more of our product candidates could materially harm our business. We will be required to obtain an effective Investigational New Drug Application, or IND, prior to initiating new human clinical trials in the United States, and must submit a New Drug Application, or NDA, to obtain marketing approval prior to commercializing our products in the United States. This process is expensive, highly uncertain and lengthy, often taking a number of years until a product is approved for marketing in the United States, if at all. For instance, based on guidance from the FDA in April 2014, we now expect to conduct at least one additional confirmatory Phase 3 clinical trial in patients with GA associated with dry AMD after we complete our current 24-month emixustat study. Approval policies or regulations may change and the FDA and other comparable foreign regulatory authorities have substantial discretion in the drug approval process, including the ability to delay, limit, or deny approval of a product candidate for many reasons, such as:

• such authorities may disagree with the design or implementation of our, Otsuka’s, or any of our future development partners’ clinical trials;

• we, Otsuka, or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a product candidate is safe and effective for any indication or its clinical and other benefits outweigh any safety risk;

• such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from the United States;

• the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;

• such authorities may disagree with our interpretation of data from pre-clinical studies or clinical trials or the use of results from antibody studies that served as precursors to our current drug candidates;

• such authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we, Otsuka, or any of our future development partners contract for clinical and commercial supplies; and

• the approval policies or regulations of such authorities may significantly change in a manner rendering our, Otsuka’s, or any of our future development partners’ clinical data insufficient for approval.

With respect to foreign markets, approval procedures vary among countries and, in addition to the aforementioned risks, can involve additional product testing, administrative review periods and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals may result in increased cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us, Otsuka, or any of our future development partners from commercializing our product candidates.

We may need to successfully address a number of technological challenges in order to complete the development of our product candidates. Success in early clinical trials does not mean that later clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical

27

trials have shown promising results. In addition, our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use, which could have a material adverse effect on our business. Accordingly, there can be no assurance that the FDA and other regulatory authorities will approve any product that we develop.

The “fast track” designation for development of emixustat for dry macular degeneration (geographic atrophy) may not actually lead to a faster regulatory review or approval process.

If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA “fast track” designation. The fast track classification does not apply to the product alone, but applies to the combination of the product and the specific indication or indications for which it is being studied. The FDA’s fast track program is designed to facilitate the clinical development and evaluation of the drug’s safety and efficacy for the fast track indication or indications. NDAs or marketing applications filed by sponsors of products in fast track development may qualify for expedited review under policies or procedures offered by the FDA, but the fast track designation does not assure such qualification. Although we have obtained a fast track designation from the FDA for emixustat for the treatment of dry macular degeneration (geographic atrophy), we may not experience a faster development process, review or approval compared to conventional FDA procedures and we do not expect FDA approval to be granted for at least several years, if at all. Our fast track designation may be withdrawn by the FDA if it believes that the designation is no longer supported by data from our clinical development program. Our fast track designation does not guarantee that we will qualify for or be able to take advantage of the expedited review procedures. For instance, based on guidance from the FDA in April 2014, we plan to continue our current emixustat study through the original 24-month treatment duration without any access to interim results.

Our products could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if we experience problems with our products, when and if any of them are approved.

Any product for which we obtain marketing approval will be subject to continual requirements, review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed. The approval may contain conditions or requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in:

• voluntary or mandatory recall;

• withdrawal of the products from the market;

• restrictions on such products or manufacturing processes;

• fines;

• suspension of regulatory approvals;

• product seizure; and

• injunctions or the imposition of civil or criminal penalties.

We may be slow to adapt, or we may never adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements or policies.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products outside of the United States.

We and Otsuka may market emixustat in our respective exclusive territories. To market emixustat in foreign jurisdictions, we or Otsuka must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies from country to country and can involve additional testing and documentation. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We and Otsuka may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

Risks Relating to Intellectual Property and Other Legal Matters

28

If our efforts to protect the proprietary nature of the intellectual property related to our products are not adequate, we may not be able to compete effectively in our markets.

The strength of our patents in the biotechnology and pharmaceutical fields involves complex legal and scientific questions and can be uncertain. In addition to the rights we have obtained from Otsuka relating to some of our product candidates, we rely upon intellectual property we own relating to our product candidates, including patents, patent applications and trade secrets. For a detailed discussion of our patent rights, see “Business—Intellectual Property.” Our patent applications may be challenged or fail to result in issued patents and our existing or future patents may be too narrow to prevent third parties from developing or designing around these patents. Further, there is no uniform, global policy regarding the subject matter and scope of claims allowable in pharmaceutical patents and the criteria applied by patent offices throughout the world to grant patents are not always predictable or uniform.

In general, there is no guarantee that the patents we file or in-license will be granted or that the patents we hold would be found valid and enforceable if challenged. Third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Additionally, we may lose our rights to the patents and patent applications we license in the event of a breach or termination of the collaboration agreement. Manufacturers may also seek to obtain approval to sell generic versions of our product candidates prior to the expiration of the relevant licensed patents. If the sufficiency of the breadth or strength of protection provided by the patents we license with respect to our product candidates is threatened, it could dissuade others from collaborating with us to develop, and threaten our ability to commercialize, our other product candidates. Further, if we encounter delays in our clinical trials or our development activities are otherwise impeded, the period of time during which we could market our product candidates under patent protection would be reduced. Once the patent life has expired for a product, we may be subject to competition from generic pharmaceutical companies.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

We rely on trade secret protection and confidentiality agreements to protect certain proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our development processes with respect to emixustat and our other product candidates that involve proprietary know-how, information and technology that is not covered by patent applications. While we maintain physical security of our premises and physical and electronic security of our information technology systems, security measures may be breached and we may not have adequate remedies to protect the confidentiality of our proprietary information and know-how. Our systems and external backup measures may also be vulnerable to damage or breach due to natural disasters or other unexpected events.

While we require all of our employees, consultants, advisors and any 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. These agreements may be terminated or breached, and we may not have adequate remedies for any such termination or breach. Furthermore, to the extent we develop our operations outside the United States, these agreements may not provide meaningful protection for our trade secrets and know-how in the event of unauthorized use or disclosure as the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. Additionally, to the extent we license certain proprietary know-how, information or technologies from third-parties, including our collaboration partners, we also rely on such third-parties to adopt and enforce policies to protect such proprietary know-how, information and technology.

Third-party claims of intellectual property infringement may prevent or delay our discovery, development and commercialization efforts with respect to emixustat and our other product candidates.

