Paratek Pharmaceuticals Annual Report 2013

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-KxAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended: December 31, 2013oroTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934Commission file number: 000-51967TRANSCEPT PHARMACEUTICALS, INC.(Exact name of registrant as specified in its charter) Delaware 33-0960223(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)1003 W. Cutting Blvd., Suite #110Point Richmond, California 94804(510) 215-3500(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of exchange on which registeredCommon Stock, par value $0.001 per share The NASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant wasrequired 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 is not contained herein, and will not be contained, tothe 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 tothis Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x (Do not check if a smallerreporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No xThe aggregate market value of the common stock of the registrant held by non-affiliates of the registrant on June 30, 2013, the last business day of theregistrant’s second fiscal quarter was: $48,144,662.As of March 12, 2014 there were 18,842,888 shares of the registrant’s common stock outstanding. Table of ContentsTABLE OF CONTENTS Item No. Page No.PART I 1.Business3 1A.Risk Factors16 1B.Unresolved Staff Comments33 2.Properties33 3.Legal Proceedings33 4.Mine Safety Disclosures35PART II 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities36 6.Selected Financial Data38 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations39 7A.Quantitative and Qualitative Disclosures About Market Risk48 8.Financial Statements and Supplementary Data49 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure76 9A.Controls and Procedures76 9B.Other Information76PART III 10.Directors, Executive Officers and Corporate Governance77 11.Executive Compensation82 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters99 13.Certain Relationships and Related Transactions, and Director Independence102 14.Principal Accountant Fees and Services103PART IV 15.Exhibits and Financial Statement Schedules104SIGNATURES105EXHIBIT INDEX107Table of ContentsSpecial Note Regarding Forward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements that are based upon current expectations within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Transcept Pharmaceuticals, Inc., or Transcept, intends that such statements be protected by the safe harbor createdthereby. Forward-looking statements involve risks and uncertainties and actual Transcept results and the timing of events may differ significantly from thoseresults discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about or relatingto:•expectations regarding the timing, likelihood, nature and effects of our ongoing exploration of strategic alternatives and any consummation of astrategic transaction;•the possibility of a liquidation of the Company if we are not successful in pursuing and consummating a transaction or other alternative toenhance stockholder value;•expected activities and responsibilities of us and Purdue Pharmaceuticals L.P., or Purdue Pharma, under our United States License andCollaboration Agreement, or the Collaboration Agreement;•expectations for the commercial potential of Intermezzo and our collaboration partner's commitment to collaborate with us;•the future satisfaction of conditions required for continued commercialization of Intermezzo under the Collaboration Agreement, and thefulfillment of Purdue Pharma's obligations under the Collaboration Agreement;•our expectations regarding suits that Purdue Pharma or we have filed or may file in regards to Abbreviated New Drug Application, or ANDA,proceedings, and the timing, costs and results of such actions and ANDA proceedings;•our potential receipt of revenue under the Collaboration Agreement, including milestone and royalty revenue;•expectations regarding our TO-2070 development program, including the nature of our relationship with Shin Nippon Biomedical LaboratoriesLtd., or SNBL, under our License Agreement regarding TO-2070, or the License Agreement;•expectations regarding potential payments by us to SNBL under the License Agreement, including milestone and royalty payments;•expectations regarding reimbursement for Intermezzo in the United States;•expectations with respect to our ability to successfully and profitably carry out plans to co-promote Intermezzo to psychiatrists in the UnitedStates through our co-promotion option under the Collaboration Agreement;•the potential benefits of, and markets for, Intermezzo and TO-2070;•potential competitors and competitive products, including generic manufacturers;•expectations with respect to our intent and ability to successfully enter into other collaboration or co-promotion arrangements;•expectations regarding our ability to obtain regulatory approval of Intermezzo outside of the United States and TO-2070;•the adequacy of our current cash, cash equivalents and marketable securities to fund our operations for at least the next twelve months;•our beliefs regarding the merits of pending litigation and our expectations regarding our response to such litigation;•expectations regarding the value of our net operating loss carry forwards, or NOLs, and the preservation of such NOLs by our tax benefitpreservation plan adopted in September 2013, or Tax Benefit Preservation Plan;•capital requirements and our need for additional financing;•expectations regarding future losses, costs, expenses, expenditures and cash flows;•the ability and degree to which we may obtain and maintain market exclusivity from the U.S. Food and Drug Administration, or FDA, forIntermezzo and TO-2070 under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or FFDCA;•our ability to maintain and obtain additional patent protection for Intermezzo and TO-2070 without violating the intellectual property rights ofothers;1Table of Contents•our expectations regarding issuances of patents from any currently pending or future patent applications; and•expected future sources of revenue and capital.Forward-looking statements do not reflect the potential impact of any future in-licensing, collaborations, acquisitions, mergers, dispositions, joint ventures, orinvestments we may enter into or make. Except as required by law, we undertake no obligation to, and expressly disclaim any obligation to, revise or updatethe forward‑looking statements made herein or the risk factors whether as a result of new information, future events or otherwise. Forward‑looking statementsinvolve risks and uncertainties, which are more fully discussed in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, including,but not limited to, those risks and uncertainties relating to:•potential termination of the Collaboration Agreement by Purdue Pharma;•our inability to successfully pursue and consummate a strategic transaction or other alternative to enhance stockholder value;•actual and potential decreases in Purdue Pharma's commercialization efforts with respect to Intermezzo;•physician or patient reluctance to use Intermezzo;•the potential for delays in or the inability to complete commercial partnership relationships, including any future partnerships with SNBL forTO-2070;•unexpected results from and/or additional costs related to ANDA proceedings;•changing standards of care and the introduction of products by competitors that could reduce our royalty rates under the CollaborationAgreement, or alternative therapies for the treatment of indications we target;•generic equivalents to Intermezzo whose introduction would reduce royalty rates under the Collaboration Agreement;•our inability to obtain additional financing, if available, under favorable terms, if necessary;•the ability of our Tax Benefit Preservation Plan adopted in September 2013 to protect the value of our net operating loss carryforwards;•difficulties or delays in building, or our inability to operate, a sales and marketing organization in connection with any reacquisition of full U.S.rights to Intermezzo or exercise of our co-promote option to psychiatrists under the Collaboration Agreement;•unexpected adverse side effects or inadequate therapeutic efficacy of our product candidates that could slow or prevent product approval orapproval for particular indications;•other difficulties or delays in development, testing, obtaining regulatory approvals for, and undertaking production and marketing of Intermezzoand TO-2070;•the uncertainty of protection for our intellectual property, through patents, trade secrets or otherwise; and•potential infringement of the intellectual property rights or trade secrets of third parties.Transcept Pharmaceuticals, Inc.TM is a registered and unregistered trademark of ours in the United States and other jurisdictions. Intermezzo® is a registeredand unregistered trademark of Purdue Pharma and associated companies in the United States and other jurisdictions and is a registered and unregisteredtrademark of ours in certain other jurisdictions. Other trademarks and trade names referred to in this Annual Report on Form 10-K are the property of theirrespective owners.2Table of ContentsPART I Item 1.BusinessOverviewWe are a specialty pharmaceutical company focused on the development and commercialization of proprietary products that address importanttherapeutic needs in the field of neuroscience. We have one commercial product, Intermezzo® (zolpidem tartrate) sublingual tablet C-IV for the treatment ofinsomnia related to middle-of-the-night awakenings, and our lead product candidate is TO-2070, a novel, rapidly absorbed treatment for acute migraineincorporating dihydroergotamine (DHE) as the active drug.In 2013, we engaged a financial and strategic advisor to explore a range of alternatives to enhance stockholder value, including but not limited to a sale ofTranscept, a business combination or collaboration, joint development and partnership opportunities, a distribution of all or a significant amount of cash tostockholders, and liquidation of the Company. Our strategic process is both active and ongoing and includes a range of interactions with transactioncounterparties. Thus we believe it is in our stockholders' best interest to allow sufficient opportunity to pursue and consummate one or more of thesetransactions, and to consider additional alternatives that may materialize in the near future, before making a decision regarding a liquidation of the Company.We intend to continue to develop TO-2070 through the completion of preclinical safety studies, but given the timing of our current strategic process asdescribed herein, we do not currently plan to initiate a Phase 1 human pharmacokinetic study.Intermezzo® (zolpidem tartrate) sublingual tablet C-IVOur first approved product, Intermezzo (zolpidem tartrate) sublingual tablet, is a sublingual formulation of zolpidem approved for use as needed for thetreatment of insomnia when a middle-of-the-night awakening is followed by difficulty returning to sleep. Intermezzo is the first and only sleep aid approved bythe U.S. Food and Drug Administration, or FDA, for this indication.Intermezzo is formulated as a sublingual tablet containing a bicarbonate-carbonate buffer and is rapidly absorbed in both women and men. Therecommended and maximum dose of Intermezzo is 1.75 mg for women and 3.5 mg for men, taken once per night. The recommended doses for women andmen are different because women clear zolpidem from the body at a slower rate than men. Intermezzo is to be taken in bed when a patient wakes in the middleof the night and has difficulty returning to sleep. Intermezzo should only be taken if the patient has at least 4 hours of bedtime remaining before the plannedtime of waking.In November 2011, the FDA approved our New Drug Application, or NDA, for Intermezzo for use as needed for the treatment of insomnia when amiddle-of-the-night awakening is followed by difficulty returning to sleep. Intermezzo, a prescription product, was made commercially available in the UnitedStates in April 2012.Intermezzo is the first and only sleep aid approved specifically for use in the middle of the night at the time that patients awaken and have difficultyreturning to sleep. Intermezzo has been uniquely designed for this indication and employs the following product features: •Known active agent. The active pharmaceutical ingredient in Intermezzo is zolpidem tartrate, cited by IMS Health as the most commonlyprescribed agent for the treatment of insomnia in the United States, with over 1.39 billion zolpidem tablets prescribed in the United States for thetwelve months ended December 31, 2012. Approved in 1992 as the active ingredient in Ambien®, a branded prescription sleep aid, zolpidem has awell-established record of safety and efficacy.•Rapid absorption. Intermezzo disintegrates in the sublingual cavity after administration. On average, Intermezzo is rapidly absorbed in bothgenders, with a mean Tmax across studies of about 35 minutes to about 75 minutes. We believe that rapid absorption, the delivery of the activepharmaceutical ingredient into systemic circulation, is a key product feature.•Dose. The recommended dose of Intermezzo in women and in elderly patients is 1.75 mg, and the recommended dose in men is 3.5 mg. Intermezzois indicated for use as needed for the treatment of insomnia when a middle-of-the-night awakening is followed by difficulty returning to sleep.Intermezzo should only be taken if the patient has at least 4 hours of bedtime remaining before the planned time of waking.3Table of ContentsAmbien® and its generic equivalents are available in doses of 5 mg and 10 mg. Ambien CR® and its generic equivalents are available in doses of6.25 mg and 12.5 mg. Each of these products is intended to be taken only at the beginning of the night in order to fall and stay asleep throughoutthe night, and is not appropriate to be taken in the middle of the night when a patient has only 4 hours of bedtime remaining. In January 2013, theFDA issued a new safety warning that may result in a change in the recommended doses for women of these and other bedtime zolpidem products.This FDA safety warning specifically states that the dose recommendations for Intermezzo were not affected.In July 2009, we entered into a United States License and Collaboration Agreement, or the Collaboration Agreement, with Purdue PharmaceuticalProducts L.P., or Purdue Pharma, which provides Purdue Pharma with an exclusive license to commercialize Intermezzo in the United States. TheCollaboration Agreement also provides us an option to begin co-promoting Intermezzo to psychiatrists in the United States as late as 55 months aftercommercial launch, or November 2016. We retain full rights to Intermezzo outside North America.Purdue Pharma is obligated to pay us tiered base royalties on net sales of Intermezzo in the United States ranging from the mid-teens up to the mid-twenty-percent level, and we are eligible to receive up to an additional $70 million in net sales based milestone payments. The Collaboration Agreement alsoprovides us the option to co-promote Intermezzo to psychiatrists in the United States. If we exercise this option and begin marketing to psychiatrists, PurduePharma will be obligated to pay us an additional royalty on sales of Intermezzo to psychiatrists. The rate of this additional co-promote royalty ranges from 40%to 22% and would be fixed at the time we begin our specialty marketing effort.TO-2070: a developmental product candidate for migraine treatmentIn September 2013, we entered into the License Agreement with SNBL, pursuant to which SNBL granted us an exclusive worldwide license tocommercialize SNBL's proprietary nasal drug delivery technology to develop TO-2070. We are developing TO-2070 as a treatment for acute migraine usingSNBL’s proprietary nasal powder drug delivery system. Under the License Agreement, we are required to fund, lead and be responsible for productdevelopment, preparing and submitting regulatory filings and obtaining and maintaining regulatory approval with respect to TO-2070. Pursuant to the LicenseAgreement, we have incurred an upfront nonrefundable technology license fee of $1.0 million, and we are also obligated to pay:•up to $6.5 million upon the occurrence of certain development milestones, including NDA approval of TO-2070 by the FDA,•up to $35.0 million in commercialization milestone payments tied to the achievement of specified annual sales levels of TO-2070, and•tiered, low double-digit royalties on annual net sales of TO-2070.Under the License Agreement, we are responsible for the clinical and commercial manufacture, supply, and distribution of TO-2070 products. SNBLhas agreed to supply its nasal drug delivery device to us to conduct development activities for non-registration studies, and has the right of first negotiation tobe our exclusive supplier for devices for any registration studies and for incorporation into commercial TO-2070 products under the License Agreementthereafter.The License Agreement terminates on a country-by-country basis upon the later of (i) the expiration of the last patent licensed under the LicenseAgreement in such country and (ii) 15 years from the first commercial sale in such country. The License Agreement may also be terminated (i) by either partyupon 90 days' written notice in connection with an uncured material breach of the License Agreement, (ii) by either party upon insolvency of the other party,(iii) immediately by SNBL if we challenge the validity of the patents licensed under the License Agreement, or (iv) by us at our convenience upon 90 days'prior notice.We intend to continue to develop TO-2070 through the completion of preclinical safety studies, but given the timing of our current strategic process asdescribed herein, we do not currently plan to initiate a Phase 1 human pharmacokinetic study.TO-2061: an investigational product for adjunctive therapy in patients with obsessive compulsive disorderIn March 2011, we announced that we had started a Phase 2 clinical trial of TO-2061, an investigational product for adjunctive therapy in patientswith obsessive compulsive disorder and our only product candidate in active clinical development. In December 2012, we announced that this trial did notmeet its primary endpoint. Based on this result, we discontinued the clinical development of TO-2061.Our financial performance and profitabilityWe have incurred net losses since inception as we have devoted substantially all of our resources to research and development, including contractmanufacturing and clinical trials, and the administrative functions needed to support these4Table of Contentsefforts. As of December 31, 2013, we had cash, cash equivalents and marketable securities of approximately $70.0 million, working capital of approximately$71.7 million, and an accumulated deficit of approximately $139.6 million.Our ability to generate near term revenue is dependent upon the receipt of milestone and royalty payments under our Collaboration Agreement withPurdue Pharma. Please see “Risk Factors” below for a discussion of risks related to our dependence on Purdue Pharma and the uncertainty of future revenue.Our business strategyWe intend to pursue the following key strategies:•Pursue strategic initiatives to enhance stockholder value. We have implemented operating cost reductions and organizational restructuring,including a recent reduction in our workforce, to reduce overall cash burn and facilitate our pursuit of strategic initiatives. We have engaged LeerinkSwann as our financial and strategic advisor to explore a range of alternatives to enhance stockholder value, including but not limited to a sale ofTranscept, a business combination or collaboration, joint development and partnership opportunities, a distribution of all or a significant amount ofcash to stockholders, and liquidation of the Company. Our strategic process is both active and ongoing and includes a range of interactions withtransaction counterparties. Thus we believe it is in our stockholders' best interest to allow sufficient opportunity to pursue and consummate one ormore such transactions and to consider additional alternatives that may materialize in the near future, before making a decision regarding aliquidation of the Company.•Implement strategies to maximize the value of Intermezzo. We continue to work with Purdue Pharma, our U.S. marketing partner forIntermezzo, to develop and implement strategies to maximize the value of Intermezzo. Additionally, we have retained rights to commercializeIntermezzo in the rest of the world.•Targeted Development of TO-2070. We intend to continue to develop TO-2070, our DHE product candidate for the treatment of acute migraine,through the completion of preclinical safety studies. We believe that the continued development of TO-2070 through a successful completion ofpreclinical safety studies will add value to the asset that may be recognized in a potential transaction. Given the timing of the strategic processdescribed herein, we do not currently plan to initiate a Phase 1 human pharmacokinetic study.The Intermezzo OpportunityOverview of the insomnia marketAccording to IMS Health, an independent market research firm, the number of prescriptions filled in the United States to treat insomnia grew toapproximately 83 million for the twelve months ended December 31, 2012.Middle-of-the-night awakening: the most common insomnia symptomThe 2003 National Sleep Foundation, or NSF, “Sleep in America” poll of the United States population between the ages of 55 and 84 described wakingup during the night as the most prevalent insomnia symptom, affecting 33% of respondents. Based on the 2005 NSF poll data, we estimate that middle-of-the-night awakening is 50% more common than difficulty going to sleep at bedtime among the general population. The 2009 NSF poll found that 46% ofrespondents described being “awake a lot during the night.”Based on a study published in 2009 of nearly 9,000 individuals, the Stanford Sleep Epidemiology Research Center has estimated that about one-third ofadults in the United States experience middle-of-the-night awakenings at least three times each week. The study concluded that more than 90% of thosesubjects who reported middle-of-the-night awakenings reported that this insomnia symptom persisted for at least six months. In the Stanford study, fewer than25% of this middle-of-the-night awakening group reported difficulty going to sleep at bedtime.Data from a study published in Population Health Management in 2010, based on information from the United States National Health and WellnessSurvey to evaluate the economic and humanistic burden of chronic insomnia characterized by nighttime awakenings, indicate that this condition wasassociated with a significant negative impact in health care utilization, health-related quality of life and work productivity.Commonly prescribed sleep aidsThe most commonly prescribed sleep aids are recommended for bedtime use only. These sleep aids are formulated with doses of an activepharmaceutical ingredient such that they require patients to remain in bed for seven to eight hours to avoid the risks associated with next day residual effects.The prolonged duration of seven to eight hour sleep aids makes them unsuitable for administration in the middle of the night when an awakening occurs, asthis would increase the risk of residual sedative effects the following day. 5Table of ContentsMiddle-of-the-night awakenings typically do not occur every night, thus bedtime use of a high dose sleep aid to prevent an awakening requires that thepatient either predict which night an awakening might occur, or take a seven to eight hour product every night. The result is that patients may use their sleepaid more often than necessary, and at a higher dose than necessary, as compared to a rapidly absorbed, low dose sleep aid that is designed to be used only onthe nights and at the time that an awakening actually occurs.CommercializationIntermezzo collaboration with Purdue Pharma in the United StatesIn July 2009, we entered into the Collaboration Agreement with Purdue Pharma that grants an exclusive license to Purdue Pharma to commercializeIntermezzo in the United States and pursuant to which:▪Purdue Pharma paid us a $25.0 million non-refundable license fee in August 2009;▪Purdue Pharma paid us a $10.0 million non-refundable intellectual property milestone in December 2011 when the first of two issuedformulation patents was listed in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations, or Orange Book;▪Purdue Pharma paid us a $10.0 million non-refundable intellectual property milestone in August 2012 when the first of two issued patents withclaims directed to methods of treating middle-of-the-night insomnia with low doses of zolpidem was listed in the FDA's Approved Drug Productswith Therapeutic Equivalence Evaluations, or Orange Book;▪We have transferred the Intermezzo NDA to Purdue Pharma, and Purdue Pharma is obligated to assume the expense associated with maintainingthe NDA and further development of Intermezzo in the United States, including any expense associated with post-approval studies;▪Purdue Pharma is obligated to commercialize Intermezzo in the United States at its expense using commercially reasonable efforts;▪Purdue Pharma is obligated to pay us tiered base royalties on net sales of Intermezzo in the United States ranging from the mid-teens up to themid-20% level. The base royalty is tiered depending upon the achievement of certain fixed net sales thresholds by Purdue Pharma, which netsales levels reset each year for the purpose of calculating the royalty; and▪Purdue Pharma is obligated to pay us up to an additional $70.0 million upon the achievement of certain net sales targets for Intermezzo in theUnited States.We have retained an option to co-promote Intermezzo to psychiatrists in the United States. The option can be exercised as late as August 2015. We maybegin promotion to psychiatrists 8 to 15 months after option exercise. The exact timing of when we begin promoting to psychiatrists is determined by thecalendar month in which the option exercise notice is delivered to Purdue Pharma. If we exercise the co-promote option and enter the marketplace, we are entitledto receive an additional co-promote royalty from Purdue Pharma on net sales that are generated by psychiatrist prescriptions. Had we chosen to exercise theoption as soon as we were eligible, we could have begun promoting to psychiatrists in May 2013 and received a co-promote royalty of 40%. The co-promoteroyalty rate declines on a straight-line basis to approximately 22% if we do not begin promoting to psychiatrists until November 2016, at which time the rightto co-promote expires. Net sales qualifying for this additional co-promote royalty are limited by an annual cap of 15% of total Intermezzo annual net sales inthe United States. The co-promote option cannot be transferred to a third party, except under a limited circumstance at the discretion of Purdue Pharma.Under the Collaboration Agreement, Purdue Pharma shall be responsible for the manufacture of Intermezzo for commercialization in the United States.We and Purdue Pharma share responsibility for the cost of defending against product liability and related claims, and have agreed to allocate any losses forsuch claims on a comparative fault basis but, in the absence of such determination, have agreed to split such losses equally. We and Purdue Pharma are alsoresponsible for 40% and 60%, respectively, of costs relating to enforcement of our intellectual property initiated by Purdue Pharma under the CollaborationAgreement, with an aggregate cap on our expenses of $1 million per calendar year and $4 million for the term of the agreement. In 2013, we met the $1 millionannual cap.Either we or Purdue Pharma may assign the Collaboration Agreement to an affiliate or successor to all or substantially all of the assigning party’sbusiness, including by way of merger, sale of stock, sale of assets or other transaction (in Purdue Pharma’s case, that portion of their business relating to theCollaboration Agreement), or by prior written consent of the other6Table of Contentsparty. In addition, Purdue Pharma may choose to terminate our co-promotion right, if exercised, upon an acquisition of Transcept and certain other conditions.Purdue Pharma has the right to terminate the Collaboration Agreement at any time upon advance notice of 180 days. Our co-promote option may also beterminated by Purdue Pharma upon our acquisition by a third party or in the event of entry of generic competition to Intermezzo. The royalty paymentsdiscussed above are subject to reduction in connection with, among other things, the entry of generic competition to Intermezzo. The Collaboration Agreementexpires on the later of 15 years from the date of first commercial sale in the United States or the expiration of patent claims related to Intermezzo. TheCollaboration Agreement is also subject to termination by Purdue Pharma in the event of FDA or governmental action that materially impairs Purdue Pharma'sability to commercialize Intermezzo or the occurrence of a serious event with respect to the safety of Intermezzo. The Collaboration Agreement may also beterminated by us upon Purdue Pharma commencing an action that challenges the validity of Intermezzo related patents. We also have the right to terminate theCollaboration Agreement immediately if Purdue Pharma is excluded from participation in federal healthcare programs. The Collaboration Agreement may alsobe terminated by either party in the event of a material breach by or insolvency of the other party.Sales and marketingIn November 2012, we announced that Purdue Pharma planned to broaden its Intermezzo commercialization efforts. As part of this effort, Purdueinitiated a direct-to-consumer (DTC) advertising campaign to which it contributed approximately $19 million and we committed approximately $10 million.This $29 million program began with print and digital advertisements in November 2012 and television advertisements in January 2013, and would beexecuted primarily during the first six months of 2013. The actual DTC advertising campaign spend totaled approximately $24 million, which includes anapproximately $8 million contribution from Transcept. In addition, in January 2013 Purdue Pharma began utilizing its analgesic sales force as part of theoverall Intermezzo commercialization effort. The total sales force consisted of approximately 615 sales representatives, including approximately 525 analgesicsales representatives joined by an additional approximately 90 contract sales representatives that were dedicated exclusively to the promotion of Intermezzo.The November 2012 announcement included the reduction of the sales force dedicated exclusively to the promotion of Intermezzo from 275 to 90 salesrepresentatives. In May 2013, Purdue Pharma notified us that they would no longer be utilizing the 90 sales representatives that were dedicated to promotingIntermezzo. In December 2013, Purdue Pharma notified us that it intended to discontinue the use of the Purdue sales force to actively market Intermezzo tohealthcare professionals during the first quarter of 2014.Intermezzo commercialization outside the United StatesPursuant to the Collaboration Agreement, we granted Purdue Pharma and an associated company the right to negotiate for the commercialization ofIntermezzo in Mexico, and retained rights to commercialize Intermezzo in the rest of the world. We have not yet applied for regulatory approval to sellIntermezzo in any country other than the United States, and believe we may need to conduct successful additional clinical trials in certain jurisdictions beforewe could obtain such approval.CompetitionIntermezzo competes against well-established products currently used in the treatment of insomnia, both branded and generic. Competitive productsinclude generic formulations of zolpidem available from multiple manufacturers, branded formulations of zolpidem, such as Ambien® and Ambien CR®marketed by sanofi-aventis, Lunesta® marketed by Sunovion Pharmaceuticals Inc., a subsidiary of Dainippon-Sumitomo Pharma Co., Ltd., Rozerem®marketed by Takeda Pharmaceuticals Company Limited, Sonata® marketed by King Pharmaceuticals, Inc. and generic forms of this product, Silenor®, aproduct developed by Somaxon Pharmaceuticals, Inc. which is being acquired by Pernix Therapeutics Holdings, Inc., and a number of other pharmaceuticalagents, including antidepressants and antipsychotics, that are prescribed off-label. None of the currently marketed sleep aids that have FDA approval arespecifically approved for use as needed for the treatment of insomnia when a middle-of-the-night awakening is followed by difficulty returning to sleep.However, many of these products can be used to prevent middle-of-the-night awakenings by prophylactic use at bedtime.The market for prescription sleep products has evolved significantly over the last 30 years. Until about 30 years ago, the market was dominated bybarbiturate sedative-hypnotics such as Seconal® and Nembutal®. These were superseded by the benzodiazepine class of sedative-hypnotics includingDalmane®, RestorilTM and Halcion®. Zolpidem, which is a selective modulator of GABAA receptor and is a member of the non-benzodiazepine class of sleepaids, was introduced in the United States in 1993 under the Ambien® brand for the treatment of sleep onset insomnia at 10 mg for non-elderly adult use and 5mg for elderly use, and, according to Wolters Kluwer, rapidly achieved the dominant position in the prescription sleep aid market. An extended release versionof zolpidem was launched successfully as Ambien CR® in 2005. The patent for Ambien® expired in April 2007, and shortly thereafter the FDA approved thegeneric manufacture of zolpidem by multiple pharmaceutical companies. The FDA approved the generic manufacture of zolpidem extended release 6.25 mg inOctober 2010 and zolpidem7Table of Contentsextended release 12.5 mg in June 2011. In January 2013, the FDA reduced the recommended dose of zolpidem at bedtime for women from 10 mg to 5 mg forimmediate-release products such as Ambien and its generic equivalents, and from 12.5 mg to 6.25 mg for extended-release products such as Ambien CR andits generic equivalents. The FDA also informed manufacturers of zolpidem-based bedtime prescription sleep aids that, for men, the labeling shouldrecommend that health care professionals consider prescribing the lower doses 5 mg for immediate-release products and 6.25 mg for extended-release products.This FDA safety warning did not affect Intermezzo.According to IMS Health, an independent market research firm, the number of generic zolpidem prescriptions filled in the United States to treatinsomnia accounted for approximately 43% of the U.S. prescription market for sleep aids during the twelve months ended September 2011. Over 1.2 billionbranded and generic zolpidem tablets were prescribed in the United States during this period. The pricing of generically manufactured zolpidem issignificantly lower than branded formulations of zolpidem and other non-generic sleep aids.Other branded prescription sleep aids include Lunesta® (eszopiclone), which was approved in December 2004 by the FDA and launched in the firstquarter of 2005, and Rozerem® (ramelteon). According to IMS Health, in October 2011, Lunesta® held a 5.5% U.S. prescription market share and Rozerem®held a 0.5% U.S. prescription market share. EdluarTM, a sublingual tablet containing zolpidem for which Orexo AB received marketing approval in March2009, was launched in the U.S. market by Meda Pharmaceuticals, Inc. in September 2009. ZolpimistTM, an orally administered spray containing zolpidem,received marketing approval from the FDA in December 2008, and was launched by ECR Pharmaceuticals Company, Inc., a wholly-owned subsidiary of Hi-Tech Pharmacal Co., Inc., in February 2011. EdluarTM and ZolpimistTM employ the same 10 mg and 5 mg zolpidem doses as generic Ambien® and aredesigned to be used in the same manner at bedtime to promote sleep onset. In March 2010, Somaxon Pharmaceuticals, Inc. which is in the process of beingacquired by Pernix Therapeutics Holdings, Inc. announced FDA approval of Silenor®, a low dose doxepin formulation intended for use at bedtime for thetreatment of both transient (short term) and chronic (long term) insomnia characterized by difficulty with sleep maintenance in both adults and elderlypatients. In September 2010, Somaxon announced that Silenor® was commercially available in the United States.A number of other agents are used to treat insomnia. These include Sonata®, a short-acting sleep aid, which lost patent protection in June 2008. Althoughnot approved or promoted for the treatment of middle-of-the-night awakenings, some physicians prescribe Sonata® off-label for this purpose. There are also anumber of other pharmaceutical agents including antidepressants and antipsychotics that are not approved for the treatment of insomnia but are frequentlyprescribed off-label owing to their ancillary sedative effects. For example, the antidepressant generic trazodone is widely prescribed off-label for the treatment ofinsomnia.In addition to current products for the treatment of insomnia, a number of new prescription products may enter the insomnia market over the nextseveral years. These may include the following:• Suvorexant, an orexin receptor antagonist, is being developed by Merck & Co., Inc. for the treatment of insomnia. Merck announced in July 2013that the company received a Complete Response Letter from the FDA, advising that the starting dose should be lower than the proposed doses andmust be available before Suvorexant can be approved.•On January 31 2014, the FDA approved Tasimelteon (HetliozTM) for treatment of non-24 hour sleep/wake cycle which is a new category in the field ofinsomnia as an orphan drug. Vanda Pharmaceuticals Inc. announced it received an orphan designation from the FDA in January 2010 for treatmentof non-24 hour sleep/wake disorder (Non-24) in blind individuals without light perception. In December 2012, Vanda announced that it plans tosubmit an NDA for tasimelteon to the FDA in mid-2013. In January 2014, Vanda announced FDA approval of Hetlioz for Non-24.•SKP-1041, a controlled-release zaleplon formulation, is being developed by Somnus Therapeutics Inc. targeting treatment of middle-of-the-nightawakenings with a formulation that is administered at bed time. According to a notice posted on www.clinicaltrials.gov, a Phase 2 study of SKP-1041 was completed in December 2010 and another in August 2011.• AZ-007, Staccato zaleplon, an inhaled version of zaleplon, is being developed by Alexza Pharmaceuticals, Inc. for the treatment of insomnia inpatients who have difficulty falling asleep, including patients who wake up in the middle of the night and have difficulty falling back to sleep.Alexza completed a Phase 1 trial of AZ-007 in 2008 with positive results reported. AZ-007 incorporates a vaporization technology developed byAlexza. There are a variety of other drugs intended as sleep aids under earlier stages of development. With the exceptions of a possible new formulation ofZolpimistTM and AZ-007, as noted above, we believe that all of these product candidates are intended to be taken at bedtime, and are not being developed forthe as-needed treatment of middle-of-the-night awakenings at the time they occur.8Table of ContentsManufacturingWe do not have or intend to develop internal clinical supply or commercial manufacturing capabilities for Intermezzo or TO-2070. In connection withentering into the Collaboration Agreement with Purdue Pharma, we amended our existing supply agreements for Intermezzo to be effective upon notice tosuppliers that the NDA for Intermezzo has been transferred from us to Purdue Pharma. These amendments, which became effective in December 2011,allowed Purdue Pharma to enter into direct supply agreements with such manufacturers for Intermezzo supplied and sold in the United States. Accordingly,Purdue Pharma has entered into agreements with respect to the U.S. territory with certain manufacturers and suppliers. We also have retained our agreementswith several of the same manufacturers and suppliers; however, following the effectiveness of the amendments to these agreements, our supply agreements arelimited to the manufacture and supply of Intermezzo outside of the U.S. territory. While our goal is to commercialize Intermezzo outside the U.S. territory withthe assistance of one or more marketing partners, we have no plans to make use of such manufacturing and supply arrangements in the near future. Inconnection with a termination of the Collaboration Agreement, the amendments to supply agreements implementing the territory changes will also terminate,and all supply arrangements for the U.S. territory return to us.We have a primary manufacturing and supply agreement with Patheon, Inc., or Patheon, to manufacture a supply of Intermezzo for use outside theUnited States, and Purdue Pharma has entered into an agreement with Patheon to manufacture and supply Intermezzo for use in the United States. We andPurdue Pharma currently have arrangements to use Sharp Corporation as a primary packager of Intermezzo. Purdue Pharma relies upon SPI Pharma, Inc., orSPI Pharma, as a supplier for certain key excipients contained within Intermezzo and as the sole supplier for one such excipient, Pharmaburst®. PurduePharma relies upon Teva Pharmaceutical Industries Ltd., API Division (formerly Plantex USA, Inc.), or Teva API, as the sole source for a special form ofzolpidem tartrate, which is the active pharmaceutical ingredient of Intermezzo. Purdue Pharma is dependent upon these manufacturers for the commercialsupply of Intermezzo in the United States. Should any of these key suppliers fail to perform under the terms of their respective agreements, it could have asignificant impact on Purdue Pharma's commercialization efforts for Intermezzo and our ability to generate revenue under the Collaboration Agreement. In theevent we commercialize Intermezzo outside the U.S. territory, we would likely also rely on many of the same key manufacturers and suppliers as PurduePharma intends to use to commercialize Intermezzo in the U.S. territory.All of these supply and manufacturing agreements contain customary commercial terms for pharmaceutical companies regarding forecasting, payment,pricing, ordering, current good manufacturing practices, or cGMP, compliance and quality. All such agreements provide for payment for supplies within 30days of being invoiced upon their shipment. Other than the agreements with Sharp and Patheon, all agreements set forth four quarters of forecasting, with thefirst such quarter's forecast being a binding firm order. The agreements with Sharp and Patheon contain similar forecasting provisions, except that the Sharpagreement sets forth a 12-month rolling forecast, with the first three months of such forecast being a binding firm order, and the Patheon agreement sets forth18-month, non-binding forecasting, but with a requirement that firm orders be separately placed three months prior to expected delivery. There are no alternatemanufacturers qualified at this time with respect to the commercial supply of Intermezzo, nor are there alternate manufacturers identified or qualified withrespect to the commercial supply of several of the key ingredients and packaging materials used in Intermezzo. If manufacturers are required to be changed,prior approval by the FDA and comparable foreign regulators would be required and Purdue Pharma would likely incur significant costs and expendsignificant efforts to educate the new manufacturer with respect to, or to help the new manufacturer independently develop, the processes necessary forproduction. If we exercise our right to co-promote Intermezzo to psychiatrists, we may also incur such costs and expend such efforts to ensure commercialsupply of Intermezzo. Manufacturing and supply switching costs in the pharmaceutical industry can be very high, and switching manufacturers or keysuppliers can frequently take 12 to 18 months to complete, although in certain circumstances such a switch may be significantly delayed or prevented byregulatory and other factors. Please see “Risk Factors” below for a discussion of our supply and manufacturing risks related to Intermezzo.Manufacturers and suppliers of Intermezzo are subject to current cGMP requirements, U.S. Drug Enforcement Administration, or DEA, regulations andother rules and regulations prescribed by foreign regulatory authorities. Purdue Pharma, and we through our collaboration with Purdue Pharma, depend onthird party suppliers and manufacturers for continued compliance with cGMP requirements and applicable foreign standards.Government RegulationPrescription drug products are subject to extensive regulation by the FDA, including regulations that govern the testing, manufacturing, safety, efficacy,labeling, storage, record keeping, distribution, import, export, advertising and promotion of such products under the Federal Food Drug and Cosmetic Act, orFFDCA, and its implementing regulations, and by comparable agencies and laws in foreign countries. Failure to comply with applicable FDA or otherregulatory requirements may result in a variety of administrative or judicially imposed sanctions, including FDA refusal to approve pending applications,suspension or termination of clinical trials, warning letters, civil or criminal penalties, recall or seizure of products, partial or total suspension of productionor withdrawal of a product from the market.9Table of ContentsNew drug approvalFDA approval is required before any new drug, including a new use or new dosage form of a previously approved drug, can be marketed in the UnitedStates. Applications for FDA approval of a new, brand name drug product must contain, among other things, information relating to safety and effectiveness,pharmaceutical formulation, stability, manufacturing, processing, packaging and labeling.An NDA for a brand name drug product generally requires, among other things:•completion of extensive preclinical laboratory and animal testing in compliance with FDA good laboratory practice, or GLP, regulations;•submission to the FDA of an Investigational New Drug, or IND, application to conduct human clinical testing, which must become effective beforehuman clinical trials may begin;•performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug product for eachindication;•satisfactory completion of an FDA pre-approval inspection of the facility or facilities at which the product is produced to assess compliance withFDA's cGMP regulations; and• submission to and approval by the FDA of an NDA.The preclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that anyapprovals for our product candidates or any indications will be granted on a timely basis, if at all.Preclinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animals. Theresults of preclinical tests, together with manufacturing information and analytical data, are submitted as part of an IND to the FDA. The IND automaticallybecomes effective 30 days after acceptance by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of theclinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDAmust resolve any outstanding concerns before the clinical trial can begin. The submission of an IND may not result in FDA authorization to commence aclinical trial. Further, an independent institutional review board, or IRB, for each medical center proposing to conduct the clinical trial must review andapprove the plan for any clinical trial before it commences at that center and it must monitor the study until completed. The FDA, the IRB, or the sponsor maysuspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.For purposes of an NDA submission and approval, human clinical trials are typically conducted in the following four sequential phases, which mayoverlap: •Phase 1: Studies are initially conducted in a limited population to test the product candidate for initial safety, dose tolerance, absorption,metabolism, distribution and excretion in healthy humans or, on occasion, in patients.•Phase 2: Studies are generally conducted in a limited patient population to identify adverse effects and safety risks, to determine initial efficacy ofthe product for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted bythe sponsor to obtain additional information prior to beginning larger, more expensive and time consuming Phase 3 clinical trials. In limitedsituations, a Phase 2 trial may be accepted by the FDA and serve as one of the pivotal trials in the approval of a product candidate if the study ispositive.• Phase 3: These are commonly referred to as pivotal studies. When Phase 2 evaluations demonstrate that a dose range of the product is effective andhas an acceptable safety profile, Phase 3 trials are undertaken in larger patient populations in the target indication to further evaluate dosage, toprovide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population, often at multiple,geographically dispersed clinical trial sites.• Phase 4: In many cases, the FDA incorporates into the approval of an NDA the sponsor's agreement to conduct additional studies or clinical trialswithin a specified time period after NDA approval to further assess a drug's safety and effectiveness. The FDA may also exercise its authority tomandate such studies or clinical trials as post-marketing requirements. Such post approval trials are typically referred to as Phase 4 studies.Controlled clinical trials conducted for our drug candidates must be included in a clinical trials registry and results database that is available andaccessible to the public through the internet. Failure to properly satisfy the clinical trial registry and results reporting requirement could result in significantcivil monetary penalties.The submission of an NDA is no guarantee that the FDA will find it complete and accept it for filing. The FDA reviews all NDAs submitted before itaccepts them for filing. It may refuse to file the application and instead request additional10Table of Contentsinformation, in which case, the application must be resubmitted with the supplemental information. After the application is deemed filed by the FDA, FDAstaff will review an NDA to determine, among other things, whether a product is safe and efficacious for its intended use.In 1992, under the Prescription Drug User Fee Act, or PDUFA, the FDA agreed to specific goals for improving the drug review time and created a two-tiered system of review times-Standard Review and Priority Review. Standard Review is applied to a drug that offers at most, only minor improvement overexisting marketed therapies. The 2012 amendments to PDUFA set a goal that for 90% of the NDAs receiving a Standard Review of an NDA, the review beaccomplished within a ten month time frame. A Priority Review designation is given to drugs that offer major advances in treatment, or provide a treatmentwhere no adequate therapy exists. The goal of the FDA for Priority Reviews is to complete 90% of such reviews within six months. The FDA strives to meetthese review goals, but is not legally required to do so, and in individual cases may extend the goal date under certain circumstances. The FDA has substantialdiscretion in the approval process and may disagree with an applicant's interpretation of the data submitted in its NDA. As part of this review, the FDA mayrefer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but is not boundby the recommendation of such advisory committee. The FDA may deny approval of an NDA if the applicable regulatory criteria are not satisfied, or it mayrequire additional clinical data or additional pivotal Phase 3 clinical trials.Under legislation enacted in 2007 that granted significant new powers to the FDA, many of which are aimed at improving the safety of drug productsbefore and after approval, the FDA may determine that a risk evaluation and mitigation strategy, or REMS, is necessary to ensure that the benefits of a newproduct outweigh its risks. If required, a REMS may include various elements, such as publication of a medication guide, patient package insert, acommunication plan to educate healthcare providers of the drug's risks, limitations on who may prescribe or dispense the drug, or other measures that theFDA deems necessary to assure the safe use of the drug.Once the NDA is approved, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems occur afterthe product reaches the market. In addition, the FDA may require testing, including Phase 4 studies or clinical trials, and surveillance programs to monitor theeffect of approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on theresults of these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approvedlabel. Further, if there are to be any material modifications to the drug, including changes in indications, labeling, or manufacturing processes or facilities, wewill likely be required to submit and obtain FDA approval of a new or supplemental NDA, which may require us to develop additional data or conductadditional and extensive preclinical studies and clinical trials.Section 505(b)(2) New Drug ApplicationsAs an alternate path to FDA approval for modifications of products previously approved by the FDA, an applicant may submit an NDA underSection 505(b)(2) of the FFDCA. Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, also knownas the Hatch-Waxman Act. This statutory provision permits the filing of an NDA where at least some of the information required for approval comes fromstudies not conducted by or for the applicant, and for which the applicant has not obtained a right of reference from the owner of the data. The Hatch-WaxmanAct permits the applicant to rely upon the FDA's prior findings of safety and effectiveness of a drug that has obtained FDA approval. In addition to relying onprior FDA findings of safety and effectiveness for a referenced drug product, the FDA may require companies to perform additional preclinical or clinicalstudies to support approval of the modification to the referenced product. We submitted the NDA for Intermezzo under Section 505(b)(2).To the extent that a Section 505(b)(2) application relies on a prior FDA finding of safety and effectiveness of a previously approved product, the FDA'sability to give final approval to the 505(b)(2) application may be delayed by any non-patent exclusivity that has been awarded to the referenced drug product.In addition, a 505(b)(2) applicant is required to certify to the FDA concerning any patents listed for the referenced product in the FDA publication titled“Approved Drug Products with Therapeutic Equivalence Evaluations,” or the Orange Book. Specifically, the applicant must certify in the application that, foreach patent that claims the drug or a use of the drug for which the applicant is seeking approval:• there is no patent information listed for the reference drug (known as a Paragraph I certification);•the listed patent has expired for the reference drug (known as a Paragraph II certification);• the listed patent for the reference drug has not expired, but will expire on a particular date and approval is sought after patent expiration (known as aParagraph III certification); or• the listed patent for the reference drug is invalid, unenforceable, or will not be infringed by the manufacture, use or sale of the product for which the505(b)(2) NDA is submitted (known as a Paragraph IV certification).A paragraph III certification, stating that a listed patent has not expired, but will expire on a particular date, may delay the approval of an applicationsubmitted under 505(b)(2) until the expiration of the patent. A paragraph IV certification, stating that11Table of Contentsa listed patent is invalid, unenforceable, or not infringed may require us to notify the patent owner and the holder of the NDA for the referenced product, andmay result in patent litigation against us and the entry of a 30 month stay on FDA's ability to issue final approval to our 505(b)(2) NDA.Under Hatch-Waxman exclusivity, the FDA is precluded from approving an abbreviated new drug application for a generic version of a drug for aperiod of three years from its date of approval and is precluded from approving a 505(b)(2) application that seeks to reference the FDA's findings of safetyand effectiveness for such drug, or otherwise seeks approval of a similar drug product for the same basic conditions of use, for a period of three years fromthe date of approval. This form of exclusivity may not prevent the FDA from approving an NDA that relies only on its own data. Manufacturing and other regulatory requirementsWith respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise andpromote pharmaceuticals, which include, among others, standards for direct-to-consumer advertising, industry-sponsored scientific and educationalactivities, and promotional activities involving the internet, as well as a prohibition on off-label promotion. The FDA has very broad enforcement authorityunder the FFDCA, and failure to abide by these regulations can result in penalties, including the issuance of a warning letter directing entities to correctdeviations from FDA standards, a requirement that future advertising and promotional materials must be pre-cleared by the FDA, and state and federal civiland criminal investigations and prosecutions. Numerous other laws, not administered by the FDA, also apply to the promotion of pharmaceuticals, allegedviolations of which may also result in state and federal civil and criminal investigation and prosecutions.We and our contract manufacturers are required to comply with applicable FDA manufacturing requirements contained in the FDA cGMP regulations,which require, among other things, quality control and assurance and maintenance of records and documentation. Manufacturing facilities must meet cGMPrequirements to the satisfaction of the FDA and pass a pre-approval inspection before we can use them to manufacture our products. We and our third partymanufacturers are also subject to periodic inspections of facilities by the FDA and other authorities, including inspection of the procedures and operationsused in the testing and manufacture of our products to assess continued compliance with applicable regulations. Failure to comply with statutory andregulatory requirements subjects a manufacturer to possible legal or regulatory action and civil and criminal penalties. Adverse patient experiences and failureto maintain regulatory compliance could result in additional sanctions, including withdrawal of product approvals.We are also subject to various laws and regulations regarding laboratory practices, the experimental use of animals, and the use and disposal ofhazardous or potentially hazardous substances in connection with our activities. In each of these areas, as above, the FDA and other agencies have broadregulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products,and withdraw approvals, any one or more of which could have a material adverse effect on us.DEA regulationZolpidem, the active pharmaceutical ingredient in Intermezzo, is classified as a schedule IV controlled substance by the DEA. As a result,manufacturing of zolpidem is subject to regulation by the DEA. Controlled substances are those drugs that appear on one of five schedules promulgated andadministered by the DEA under the Controlled Substances Act, or CSA. Drug substances are scheduled under the CSA when, because of their effects on thecentral nervous system, they have the potential to be abused and their use may lead to physical or psychological dependence. The CSA governs, among otherthings, the distribution, record keeping, handling, security, and disposal of controlled substances. We, Purdue Pharma, and our respective key third partysuppliers who handle zolpidem must be registered by the DEA in order to engage in these activities, and are subject to periodic and ongoing inspections by theDEA and similar state drug enforcement authorities to assess ongoing compliance with DEA regulations. Any failure by us, Purdue Pharma, or our third partysuppliers to comply with these regulations could lead to a variety of sanctions, including the revocation, or a denial of renewal, of DEA registration,injunctions, or civil or criminal penalties and loss of supply.Third party reimbursement and pricing controlsIn the United States and elsewhere, sales of pharmaceutical products depend in significant part on the availability of coverage and reimbursement toproviders and the consumer from third party payors, such as government and private insurance plans. Third party payors are increasingly challenging theprices charged for medical products and services. Our products may not be considered cost effective, and coverage and reimbursement may not be available orsufficient to allow sales of our products on a competitive and profitable basis.In the United States, there have been a number of federal and state proposals to implement governmental pricing control, including the Patient Protectionand Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, together known as the Affordable Care Act, which are expected toimpact our business and operations in ways we cannot12Table of Contentscurrently predict. These changes could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in productdemand.The number and complexity of both federal and state laws continues to increase, and additional governmental resources are being added to enforce theselaws and to prosecute companies and individuals who are believed to be violating them. While it is too early to predict what effect these changes will have onour business, we anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us tothe risk of government investigations and enforcement actions.MedicareWe expect that in the United States many patients who are treated with Intermezzo will be Medicare beneficiaries. The Centers for Medicare and MedicaidServices, or CMS, is the agency that administers Medicare and, at the federal level, administers Medicaid.Effective January 1, 2006, Congress enacted a prescription drug benefit known as Medicare Part D. CMS contracts with numerous managed care plansand drug benefit plans to deliver this drug benefit. These plans develop formularies that determine which products are covered and what co-pay will apply tocovered drugs. Coverage for Intermezzo will be under the Medicare Part D benefits. The plans have considerable discretion in establishing formularies andtiered co-pay structures, negotiating rebates with manufacturers and placing prior authorization and other restrictions on the utilization of specific products,subject to CMS review for discriminatory practices. Additionally, the Affordable Care Act will reduce patient responsibility for the Part D funding gap from100% in 2010 to 25% in 2020, and requires manufacturers to pay a 50% discount on the negotiated price of branded drugs dispensed to Medicare Part Dpatients in the coverage gap.MedicaidMedicaid is a federal and state entitlement program jointly funded by the federal and state governments that pays for medical assistance for certainindividuals and families with low incomes and resources and who meet other eligibility requirements. Medicaid is the largest source of funding for medicaland health-related services for the indigent population of the United States.Pharmaceutical manufacturers, as a condition of having federal funds being made available to pay for the manufacturer's products under Medicaid,must enter into an agreement with the Secretary of the Department of Health and Human Services to participate in the Medicaid Drug Rebate Program. Weexpect that Purdue Pharma will sign a Medicaid agreement, such that Intermezzo will be eligible for reimbursement under Medicaid and subject to rebatesunder the Medicaid Drug Rebate Program. Under the Medicaid Drug Rebate Program, as amended through the Affordable Care Act, we are required to pay arebate based on our Average Manufacturer Price, or AMP, for Intermezzo to each participating state Medicaid program for each unit of product dispensed toMedicaid beneficiaries and reimbursed by Medicaid. Those rebates are based on pricing data reported by us on a monthly and quarterly basis to CMS, thefederal agency that administers the Medicaid Drug Rebate Program. Effective March 23, 2010, rebates are also due on the utilization of Medicaid managed careorganization.Several state Medicaid programs have implemented Preferred Drug Lists, or PDLs, for drugs paid for under fee-for-service arrangements and more statesmay adopt this practice. Products placed on a state Medicaid program's PDL are subject to fewer restrictions on their utilization by Medicaid fee-for-servicepatients. In states that have adopted PDLs, Purdue Pharma or we may be required to provide substantial supplemental rebates to state Medicaid authorities forfee-for service utilization and potentially for capitated utilization as well in order for Intermezzo to be included on the PDL.Pharmaceutical manufacturers, as a condition of having federal funds being made available to pay for the manufacturer's products under Medicaid andMedicare Part B, also must enter into an agreement with the Secretary of the Department of Health and Human Services to participate in the 340B Drug PricingProgram, enacted by the Public Health Service, or PHS, Act. Under the 340B program, participating pharmaceutical manufacturers agree to charge statutorily-defined covered entities, such as certain hospitals serving a disproportionate share of low income patients, no more than the 340B “ceiling price” for themanufacturer's covered outpatient drugs.Federal Supply Schedule pricing programFederal law requires that for a company to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part Bprograms, and purchased by PHS 340B eligible entities and certain federal agencies, it also must participate in the Department of Veterans Affairs (VA) FederalSupply Schedule, or FSS, pricing program. Section 603 of the Veteran's Health Care Act of 1992, or VHCA, requires the manufacturer to execute a MasterAgreement and Pharmaceutical Pricing Agreement, with the VA under which the manufacturer agrees to make its covered drugs available for federalprocurement on a VA Federal Supply Schedule, or FSS, contract to the ” Big Four” federal agencies-the VA; the Department of Defense, or DoD; the PublicHealth Service, or PHS; and the Coast Guard-at pricing that is capped pursuant to a statutory13Table of ContentsFederal ceiling price, or FCP, formula. The FCP is based on a weighted-average wholesaler price known as the “non-federal average manufacturer price,” orNon-FAMP.State Pharmaceutical Assistance ProgramsAnother source of reimbursement for drug products is state Pharmaceutical Assistance Programs, or SPAPs. Many of these programs were created bystates to aid low-income elderly or persons with disabilities who do not qualify for Medicaid. Payment of rebates to these programs is typically a condition ofthe program's coverage of a manufacturer's product. The manufacturer of a drug would pay rebates to SPAPs to gain coverage as appropriate. If the programsare not considered qualified programs by CMS, the rebates we provide these entities would not be excluded from our Medicaid best price calculation,potentially increasing our rebate liability under the Medicaid Drug Rebate and PHS 340B programs.Private insurance reimbursementCommercial insurers usually offer pharmacy benefits and tend to adopt reimbursement methodologies for a product similar to those adopted byMedicare. If private insurers decide to cover Intermezzo, they will reimburse for the drug in a variety of ways, depending on the insurance plan's policies,employer and benefit manager input and contracts with their physician network.The continuing efforts of government and third party payors to contain or reduce the costs of health care could decrease the price that we receive forproducts we may sell, including Intermezzo. In addition, third party insurance coverage may not be available to patients for our products at all, especially inlight of the availability of low-cost generic zolpidem therapeutics, regardless of the fact that such products are not designed or approved to treat middle-of-the-night awakenings at the time a patient awakens and has difficulty returning to sleep. Third party payors could also impose conditions that must be met bypatients prior to providing coverage for use of our products, such as a prior authorization procedure or “step-edit” system that requires a patient to first utilizea lower price alternative product prior to a higher price productIntellectual Property and Proprietary TechnologyOur success will depend in part on our ability to protect Intermezzo and TO-2070 by obtaining and maintaining a strong proprietary position both in theUnited States and in other countries. To develop and maintain our proprietary position, we rely on patent protection, regulatory protection, trade secrets, know-how, continuing technological innovations and licensing opportunities.The active pharmaceutical ingredient in Intermezzo, zolpidem, and many of the inactive ingredients, have been known and used for many years. Thezolpidem composition of matter is no longer subject to patent protection. Accordingly, our patents and applications are directed to the particular formulationsand methods of use of zolpidem. There can be no assurance that our issued patents that cover the compositions and methods of using the buffered formulationof Intermezzo will prevent others from marketing formulations using the same active and inactive ingredients in similar but different formulations for the sameindication statement. Issued patents and currently pending patent applications that cover Intermezzo have claims that are directed to both formulation andmethods of use and are summarized below:•Buffered formulations of zolpidem. We have two issued U.S. patents that expire no sooner than 2025, one pending U.S. patent application and 14corresponding foreign patents or applications. Foreign patents have been granted in Australia, China, