Ocera Therapeutics, Inc.
Ocera Therapeutics, Inc. (Form: 10-K, Received: 03/18/2014 06:02:36)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___ .
Commission file number 001-35119
OCERA THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
 
63-1192270
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
525 University Avenue, Suite 610
Palo Alto, CA 94301
(Address of principal executive offices including zip code)
650-475-0158
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.00001 par value
 
NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No   x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o  No   x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No   o  
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  x No   o  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x .
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):

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Large accelerated Filer o
 
Accelerated Filer o
 
 
 
Non-accelerated Filer o
 
Smaller Reporting Company x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the Act). Yes  o  No   x
The aggregate market value of the common stock held by non-affiliates computed by reference to the last reported sale price on June 28, 2013 was approximately $10.106 million. As of March 14, 2014, there were outstanding 15,453,448 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part III of the Annual Report on Form 10-K is incorporated by reference from the registrant's definitive proxy statement for the registrant's 2014 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the registrant's fiscal year ended December 31, 2013.

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OCERA THERAPEUTICS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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CORPORATE INFORMATION AND FORWARD-LOOKING STATEMENTS
Corporate Information
On July 15, 2013, Tranzyme, Inc., or Tranzyme, completed its merger, or the Merger, with Ocera Therapeutics, Inc., a privately held Delaware corporation, or Private Ocera, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of April 23, 2013, or the Merger Agreement, by and among Tranzyme, Private Ocera and Terrapin Acquisition, Inc., a wholly-owned subsidiary of Tranzyme, or the Merger Subsidiary. Pursuant to the Merger Agreement, Merger Subsidiary merged with and into Private Ocera, with Private Ocera, renamed as Ocera Subsidiary, Inc., surviving the merger as a wholly-owned subsidiary of the combined company. Immediately following the Merger, the combined company changed its name from “Tranzyme, Inc.” to “Ocera Therapeutics, Inc.”
Unless otherwise stated in this Annual Report on Form 10-K (also referred to as this Annual Report or this Form 10-K) or the context otherwise requires, references to “Ocera,” “we,” “us,” “our,” the “Company” and similar references refer to Ocera Therapeutics, Inc. and its subsidiaries.
Forward-Looking Statement Safe Harbor
This Annual Report on Form 10-K and the information incorporated herein by reference contain forward-looking statements that involve a number of risks, uncertainties and assumptions, including information with respect to our plans and strategy for our strategic process, product candidates, drug discovery platform and business . All statements that express expectations, estimates, forecasts or projections are forward-looking statements. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, “forecasts”, “may”, “should”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements include but are not limited to statements under the captions “Business”, “Risk Factors,” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as other sections in this Annual Report on Form 10-K. You should be aware that the occurrence of any of the events discussed under the heading “Item 1A. Risk Factors” and elsewhere in this report could substantially harm our business, results of operations and financial condition and that if any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock. The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this Annual Report on Form 10-K. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update our forward-looking statements, even if new information becomes available in the future.

Part I.
Item 1. Business
Overview
We are a clinical stage biopharmaceutical company focused on the development and commercialization of a clinical candidate, OCR-002, for the treatment of hepatic encephalopathy, or HE. HE is a serious complication of liver failure marked by mental changes including confusion, impaired motor skills, disorientation in time and space, and, in its more severe form, stupor, coma and even death. Common causes of liver malfunction leading to HE include alcoholism and hepatitis as well as obesity, Type II diabetes, and acetaminophen overdose.
OCR-002 is a novel molecule, ornithine phenylacetate, which functions as an ammonia scavenger. OCR-002 has been shown to lower ammonia in patients with cirrhosis when administered as a continuous intravenous infusion. In pre-clinical efficacy studies, OCR-002 significantly reduced arterial ammonia in an animal model of chronic liver disease and significantly reduced arterial ammonia, brain ammonia and intracranial pressure in a second animal model of acute liver failure. In 2012, we completed a Phase 1 pharmacokinetic and safety study of the intravenous form of the OCR-002. We are now conducting a randomized, placebo-controlled double blind Phase 2b study to evaluate the efficacy of intravenous therapy with OCR-002 in reducing the severity of HE symptoms among hospitalized HE patients. In addition, there are two investigator- sponsored Phase 2a studies underway, one in Spain studying ammonia levels in a double blind study of patients with upper gastrointestinal bleeding and the other an open label NIH-sponsored study of safety of OCR-002 in patients with hyperammonemia and HE due to acute liver failure.

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We are also developing an oral form of OCR-002 to provide continuity of care for HE patients, where the intravenous form would be used for hospital-based acute care and the oral form for chronic maintenance care post discharge. We have started formulation studies designed to identify a prototype orally deliverable form of OCR-002.
OCR-002 has been granted orphan drug designation by the U.S. Food and Drug Administration, or FDA, for the treatment of hyperammonemia and resultant HE in patients with acute and chronic liver disease. Orphan drug designation is given to a drug candidate intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States.
We are building intellectual property protection of OCR-002, with composition of matter claims granted in Europe, Japan, China and several other countries, and specific drug substance claims granted in the United States. In December, 2008, we licensed rights to OCR-002 from University College London. In addition, we have been granted use claims for the treatment of HE in the United States, Europe, Japan, China, and elsewhere.  We also have worldwide patents pending for the use of OCR-002 in the treatment of portal hypertension and for the manufacture of OCR-002. 
We are developing OCR-002 and retain global rights to commercialization for both the intravenous and oral forms of the drug. We may seek partners to help us develop OCR-002, including the potential to partner product commercialization rights.
Hepatic Encephalopathy: A Progressive Disorder Related to Elevated Ammonia Levels
HE is a serious neurological disorder that can occur in patients with advanced cirrhosis or acute liver failure. HE is believed to occur when the brain is exposed to gut-derived toxins normally removed by the healthy liver. While a variety of these toxins may contribute to HE, we believe that ammonia plays a causational role in the disorder. The diagnosis of hepatic encephalopathy requires the presence of impaired liver function and the exclusion of an alternative explanation for the symptoms. Blood tests of ammonia levels may assist in the diagnosis. In the mild form of HE, patients experience forgetfulness, mild confusion and irritability. As the condition worsens, HE is characterized by an inverted sleep-wake pattern, lethargy and personality changes. Patients often present in the hospital with asterixis, a characteristic flapping of the hands. In its most severe form, the disease is marked by a progression to coma. To categorize the stage of the disease, physicians often apply the West Haven scale of Grade 0 to Grade 4 to categorize the severity of episodic HE. Patients with West Haven Grade 0 or 1 are typically ambulatory and can usually be managed as outpatients. Patients with Grade 2 are often hospitalized and Grade 3 and 4 patients exhibit stupor or coma.
Acute Hepatic Encephalopathy: Current Treatment and Unmet Medical Need
There is currently no FDA-approved treatment for patients presenting at the hospital with acute HE. The current standard of care for these patients includes hydration, supportive care and pharmacologic treatment to suppress the production of ammonia in the intestine, most commonly through administration of the laxative lactulose or non-absorbable antibiotics. There is no definitive data on the degree of effectiveness of these agents in treating the acute HE patient.
Lactulose can be difficult to administer in the hospital setting where patients may not be able to swallow, requiring the medication to be given by nasal-gastric tube or by enema. Abdominal cramping, diarrhea and flatulence are common side effects with lactulose, making the drug difficult for many patients to tolerate. Moreover, a published review of clinical trials involving lactulose and lactitol in the treatment of HE concluded that those agents failed to demonstrate a statistically significant benefit.
Rifaximin, a poorly absorbed non-systemic oral antibiotic manufactured by Salix Pharmaceuticals, Ltd (“Salix”) is believed to limit the local production of ammonia in the intestine. Rifaximin 550 mg tablets were FDA approved in March 2010 for the maintenance of remission from overt HE in patients 18 years of age or older. While rifaximin has been shown to be effective in preventing recurrent episode of HE in the outpatient setting, there is no evidence that it is effective in the acute care of hospitalized cirrhotic patients with HE.
Ravicti is an oral ammonia-lowering agent currently in development by Hyperion for the prevention of HE events in patients with cirrhosis. In a Phase 2b trial, Hyperion showed that Ravicti was effective in reducing the number of episodes of overt HE. However, there is no evidence that Ravicti is effective in the acute setting for patients who present to the hospital with overt HE.
BUPHENYL is not an appropriate treatment for most HE patients given the FDA warning regarding the use of the drug in patients with sodium retention and edema which is common for patients with HE. AMMONUL, an intravenous ammonia lowering drug is also contraindicated in patients with decompensated liver cirrhosis because of its high sodium load.

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Based on third party analysis of Healthcare Cost and Utilization Project (HCUP) data, we estimate that there are approximately 160,000 patients hospitalized with HE in the U.S. annually, and that this population is growing by about 5% a year.
OCR-002 for the Treatment of Acute HE in Hospitalized Patients
Rationale for OCR-002 in Acute HE
Acute HE is believed to be caused by the rapid accumulation of ammonia in the blood in patients with a failing liver. As the ammonia crosses the blood brain barrier, it leads to brain swelling and serious neurocognitive deficit. These patients are generally very sick, often stuporous or comatose, and unable to swallow and effectively absorb oral medications. Therefore, we believe it is preferable to treat them with an intravenous, easily administrable agent that can act rapidly and safely. We believe that OCR-002, which has been shown to lower ammonia levels rapidly and safely, can be beneficial in managing these patients.
OCR-002 Clinical Development of IV form of OCR-002
Mechanism of Action
OCR-002 appears to have a dual mode of action designed to lower ammonia without involvement of the liver, which is damaged or diseased in HE patients. Once in circulation, OCR-002 breaks down into ornithine and phenylacetate. We believe that ornithine enters the muscle where it is converted to glutamate, which in turn combines with ammonia to create glutamine. Glutamine combines with phenylacetate to form phenylacetylglutamine (PAGN) which is then excreted through the kidneys.
Pre-clinical and Phase 1 Pharmacokinetics Studies
Preclinical efficacy studies of OCR-002 were performed in two animal models, rat with bile duct ligation as a model for chronic liver disease and pig with hepatic artery ligation as a model for acute liver failure. In the rat model, OCR-002 significantly reduced arterial ammonia, and in the pig model, OCR-002 significantly reduced arterial ammonia, brain ammonia and intracranial pressure.
We completed Phase 1 pharmacokinetic and safety studies of OCR-002 in a parallel ascending dose study of 54 healthy volunteers and 43 stable cirrhotic patients. Through this study, we established pharmacokinetic profile of the OCR-002 and identified safety margins.
Phase 2 Efficacy Studies
We are conducting a Phase 2b “STOP-HE” or OCR002-HE209 trial to evaluate the efficacy, safety and pharmacokinetics of OCR-002 in hospitalized patients with liver cirrhosis and an acute episode of HE. (HE). The study is a randomized double-blind, controlled study of OCR-002 plus current standard of care versus standard of care alone. The trial will assess time to achievement of meaningful improvement in HE symptoms.
In addition to the Phase 2b trial, there are two externally-sponsored Phase 2a trials of OCR-002: A study in Spain studying ammonia lowering in patients with upper gastrointestinal bleeding and a NIH sponsored study of hyperammonemia in patients with acute liver failure.
The first, open-label, phase of the Spanish study included 10 patients who received OCR-002 compared with historic controls, and demonstrated that OCR-002 rapidly lowered the ammonia levels of these patients.
An open label NIH study of OCR-002 in acute liver failure. These patients are often young and otherwise healthy, with liver failure caused by acetaminophen overdose and other acute causes.
Oral Formulation of OCR-002
We are also developing an oral form of OCR-002 to provide continuity of care for HE patients, where the intravenous form would be used for hospital-based acute care and the oral form for chronic, preventative care post discharge. We are in the process of starting formulation studies designed to identify a prototype orally deliverable form of OCR-002.
Manufacturing
We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on third-party manufacturers to produce bulk drug substance and drug products required for commercial use and for our clinical trials.

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We have clinical supplies of OCR-002 manufactured for us by Helsinn Chemicals SA in Switzerland. Finished product manufacturing and filling for OCR-002, if regulatory approval is obtained, will be undertaken by AAI Pharma Service Corp in North Carolina. Our third-party manufacturers, their facilities and all lots of drug substance and drug products are required to be in compliance with current Good Manufacturing Practices, or cGMP. The cGMP regulations include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports, and returned or salvaged products. The manufacturing facilities for our products must meet cGMP requirements and FDA satisfaction before any product is approved and we can manufacture commercial products. Our third-party manufacturers are also subject to periodic inspections of facilities by the FDA and other authorities, including procedures and operations used in the testing and manufacture of our products to assess our compliance with applicable regulations. Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including warning letters, the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations and civil and criminal penalties. These actions could have a material impact on the availability of our products. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel.
Competition
We face competition from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions, among others, which may in the future develop products to treat HE. Our commercial opportunity may be reduced significantly if our competitors develop and commercialize products that are safer, more effective, more convenient, have fewer side effects or are less expensive than OCR-002. Public announcements regarding the development of competing drugs could adversely affect the commercial potential of OCR-002.
Currently there is no cure for HE other than liver transplantation, which is limited by donor availability and patient eligibility. For treatment of acute HE, the standard of care is treatment with hydration and lactulose. For prevention of recurring HE, although lactulose has been commonly used, rifaximin is the only FDA-approved therapy for reduction in risk of episodic HE recurrence. In addition to currently marketed treatments for chronic HE, Hyperion completed a Phase 2 study of glycerol phenylbutyrate (GPB) for the treatment of hepatic encephalopathy. Hyperion reported that this study met its primary endpoint with significantly fewer patients treated with GPB experiencing HE events as compared to patients receiving placebo. To be commercially viable in the treatment of acute HE, we must demonstrate that OCR-002 shortens the time to meaningful clinical improvement, and to be viable in the chronic treatment of HE, OCR-002 must be deliverable in a practical and competitive dosage form as well as offering sufficient efficacy and tolerability. If a curative treatment for HE is developed other than liver transplantation, OCR-002 may become obsolete for that indication.
Intellectual Property
We are seeking patent protection in the United States and internationally for our products and product candidates. Our policy is to pursue, maintain and defend patent rights developed internally and to protect the technology, inventions and improvements that are commercially important to the development of our business. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of the existing patents upon which our product candidates rely or any patents granted to us in the future will be commercially useful in protecting our technology. We also rely on trade secrets to protect our product candidates. Our commercial success also depends in part on our non-infringement of the patents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property, please see “Risk Factors - Risks Related to Our Intellectual Property.”
Our success depends in part on our ability to:
obtain and maintain proprietary and marketing exclusivity rights for OCR-002;
preserve trade secrets;
prevent third parties from infringing upon the proprietary rights; and
operate our business without infringing the patents and proprietary rights of third parties, both in the United States and internationally.
We own pending patent applications in the United States, Europe, Japan, Canada and other jurisdictions around the world directed to methods of making OCR-002. If issued, one or more of these pending patent applications could provide

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additional patent protection to 2031. However, there is a significant risk that these applications will not issue as patents, or that they may issue with substantially narrower claims than those that are currently sought.
We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
Regulatory Matters
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act and related regulations. Drugs are also subject to other federal, state and local statutes and regulations. Failure to comply with the applicable United States regulatory requirements at any time during the product development process, approval process or after approval may subject an applicant to administrative or judicial sanctions. These sanctions could include the imposition by the FDA or an Institutional Review Board, or IRB, of a clinical hold on trials, the FDA’s refusal to approve pending applications or supplements, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any agency or judicial enforcement action could have a material adverse effect on us.
The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, distribution, record keeping, approval, advertising and promotion of our products.
The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of OCR-002 or any future product candidates or approval of new disease indications or label changes. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.
Marketing Approval
The process required by the FDA before drugs may be marketed in the United States generally involves the following:
nonclinical laboratory and animal tests;
submission of an Investigational New Drug, or IND, application which must become effective before clinical trials may begin;
adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use or uses;
pre-approval inspection of manufacturing facilities and clinical trial sites; and
FDA approval of a new drug application, or NDA, which must occur before a drug can be marketed or sold.  
The testing and approval process requires substantial time and financial resources, and we cannot be certain that any new approvals for our product candidates will be granted on a timely basis if at all.
Our planned clinical trials for our product candidates may not begin or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays in:
obtaining regulatory approval to commence a study;
reaching agreement with third-party clinical trial sites and their subsequent performance in conducting accurate and reliable studies on a timely basis;
obtaining IRB approval to conduct a study at a prospective site;
recruiting patients to participate in a study; and
supply of the drug.

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 Prior to commencing the first clinical trial, an initial IND application must be submitted to the FDA. The IND application automatically becomes effective 30 days after receipt by the FDA unless the FDA within the 30-day time period raises concerns or questions about the conduct of the clinical trial. In such case, the IND application sponsor must resolve any outstanding concerns with the FDA before the clinical trial may begin. A separate submission to the existing IND application must be made for each successive clinical trial to be conducted during product development. Further, an independent IRB for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that site. Informed consent must also be obtained from each study subject. Regulatory authorities, an IRB, a data safety monitoring board or the sponsor, may suspend or terminate a clinical trial at any time on various grounds, including a finding that the participants are being exposed to an unacceptable health risk.
For purposes of NDA approval, human clinical trials are typically conducted in phases that may overlap:  
Phase I - the drug is initially given to healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. These studies may also gain early evidence on effectiveness. During Phase I clinical trials, sufficient information about the investigational drug’s pharmacokinetics and pharmacologic effects may be obtained to permit the design of well-controlled and scientifically valid Phase II clinical trials.
Phase II - studies are conducted in a limited number of patients in the target population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Multiple Phase II clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase III clinical trials.
Phase III - when Phase II evaluations demonstrate that a dosage range of the product appears effective and has an acceptable safety profile, and provide sufficient information for the design of Phase III studies, Phase III trials are undertaken to provide statistically significant evidence of clinical efficacy and to further test for safety in an expanded patient population at multiple clinical study sites. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained, and are intended to further evaluate dosage, effectiveness and safety, to establish the overall benefit-risk relationship of the investigational drug, and to provide an adequate basis for product approval by the FDA.
Phase IV - post-marketing studies, or Phase IV clinical trials, may be conducted after initial marketing approval. These studies may be required by the FDA as a condition of approval and are used to gain additional experience from the treatment of patients in the intended therapeutic indication. The FDA also now has express statutory authority to require post-market clinical studies to address safety issues.
All of these trials must be conducted in accordance with good clinical practice requirements in order for the data to be considered reliable for regulatory purposes.
Government regulation may delay or prevent marketing of product candidates or new drugs for a considerable period of time and impose costly procedures upon our activities. We cannot be certain that the FDA or any other regulatory agency will grant approvals for any future product candidates on a timely basis, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.
The NDA Approval Process
In order to obtain approval to market a drug in the United States, a marketing application must be submitted to the FDA that provides data establishing to the FDA’s satisfaction the safety and effectiveness of the investigational drug for the proposed indication. Each NDA submission requires a substantial user fee payment unless a waiver or exemption applies. The application includes all relevant data available from pertinent nonclinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated by investigators.
The FDA will initially review the NDA for completeness before it accepts it for filing. The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that the application is sufficiently complete to permit substantive review. After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. The FDA may refer applications for novel drug products or drug products that present

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difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and, if so, under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Based on pivotal Phase III trial results submitted in an NDA, upon the request of an applicant, the FDA may grant a priority review designation to a product, which sets the target date for FDA action on the application at six months, rather than the standard ten months. Priority review is given where preliminary estimates indicate that a product, if approved, has the potential to provide a significant improvement compared to marketed products or offers a therapy where no satisfactory alternative therapy exists. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.
After the FDA completes its initial review of an NDA, it will communicate to the sponsor that the drug will either be approved, or it will issue a complete response letter to communicate that the NDA will not be approved in its current form and inform the sponsor of changes that must be made or additional clinical, nonclinical or manufacturing data that must be received before the application can be approved, with no implication regarding the ultimate approvability of the application.
Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical sites to assure compliance with GCP. If the FDA determines the application, manufacturing process or manufacturing facilities are not acceptable, it typically will outline the deficiencies and often will request additional testing or information. This may significantly delay further review of the application. If the FDA finds that a clinical site did not conduct the clinical trial in accordance with GCP, the FDA may determine the data generated by the clinical site should be excluded from the primary efficacy analyses provided in the NDA. Additionally, notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
The testing and approval process for a drug requires substantial time, effort and financial resources and this process may take several years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products.  
The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called Phase IV studies may be made a condition to be satisfied for continuing drug approval. The results of Phase IV studies can confirm the effectiveness of a product candidate and can provide important safety information. In addition, the FDA has express statutory authority to require sponsors to conduct post-market studies to specifically address safety issues identified by the agency.
Even if a product candidate receives regulatory approval, the approval may be limited to specific disease states, patient populations and dosages, or might contain significant limitations on use in the form of warnings, precautions or contraindications, or in the form of onerous risk management plans, restrictions on distribution, or post-marketing study requirements. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.
FDA Post-Approval Requirements
Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including requirements for record-keeping and reporting of adverse experiences with the drug. Drug manufacturers are required to register their facilities with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMPs, which impose certain quality processes, manufacturing controls and documentation requirements upon us and our third-party manufacturers in order to ensure that the product is safe, has the identity and strength, and meets the quality and purity characteristics that it purports to have. Certain states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. We cannot be certain that we or our present or future suppliers will be able to comply with the cGMP and other FDA regulatory requirements. If our present or future suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, fail to approve any NDA or other application, require us

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to recall a drug from distribution, shut down manufacturing operations or withdraw approval of the NDA for that drug. Noncompliance with cGMP or other requirements can result in issuance of warning letters, civil and criminal penalties, seizures and injunctive action.
Labeling, Marketing and Promotion
The FDA closely regulates the labeling, marketing and promotion of drugs. While doctors are free to prescribe any drug approved by the FDA for any use, a company can only make claims relating to safety and efficacy of a drug that are consistent with FDA approval, and the company is allowed to actively market a drug only for the particular use and treatment approved by the FDA. In addition, any claims we make for our products in advertising or promotion must be appropriately balanced with important safety information and otherwise be adequately substantiated. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising, injunctions and potential civil and criminal penalties. Government regulators recently have increased their scrutiny of the promotion and marketing of drugs.
Orphan Designation and Fast Track Status
OCR-002 received orphan designation for the treatment of hyperammonemia and resultant HE in patients with acute liver failure or acute on chronic liver disease. Under the Orphan Drug Act, the FDA may grant orphan designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan designation must be requested before submitting an NDA. Generally, if a drug that receives orphan designation is approved for the orphan indication, it receives orphan drug exclusivity, which for seven years prohibits the FDA approving another product with the same active chemical entity for the same indication. Orphan exclusivity will not bar approval of another product under certain circumstances, including if the new drug is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care. After the FDA grants orphan designation, the identity of the applicant, as well as the name of the therapeutic agent and its designated orphan use, are disclosed publicly by the FDA.
Orphan designation for OCR-002 for HE was granted based on data demonstrating that this disease affects fewer than 200,000 patients in the United States.
Orphan designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product that has orphan designation is the first such product to receive FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that subsequent to approval the FDA may not approve any other applications to market a drug with the same active moiety for the same disease, except in limited circumstances, for seven years. During orphan exclusivity, the FDA may only permit additional companies to market a drug with the same active chemical entity for the designated condition if such companies can demonstrate substantial improvement, or if the company with the orphan drug exclusivity is not able to meet market demand. More than one product may also be approved by the FDA for the same orphan indication or disease as long as the products contain different active ingredients. As a result, even though OCR-002 has received orphan exclusivity, the FDA can still approve other drugs that have a different active chemical entity for use in treating the same indication or disease covered by OCR-002, which could create a more competitive market for us.
OCR-002 has also received Fast Track status from the FDA. Fast Track is a process designed to facilitate the development and expedite the review of drugs to treat serious conditions and fill an unmet medical need. The purpose is to get important new drugs to the patient earlier.
Anti-Kickback and False Claims Laws
In the United States, the research, manufacturing, distribution, sale and promotion of drug products and medical devices are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice, state Attorneys General, and other state and local government agencies. For example, sales, marketing and scientific/educational grant programs must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended, or the Anti-Kickback Statute, the False Claims Act, as amended, the privacy regulations promulgated under the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws. Pricing and rebate programs must comply with the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.

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As noted above, in the United States, we are subject to complex laws and regulations pertaining to healthcare “fraud and abuse,” including, but not limited to, the Anti-Kickback Statute, the federal False Claims Act, and other state and federal laws and regulations. The Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties, and exclusion from participation in federal healthcare programs. In addition, many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to the referral of patients for healthcare services reimbursed by any insurer, not just federal healthcare programs such as Medicare and Medicaid. Due to the breadth of these federal and state anti-kickback laws, the absence of guidance in the form of regulations or court decisions, and the potential for additional legal or regulatory change in this area, it is possible that our future sales and marketing practices and/or our future relationships with physicians might be challenged under anti-kickback laws, which could harm us. Because we intend to commercialize products that could be reimbursed under a federal healthcare program and other governmental healthcare programs, we plan to develop a comprehensive compliance program that establishes internal controls to facilitate adherence to the rules and program requirements to which we will or may become subject.
The federal False Claims Act prohibits anyone from knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Although we would not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state, and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law. For example, pharmaceutical companies have been prosecuted under the federal False Claims Act in connection with their off-label promotion of drugs. Penalties for a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal criminal statutes. If the government were to allege that we were, or convict us of, violating these false claims laws, we could be subject to a substantial fine and may suffer a decline in our stock price. In addition, private individuals have the ability to bring actions under the federal False Claims Act and certain states have enacted laws modeled after the federal False Claims Act.
There are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, as discussed below, beginning in 2013, a similar federal requirement has required manufacturers to track and report to the federal government certain payments made to physicians and teaching hospitals made in the previous calendar year. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state and federal authorities.
Patient Protection and Affordable Care Act
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively, the PPACA, was enacted, which includes measures that have or will significantly change the way health care is financed by both governmental and private insurers. Among the provisions of PPACA of greatest importance to the pharmaceutical industry are the following:
The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Effective in 2010, PPACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs and biologic agents from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. PPACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization as of 2010 and by expanding the

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population potentially eligible for Medicaid drug benefits, to be phased-in by 2014. The Centers for Medicare and Medicaid Services , or CMS, have proposed to expand Medicaid rebate liability to the territories of the United States as well. In addition, PPACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program. The implementation of this requirement by the CMS may also provide for the public availability of pharmacy acquisition of cost data, which could negatively impact our sales.
In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. Effective in 2010, PPACA expanded the types of entities eligible to receive discounted 340B pricing, although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs when used for the orphan indication. In addition, as 340B drug pricing is determined based on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.
Effective in 2011, PPACA imposed a requirement on manufacturers of branded drugs and biologic agents to provide a 50% discount off the negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap.
Effective in 2011, PPACA imposed an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications.
Effective in 2013, PPACA will require pharmaceutical manufacturers to track certain financial arrangements with physicians and teaching hospitals, including any “transfer of value” made or distributed to such entities, as well as any investment interests held by physicians and their immediate family members. Manufacturers will be required to report this information beginning in 2013.
As of 2010, a new Patient-Centered Outcomes Research Institute was established pursuant to PPACA to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. The research conducted by the Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.
PPACA created the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to the Medicare program to reduce expenditures by the program that could result in reduced payments for prescription drugs. Under certain circumstances, these recommendations will become law unless Congress enacts legislation that will achieve the same or greater Medicare cost savings.
PPACA established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending. Funding has been allocated to support the mission of the Center for Medicare and Medicaid Innovation from 2011 to 2019.
Many of the details regarding the implementation of PPACA are yet to be determined, and at this time, it remains unclear the full effect that PPACA would have on our business.
Other Regulations
We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.
Research and Development
We devote a substantial portion of our resources to developing new product candidates. During the years ended December 31, 2013 and 2012, we expended approximately $3.5 million and $1.6 million, respectively, on research and development activities.
Employees

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We had 14 full-time employees as of December 31, 2013. None of our employees are represented by any collective bargaining unit. We believe that we maintain good relations with our employees.
Restructuring and Technology Transfer
On September 11, 2013, our Board of Directors approved a restructuring plan related to the operations of our Sherbrooke, Quebec facility whereby we closed the operations of the Sherbrooke facility effective November 11, 2013. On December 13, 2013, we entered into a Technology Transfer and License Agreement to transfer of ownership of certain equipment and tangible materials, and granted a license to our intellectual property rights, related to our Macrocyclic Template Chemistry (MATCH) discovery platform to Genentech, Inc. and F. Hoffman-La Roche, Ltd., which transfer was completed on February 18, 2014.
Corporate and Available Information
Our principal corporate offices are located at 525 University Avenue, Suite 610, Palo Alto, CA 94301 and our telephone number is (650) 475-0158. We were incorporated in Delaware in 2004. Our internet address is www.ocerainc.com. We make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. Our SEC reports can be accessed through the Investors section of our website. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D. C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov. The information found on our website is not incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.

Item 1A.   Risk Factors

  You should consider carefully the following information about the risks described below, together with the other information contained in this Annual Report on Form 10-K and in our other public filings in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.
Risks Related to Our Business and the Development, Regulatory Approval and Commercialization of our Product Candidates
We depend substantially on the success of our product candidate, OCR-002, and we may not successfully complete the development of OCR-002, obtain regulatory approval or successfully commercialize it.
Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for, and successfully commercialize OCR-002 for the treatment of hyperammonemia and associated hepatic encephalopathy, or HE, in patients with liver cirrhosis, acute liver failure and acute liver injury. The process to develop, obtain regulatory approval for and commercialize OCR-002 is long, complex and costly.
We have not submitted a new drug application, or NDA, or received regulatory approval to market for OCR-002 in any jurisdiction. We have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on consultants and third party contract research organizations to assist us in this process. Securing approval by the U.S. Food and Drug Administration, or FDA, requires the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish a product candidate's safety and efficacy. OCR-002 and any future product candidates we may develop, 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.
OCR-002 and the activities associated with its development and commercialization, including testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. We are not permitted to market OCR-002 or any product candidates we may develop in the United States until we receive approval of an NDA for the product candidate in a particular indication from the FDA. Failure to obtain regulatory marketing approval for a product candidate will prevent us from commercializing the product candidate, and our

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ability to generate revenue will be materially impaired.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the product candidates involved. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for a submitted product application, may cause delays in the approval or rejection of an application. Regulatory approval obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions in which we may seek approval.
The FDA, European Medicine Agency, or EMA, and other regulators have substantial discretion in the approval process and may form an opinion, after review of our data, that the NDA is insufficient to allow approval of OCR-002 for either HE or acute liver failure. The FDA may require that we conduct additional clinical, nonclinical, manufacturing validation or drug product quality studies and submit such data before it will consider or reconsider the NDA. Depending on the extent of these or any other studies, approval of any applications that we submit may be delayed, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve the use of OCR-002 for either HE or acute liver failure. If any of these outcomes occur, we may not receive approval for OCR-002. Even if we obtain FDA approval for OCR-002, the approval might contain significant limitations related to use restrictions for certain age groups, warnings, precautions or contraindications, or may be subject to significant post-marketing studies or risk mitigation requirements. If we are unable to successfully commercialize OCR-002, we may not be able to earn sufficient revenues to continue our business.
Any safety or efficacy concerns, including our ability to show a statistically significant reduction in the clinical severity of HE, or delays in enrollment, in our Phase 2b and planned Phase 3 clinical trials may delay or prevent regulatory approval of OCR-002.
To date, the clinical trials relating to OCR-002 have studied, as a primary endpoint, the ability of OCR-002 to reduce plasma ammonia in the patient population. While we believe that a reduction in patient's plasma ammonia levels is linked to our planned HE endpoint of a reduction in the clinical severity of HE, which we are using in our ongoing Phase 2b clinical trial, and which we intend to use in our planned Phase 3 clinical trials, the study results may not bear this out.
Enrollment in our Phase 2b clinical trial is ongoing. We are amending the trial protocol to expand the enrollment criteria which we believe will allow for a somewhat more rapid enrollment of patients. However, there can be no assurance that enrollment will occur on a timely basis or that the study will ever achieve full enrollment. In the event that safety or efficacy concerns are raised by this study, we may no longer be able to pursue an acute liver failure indication for OCR-002.
Any safety or efficacy concerns, or delays in enrollment, relating to the two externally sponsored Phase 2a studies of OCR-002 may delay or prevent approval of OCR-002.
There are two externally sponsored Phase 2a studies that are ongoing. A study of OCR-002 was initiated in patients with liver cirrhosis and upper gastrointestinal, or GI, bleeding. While, in an open label portion of the study, the first cohort of patients suggested that the drug is well tolerated and provides rapid and durable ammonia reduction within 36 hours of treatment, there can be no assurance that similar results will be demonstrated in the ongoing double-blind, placebo-controlled portion of the study designed to measure ammonia plasma concentration. If the results of this Phase 2a study, which we are currently expected to receive in 2014, are not positive, we may need to spend additional time evaluating the results and our OCR-002 development plans.
The Acute Liver Failure Study Group of the National Institutes of Health is funding a second Phase 2a study of OCR-002, for the treatment of patients with acute liver injury, as well as those that have progressed to acute liver failure following acetaminophen overdose. Enrollment in this clinical trial is ongoing. In March 2013, the FDA approved less restrictive enrollment inclusion criteria for the study, which we believe will allow for a somewhat more rapid enrollment of patients. However, there can be no assurance that enrollment will occur on a timely basis or that the study will ever achieve full enrollment. In the event that safety or efficacy concerns are raised by this study, we may no longer be able to pursue an acute liver failure indication for OCR-002.
The patient populations suffering from both HE and acute liver failure are small. If we are unable to timely enroll our clinical trials or reach the desired enrollment levels, our development program for OCR-002 will likely be delayed.
We estimate that in the United States, the annual number of hospitalizations due to HE is approximately 160,000 cases, and the annual number of hospitalizations due to acute liver failure is approximately 2,000-3,000. To date, the largest clinical trial studying OCR-002 involved approximately 77 patients. We currently plan to enroll substantially greater numbers of patients in our Phase 2b clinical trial and, if the Phase 2b clinical trial is successful, our future Phase 3 clinical trials. If the

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enrollment in these studies is delayed, it will result in delays in our OCR-002 development program and the time to commercialization.
To obtain regulatory approval to market OCR-002 in additional indications and formulations, additional costly and lengthy clinical studies will be required, and the results are uncertain.
As part of the regulatory approval process, we will conduct, at our own expense, nonclinical and clinical studies for each indication and formulation that we intend to pursue. We expect the number of nonclinical and clinical studies that the regulatory authorities will require will vary. Generally, the number and size of clinical trials required for approval depends on the nature of the disease and size of the expected patient population that may be treated with a drug. We may need to perform additional nonclinical and clinical studies, which could result in delays in our ability to market OCR-002 for any additional indications, or in additional formulations.
Serious adverse events or other safety risks could require us to abandon development and preclude or limit approval of OCR-002 to treat HE or acute liver failure.
We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants or if preliminary data demonstrates that OCR-002 or any future product candidates we may develop is unlikely to receive regulatory approval or unlikely to be successfully commercialized. In addition, regulatory agencies, institutional review boards or data safety monitoring boards may at any time order the temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate a clinical trial of OCR-002 to treat HE or acute liver failure, the commercial prospects for OCR-002 will be harmed and our ability to generate product revenues from OCR-002 may be delayed or eliminated.
Even though we have received orphan drug designation, we may not receive orphan drug exclusivity for OCR-002.
As part of our business strategy, we have obtained orphan drug designation in the United States for OCR-002 for the treatment of both HE and acute liver failure. We have also obtained orphan drug designation in the European Union for OCR-002 for the treatment of acute liver failure and are planning to submit such a request for the HE indication in the near future. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA, to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs, the FDA defines "same drug" as a drug that contains the same active chemical entity and is intended for the same use as the drug in question. To obtain orphan drug exclusivity for a drug that shares the same active chemical entity as an already orphan designated drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Even if we obtain orphan drug exclusivity for OCR-002, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition.
Even if the FDA approves OCR-002 in the United States, we may never obtain approval for or commercialize OCR-002 outside of the United States, which would limit our ability to realize our full market potential.
In order to market OCR-002 outside of the United States, we must comply with the regulatory requirements of, and obtain the required regulatory approvals in, other countries. Clinical trials conducted in one country may not be accepted by the regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional nonclinical studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of OCR-002 in those countries. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market

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potential of our products will be harmed.
Our future growth depends, in part, on our ability to penetrate foreign markets, where we are subject to additional regulatory burdens and other risks and uncertainties. However, we have limited experience marketing and servicing our products outside North America.
Our future profitability will depend, in part, on our ability to grow and ultimately maintain our sales in foreign markets. We may rely on third parties to support our foreign operations.
Any foreign operations we establish in the future subject us to additional risks and uncertainties, including:
our customers' ability to obtain reimbursement for procedures using our products in foreign markets;
our inability to directly control commercial activities because we are relying on third parties who may not put the same priority on our products as we would;
the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;
different medical practices and customs in foreign countries affecting acceptance in the marketplace;
import or export licensing requirements;
longer accounts receivable collection times;
longer lead times for shipping;
language barriers for technical training;
reduced protection of intellectual property rights in some foreign countries;
foreign currency exchange rate fluctuations; and
the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
Foreign sales of our products could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions, changes in tariffs and difficulties in staffing and managing foreign operations .
If we obtain approval to commercialize OCR-002 outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.
If OCR-002 is approved outside the United States, we will likely enter into agreements with third parties to commercialize and distribute OCR-002 outside the United States. We expect that we will be subject to additional risks related to entering into or maintaining these international business relationships, including:
different regulatory requirements for drug approvals in foreign countries;
differing U.S. and foreign drug import and export rules;
reduced protection for intellectual property rights in foreign countries;
unexpected changes in tariffs, trade barriers and regulatory requirements;
different reimbursement systems;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
potential liability resulting from development work conducted by these distributors; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.

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Our product candidates are subject to extensive regulatory requirements.
Even if a drug is FDA-approved, regulatory requirements still impose significant restrictions on a product's indicated uses and marketing and the FDA may impose ongoing requirements for potentially costly post-marketing studies. Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs to assure compliance.
OCR-002, if approved, will be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information, including both federal and state requirements in any jurisdiction in which we or a partner commercialize the product. In addition, manufacturers and their facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and applicable foreign regulatory bodies, and to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product's approved label. As such, we may not promote our products for indications or uses for which we do not have FDA or foreign approval, as applicable.
If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing, or labeling of a product, a regulatory agency may impose restrictions on that product, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may:
issue warning letters;
impose civil or criminal penalties;
suspend regulatory approval;
suspend any of our ongoing clinical trials;
refuse to approve pending applications or supplements to approved applications submitted by us;
impose restrictions on our operations, including closing our contract manufacturers' facilities; or
seize or detain products or require a product recall.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenues from OCR-002, if approved. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are unable to generate revenues from the sale of OCR-002, if approved, our potential for achieving profitability will be diminished and the capital necessary to fund our operations will be increased.
Any product for which we obtain marketing approval 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 unanticipated problems with our product candidates, when and if any of them are approved.
Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product's indicated uses or marketing or impose ongoing requirements for potentially costly and time consuming post-approval studies, post-market surveillance or clinical trials. Our product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requesting recall or withdrawal of the product from the market or suspension of manufacturing.

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If we, OCR-002, any future product candidates we may develop, or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:
issue warning letters or untitled letters;
seek an injunction or impose civil or criminal penalties or monetary fines;
suspend or withdraw regulatory approval;
suspend any ongoing clinical trials;
refuse to approve pending applications or supplements or applications filed by us;
suspend or impose restrictions on operations, including costly new manufacturing requirements; or
seize or detain products, refuse to permit the import or export of product, or request us to initiate a product recall.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue. 
The FDA has the authority to require a risk evaluation and mitigation strategy plan as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry.
In addition, if OCR-002 or any future product candidates we may develop are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product's approved labeling. If we receive marketing approval for OCR-002 or any future product candidates we may develop, physicians may nevertheless prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize OCR-002 and any future product candidates we may develop and affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for OCR-002 and any future product candidates we may develop, restrict or regulate post-approval activities and affect our ability to profitably sell any of our product candidates for which we obtain marketing approval.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA's approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements. 
In the United States, the Medicare Modernization Act or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors. 

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In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, the Health Care Reform Law, became law in the United States. The Health Care Reform law is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the new law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with healthcare practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.
If our competitors are able to develop and market products that are preferred over OCR-002, our commercial opportunity for such product candidate will be reduced.
We face competition from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions, which may in the future develop products to treat HE and acute liver failure. Even if we complete development, obtain regulatory approval and commercialize OCR-002 to treat HE in chronic patient population in oral formulation, we will face competition from Salix Pharmaceuticals, Inc., the manufacturer of rifaximin, as well as generic manufacturers of lactulose. Additionally, Hyperion Therapeutics has announced its intent to develop HPN-100 (Ravicti™), currently approved for the treatment of urea cycle disorder, for the treatment of HE, which we expect to compete with OCR-002. In addition, researchers are continually learning more about liver disease including HE, and new discoveries may lead to new therapies. As a result, OCR-002 may be rendered less competitive. Other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
Our commercial opportunity will be reduced if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient or are less expensive than OCR-002. We expect that our ability to compete effectively will depend upon, among other things, our ability to:
successfully and rapidly complete clinical trials and obtain all required regulatory approvals in a timely and cost- effective manner;
maintain patent protection for OCR-002 and otherwise prevent the introduction of generics of OCR-002;
attract and retain key personnel;
build an adequate sales and marketing infrastructure;
obtain adequate reimbursement from third-party payors; and
maintain positive relationships with patient advocacy groups.
The commercial success of OCR-002 will depend upon the degree of market acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community. If we fail to achieve market acceptance of OCR-002, our revenue will be more limited and it will be more difficult to achieve profitability.

OCR-002 may not gain sufficient market acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community and our business may suffer. The degree of market acceptance of OCR-002 will depend on a number of factors, including:
the effectiveness of OCR-002 as compared to other products pertaining to their respective indications;
the prevalence and severity of any side effects;
the market price and patient out-of-pocket costs of OCR-002 relative to other treatment options, including any generics;
relative convenience and ease of administration;
willingness by patients to stop using current treatments and adopt a new treatment;

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restrictions on healthcare provider prescribing of and patient access to our products due to a Risk Evaluation
Mitigation Strategy, or REMS;
the strength of our marketing and distribution organizations;
the quality of our relationship with patient advocacy groups; and
sufficient third-party coverage or reimbursement.
If we fail to obtain and sustain an adequate level of reimbursement for OCR-002 by commercial third-party and governmental payors, our sales, revenue and gross margins would be adversely affected, and we may not find it commercially viable. Third-party payors, such as government or private health care insurers, carefully review and increasingly question the coverage of, and challenge the prices charged for, drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. A current trend in the United States health care industry is toward cost containment. Large public and private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are questioning the coverage of, and challenging the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved health care products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues being lower than anticipated. If the prices for our products decrease or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels, our revenue and prospects for profitability will suffer. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis.
Reimbursement in the European Union must be negotiated on a country-by-country basis and in many countries the product cannot be commercially launched until reimbursement is approved. The negotiation process in some countries can exceed 12 months.
If we are unable to establish a direct sales force for OCR-002 in the United States, our business may be harmed.
We currently do not have an established sales organization. If OCR-002 is approved by the FDA for commercial sale, we may market OCR-002 directly to physicians in the United States through our own sales force. We will need to incur significant additional expenses and commit significant additional management resources to establish and train a sales force to market and sell OCR-002. We may not be able to successfully establish these capabilities despite these additional expenditures. We will also have to compete with other pharmaceutical and life sciences companies to recruit, hire, train and retain sales and marketing personnel. In the event we are unable to successfully market and promote OCR-002, our business may be harmed.
If we fail to establish an effective distribution process utilizing specialty pharmacies, our business could suffer materially and our stock price could decline.
We do not currently have the infrastructure necessary for distributing pharmaceutical products to patients. We intend to contract with a third-party logistics company to warehouse these products and distribute them to specialty pharmacies. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions which require a high level of patient education and ongoing management. This distribution network will require significant coordination with our sales and marketing and finance organizations. Failure to secure contracts with a logistics company and specialty pharmacies could negatively impact the distribution of our products, and failure to coordinate financial systems could negatively impact its ability to accurately report product revenue. If we are unable to effectively establish and manage the distribution process, the commercial launch and sales of our products will be delayed or severely compromised and our results of operations may be harmed.
In addition, the use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:
not provide us with accurate or timely information regarding their inventories, the number of patients who are using our products, or complaints regarding our products;
not effectively sell or support our products;
reduce their efforts or discontinue to sell or support our products;
not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;

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not comply with any requirements imposed on pharmacies through REMS;
be unable to satisfy financial obligations to us; or
cease operations.
Any such failure may result in decreased product sales and lower product revenue, which would harm our business.
If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully develop OCR-002 or any future product candidates we may develop, conduct clinical trials and commercialize OCR-002 or any future product candidates we may develop.
  Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management, as well as other senior scientists and members of our management team. The loss of services of any of these individuals or one or more of our other members of senior management could delay or prevent the successful development of OCR-002 or the commercialization of OCR-002 or any other product candidates we may develop. We need to hire and retain qualified personnel for the development, manufacture and commercialization of drugs. We could experience problems in the future attracting and retaining qualified employees. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We may not be able to attract and retain quality personnel on acceptable terms who have the expertise we need to sustain and grow our business.
If we are found in violation of federal or state "fraud and abuse" laws, we may be required to pay a penalty and/or be suspended from participation in federal or state health care programs, which may adversely affect our business, financial condition and results of operation.
In the United States, we are subject to various federal and state health care "fraud and abuse" laws, including anti- kickback laws, false claims laws and other laws intended to reduce fraud and abuse in federal and state health care programs. The federal Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce the referral of business, including the purchase, order or prescription of a particular drug for which payment may be made under a federal health care program, such as Medicare or Medicaid. Under federal government regulations, some arrangements, known as safe harbors, are deemed not to violate the federal Anti-Kickback Statute. Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the federal Anti-Kickback Statute. False claims laws prohibit anyone from knowingly and willfully presenting or causing to be presented for payment to third-party payors, including government payors, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that we are not provided as claimed, or claims for medically unnecessary items or services. Cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products or the provision of kickbacks has resulted in the submission of false claims to governmental health care programs. Under the Health Insurance Portability and Accountability Act of 1996, we are prohibited from knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Violations of fraud and abuse laws may be punishable by criminal and/ or civil sanctions, including fines and/or exclusion or suspension from federal and state health care programs such as Medicare and Medicaid and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.
Many states have adopted laws similar to the federal anti-kickback statute, some of which apply to the referral of patients for health care services reimbursed by any source, not just governmental payors. In addition, California and a few other states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America, Code on Interactions with Healthcare Professionals. In addition, several states impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties.
Neither the government nor the courts have provided definitive guidance on the application of fraud and abuse laws to our business. Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of its practices may be challenged under these laws. While we believe we has structured our business arrangements to comply with

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these laws, it is possible that the government could allege violations of, or convict us of violating, these laws. If we are found in violation of one of these laws, we could be required to pay a penalty and could be suspended or excluded from participation in federal or state health care programs, and our business, financial condition and results of operations may be adversely affected.
The failure to integrate successfully the businesses of the combined company could adversely affect our future results.
The success of the Merger will depend, in large part, on our ability to realize the anticipated benefits from combining the businesses of Tranzyme and Private Ocera. The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in our failure to achieve some or all of the anticipated benefits of the Merger. Potential difficulties that may be encountered in the integration process include the following:
using our cash and assets efficiently to develop our business;
appropriately managing our liabilities;
potential unknown or currently unquantifiable liabilities associated with the Merger and our operations; and
performance shortfalls as a result of the diversion of the management's attention caused by integrating the companies' operations.
Our success will depend in part on relationships with third parties, which relationships may be affected by third-party preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect our business, financial condition or results of operations.
Our success will be dependent on our ability to maintain and renew the business relationships of both Tranzyme and Private Ocera and to establish new business relationships. There can be no assurance that our management will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition or results of operations.
Risks Related to Our Financial Position and Need for Additional Capital
We anticipate that we will continue to incur net losses for the foreseeable future.
We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and obtaining regulatory approval of OCR-002. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have an adverse effect on stockholders' deficit and working capital.
If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully develop and commercialize our most advanced product candidates.
We will need to obtain additional financing to fund future operations, including the development and commercialization of OCR-002 and to support sales and marketing activities. Moreover, our fixed expenses such as rent, license payments, interest expense and other contractual commitments are substantial and are expected to increase in the future.
Our future funding requirements will depend on many factors, including, but not limited to:
the initiation, progress, timing, scope and costs of our nonclinical studies and clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;
the time and cost necessary to obtain regulatory approvals;
the costs of manufacture clinical and commercial supplies of our product candidates, including OCR-002;
payments of milestones and royalties to third parties;
the costs and timing of establishing sales and marketing capabilities in selected markets;
the terms and timing of establishing collaborations, license agreements and other partnerships on terms favorable to us;
the time and cost necessary to respond to technological and market developments;

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the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
any changes made to, or new developments in, our restated collaboration agreement with UCL Business PLC or any new collaborative, licensing and other commercial relationships that we may establish.
We have not generated any revenue from the sale of any products and do not know when, or if, we will generate any revenue. Until we can generate a sufficient amount of revenue, we may raise additional funds through collaborations and public or private debt or equity financings. Additional funds may not be available when needed on terms that are acceptable, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
We believe that our current cash and cash equivalents will be sufficient to fund our anticipated operating requirements through at least the next twelve months. This estimate is based on a number of assumptions that may prove wrong, and changing circumstances beyond our control may cause the consumption of capital more rapidly than currently anticipated. Inability to obtain funding when needed could seriously harm the business.
Our future financial results could be adversely impacted by asset impairments or other charges.
Applicable accounting standards requires that we test assets determined to have long lives for impairment on an annual, or on an interim basis if certain events occur or circumstances change that would reduce the fair value of an asset below its carrying value. In addition, long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. A significant decrease in the fair value of a long-lived asset, an adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition or an expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated life are among several of the factors that could result in an impairment charge. We intend to evaluate the carrying value of our assets to determine if the merger and private placement indicate that the carrying amounts of such assets may not be recoverable. Such a review could result in an impairment charge, which could have a negative impact on our results of operations and financial position, as well as on the market price of our common stock.
Risks Related to Our Reliance on Third Parties
We have no manufacturing capacity and anticipate continued reliance on third-party manufacturers for the development and commercialization of our products.
We do not currently operate manufacturing facilities for clinical or commercial production of any product. We have no experience in drug formulation, and we lack the resources and the capabilities to manufacture OCR-002 on a clinical or commercial scale. We do not intend to develop facilities for the manufacture of drug substance for clinical trials or products for commercial purposes in the foreseeable future. We rely on third-party manufacturers to produce bulk drug substance and drug products required for our clinical trials. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of our products if and when approved for marketing by the applicable regulatory authorities. We have clinical supplies of the active pharmaceutical ingredient for OCR-002 manufactured for us by a single drug substance supplier Helsinn Chemicals SA. The OCR-002 finished product manufacturing and filling is undertaken by AAI Pharma Service Corp. on our behalf. We have not secured commercial supply agreements with any contract manufacturers and can give no assurance that we will enter commercial supply agreements with any contract manufacturers on favorable terms or at all. Our contract manufacturers' failure to achieve and maintain high manufacturing standards, in accordance with applicable regulatory requirements, or the incidence of manufacturing errors, could result in patient injury or death, product shortages, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel.
Our existing manufacturer and any future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business. In the event of a natural disaster, business failure, strike or other difficulty, we may be unable to replace a third-party manufacturer in a timely manner and the production of our products would be interrupted, resulting in delays and additional costs.

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Some of the intellectual property necessary for the commercialization of our products is or will be licensed from third parties, which will require us to pay milestones and royalties.
We have a license agreement on OCR-002 with UCL Business PLC for worldwide rights to develop and commercialize the product candidate and related technologies for any use. We may be required to make future milestone payments totaling up to $17.0 million upon the achievement of various milestones related to regulatory or commercial events for OCR-002. We may also be required to pay incremental milestone payments for an additional dosage form. We are also obligated to pay a royalty in the low to mid-single digits on future net sales of the licensed product.
We may become obligated to make a milestone or royalty payments when we do not have the cash on hand to make these payments or have budgeted cash for our development efforts. This could cause us to delay our development efforts, curtail our operations, scale back our commercialization and marketing efforts or seek additional capital to meet these obligations, which could be on terms unfavorable to us. Additionally, if we fail to make a required payment and do not cure the failure within the required time period, the licensor may be able to terminate our license to use the licensed technology. If our license from UCL Business PLC is terminated, it will likely be impossible for us to commercialize OCR-002.
We currently depend on third parties to conduct some of the operations of our clinical trials and on a single third-party to supply OCR-002 for our clinical uses in connection with the development of, and application for regulatory approval of, such product candidate.
We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to oversee some of the operations of our clinical trials and to perform data collection and analysis. As a result, we may face additional delays outside of our control if these parties do not perform their obligations in a timely fashion or in accordance with regulatory requirements. If these third parties do not successfully carry out their contractual duties or obligations and meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our financial results and the commercial prospects for OCR-002 or our other potential product candidates could be harmed, our costs could increase and our ability to obtain regulatory approval and commence product sales could be delayed.
Risks Related to Product Liability
If product liability lawsuits are successfully brought against us, we will incur substantial liabilities and may be required to limit the commercialization of OCR-002 or other products.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
decreased demand for our product candidates or products that we may develop;
injury to our reputation;
withdrawal of clinical trial participants;
costs to defend the related litigation;
a diversion of management's time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;
the inability to commercialize our product candidates; and
a decline in our stock price.
In addition, while we continue to take what we believes are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us.

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If product liability lawsuits are successfully brought against us, our insurance may be inadequate.
We are exposed to the potential product liability risks inherent in the testing, manufacturing and marketing of human pharmaceuticals. We plan to maintain insurance against product liability lawsuits for commercial sale of OCR-002, if approved for sale. We currently maintain insurance for the clinical trials of product candidates. Biopharmaceutical companies must balance the cost of insurance with the level of coverage based on estimates of potential liability. Historically, the potential liability associated with product liability lawsuits for pharmaceutical products has been unpredictable. Although we believe that our current insurance is a reasonable estimate of our potential liability and represents a commercially reasonable balancing of the level of coverage as compared to the cost of the insurance, we may be subject to claims in connection with clinical trials and commercial use of OCR-002 and other product candidates we may develop, for which existing insurance coverage may not be adequate.
The product liability insurance we will need to obtain in connection with the commercial sales of our product and product candidates, if and when they receive regulatory approval, may be unavailable in meaningful amounts or at a reasonable cost. If we are the subject of a successful product liability claim that exceeds the limits of any insurance coverage obtained, we may incur substantial charges that would adversely affect earnings and require the commitment of capital resources that might otherwise be available for the development and commercial launch of product programs.
Risks Related to Our Intellectual Property
We may not be able to protect our proprietary technology in the marketplace.
We place considerable importance on obtaining patent protection for new technologies, products and processes because our commercial success will depend, in part, on obtaining patent protection for new technologies, products and processes, successfully defending these patents against third-party challenges and successfully enforcing our patents against third party competitors. To that end, we file applications for patents covering compositions of matter or uses of our product candidates or our proprietary processes as well as other intellectual property important to our business.
Where appropriate, we seek patent protection for certain aspects of our technology. Patent protection may not be available for some of the product candidates or technology we are developing. If we must spend significant time and money protecting or enforcing our patents, designing around patents held by others or licensing, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed. We may not develop additional proprietary products which are patentable.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. Accordingly, our patent applications may never be approved by U.S. or foreign patent offices and the patents and patent applications relating to our product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technologies. Publication of information related to OCR-002 and future product candidates we may develop may prevent us from obtaining or enforcing patents relating to these product candidates, including without limitation composition-of- matter patents, which are generally believed to offer the strongest patent protection.
We own, or have licensed, patents in the United States and in certain foreign jurisdictions related to OCR-002. Patents that we own or license do not ensure the protection of our intellectual property for a number of reasons, including without limitation the following:
we may be required to disclaim part of the term of one or more patents;
there may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim;
there may be prior art of which we are aware, which we do not believe affects the validity or enforceability of a patent claim, but which, nonetheless ultimately may be found to affect the validity or enforceability of a patent claim;
there may be other patents existing in the patent landscape for OCR-002 that will affect our freedom to operate;
if our patents are challenged, a court could determine that they are not valid or enforceable;
a court could determine that a competitor's technology or product does not infringe our patents; and
our patents could irretrievably lapse due to failure to pay fees or otherwise comply with regulations, or could be subject to compulsory licensing.

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If we encounter delays in our development or clinical trials, the period of time during which we could market our products under patent protection would be reduced.
Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to ours, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference, opposition or invalidity proceedings before U.S. or foreign patent offices. In addition, under the America Invents Act of 2011, or AIA, the U.S. patent system, among other things, will transition from a first-to-invent to a first-to-file patent system, will increase the scope of prior art available for patentability and invalidity determinations, and will introduce new procedures, including post-grant review and inter parties review, for challenging U.S. patents once they have granted.  The various provisions of the AIA, once they become effective, may impact our ability to secure meaningful patent protection for inventions that we develop in the future.
We also rely on trade secrets to protect technology in cases when we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information. Our research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborators and advisors, our ability to receive patent protection or protect our proprietary information may be imperiled.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of our in-licensed patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing OCR-002 or any future products we may develop.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. For example, there could be issued patents of which we are not aware that our products infringe. There also could be patents that we believe we do not infringe, but that we may ultimately be found to infringe. Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications we filed. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our products infringe. For example, pending applications may exist that provide support or can be amended to provide support for a claim that results in an issued patent that our product infringes.
Third parties may assert that we are employing their proprietary technology without authorization. If a court held that any third-party patents are valid, enforceable and cover OCR-002 and any future products we may develop or their use, the holders of any of these patents may be able to block our ability to commercialize OCR-002 or any future products we may develop unless we obtained a license under the applicable patents, or until the patents expire. We may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introduction of OCR-002 or any future products we may develop or lead to prohibition of the manufacture or sale of products by us.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

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We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position.
Any lawsuits relating to infringement of intellectual property rights necessary to defend us or enforce our rights will be costly and time consuming.
Our ability to defend our intellectual property may require us to initiate litigation to enforce our rights or defend our activities in response to alleged infringement of a third-party. In addition, we may be sued by others who hold intellectual property rights who claim that their issued patents are infringed by OCR-002 or any future products or product candidates. These lawsuits can be very time consuming and costly. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally.
In addition, our patents and patent applications, or those of our licensors, could face other challenges, such as interference proceedings, opposition proceedings, and re-examination proceedings. Any of these challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to challenge. Any of these challenges, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert our management's time and attention.
We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.
As is commonplace in our industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject in the future to claims that our employees or prospective employees are subject to a continuing obligation to their former employers (such as non-competition or non-solicitation obligations) or claims that our employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
If we do not obtain protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for OCR-002 or any future product candidates we may develop, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of OCR-002 or any future product candidates we may develop, one or more of our U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.
Risks Related to Ownership of Our Capital Stock
Our principal stockholders, executive officers and directors own a significant percentage of our common stock and will be able to exert a significant control over matters submitted to the stockholders for approval.
Our officers and directors, and stockholders who own more than 5% of our common stock beneficially own a significant percentage of our common stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, if they acted together, could significantly influence all matters requiring approval by the stockholders, including the election of directors. The interests of these stockholders may not always coincide with the interests

28




of other stockholders.
The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock could incur substantial losses.
Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price at which it was purchased. The market price for our common stock may be influenced by many factors, including:
results of the development efforts involving OCR-002 or any future product candidates we may develop, those of our competitors or those of other companies in our market sector;
regulatory developments in the United States and foreign countries;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in the structure of healthcare payment systems, especially in light of current reforms to the U.S. healthcare system;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts' reports or recommendations;
sales of our stock by insiders and 5% or greater stockholders;
general economic, industry and market conditions;
additions or departures of key personnel;
intellectual property, product liability or other litigation against us;
expiration or termination of our relationships with our collaborators; and
the other factors described in this “Risk Factors” section.
In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies' stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management's attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.
Our quarterly operating results may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:
variations in the level of expenses related to our development programs;
addition or termination of clinical trials;
any intellectual property infringement lawsuit in which we may become involved;
regulatory developments affecting OCR-002 or any future product candidates we may develop;
our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements; and
the achievement and timing of milestone payments under our existing strategic partnership agreements.
If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.
Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of the

29




Merger and prior or future offerings of our stock.
Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long term tax exempt rate and the value of the company's stock immediately before the ownership change. We may be unable to offset future taxable income, if any, with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax liability.
It is likely that the Merger and other sales of our stock, either on a standalone bases or when combined with future transactions, have caused or will cause us to undergo one or more additional ownership changes. In that event, we generally would not be able to use our pre-change loss or credit carryovers or certain built-in losses prior to such ownership change to offset future taxable income in excess of the annual limitations imposed by Sections 382 and 383 and those attributes already subject to limitations as a result of our prior ownership changes may be subject to more stringent limitations.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:
the prohibition on actions by written consent of our stockholders;
the limitation on who may call a special meeting of stockholders;
the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;
the ability of our board of directors to issue preferred stock without stockholder approval, which would increase the number of outstanding shares and could thwart a takeover attempt; and
the requirement of at least 75% of the outstanding common stock to amend any of the foregoing provisions.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. 
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Future sales of our common stock may cause our stock price to decline.
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after legal restrictions lapse, the trading price of our common stock could decline significantly. Moreover, a relatively small number of our stockholders own large blocks of shares. We cannot predict the effect, if any, that public sales of these

30




shares or the availability of these shares for sale will have on the market price of our common stock.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. The internal control report must contain (a) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (b) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, and (c) management's assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective.
To achieve compliance with Section 404 within the prescribed period, we are engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will have dedicated internal resources, engaged outside consultants and adopted a detailed work plan to (a) assess and document the adequacy of internal control over financial reporting, (b) take steps to improve control processes where appropriate, (c) validate through testing that controls are functioning as documented, and (d) implement a continuous reporting and improvement process for internal control over financial reporting. Though smaller reporting companies are not required to have their external auditors test internal controls or provide an attestation report on internal control over financial reporting, management will still need to do its assessment and there is a risk that we will not be able to conclude within the prescribed time frame that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We have limited research coverage by securities and industry analysts and may not maintain such coverage or obtain research coverage by additional securities and industry analysts. If we do not maintain such existing coverage, and additional securities or industry analysts do not commence coverage of our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.
    
Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
On October 10, 2013, our corporate headquarters were moved to 761 square feet of office space located at 525 University Avenue, Palo Alto, California under a lease that commenced on October 10, 2013 and will terminate on May 31, 2015.     
Prior to the Merger, our corporate headquarters and clinical development operations were located in 5,000 square feet of office space located at 12651 High Bluff Drive, San Diego, California under a lease that terminated on January 31, 2014.
Subsequent to the Merger, our clinical development operations were moved to 8,126 square feet of office space located at 5001 South Miami Boulevard, Durham, North Carolina under a lease that will terminate on January 31, 2015. We have an option to renew the lease term for an additional 12 months at the prevailing rental rate at the end of the term and the right of first offer on additional space located on the property's third floor.
Approximately 7,323 square feet of office and laboratory space that were leased for our research operations based in Sherbrooke, Quebec on a month to month basis was terminated in November 2013 as a result of our restructuring of operations at this facility.

31




We believe that our facilities are suitable and adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms.
Item 3. Legal Proceedings
We are not currently subject to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
PART II.
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
On July 15, 2013 we completed a reverse merger with Tranzyme, Inc., symbol "TZYM" on the NASDAQ Global Market. Following the merger, we changed the name of the combined company to Ocera Therapeutics, Inc. and changed the symbol to "OCRX". The following table details the quarterly high and low sales prices for the common stock as reported by The NASDAQ Global Market for TZYM from January 1, 2012 through July 15, 2013, retroactively adjusted for a 12-for-1 reverse stock split, and for OCRX from July 16, 2013 through December 31, 2013.
 
Price Range
Fiscal year ending December 31, 2012
High
Low
1st Quarter
$5.64
$1.68
2nd Quarter
$3.98
$2.56
3rd Quarter
$5.16
$3.57
4th Quarter
$4.79
$0.53
Fiscal year ending December 31, 2013
 
 
1st Quarter
$0.68
$0.44
2nd Quarter
$0.63
$0.40
3rd Quarter
$12.09
$0.45
4th Quarter
$13.35
$7.00
    
On March 14, 2014, the last trading day prior to March 17, 2014, the closing price for our common stock as reported by the NASDAQ Global Market was $13.24. We paid no cash dividends in 2013. We currently intend to retain all of our future earnings to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future.
July 2013 Merger and Private Placement    
On July 15, 2013, Tranzyme, Inc., or Tranzyme, completed a business combination, or the merger, with Ocera Therapeutics, Inc., a privately held Delaware corporation developing novel therapeutics for liver diseases, or Private Ocera, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of April 23, 2013, or the Merger Agreement, by and among Tranzyme, Private Ocera and Terrapin Acquisition, Inc., a Delaware corporation and a newly-formed, wholly-owned subsidiary of Tranzyme, or the Merger Subsidiary. Pursuant to the Merger Agreement, Merger Subsidiary merged with and into Private Ocera, with Private Ocera, renamed as Ocera Subsidiary, Inc., surviving the merger as a wholly-owned subsidiary of Tranzyme. Private Ocera is considered the acquiring company for accounting purposes as upon completion of the Merger, Private Ocera's former stockholders held a majority of the voting interest of the combined company. In addition, upon closing of the Merger, six of the nine members of the board of directors of the combined company were former members of the Private Ocera board of directors and therefore possessed majority control of the

32




board of directors of the combined company. Immediately following the Merger, we changed the name of the company to “Ocera Therapeutics, Inc.”
In connection with the Merger, on July 15, 2013, Tranzyme, Inc. effected a 12-to-1 reverse stock of its outstanding common stock. As a result of the Merger and after giving effect to a 12-to-1 reverse stock split, each outstanding share of Private Ocera's common stock was converted into the right to receive approximately 0.11969414 shares of our common stock. At the effective time of the Merger, the terms of each of Private Ocera's options and warrants were assumed by us and each outstanding option to purchase Private Ocera's common stock and warrant to purchase Private Ocera's common stock was converted into an option or warrant to purchase our common stock, respectively. No fractional shares of our common stock were issued in connection with the Merger. Instead, Ocera stockholders received cash in lieu of any fractional shares of our common stock such stockholders would otherwise be entitled to receive in accordance with the Merger Agreement.
On April 23, 2013, concurrently with the execution of the Merger Agreement, we entered into a Securities Purchase Agreement, or the Financing Agreement, with certain existing Private Ocera stockholders and their affiliates. Pursuant to the Financing Agreement, immediately following the consummation of the Merger, we sold approximately $20 million in shares of our common stock (the Financing) to the financing participants at a per share purchase price of $6.0264, representing the volume weighted average closing price of our common stock for the 10 trading days ending the day prior to the closing of the Merger. The Financing was consummated on July 15, 2013 pursuant to a private placement exempt from registration under Section 4(2) and Regulation D under the Securities Act of 1933, as amended, and the rules promulgated thereunder. Concurrently with the execution of the Financing Agreement, we entered into a Registration Rights Agreement that granted customary registration rights to the participants in the Financing.
November 2013 Private Placement
On November 8, 2013, we closed on a private placement financing contemplated by the Securities Purchase Agreement, or the Agreement, dated as of November 5, 2013 by and among us and entities affiliated with Vivo Capital, Venrock, Deerfield Management, Great Point Partners, QVT Financial, RA Capital Management, InterWest Partners, Three Arch Opportunities Fund and certain other purchasers identified therein, or the Purchasers, pursuant to which we issued an aggregate of 3,940,887 units, or Units, for an aggregate purchase price of $28,000,000 in reliance upon exemptions from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, and on Regulation D promulgated thereunder. Each Unit consisted of one share of our common stock and a warrant to acquire 0.20 shares of our common stock at an exercise price of $7.663 per share, or Warrants. The Units consist of an aggregate of 3,940,887 shares of common stock, or the Shares, and Warrants exercisable for an aggregate of 788,177 shares of our common stock, or the Warrant Shares. Concurrently with the execution of the Agreement, we entered into a Registration Rights Agreement that granted customary registration rights to the Purchasers. We filed a registration statement on Form S-3 registering the resale of the Shares and Warrant Shares on December 6, 2013, which was declared effective on December 16, 2013.
Comparative Stock Performance Graph
The graph below matches our cumulative 32-month total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Biotechnology index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from April 4, 2011 to December 31, 2013. Performance from April 4, 2011 through July 15, 2013 represents Tranzyme, symbol "TZYM" on the NASDAQ Global Market and from July 15, 2013 through December 31, 2013 represents Ocera Therapeutics, Inc., symbol "OCRX" on the NASDAQ Global Market. Historical stockholder return is not necessarily indicative of the performance to be expected for any future periods.

33




Holders of Record
As of March 14, 2014, there were approximately 81 holders of record of our common stock.
Dividends
We have not paid any cash dividends on our common stock since inception and do not anticipate paying cash dividends in the foreseeable future and any future indebtedness that we may incur could preclude us from paying dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form 10-K.     
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data have been derived from our audited consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. The information set forth below is historical and is not necessarily indicative of our results of future operations.

34




 
Year Ended December 31,
 
2013
 
2012
 
(in thousands, except per share data)
Consolidated Statements of Operations and Comprehensive Loss Data:
 
 
 
Revenue:
 
 
 
Royalty revenue
$
85

 
$

Operating expenses:
 
 
 
Research and development
3,549

 
1,642

General and administrative
8,500

 
1,739

Amortization of intangible assets
295

 

Impairment of intangible assets
3,070

 

Total operating expenses
15,414

 
3,381

Other income (expense), net
(160
)
 
(227
)
Net loss from continuing operations
(15,489
)
 
(3,608
)
Net loss from discontinued operations
(2,025
)
 

Net loss
$
(17,514
)
 
$
(3,608
)
 
 
 
 
Net loss per share from continuing operations— basic and diluted
$
(2.52
)
 
$
(5.76
)
Net loss per share from discontinued operations— basic and diluted
(0.33
)
 

Net loss per share— basic and diluted
$
(2.85
)
 
$
(5.76
)
Shares used to compute net loss per share— basic and diluted
6,145,731

 
626,593

 
 
 
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Consolidated Balance Sheets Data:
 
 
 
Cash and cash equivalents
$
15,533

 
$
2,303

Short and long-term investments
31,680

 

Working capital (deficit)
42,605

 
(1,054
)
Total assets
51,820

 
2,410

Convertible notes payable

 
2,908

Convertible preferred stock

 
61,743

Accumulated deficit
(81,486
)
 
(63,972
)
Total stockholders' equity (deficit)
45,132

 
(62,806
)
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections or earnings. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many

35




of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Overview
We are a clinical stage biopharmaceutical company focused on the development of OCR-002 for the treatment of acute and chronic hyperammonemia and associated hepatic encephalopathy, or HE, in patients with liver cirrhosis, acute liver failure and acute liver injury.
OCR-002 is a novel, proprietary molecule comprised of phenylacetate bound with ornithine functioning as an ammonia scavenger to treat acute and chronic HE.
OCR-002 has received Orphan Drug designation and Fast Track status from the U.S. Food and Drug Administration, or FDA, for the treatment of hyperammonemia and resultant HE in patients with acute liver failure or acute on chronic liver disease.
Our strategy is to focus clinical development activities on the intravenous form of OCR-002 to treat acute HE in hospitalized patients while beginning formulation work on the oral form of OCR-002 which would focus on acute-to-chronic care of HE patients.
Clinical Activity
Currently, we are conducting a Phase 2b study of OCR-002 and, in addition, there are two externally-sponsored Phase 2a trials underway. One of these Phase 2a studies is being conducted in Spain, studying ammonia lowering in patients with upper gastrointestinal bleeding. The other is a study sponsored by National Institutes of Health, or NIH, of hyperammonemia in patients with acute liver failure. The first phase of the Spanish study, which has been completed, was an open-label study of 10 patients who received OCR-002 showing a rapid decline in ammonia in these patients compared with historic controls. The second phase of the study is a double-blind placebo controlled study of 38 patients, of which 30 have been enrolled. The NIH study is open label study of OCR-002 in acute liver failure. These patients are often young and otherwise healthy, with liver failure caused by acetaminophen overdose. 11 patients have been enrolled to date and all patients have recovered.
We commenced our Phase 2b study of OCR-002 in the fourth quarter of 2013 and enrolled our first patient in the study in January 2014. This is a randomized, placebo-controlled, double blind trial evaluating the efficacy, safety and pharmacokinetics of OCR-002 in hospitalized patients with liver cirrhosis and an acute episode of HE. Initial patient enrollment is below our expectations due in large part to higher screening failures. To increase the pace of enrollment, we are amending the study protocol to broaden the eligible patient criteria and adding clinical trial sites in Europe. We expect to complete trial enrollment mid-2015.
Previously, we completed preclinical efficacy studies of OCR-002 in two animal models, rat with bile duct ligation as a model for chronic liver disease and pig with hepatic artery ligation as a model for acute liver failure. In the rat model, OCR-002 significantly reduced arterial ammonia, and in the pig model, OCR-002 significantly reduced arterial ammonia, brain ammonia and intracranial pressure. We also completed Phase 1 pharmacokinetic and safety studies of OCR-002 in a parallel ascending dose study of 54 healthy volunteers and 43 stable cirrhotic patients. Through this study, we established pharmacokinetic profile of the OCR-002 and identified safety margins.
Merger
On July 15, 2013, Tranzyme, Inc., or Tranzyme, completed its merger, or the Merger, with Ocera Therapeutics, Inc., a privately held Delaware corporation, or Private Ocera, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of April 23, 2013, or the Merger Agreement, by and among Tranzyme, Private Ocera and Terrapin Acquisition, Inc., a wholly-owned subsidiary of Tranzyme, or the Merger Subsidiary. Pursuant to the Merger Agreement, Merger Subsidiary merged with and into Private Ocera, with Private Ocera, renamed as Ocera Subsidiary, Inc., surviving the merger as a wholly-owned subsidiary of the combined company. Immediately following the Merger, the combined company changed its name from “Tranzyme, Inc.” to “Ocera Therapeutics, Inc.”

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Restructuring of Canadian Operations and sale of related assets
In September 2013, we approved a restructuring plan related to Tranzyme Pharma, Inc., our Canadian subsidiary acquired in the Merger that previously housed the research operations of Tranzyme, including Tranzyme’s proprietary chemistry technology platform, MATCH (Macrocyclic Template Chemistry), used to develop its pre-clinical and clinical stage product candidates. The goal of the restructuring plan was to enable us to focus management and financial resources on advancing OCR-002. In November 2013, we terminated most employees at the Canadian location except those needed for final closure of the facility. In December 2013, we entered into a Technology Transfer and License Agreement with the Roche Group, including the Research and Early Development arms of both Genentech and Roche, for rights to the MATCH discovery platform. In February 2014, we have transferred ownership of equipment and materials stipulated under this agreement, and in the aggregate have received payments totaling $4.0 million in conjunction with the agreement.
Financing
On April 23, 2013, concurrently with the execution of the Merger Agreement, Tranzyme entered into a Securities Purchase Agreement with certain former Private Ocera stockholders and their affiliates and a Registration Rights Agreement that granted customary registration rights to the participants of the Financing. Pursuant to the Securities Purchase Agreement, immediately following the consummation of the Merger, we sold approximately $20 million of our common stock to the parties at a per share purchase price of $6.0264.
On November 8, 2013, we closed on a private placement financing contemplated by the Securities Purchase Agreement, or the Agreement, dated as of November 5, 2013 by and among the entities affiliated with Vivo Capital, Venrock, Deerfield Management, Great Point Partners, QVT Financial, RA Capital Management, InterWest Partners, Three Arch Opportunities Fund and certain other purchasers identified therein, or the Purchasers, pursuant to which we issued an aggregate of 3,940,887 units, or Units, for an aggregate purchase price of $28 million. Each Unit consisted of one share of our common stock and a warrant to acquire 0.20 shares of our common stock at an exercise price of $7.663 per share, or Warrants. The Units consist of an aggregate of 3,940,887 shares of common stock, or the Shares, and Warrants exercisable for an aggregate of 788,177 shares of our Common Stock, or the Warrant Shares. Concurrently with the execution of the Agreement, we entered into a Registration Rights Agreement that granted customary registration rights to the Purchasers. On December 6, 2013, we filed a registration statement registering the resale of the Shares and Warrant Shares subject to this private placement, which registration statement was declared effective on December 16, 2013.
Licensing
In December, 2008, we entered into an exclusive license with the University College of London, or UCL, for worldwide rights to develop and commercialize OCR-002. Under the most recent amendment of that license dated February 2013, we are obligated to pay milestone payments upon completion of certain clinical trials, receipt of regulatory approval and upon achievement of defined net sales levels. In addition, we are required to pay royalties on net sales during the term of the agreement.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to each of our critical accounting areas. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Accrued Expenses
As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with selected service providers and

37




make adjustments, if necessary. To date, we have not adjusted our estimate at any particular balance sheet date by any material amount. Examples of estimated accrued expenses include:
fees paid to investigative sites in connection with clinical trials;
fees paid to contract manufacturers in connection with the production of clinical trial materials; and
professional service fees.     
We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.  
Fair Value Measurements
The carrying amounts of certain of our financial instruments, including cash and cash equivalents, short-term investments and long-term investments, are stated at fair value. We account for the fair value of our financial instruments in accordance with the provisions of the Fair Value Measurement topic of the Financial Accounting Standards Board Codification, or the Codification.
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. We apply the market approach valuation technique for fair value measurements on a recurring basis and attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. All of our cash equivalents and short-term investments are measured using inputs classified at Level 1 or Level 2 within the fair value hierarchy. Level 1 inputs are quoted prices in active markets for identical assets. Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Level 3 inputs are unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third-party data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and market reference data.
Stock-Based Compensation
The provisions of the Compensation - Stock Compensation topic of the Codification establish accounting for stock-based awards exchanged for employee services. In accordance with the topic, for stock options, awards and stock purchase rights, stock-based compensation cost is measured on the grant date, based on the fair value of the award, and is recognized as expense over the requisite employee service period.
We estimate the fair value of stock options and stock purchase rights using a Black-Scholes valuation model which require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. We have opted to use the simplified method for estimating the expected term as provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average time-to-vesting and the contractual life of the options. The expected stock price volatility assumption was determined by examining the historical volatilities of a group of industry peers. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model, and the resulting charge is expensed using the straight-line attribution method over the vesting period. Restricted stock units are measured at the fair value of our common stock on the date of grant and expensed over the period of vesting using the straight-line attribution approach. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived, exchange-traded options that have no vesting restrictions and are fully transferable.     
Research and Development Expenses
Research and development expenses consisted of costs associated with external research and development expenses incurred under agreements with (i) third-party investigative sites, where a substantial portion of our preclinical studies and all

38




of our clinical trials are conducted, (ii) third-party manufacturing organizations, where a substantial portion of our preclinical supplies and all of our clinical supplies are produced, and (iii) consultants; employee-related expenses, which include salaries and benefits; and facilities, depreciation and amortization and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.
Business Combinations
We accounted for the merger with Tranzyme as a reverse merger under the acquisition method of accounting. The consideration paid to acquire Tranzyme was measured at fair value and included the exchange of our common stock and assumption of vested stock options. This allocation of the purchase price resulted in recognition of intangible assets related to customer relationships, developed technology and goodwill. The allocation of purchase price requires us to make significant estimates and assumptions. The key assumptions in determining the fair value of intangible assets were the discount rate and the probability assigned to the milestone or royalty being achieved.
Discontinued Operations
On September 11, 2013, the Board of Directors approved a restructuring plan related to the operations of its Sherbrooke, Quebec facility whereby the Company closed the operations of the facility effective as of November 11, 2013. On December 13, 2013, the Company entered into a Technology Transfer and License Agreement to sell the Company’s MATCH discovery platform and license the related intellectual property rights. The Company concluded that since the Sherbrooke, Quebec operations and MATCH discovery platform comprise a component with distinct operations and cash flows that will be eliminated from ongoing operations and the Company will not have significant involvement after the disposal, this component will be accounted for as discontinued operations. The results of operations of the components to be disposed of and related restructuring costs have been classified as net loss from discontinued operations from their acquisition on July 15, 2013 through December 31, 2013. The assets and liabilities of Tranzyme Pharma Inc. have been classified as assets and liabilities, respectively, of discontinued operations.
Intangible Assets and Goodwill
We recorded intangible assets and goodwill upon the acquisition of Tranzyme on July 15, 2013. Acquired intangible assets are amortized on a straight-line basis over the remaining estimated economic life of 2.5 to 5 years. We review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparing its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that the carrying amount is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. We recorded an impairment loss of $1.5 million and $3.1 million in the fourth quarter and year ended December 31, 2013, respectively, due to the termination of work on macrocyclic compounds under collaboration with Bristol-Myers Squibb, or BMS.
We perform an annual qualitative assessment of our goodwill to determine if any events or circumstances exist, such as an adverse change in business climate or adverse developmental or regulatory results of OCR-002, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. The determination of fair value requires significant judgment and estimates. There has been no impairment of goodwill for any periods presented.

39




Results of Operations
Year Ended December 31, 2013 and 2012     
(in thousands)
Year Ended
December 31,
 
2013
 
2012
 
 
Revenue
 
 
 
Royalty revenue
$
85

 
$

Total Revenue
85

 

Operating expenses:
 
 
 
Research and development
3,549

 
1,642

General and administrative
8,500

 
1,739

Amortization of intangibles
295

 

Impairment of intangibles
3,070

 

Total operating expenses
15,414

 
3,381

Total other income (expense), net
(160)

 
(227)

Net loss from continuing operations
(15,489
)
 
(3,608)
Net loss from discontinued operations
(2,025
)
 

Net loss
$
(17,514
)
 
$(3,608)
Unrealized gain on investments
3

 

Comprehensive loss
$
(17,511
)
 
$
(3,608
)
Revenues
We generated $0.1 million in revenue for the year ended December 31, 2013 from royalty revenue from a licensing agreement compared with no revenue in 2012. Prior to acquiring this license agreement in the merger with Tranzyme, Inc. on July 15, 2013, we had not generated any revenue from operations.
Costs and Expenses
Research and Development Expenses
Our research and development expenses increased by $1.9 million for the year ended December 31, 2013 compared to 2012. The increase in expenses for the year ended December 31, 2013 was primarily due to the commencement of our Phase 2b trial for OCR-002.
 Ocera expenses research and development expenses as they are incurred. Ocera has been developing OCR-002 and AST-120 in parallel, and typically use its employees, consultants and infrastructure resources across its two programs. Thus, some of its research and development expenses are not attributable to an individual program, but rather are allocated across its two programs and these costs are included in other research and development expense as detailed below. Allocated expenses include salaries, stock-based compensation and related benefit expenses for its employees, fees paid for clinical studies and contract manufacturing expenses. In January 2014, Kuereha was notified that we had discontinued work on AST-210 and will be terminating the license.
The following table shows its research and development expenses for the years ended December 31, 2013 and 2012:
(in thousands)
Twelve months ended December 31,
 
2013
 
2012
OCR-002
$
1,259

 
$
638

AST-120
33

 
56

Other research and development expenses
2,257

 
948

Total
$
3,549

 
$
1,642


40





Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.
Due to the significant risks and uncertainties inherent in the clinical development and regulatory approval processes, we cannot reasonably estimate the cost to complete projects and development timelines for their completion. Enrollment in clinical trials might be delayed or occur faster than anticipated for reasons beyond our control, requiring additional cost and time or accelerating spending. Results from clinical trials might not be favorable, or might require us to perform additional unplanned clinical trials, accelerating spending, requiring additional cost and time, or resulting in termination of the project. Regulatory reviews can also be delayed. Process development and manufacturing scale-up for production of clinical and commercial product supplies might take longer and cost more than our forecasts. As a result, clinical development and regulatory programs are subject to risks and changes that might significantly impact cost projections and timelines. We will need to raise additional money to advance development and commercialization of OCR-002 which may include entering into strategic alliances.
General and Administrative Expenses
Our general and administrative expenses increased by $6.8 million for the year ended December 31, 2013 compared to 2012. The increase in general and administrative expense was primarily due to expenses incurred for the Merger, including employee severance, legal and accounting fees and other expenses associated with our corporate governance including directors and officer insurance and fees.
We expect that our general and administrative expenses may increase in the future as we expand our operating activities, maintain and expand our patent portfolio, and incur additional costs associated with public company support including legal fees, accounting fees and director and officers' liability insurance.
Amortization of intangibles
On July 15, 2013, we capitalized approximately $5.9 million of intangible assets acquired in the Merger. $2.2 million of these intangible assets acquired were reclassified to discontinued operations and assets held for sale during the fourth quarter of 2013. We recognized $295,000 for the amortization of the intangible assets for the year ended December 31, 2013 compared to no amortization in 2012.
Impairment of intangibles
Subsequent to the Merger with Tranzyme, during our periodic reviews of the collaboration agreement with BMS, we determined that BMS will terminate its efforts on the development of all macrocyclic compounds under development pursuant to the on-going collaboration agreement. As a result, we recognized an impairment loss of $3.1 million for the year ended December 31, 2013 associated with the termination of development by BMS pursuant to the collaboration agreement.
Other Income (Expense), Net
Interest expense consists primarily of interest accrued and amortization of debt issuance costs on convertible notes payable and the change in fair value of preferred stock warrants. The decrease in interest income (expense) for the year ended December 31, 2013 compared to the prior year is due to the conversion of convertible notes payable to common stock as a result of the Merger. Preferred stock warrants were converted to common stock warrants as a result of the Merger eliminating the terms that caused the change in fair value of the warrants to be recorded in operating results.
Net loss from discontinued operations
On September 11, 2013, our Board of Directors approved a restructuring plan related to the operations of our Sherbrooke, Quebec facility whereby we closed the operations of the facility effective as of November 11, 2013. On December 13, 2013, we entered into a Technology Transfer and License Agreement to sell our MATCH discovery platform and license the related intellectual property rights. We concluded that since the Sherbrooke, Quebec operations and MATCH discovery platform comprised a component with distinct operations and cash flows that would be eliminated from our ongoing operations, this component would be accounted for as discontinued operations.

41




The following table summarizes the results of discontinued operations for the year ended December 31, 2013:
(in thousands)
Year Ended
 
December 31, 2013
 
 
Licensing revenue
$
467

Operating expenses:
 
  Research and development
1,134

  General and administrative
220

  Amortization of intangible assets
187

  Restructuring charges
859

Total operating expenses
2,400

Total other income (expense), net
(92
)
Net loss from discontinued operations
$
(2,025
)
Licensing revenue, research and development and general and administrative reflect the operating results of our Sherbrooke, Quebec facility that were discontinued. Restructuring costs represent costs associated with the separation of employment of employees at the Sherbrooke facility and other costs related to the restructuring plan. Amortization of intangible assets relates to the MATCH discovery platform and related intangible assets held for sale at December 31, 2013. The net results of miscellaneous asset sales are recorded in other income (expense), net.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows for the twelve months ended December 31, 2013 and 2012:
 
Twelve Months Ended December 31,
(in thousands)
2013
 
2012
Cash flow from:
 
 
 
Continuing operating activities
$
(10,988
)
 
$
(3,999
)
Discontinued operating activities
(1,006
)
 

Continuing investing activities
(24,264
)
 
248

Discontinued investing activities
3,000

 

Continuing financing activities
46,488

 
2,940

Net increase (decrease) in cash and cash equivalents
$
13,230

 
$
(811
)
Comparison of the Year Ended December 31, 2013 and 2012
The primary use of cash in continuing operating activities for year ended December 31, 2013 was primarily due to our net loss from continuing operations of $15.5 million, including expenses incurred for the development of OCR-002 and expenses related to the Merger, changes in working capital of $0.5 million, and partially offset by non-cash charges of $3.9 million including depreciation expense, share-based compensation expense and the amortization of and impairment of intangibles purchased in the Merger. Cash used in continuing operating activities for year ended December 31, 2012 was primarily related to our net loss of $3.6 million and changes in working capital of $0.8 million during such period offset by non-cash charges including depreciation expense, share-based compensation expense and changes in the value of our warrant liability.
Cash used in discontinued operating activities for year ended December 31, 2013 was primarily related to our net loss of $2.0 million and offset by changes in working capital of $0.5 million and non-cash charges of $0.5 million including depreciation and amortization expense and the net book value of assets disposed.
Cash used in continuing investing activities for the year ended December 31, 2013 related to purchases of short-term and long-term investments of $34.1 million and offset partially by $7.5 million received from the Merger and maturities of short-

42




term investments of $2.4 million. For the year ended December 31, 2012, net cash provided by continuing investing activities primarily related to the maturity of investments used to fund operations.
Cash provided by discontinued operations represents cash proceeds related to the Technology Transfer and License Agreement with the Roche Group for rights to the MATCH discovery platform.
Net cash provided by continuing financing activities for the year ended December 31, 2013 related to proceeds from issuance of common stock, net of issuance costs, of $46.4 million. Net cash provided by continuing financing activities for the year ended December 31, 2012 resulted from the issuance of $2.9 million of convertible notes.
Capital Resources and Funding Requirements
We will require additional funds to support future operations including our development activities associated with the IV and oral forms of OCR-002. Our future funding requirements depends on many factors, including, but not limited to the progress, timing, scope and costs of our nonclinical studies and clinical trials including the ability to enroll patients on a timely basis in our planned and potential future clinical trials, the time and cost necessary to respond to technological, market or governmental developments, and the cost of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights.
We expect to fund expenses from our current cash and cash equivalents, possible strategic opportunities and potentially additional financing transactions. We believe that our current cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months.
We have based our estimates of our cash needs on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, our OCR-002 Phase 2b clinical trial may cost more than we expect, or development of the oral formulation of OCR-002 may involve the license of proprietary technology. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidate, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay clinical trials or other development activities for OCR-002.
Our ability to finance operations beyond our current resources will depend heavily on our ability to obtain favorable results in clinical trials of OCR-002 and to develop and commercialize OCR-002 successfully. Additional financing may not be available when we need it or may not be available on terms that are favorable to us. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. We may seek to raise additional capital through a combination of private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends.
Contractual Obligations
The following is a schedule of non-cancellable future minimum lease payments for operating leases at December 31, 2013 (in thousands):
 
December 31, 2013
2014
$
225,000

2015
38,000

Thereafter

Total
$
263,000

Other Commitments
In the normal course of business, we enter into various firm purchase commitments related to active pharmaceutical ingredients, clinical studies and research studies. As of December 31, 2013, these commitments were approximately $0.8 million.

43




Off-Balance Sheet Arrangements
 We do not currently have, and did not have during the periods presented, any off-balance sheet arrangements, as defined under SEC rules.
Item 7A.            Quantitative and Qualitative Disclosures About Market Risk
  Foreign Currency Risk     
We have historically contracted with third-party providers to manufacture product and to conduct clinical trials and perform other research and development activities in Europe. Accordingly, we are exposed to fluctuations in foreign currency exchange rates in connection with the liabilities incurred by us in these relationships. We do not currently hedge our exposures to foreign currency fluctuations.  
Market Risk  
Our cash and cash equivalents as of December 31, 2013 consisted primarily of cash and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of United States interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operations.  

44




Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Ocera Therapeutics, Inc.

We have audited the accompanying consolidated balance sheets of Ocera Therapeutics, Inc. (a development stage company) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 2013, and for the period from December 20, 2004 (inception) through December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ocera Therapeutics, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2013, and for the period from December 20, 2004 (inception) through December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

San Diego, CA
March 17, 2014

45




Ocera Therapeutics, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
 
December 31,
 
December 31,
 
2013
 
2012
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,533

 
$
2,303

Short-term investments, available-for-sale
30,167

 

Accounts receivable
93

 

Prepaid expenses and other current assets
470

 
100

Assets of discontinued operations
3,029

 

Total current assets
49,292

 
2,403

Property and equipment, net
59

 
7

Long-term investments
1,513

 

Deposits
26

 

Intangible assets, net
335

 

Goodwill
595

 

Total assets
$
51,820

 
$
2,410

Liabilities, convertible preferred stock and stockholders’ equity / (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,282

 
$
269

Accrued liabilities
1,902

 
280

Liabilities of discontinued operations
3,503

 

Convertible notes payable, net—related parties

 
2,908

Total current liabilities
6,687

 
3,457

Other liabilities
1

 

Preferred stock warrant liability

 
16

Total liabilities
6,688

 
3,473

Commitments and contingencies (Note 13)


 

Convertible preferred stock (Note 9)

 
61,743

Stockholders’ equity / (deficit):
 
 
 
Preferred Stock, $0.00001 par value; 5,000,000 shares authorized and no shares issued or outstanding at December 31, 2013 and no shares authorized, issued or outstanding at December 31, 2012, respectively.

 

Common stock, $0.00001 par value, 100,000,000 shares authorized and 15,300,214 shares issued and outstanding at December 31, 2013. $0.001 par value, 53,270,000 shares authorized and 626,593 shares issued and outstanding at December 31, 2012

 
5

Additional paid-in capital
126,615

 
1,161

Accumulated other comprehensive income
3

 

Deficit accumulated during the development stage
(81,486
)
 
(63,972
)
Total stockholder's equity / (deficit)
45,132

 
(62,806
)
Total liabilities, convertible preferred stock and stockholders’ equity / (deficit)
$
51,820

 
$
2,410

See accompanying notes.


46




Ocera Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Operations and Comprehensive Loss
(In Thousands, Except Share and Per Share Amounts)
 
Twelve Months Ended
December 31,
 
Period from
December 20, 2004
(Inception) to
December 31, 2013
 
2013
 
2012
 
 
 
 
 
Revenue:
 
 
 
 
 
   Royalty revenue
$
85

 
$

 
$
85

Total Revenue
85

 

 
85

Operating expenses:
 
 
 
 
 
Research and development
3,549

 
1,642

 
54,562

General and administrative
8,500

 
1,739

 
24,036

Amortization of intangibles
295

 

 
295

Impairment of intangibles
3,070

 

 
3,070

Total operating expenses
15,414

 
3,381

 
81,963

Other income (expense):
 
 
 
 
 
Interest and other income
18

 
2

 
3,770

Interest and other expense
(193
)
 
(184
)
 
(1,424
)
Change in fair value of warrant liability
15

 
(45
)
 
71

Total other income (expense), net
(160
)
 
(227
)
 
2,417

Net loss from continuing operations
(15,489
)
 
(3,608
)
 
(79,461
)
Discontinued operations (Note 6):
 
 
 
 
 
Net loss from discontinued operations
(2,025
)
 

 
(2,025
)
Net loss
$
(17,514
)
 
$
(3,608
)
 
$
(81,486
)
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
Net loss per share from continuing operations, basic and diluted
$
(2.52
)
 
$
(5.76
)
 
 
Net loss per share from discontinued operations, basic and diluted
(0.33
)
 

 
 
Net loss per share, basic and diluted
$
(2.85
)
 
$
(5.76
)
 
 
Weighted average number of shares used to compute net loss per share of common stock, basic and diluted
6,145,731

 
626,593

 
 
Other comprehensive loss:
 
 
 
 
 
Net loss
$
(17,514
)
 
$
(3,608
)
 
$
(81,486
)
Unrealized gain on investments
3

 

 
3

Comprehensive loss
$
(17,511
)
 
$
(3,608
)
 
$
(81,483
)
See accompanying notes.


47




Ocera Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)
(In thousands, except shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deficit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
Accumulated
 
 
 
Series A Convertible
 
Series B Convertible
 
Series C Convertible
 
 
 
 
 
Additional
 
Other
 
During the
 
Total
 
 Preferred Stock
 
 Preferred Stock
 
 Preferred Stock
 
Common Stock
 
Paid-In
 
Comprehensive
 
Development
 
Stockholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Stage
 
Equity (Deficit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 20, 2004 (inception)

 
$

 

 
$

 

 
$

 

 
$

 
$

 
$

 
$

 
$

Net Loss

 

 

 

 

 

 

 

 

 

 
(39
)
 
(39
)
Balance at December 31, 2004

 

 

 

 

 

 

 

 

 

 
(39
)
 
(39
)
Issuance of Series A convertible preferred stock for cash of $13,453 and conversion of debt and interest of $1,046, net of issuance costs of $154
1,735,565

 
14,346

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for cash

 

 

 

 

 

 
574,532

 
5

 

 

 

 
5

Issuance of nonemployee stock options for services received

 

 

 

 

 

 

 

 
2

 

 

 
2

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 
(3
)
 

 
(3
)
Net loss

 

 

 

 

 

 

 

 

 

 
(3,440
)
 
(3,440
)
Balance at December 31, 2005
1,735,565

 
14,346

 

 

 

 

 
574,532

 
5

 
2

 
(3
)
 
(3,479
)
 
(3,475
)
Issuance of Series B convertible preferred stock for cash of $12,040, net of issuance costs of $57

 

 
1,029,369

 
11,983

 

 

 

 

 

 

 

 

Issuance of nonemployee stock options for services received

 

 

 

 

 

 

 

 
3

 

 

 
3

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 
20,143

 

 
7

 

 

 
7

Stock-based compensation expense

 

 

 

 

 

 

 

 
25

 

 

 
25

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 
8

 

 
8

Net loss

 

 

 

 

 

 

 

 

 

 
(7,499
)
 
(7,499
)
Balance at December 31, 2006
1,735,565

 
14,346

 
1,029,369

 
11,983

 

 

 
594,675

 
5

 
37

 
5

 
(10,978
)
 
(10,931
)
Stock-based compensation expense

 

 
 
 
 
 
 
 
 
 

 

 
26

 

 

 
26

Reclassification of repurchase liability for early exercise of stock options

 

 

 

 

 

 

 

 
5

 

 

 
5

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 
(5
)
 

 
(5
)
Net loss

 

 

 

 

 

 

 

 

 

 
(12,193
)
 
(12,193
)
Balance at December 31, 2007
1,735,565

 
14,346

 
1,029,369

 
11,983

 

 

 
594,675

 
5

 
68

 

 
(23,171
)
 
(23,098
)
Issuance of Series C convertible preferred stock for cash, net of issuance costs of $106

 

 

 

 
2,075,390

 
35,414

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 
63

 

 

 
63


48




Ocera Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit), continued
(In thousands, except shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deficit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
Accumulated
 
 
 
Series A Convertible
 
Series B Convertible
 
Series C Convertible
 
 
 
 
 
Additional
 
Other
 
During the
 
Total
 
 Preferred Stock
 
 Preferred Stock
 
 Preferred Stock
 
Common Stock
 
Paid-In
 
Comprehensive
 
Development
 
Stockholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Stage
 
Equity (Deficit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of repurchase liability for early exercise of stock options

 

 

 

 

 

 

 

 
3

 

 

 
3

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 
143

 

 
143

Net loss

 

 

 

 

 

 

 

 

 

 
(9,735
)
 
(9,735
)
Balance at December 31, 2008
1,735,565

 
14,346

 
1,029,369

 
11,983

 
2,075,390

 
35,414

 
594,675

 
5

 
134

 
143

 
(32,906
)
 
(32,624
)
Issuance of common stock upon exercise of stock options

 

 

 

 

 

 
10,162

 

 
9

 

 

 
9

Repurchase of unvested stock options

 

 

 

 

 

 
(2,494
)
 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 
142

 

 

 
142

Reclassification of repurchase liability for early exercise of stock options

 

 

 

 

 

 

 

 
1

 

 

 
1

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 
(138
)
 

 
(138
)
Net loss

 

 

 

 

 

 

 

 

 

 
(13,048
)
 
(13,048
)
Balance at December 31, 2009
1,735,565

 
14,346

 
1,029,369

 
11,983

 
2,075,390

 
35,414

 
602,343

 
5

 
286

 
5

 
(45,954
)
 
(45,658
)
Issuance of common stock upon exercise of stock options

 

 

 

 

 

 
24,250

 

 
51

 

 

 
51

Stock-based compensation expense