Our commercial success depends, in part, on avoiding infringement of the patents and proprietary rights of third parties. Third parties may assert that we are employing their proprietary technology without authorization. Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement related to emixustat, the biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that our activities infringe their patents or that we are employing their proprietary technology without authorization. We may not have identified all the patents, patent applications or published literature that affect our business either by blocking our ability to commercialize our product, by preventing the patentability of one or more aspects of our products or those of our licensors or by covering the same or similar technologies that may affect our ability to market our product. In addition, third parties may obtain patents in the future and claim that use of our product candidates or 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

29

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, or we may be enjoined from further developing or commercializing our product candidates and technologies.

We may become involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To the extent we rely on third parties for our proprietary rights, we will have limited control over the protection and defense of such rights. 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 do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees.

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, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

If we use hazardous or 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 and biological materials. 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. 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. We do not have any insurance for liabilities arising from hazardous materials. 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 Ownership of Our Common Stock

The price of our common stock may be volatile, and you could lose all or part of your investment.

The market prices for securities of biotechnology and pharmaceutical companies in general, and clinical-stage companies in particular, have been highly volatile and may continue to be highly volatile in the future. Volatility in the market price for a particular company’s stock has often been unrelated or disproportionate to the operating performance of that company. Market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. The following factors, in addition to the other factors described in this “Risk Factors” section, may have a significant impact on the market price of our common stock:

•the development status of our product candidates, including results of our clinical trials;

•market conditions or trends related to the biotechnology and pharmaceutical industries, or the market in general;

•announcements of technological innovations, new commercial products or other material events by our competitors or us;

•disputes or other developments concerning our proprietary rights;

30

•changes in, or failure to meet, securities analysts’ or investors’ expectations of our financial performance;

•additions or departures of key personnel, particularly Dr. Kubota, or members of our board of directors;

•discussions of our business, products, financial performance, prospects or stock price by the financial and scientific press or securities analysts or lack of analyst coverage;

•public concern as to the safety of drugs and drug delivery techniques;

•regulatory developments in the United States, Japan and other foreign countries;

•changes in health care payment systems, including developments in price control legislation; or

•general economic and political factors, including wars, terrorism, natural disasters and political unrest.

In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often resulted. We may become subject to this type of litigation, which is often extremely expensive and diverts management’s attention, even if such litigation is ultimately concluded in a manner favorable to us.

The price of our stock could decrease as a result of shares being sold in the market.

As of August 8, 2014, we had approximately 35.6 million shares of common stock outstanding. Approximately 10.3million shares are currently restricted as a result of lock-up or market stand-off agreements, which shares will become freely sellable in mid-August 2014, subject in some cases to volume and other restrictions of Rule 144 and Rule 701 under the Securities Act. Sales of substantial amounts of these restricted securities in the public market, or even the perception that these sales could occur, could cause the trading price of our common stock to decline.

As a public company, we will be subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to satisfy, will raise our costs and may divert resources and management attention from operating our business.

As a public company and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, we are subject to reporting and corporate governance requirements, including the listing standards of the Mothers market of the TSE and the provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the regulations promulgated thereunder, which impose significant new compliance obligations upon us. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

In order to meet the listing standard of the Mothers market of the TSE, the adequacy of our internal control over financial reporting must be assessed by management for each year commencing with the year ending December 31, 2014. We are in the process of developing comprehensive documentation of our internal control over financial reporting and will be required to test its operating effectiveness on a periodic basis in accordance with Section 404 of the Sarbanes-Oxley Act. If we were unable to implement the controls and procedures required by Section 404 in a timely manner or otherwise to comply with Section 404, management might not be able to certify, and our independent registered public accounting firm might not be able to report on, the adequacy of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our financial information on a timely basis and might suffer adverse regulatory consequences or violate TSE listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal control from our independent registered public accounting firm.

Any future issuance of equity or debt securities by us may adversely affect the rights or value of our previously issued common stock.

31

If we raise additional capital through the issuance of equity or securities convertible into equity, further dilution to our then existing shareholders will result and new investors could have rights superior to the rights of our existing shareholders. If we raise additional funds through the issuance of debt securities, these securities could have rights that are senior to holders of our common stock and could contain covenants that restrict our operations. In addition, the terms of future financings may restrict our ability to raise additional capital, which could delay or prevent the further development or commercialization of our product candidates.

Because the principal trading market for our shares is the Mother’s market of the Tokyo Stock Exchange, the corporate governance rules of the major U.S. stock exchanges will not apply to us. As a result, our governance practices may differ from those of a company listed on such U.S. exchanges.

Our governance practices need not comply with certain New York Stock Exchange and NASDAQ corporate governance standards, including:

•the requirement that a majority of our board of directors consists of independent directors;

•the requirement that we have an audit committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

•the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

There can be no assurance that we will voluntarily comply with any of the foregoing requirements. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements.

A limited number of shareholders will have the ability to influence the outcome of director elections and other matters requiring shareholder approval.

As of August 8, 2014, Dr. Kubota, our largest shareholder, as an individual, and our directors and executive officers and their affiliates, as a group, beneficially owns approximately 28.8% and 29.4% of our outstanding common stock, respectively. Dr. Kubota or these shareholders, if they acted together, could exert substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers, acquisitions or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change of control of our company, which could deprive our shareholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other shareholders.

Anti-takeover provisions under Washington law could make an acquisition of us more difficult and affect the market price of our common stock.

Because we are incorporated in the State of Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which prohibits certain business combinations between us and certain significant shareholders unless specified conditions are met. These provisions may also have the effect of delaying or preventing a change of control of our company, even if this change of control would benefit our shareholders.

We do not expect to pay dividends in the foreseeable future. As a result, you must rely on stock appreciation for any return on your investment.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in our common stock. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends.

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

Sales of Unregistered Securities

None.

32

Use of Proceeds from Public Offerings of Common Stock

In February 2014, we closed our IPO of 9,200,000 shares of our common stock, at a price to the public of approximately $17.72 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-192900), which was declared effective by the SEC on February 3, 2014. The offering closed on February 13, 2014. We raised approximately $142.0 million from the IPO, net of underwriters’ discounts and commissions, and offering expenses. In addition, upon the closing of the IPO, $12,000,000 of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006 automatically converted into 3,636,365 shares of common stock, after an intermediate conversion into Series C preferred shares. The number of shares issued upon conversion was determined by dividing the principal of the note by $3.30.

As of June 30, 2014, we have used approximately $1.3 million of the net proceeds of our IPO for the following purposes:

• approximately $0.5 million in research and development expenditures and

• approximately $0.8 million in general and administrative expenditures.

The amounts and timing of our actual expenditures will depend on numerous factors, including the success of our studies, changes in business strategy, the amount of cash used in or generated by our operations and the extent to which we exercise co-promotion rights under our collaboration agreements.

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 31, 2014 pursuant to Rule 424(b) under the Securities Act. Pending the uses described, we maintain the cash received in money market funds, as well as corporate debt securities, commercial paper, and certificates of deposit.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

None.

Item 5.    Other Information

None.

33

Item 6.    Exhibits

Exhibit Number	Description
31.1	Certification of Principal Executive Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxely Act of 2002
32.2*	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxely Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Schema Linkbase Document
101.CAL**	XBRL Taxonomy Definition Linkbase Document
101.DEF**	XBRL Taxonomy Definition Linkbase Document
101.PRE**	XBRL Taxonomy Presentation Linkbase Document

*    Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.

**     In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, irrespective of any general incorporation language contained in any such filing, and otherwise is not subject to liability under these sections.

34

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on.

ACUCELA INC.
Dated:	August 13, 2014
By:		/s/ David L. Lowrance
		David L. Lowrance
		Chief Financial Officer, Treasurer and Secretary
		(Principal Financial Officer and Principal Accounting Officer)

35

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Ryo Kubota, certify that: 

1.             I have reviewed this quarterly report on Form 10-Q of Acucela Inc.; 

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)) 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.           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 

c.           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:	August 13, 2014	/s/ Ryo Kubota
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, David Lowrance, certify that: 

1.             I have reviewed this quarterly report on Form 10-Q of Acucela Inc.; 

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)) 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.           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 

c.           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:	August 13, 2014	/s/ David L. Lowrance
		Chief Financial Officer, Treasurer and Secretary
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 

I, Ryo Kubota, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the quarterly report of Acucela Inc. on Form 10-Q for the period ended June 30, 2014 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Acucela Inc. for the periods presented therein.

Date:	August 13, 2014	/s/ Ryo Kubota
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 

I, David Lowrance, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the quarterly report of Acucela Inc. on Form 10-K for the period ended June 30, 2014 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Acucela Inc. for the periods presented therein.

Date:	August 13, 2014	/s/ David L. Lowrance
		Chief Financial Officer, Treasurer and Secretary
		(Principal Financial Officer)

XML

Income Taxes (Details)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Income Tax Disclosure [Abstract]
Effective income tax rate	73.00%	31.00%	75.00%	35.00%
Federal statutory income tax rate			34.00%
Effective tax rate reconciliation, disclosure threshold					5.00%

XML

Significant Accounting Policies (Details) (USD $)	6 Months Ended			1 Months Ended	0 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013	Aug. 12, 2014 Subsequent Event [Member]	Feb. 13, 2014 Common Stock	Feb. 13, 2014 Common Stock Affiliated Entity IPO	Feb. 13, 2014 Common Stock IPO
Conversion of Stock [Line Items]
IPO, shares issued					9,200,000
IPO, price per share					$ 17.72
Proceeds from IPO					$ 142,000,000
Number of shares issued on conversion of preferred stock							10,813,867
Accounts receivable, collected				8,800,000
Debt Conversion [Line Items]
Convertible debt face amount	12,000,000	0
Number of Shares Issued through Debt Conversion						3,636,365
Allowance for doubtful accounts receivable	0		0
Uncertain tax positions	$ 0		$ 0

XML

Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

Significant Accounting Policies

Significant Accounting Policies

Unaudited Interim Financial Information

We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for fiscal year 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2013 Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 these estimates.

Segments

We operate in one segment, pharmaceutical product development. All of our significant assets are located in the United States. During the three and six months ended June 30, 2014 and 2013, all of our revenue was generated in the United States.

Initial Public Offering

On February 13, 2014, we completed our initial public offering ("IPO") whereby 9,200,000 shares of common stock were sold to the public at a price of $17.72 per share. We received aggregate proceeds of $142.0 million from the initial public offering ("IPO"), net of underwriters’ discounts and commissions, and offering expenses. Upon the closing of the IPO, all shares of our outstanding convertible preferred stock automatically converted into 10,813,867 shares of common stock and $12.0 million of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006, automatically converted into 3,636,365 shares of common stock.

Investments

Investments are composed of commercial paper, corporate debt securities, certificates of deposit, and government-backed securities. Investments with original maturities longer than three months and remaining maturities of less than one year are classified as short-term investments. We consider our investments as available-for-sale. Available-for-sale securities are stated at fair value as of each balance sheet date based on market quotes, and unrealized gains and losses are reflected as a net amount under the caption of accumulated other comprehensive loss. Premiums or discounts arising at acquisition are amortized into earnings.

We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as whether it is more likely than not that we will hold the investment until recovery of its amortized cost basis. Realized gains and losses are calculated using the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary are recorded within the statements of income under the caption other income (expense).

Concentration of Credit Risk

All of our accounts receivable, as of June 30, 2014 and December 31, 2013, consist of amounts due from our collaborations with Otsuka Pharmaceutical Co. Ltd., or Otsuka, a global pharmaceutical company based in Japan. There was no allowance for doubtful accounts for the periods presented, as we believe all outstanding amounts will be paid based on our contractual arrangements with Otsuka and history of successful collections thereunder and collateral is not required. As of the date of this filing, we have collected approximately $8.8 million in accounts receivable which were outstanding at June 30, 2014. Revenue recognized for the three and six month periods ended June 30, 2014 and 2013 consist of amounts derived from our collaboration agreements with Otsuka.

Deferred Offering Costs

External costs we incurred directly attributable our public offering were deferred and recorded as noncurrent assets as of December 31, 2013, and were offset against the proceeds of the 2014 IPO.

Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have already been recognized in the financial statements or tax returns. Excess tax benefits associated with stock option exercises and other equity awards are credited to shareholders' equity. Deferred tax liabilities and assets are based on the difference between financial statement carrying amounts and the tax basis of assets and liabilities, operating loss, and tax credit carryforwards and are measured using enacted tax rates expected to be in effect in the years the differences or carryforwards are anticipated to be recovered or settled. A valuation allowance is established when we believe that it is more likely than not that benefits of the deferred tax assets will not be realized. The Company had no uncertain tax positions as of June 30, 2014 and December 31, 2013.

XML

Collaboration and License Agreements (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenue Recognition, Milestone Method [Line Items]
Revenue from collaborations	$ 9,086,000	$ 11,023,000	$ 19,632,000	$ 27,003,000
Contingently repayable funding, accrued interest	1,700,000		1,700,000
Secured Promissory Note [Member] | Three-month LIBOR [Member]
Revenue Recognition, Milestone Method [Line Items]
Stated percentage	3.00%		3.00%
Collaborative Arrangement, Product
Revenue Recognition, Milestone Method [Line Items]
Revenue from collaborations	9,100,000	7,700,000	19,600,000	19,600,000
Revenues	4,500,000	3,900,000	9,600,000	7,200,000
Collaborative Arrangement, Product | Emixustat
Revenue Recognition, Milestone Method [Line Items]
Milestone method, revenue recognized	0	0		5,000,000
Collaborative Arrangement, Product | Rebamipide
Revenue Recognition, Milestone Method [Line Items]
Revenue from collaborations	0	3,000,000	0	6,100,000
Collaborative Arrangement, Product | OPA-6566
Revenue Recognition, Milestone Method [Line Items]
Revenue from collaborations		$ 400,000		$ 1,300,000

XML

Net Income (Loss) Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended		0 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Feb. 13, 2014 Common Stock	Feb. 13, 2014 Affiliated Entity Common Stock IPO
Class of Stock [Line Items]
Initial Public Offering, shares issued					9,200,000
Number of Shares Issued through Debt Conversion						3,636,365
Net income (loss) attributable to common shareholders	$ 71	$ (20)	$ 125	$ 994
Weighted average shares outstanding—basic	35,641,000	11,968,000	29,918,000	11,956,000
Dilutive effect of stock options and RSUs	226,000	0	281,000	359,000
Weighted average shares outstanding—diluted	35,867,000	11,968,000	30,199,000	12,315,000
Stock options were excluded from the calculation of diluted net income (loss) per share	463,506

XML

Strategic Restructuring (Details) (USD $)	3 Months Ended			9 Months Ended
	Dec. 31, 2013 Employee	Jun. 30, 2014 Employee Severance	Mar. 31, 2014 Employee Severance	Jun. 30, 2014 Employee Severance
Restructuring Cost and Reserve [Line Items]
Workforce reduction, percentage	35.00%
Number of positions eliminated	30
Restructuring Costs				$ 1,000,000
Restructuring Reserve [Roll Forward]
Balance, December 31, 2013		150,000	966,000
Cash payments		(150,000)	(808,000)
Adjustments			(8,000)
Balance, March 31, 2014		$ 0	$ 150,000	$ 0

XML

Shareholders' Equity (Details) (USD $)	3 Months Ended		6 Months Ended				0 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Feb. 13, 2014	Dec. 31, 2013	Feb. 13, 2014 Common Stock	Feb. 13, 2014 Common Stock IPO	Feb. 13, 2014 Affiliated Entity IPO Common Stock	Feb. 13, 2014 Affiliated Entity Convertible Debt IPO
Conversion of Stock [Line Items]
Common stock, shares authorized	100,000,000		100,000,000		100,000,000	60,000,000
Number of shares issued on conversion of preferred stock								10,813,867
Initial Public Offering, shares issued							9,200,000
Proceeds from IPO							$ 142,000,000
Convertible debt face amount			12,000,000	0						12,000,000
Number of Shares Issued through Debt Conversion									3,636,365
Debt conversion price										$ 3.30
Accumulated Other Comprehensive Income (Loss), Net of Tax [Roll Forward]
Beginning balance	(115,000)	(2,000)	(7,000)	0
Current period other comprehensive income (loss), net of tax	10,000	(10,000)	(98,000)	(12,000)
Ending balance	$ (105,000)	$ (12,000)	$ (105,000)	$ (12,000)

XML

Description of Business

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Description of Business

Description of Business

Acucela Inc. (“we,” “our” and “us”) is a clinical-stage biotechnology company that specializes in discovering and developing novel therapeutics to treat and slow the progression of sight-threatening ophthalmic diseases impacting millions of individuals worldwide. We focus on developing oral products based on our proprietary visual cycle modulation, or VCM, compounds to address a variety of retinal diseases, primarily age-related macular degeneration, or AMD, diabetic retinopathy, or DR, and diabetic macular edema, or DME, and potentially Stargardt disease, retinitis pigmentosa and retinopathy of prematurity. Our product candidates are designed to address the root cause of these diseases by reducing toxic by-products and oxidative damage as well as protecting the retina from light damage.

XML

Related-Party Transactions (Details) (USD $)	3 Months Ended		6 Months Ended		0 Months Ended
	Jun. 30, 2014 Management	Jun. 30, 2013 Management	Jun. 30, 2014 Management	Jun. 30, 2013 Management	Feb. 13, 2014 Common Stock IPO Affiliated Entity
Related Party Transaction [Line Items]
Related Party Transaction, Expenses from Transactions with Related Party	$ 0	$ 72,400	$ 30,000	$ 108,400
Number of Shares Issued through Debt Conversion					3,636,365

XML

CONDENSED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 32,979	$ 13,994
Investments	81,074	14,947
Accounts receivable from collaborations	11,813	10,262
Deferred tax asset	1,119	1,114
Prepaid expenses and other current assets	1,858	1,964
Total current assets	128,843	42,281
Property and equipment, net	861	1,112
Long-term investments	63,229	3,478
Long-term deferred tax asset	1,049	1,280
Deferred offering costs	0	5,548
Other assets	344	349
Total assets	194,326	54,048
Current liabilities:
Current maturities of contingently convertible debt, related party	0	12,000
Accounts payable	375	754
Accrued liabilities	5,085	6,579
Accrued compensation	915	3,269
Deferred revenue from collaborations	2,119	0
Deferred rent and lease incentives	178	267
Total current liabilities	8,672	22,869
Commitments (Note 4)
Long-term deferred rent, lease incentives, and others	7	55
Total long-term liabilities	7	55
Shareholders’ equity:
Common stock, no par value, 100,000 shares authorized as of June 30, 2014 and 60,000 shares authorized as of December 31, 2013; issued and outstanding, 35,641 shares as of June 30, 2014 and 11,971 shares as of December 31, 2013	185,976	3,654
Additional paid-in capital	3,111	2,728
Accumulated other comprehensive loss	(105)	(7)
Accumulated deficit	(3,335)	(3,460)
Total shareholders’ equity	185,647	31,124
Total liabilities and shareholders’ equity	194,326	54,048
Series A Preferred Stock [Member]
Shareholders’ equity:
Convertible preferred stock	0	2,051
Series B Convertible Preferred Stock
Shareholders’ equity:
Convertible preferred stock	0	13,387
Series C Convertible Preferred Stock
Shareholders’ equity:
Convertible preferred stock	$ 0	$ 12,771

XML

CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Statement of Comprehensive Income [Abstract]
Net unrealized gain (loss) on securities, tax	$ (5)	$ 0	$ 52	$ 0

XML

Net Income (Loss) Per Share (Tables)

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

The following tables reconcile the numerator and denominator used to calculate diluted net income (loss) per share for the periods presented (in thousands):

	Three months ended June 30,					Six months ended June 30,
	2014		2013			2014		2013
Numerator:
Net income (loss) attributable to common shareholders	$	71	$	(20	)	$	125	$	994
Denominator:
Weighted average shares outstanding—basic	35,641		11,968			29,918		11,956
Dilutive effect of stock options and RSUs	226		—			281		359
Weighted average shares outstanding—diluted	35,867		11,968			30,199		12,315

XML

Shareholders' Equity (Tables)

6 Months Ended

Jun. 30, 2014

Statement of Stockholders' Equity [Abstract]

Changes in Accumulated Other Comprehensive Loss

Changes in Accumulated Other Comprehensive Loss (in thousands):

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Beginning balance	$	(115	)	$	(2	)	$	(7	)	$	—
Current period other comprehensive income (loss), net of tax	10			(10		)	(98		)	(12		)
Ending balance	$	(105	)	$	(12	)	$	(105	)	$	(12	)

XML

CONDENSED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities
Net income	$ 125	$ 3,691
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	255	258
Stock-based compensation	383	841
Amortization of premium/discount on marketable securities	379	114
Deferred taxes	278	1,276
Changes in operating assets and liabilities:
Accounts receivable from collaborations	(1,551)	(6,078)
Prepaid expenses and other current assets	106	(548)
Accounts payable	(379)	(211)
Accrued liabilities	(1,494)	1,591
Accrued compensation	(2,354)	(794)
Deferred rent and lease incentives	(137)	(129)
Deferred revenue from collaborations	2,119	896
Other assets	5	14
Net cash provided by (used in) operating activities	(2,265)	921
Cash flows from investing activities
Purchases of marketable securities available for sale	(141,312)	(13,805)
Maturities of marketable securities available for sale	14,905	7,306
Additions to property and equipment	(4)	(435)
Net cash used in investing activities	(126,411)	(6,934)
Cash flows from financing activities
Proceeds from issuance of common stock	149,206	6
Restricted investments income	0	(28)
Payments for deferred offering costs	(1,545)	(1,605)
Excess tax benefit from stock-based compensation	0	123
Net cash provided by (used in) financing activities	147,661	(1,504)
Increase (decrease) in cash and cash equivalents	18,985	(7,517)
Cash and cash equivalents—beginning of period	13,994	16,639
Cash and cash equivalents—end of period	32,979	9,122
Supplemental disclosure
Deferred offering costs	5,548	0
Conversion of convertible preferred stock upon IPO	28,209	0
Conversion of contingently convertible debt, related party, upon IPO	$ 12,000	$ 0

XML

CONDENSED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Class of Stock [Line Items]
Common stock, shares authorized	100,000,000	60,000,000
Common stock, shares issued	35,641,000	11,971,000
Common stock, shares outstanding	35,641,000	11,971,000
Series A Preferred Stock [Member]
Class of Stock [Line Items]
Preferred stock, shares authorized	0	2,734,000
Preferred stock, shares issued	0	2,734,000
Preferred stock, shares outstanding	0	2,734,000
Preferred stock, liquidation value		2,051
Series B Convertible Preferred Stock
Class of Stock [Line Items]
Preferred stock, shares authorized	0	17,900,000
Preferred stock, shares issued	0	17,900,000
Preferred stock, shares outstanding	0	17,900,000
Preferred stock, liquidation value		13,425
Series C Convertible Preferred Stock
Class of Stock [Line Items]
Preferred stock, shares authorized	0	31,818,000
Preferred stock, shares issued	0	11,807,000
Preferred stock, shares outstanding	0	11,807,000
Preferred stock, liquidation value		12,988

XML

Income Taxes

6 Months Ended

Jun. 30, 2014

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Effective tax rates were 73% and 75% in the three and six months ended June 30, 2014, respectively, and 31% and 35% for the three and six months ended June 30, 2013, respectively. The difference between the U.S. federal statutory rate of 34% and our effective tax rate in 2014 was due primarily to permanent differences in book and tax earnings for stock options, meals and entertainment, and other miscellaneous items. In 2013, there were no individual items representing a greater than 5% impact on the effective tax rate.

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 08, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	ACUCELA INC.
Entity Central Index Key	0001400482
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding		35,641,319

XML

Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2014

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. This ASU amends the existing accounting standards for revenue recognition. Under the new revenue recognition model, a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The amendment may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating the transition alternatives and impact on the Company's financial statements.

XML

CONDENSED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Income Statement [Abstract]
Revenue from collaborations	$ 9,086	$ 11,023	$ 19,632	$ 27,003
Expenses:
Research and development	6,501	7,845	14,471	15,973
General and administrative	2,481	3,255	4,842	5,387
Total expenses	8,982	11,100	19,313	21,360
Income (loss) from operations	104	(77)	319	5,643
Other income (expense), net:
Interest income	120	2	164	20
Interest expense	(1)	(30)	(14)	(60)
Other income, net	39	76	35	72
Total other income, net	158	48	185	32
Income (loss) before income tax	262	(29)	504	5,675
Income tax (expense) benefit	(191)	9	(379)	(1,984)
Net income (loss)	71	(20)	125	3,691
Net income attributable to participating securities	0	0	0	2,697
Net income (loss) attributable to common shareholders	$ 71	$ (20)	$ 125	$ 994
Earnings per share
Net income (loss) per share attributable to common shareholders, Basic	$ 0.00	$ 0.00	$ 0.00	$ 0.08
Net income (loss) per share attributable to common shareholders, Diluted	$ 0.00	$ 0.00	$ 0.00	$ 0.08
Weighted average shares used to compute net income (loss) per share attributable to common shareholders: Basic	35,641	11,968	29,918	11,956
Weighted average shares used to compute net income (loss) per share attributable to common shareholders: Diluted	35,867	11,968	30,199	12,315

XML

Net Income (Loss) Per Share

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

Net Income (Loss) Per Share

Net Income (Loss) Per Share

Net income (loss) per share attributable to common shareholders is presented in conformity with the two-class method required for participating securities for periods in which we have net income. Prior to the IPO, all series of convertible preferred stock were considered to be participating securities, as the holders were entitled to participate in any dividends prior and in preference to dividends declared or paid on the common stock. Undistributed earnings allocated to these participating securities were subtracted from net income in determining net income (loss) attributable to common shareholders.

Immediately prior to the closing of our IPO, all outstanding shares of preferred stock were converted to common. We issued 9,200,000 shares of common stock in the IPO. In addition, 3,636,365 shares of common stock were issued upon the conversion of the contingently convertible debt held by a related party. As a result, as of June 30, 2014, common stock is our only outstanding class of capital stock.

Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares outstanding for the period. Diluted net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of the common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock include the exercise of outstanding stock options that are dilutive.

The following tables reconcile the numerator and denominator used to calculate diluted net income (loss) per share for the periods presented (in thousands):

	Three months ended June 30,					Six months ended June 30,
	2014		2013			2014		2013
Numerator:
Net income (loss) attributable to common shareholders	$	71	$	(20	)	$	125	$	994
Denominator:
Weighted average shares outstanding—basic	35,641		11,968			29,918		11,956
Dilutive effect of stock options and RSUs	226		—			281		359
Weighted average shares outstanding—diluted	35,867		11,968			30,199		12,315

For the three months ended June 30, 2013, 463,506 stock options were excluded from the calculation of diluted net income (loss) per share because the impact was anti-dilutive.

XML

Commitments

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments

Commitments

Upon the closing of the IPO, $12,000,000 of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006 automatically converted into 3,636,365 shares of common stock, after an intermediate conversion into Series C preferred shares.

On June 26, 2014, the Company entered into a new sublease agreement for the lease of approximately 38,723 square feet of office space. The term of the lease commences on January 1, 2015 and, subject to the terms of the lease, will expire on either November 30, 2021 or February 22, 2022. Future minimum payments under the lease are approximately $1.0 million per year.

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company is not currently a party to any material legal proceedings, and to its knowledge none is threatened. There can be no assurance that future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

XML

Strategic Restructuring (Tables)

6 Months Ended

Jun. 30, 2014

Restructuring and Related Activities [Abstract]

Summary of the Utilization of the Restructuring Liability

The following table summarizes the utilization of the restructuring liability (in thousands):

	Severance and Other Termination Benefits
Balance, December 31, 2013	$	966
Cash payments	(808		)
Adjustments	(8		)
Balance, March 31, 2014	$	150
Cash payments	(150		)
Balance, June 30, 2014	$	—

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

Unaudited Interim Financial Information

Unaudited Interim Financial Information

We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for fiscal year 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2013 Annual Report on Form 10-K.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 these estimates.

Segments

Segments

We operate in one segment, pharmaceutical product development. All of our significant assets are located in the United States. During the three and six months ended June 30, 2014 and 2013, all of our revenue was generated in the United States.

Initial Public Offering

Initial Public Offering

On February 13, 2014, we completed our initial public offering ("IPO") whereby 9,200,000 shares of common stock were sold to the public at a price of $17.72 per share. We received aggregate proceeds of $142.0 million from the initial public offering ("IPO"), net of underwriters’ discounts and commissions, and offering expenses. Upon the closing of the IPO, all shares of our outstanding convertible preferred stock automatically converted into 10,813,867 shares of common stock and $12.0 million of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006, automatically converted into 3,636,365 shares of common stock.

Investments

Investments

Investments are composed of commercial paper, corporate debt securities, certificates of deposit, and government-backed securities. Investments with original maturities longer than three months and remaining maturities of less than one year are classified as short-term investments. We consider our investments as available-for-sale. Available-for-sale securities are stated at fair value as of each balance sheet date based on market quotes, and unrealized gains and losses are reflected as a net amount under the caption of accumulated other comprehensive loss. Premiums or discounts arising at acquisition are amortized into earnings.

We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as whether it is more likely than not that we will hold the investment until recovery of its amortized cost basis. Realized gains and losses are calculated using the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary are recorded within the statements of income under the caption other income (expense).

Cash, cash equivalents and investments at June 30, 2014 and December 31, 2013 include all cash, money market funds, municipal bonds, corporate debt securities, commercial paper and certificates of deposit. We consider our investments as available-for-sale. Available-for-sale securities are stated at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Quoted prices in active markets for identical assets and 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, and

Level 3—Unobservable inputs in which there is little or no market data available, which requires us to develop our own assumptions.

We measure the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

Concentration of Credit Risk

Concentration of Credit Risk

All of our accounts receivable, as of June 30, 2014 and December 31, 2013, consist of amounts due from our collaborations with Otsuka Pharmaceutical Co. Ltd., or Otsuka, a global pharmaceutical company based in Japan. There was no allowance for doubtful accounts for the periods presented, as we believe all outstanding amounts will be paid based on our contractual arrangements with Otsuka and history of successful collections thereunder and collateral is not required. As of the date of this filing, we have collected approximately $8.8 million in accounts receivable which were outstanding at June 30, 2014. Revenue recognized for the three and six month periods ended June 30, 2014 and 2013 consist of amounts derived from our collaboration agreements with Otsuka.

Deferred Offering Costs

Deferred Offering Costs

External costs we incurred directly attributable our public offering were deferred and recorded as noncurrent assets as of December 31, 2013, and were offset against the proceeds of the 2014 IPO.

Income Taxes

Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have already been recognized in the financial statements or tax returns. Excess tax benefits associated with stock option exercises and other equity awards are credited to shareholders' equity. Deferred tax liabilities and assets are based on the difference between financial statement carrying amounts and the tax basis of assets and liabilities, operating loss, and tax credit carryforwards and are measured using enacted tax rates expected to be in effect in the years the differences or carryforwards are anticipated to be recovered or settled. A valuation allowance is established when we believe that it is more likely than not that benefits of the deferred tax assets will not be realized. The Company had no uncertain tax positions as of June 30, 2014 and December 31, 2013.

XML

Shareholders' Equity

6 Months Ended

Jun. 30, 2014

Statement of Stockholders' Equity [Abstract]

Shareholders' Equity

Shareholders’ Equity

Common Stock

Our certificate of incorporation, as amended and restated, authorizes us to issue 100,000,000 shares of common stock without par value.

In February 2014, upon the closing of our IPO, all shares of our outstanding convertible preferred stock automatically converted into 10,813,867 shares of common stock. We issued 9,200,000 shares of common stock for aggregate proceeds of $142.0 million from the IPO, net of underwriters’ discounts and commissions, and offering expenses. In addition, upon the closing of the IPO, $12,000,000 of outstanding principal underlying a convertible note that we issued to SBI Holdings, Inc. in May 2006 automatically converted into 3,636,365 shares of common stock, after an intermediate conversion into Series C preferred shares. The number of shares issued upon conversion was determined by dividing the principal of the note by $3.30.

Changes in Accumulated Other Comprehensive Loss (in thousands):

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Beginning balance	$	(115	)	$	(2	)	$	(7	)	$	—
Current period other comprehensive income (loss), net of tax	10			(10		)	(98		)	(12		)
Ending balance	$	(105	)	$	(12	)	$	(105	)	$	(12	)

The changes in accumulated other comprehensive loss relate to unrealized holding gains and losses in available-for-sale securities.

XML

Collaboration and License Agreements

6 Months Ended

Jun. 30, 2014

Revenue Recognition [Abstract]

Collaboration and License Agreements

Collaboration and License Agreements

During the six months ended June 30, 2013, we received and recognized as revenue the $5.0 million milestone payment associated with the initiation of the Phase 2b/3 clinical trial related to emixustat. No development or net sales milestones were achieved during the three months ended June 30, 2014 or 2013. During the three and six months ended June 30, 2014 and 2013, we recognized $9.1 million and $19.6 million, respectively, and $7.7 million and $19.6 million, respectively, of revenue in performance of under our agreement with Otsuka Pharmaceutical Co., Ltd., or Otsuka, regarding emixustat (referred to as the Emixustat Agreement).

Under the Emixustat Agreement, Otsuka will fund the Company's share of the Phase 2 and Phase 3 development costs in the form of a secured promissory note. The promissory note provides that (a) interest will accrue daily and be calculated on the basis of 360 days per year and be payable on all amounts advanced to us from the date of advance until paid in full; (b) unpaid interest will compound annually; and (c) the applicable interest rate will be adjusted quarterly to reflect the then-effective rate equal to the three-month London InterBank Offered Rate (“LIBOR”) in the “Money Rates” column of The Wall Street Journal as of the first business day of each calendar quarter, plus 3%; and (d) all amounts are payable in U.S. dollars. The agreement includes a security interest agreement that grants Otsuka a first priority interest on the Company's interests in net profits and royalty payments, and on the Company's interests in ownership of the related collaboration compounds and collaboration products and the underlying intellectual property rights, both in the Shared Territory and the Acucela Territory (as such terms are defined in the Emixustat Agreement).

The promissory note is repayable only in the event that proceeds are generated by any future product sales under the Emixustat Agreement or by the sale or license of collaboration compounds and collaboration products developed under the Emixustat Agreement outside North America and Otsuka’s sole territory. During the three and six months ended June 30, 2014 and 2013, we have recognized revenue of approximately $4.5 million and $9.6 million, respectively, and $3.9 million and $7.2 million, respectively, under the Emixustat Agreement, which is contingently repayable as described above. As of June 30, 2014, the contingently repayable funding has accrued $1.7 million of interest, which is contingently repayable along with the above. In addition, we have received $2.1 million in advances from Otsuka, which we have recorded as deferred revenue from collaborations in the accompanying balance sheets as of June 30, 2014.

During the three and six months ended June 30, 2014, we recognized no revenue and during the three and six months ended June 30, 2013, we recognized $3.0 million and $6.1 million, respectively, of revenue associated with rebamipide clinical development activities. The Rebamipide Agreement was terminated in September 2013. During the three and six months ended June 30, 2014, we recognized no revenue and during the three and six months ended June 30, 2013 we recognized $0.4 million and $1.3 million, respectively, of revenue associated with OPA-6566 for glaucoma clinical development activities.

Continued Involvement of the CEO

The Company’s collaboration arrangements with Otsuka require the continuing involvement of our CEO, Dr. Ryo Kubota. In the event of the departure of Dr. Kubota from the Company or a change in his role or responsibilities with the Company, the arrangements are subject to termination, at the option of Otsuka. For each agreement, this provision expires upon the approval of the NDA for the first indication in the United States.

XML

Strategic Restructuring

6 Months Ended

Jun. 30, 2014

Restructuring and Related Activities [Abstract]

Strategic Restructuring

Strategic Restructuring

In October 2013, we announced a plan to reduce expenses, including a workforce reduction, as a result of the termination of the Rebamipide Agreement. The plan resulted in a reduction in force of approximately 35% of our total workforce, or approximately 30 employees, effective January 1, 2014. As a result of this workforce reduction, we recorded a $1.0 million charge in 2013 in general and administrative expense, related to severance, other termination benefits, and outplacement services. The cash outlays related to this charge primarily took place in the first six months of 2014 and activities are complete as of June 30, 2014. The following table summarizes the utilization of the restructuring liability (in thousands):

	Severance and Other Termination Benefits
Balance, December 31, 2013	$	966
Cash payments	(808		)
Adjustments	(8		)
Balance, March 31, 2014	$	150
Cash payments	(150		)
Balance, June 30, 2014	$	—

XML

Related-Party Transactions

6 Months Ended

Jun. 30, 2014

Related Party Transactions [Abstract]

Related-Party Transactions

Related-Party Transactions

Peter Kresel, M.B.A., a member of the Board, received payment from us for consulting services and reimbursement of direct expenses. Mr. Kresel’s payments for consulting services and expense reimbursements were $0 and $30,000 during the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, Mr. Kresel's payments for consulting services and expense reimbursements were $72,400 and $108,400, respectively.

SBI Holdings, Inc. (a related party), one of our shareholders, was the holder for our contingently convertible debt. In connection with our IPO, the contingently convertible debt automatically converted into 3,636,365 shares of common stock (see Note 8).

XML

Cash, Cash Equivalents and Investments (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Schedule of Cash and Cash Equivalents and Investments

Cash and cash equivalents and investments as of June 30, 2014 and December 31, 2013 consisted of the following (in thousands):

	June 30, 2014
	Amortized Cost		Gross Unrealized					Fair Value
			Holding Gains		Holding Losses
Cash	$	407	$	—	$	—		$	407
Level 1 Securities:
Money market funds	32,572		—		—			32,572
Level 2 Securities:
Commercial paper	37,687		14		(9		)	37,692
Corporate debt securities	85,269		1		(146		)	85,124
Municipal bonds	—		—		—			—
Certificates of deposit	21,507		3		(23		)	21,487
	$	177,442	$	18	$	(178	)	$	177,282

	December 31, 2013
	Amortized Cost		Gross Unrealized					Fair Value
			Holding Gains		Holding Losses
Cash	$	868	$	—	$	—		$	868
Level 1 Securities:
Money market funds	12,501		—		—			12,501
Level 2 Securities:
Commercial paper	1,099		1		—			1,100
Corporate debt securities	12,101		—		(4		)	12,097
Municipal bonds	625		—		—			625
Certificates of deposit	5,235		2		(9		)	5,228
	$	32,429	$	3	$	(13	)	$	32,419

XML

Cash, Cash Equivalents and Investments (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash	$ 407,000	$ 868,000
Amortized Cost	177,442,000	32,429,000
Gross Unrealized Holding Gains	18,000	3,000
Gross Unrealized Holding Losses	(178,000)	(13,000)
Fair Value	177,282,000	32,419,000
Corporate debt securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities maturing from year one to year two	58,100,000
Certificates of deposit
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities maturing from year one to year two	5,100,000
Level 1 Securities | Money market funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Amortized Cost	32,572,000	12,501,000
Gross Unrealized Holding Gains	0	0
Gross Unrealized Holding Losses	0	0
Fair Value	32,572,000	12,501,000
Level 2 Securities | Commercial paper
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Amortized Cost	37,687,000	1,099,000
Gross Unrealized Holding Gains	14,000	1,000
Gross Unrealized Holding Losses	(9,000)	0
Fair Value	37,692,000	1,100,000
Level 2 Securities | Corporate debt securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Amortized Cost	85,269,000	12,101,000
Gross Unrealized Holding Gains	1,000	0
Gross Unrealized Holding Losses	(146,000)	(4,000)
Fair Value	85,124,000	12,097,000
Level 2 Securities | Municipal bonds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Amortized Cost	0	625,000
Gross Unrealized Holding Gains	0	0
Gross Unrealized Holding Losses	0	0
Fair Value	0	625,000
Level 2 Securities | Certificates of deposit
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Amortized Cost	21,507,000	5,235,000
Gross Unrealized Holding Gains	3,000	2,000
Gross Unrealized Holding Losses	(23,000)	(9,000)
Fair Value	$ 21,487,000	$ 5,228,000

XML

CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Statement of Comprehensive Income [Abstract]
Net income (loss)	$ 71	$ (20)	$ 125	$ 3,691
Other comprehensive (loss) income:
Net unrealized gain (loss) on securities, net of income tax benefit of $5 and $0 for the three months ended June 30, 2014 and 2013, respectively, and income tax of $52 and $0 for the six months ended June 30, 2014 and 2013, respectively	10	(10)	(98)	(12)
Comprehensive (loss) income	$ 81	$ (30)	$ 27	$ 3,679

XML

Cash, Cash Equivalents and Investments

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Cash, Cash Equivalents, and Investments

Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments at June 30, 2014 and December 31, 2013 include all cash, money market funds, municipal bonds, corporate debt securities, commercial paper and certificates of deposit. We consider our investments as available-for-sale. Available-for-sale securities are stated at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Quoted prices in active markets for identical assets and 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, and

Level 3—Unobservable inputs in which there is little or no market data available, which requires us to develop our own assumptions.

We measure the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. We did not hold any cash, cash equivalents, or investments categorized as Level 3 as of June 30, 2014 or December 31, 2013.

Cash and cash equivalents and investments as of June 30, 2014 and December 31, 2013 consisted of the following (in thousands):

	June 30, 2014
	Amortized Cost		Gross Unrealized					Fair Value
			Holding Gains		Holding Losses
Cash	$	407	$	—	$	—		$	407
Level 1 Securities:
Money market funds	32,572		—		—			32,572
Level 2 Securities:
Commercial paper	37,687		14		(9		)	37,692
Corporate debt securities	85,269		1		(146		)	85,124
Municipal bonds	—		—		—			—
Certificates of deposit	21,507		3		(23		)	21,487
	$	177,442	$	18	$	(178	)	$	177,282

	December 31, 2013
	Amortized Cost		Gross Unrealized					Fair Value
			Holding Gains		Holding Losses
Cash	$	868	$	—	$	—		$	868
Level 1 Securities:
Money market funds	12,501		—		—			12,501
Level 2 Securities:
Commercial paper	1,099		1		—			1,100
Corporate debt securities	12,101		—		(4		)	12,097
Municipal bonds	625		—		—			625
Certificates of deposit	5,235		2		(9		)	5,228
	$	32,429	$	3	$	(13	)	$	32,419

As of June 30, 2014, $58.1 million of corporate debt securities and $5.1 million of certificates of deposit mature in greater than one year, but less than two years. All other investment securities held at June 30, 2014 mature within 12 months.

Unrealized losses as of June 30, 2014 are related to changes in interest rates and it is more likely than not that we will hold these securities until a recovery of the cost basis occurs. No investments have been in a loss position for more than 12 months.

XML

Commitments (Details) (USD $)	6 Months Ended			0 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 26, 2014 sqft	Feb. 13, 2014 IPO Affiliated Entity Convertible Debt	Feb. 13, 2014 Common Stock IPO Affiliated Entity
Debt Instrument [Line Items]
Convertible debt face amount	$ 12,000,000	$ 0		$ 12,000,000
Number of Shares Issued through Debt Conversion					3,636,365
Sublease agreement, rentable area			38,723
Future minimum annual payments			$ 1,000,000

XML

Recent Accounting Pronouncements (Policies)

6 Months Ended

Jun. 30, 2014

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. This ASU amends the existing accounting standards for revenue recognition. Under the new revenue recognition model, a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The amendment may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating the transition alternatives and impact on the Company's financial statements.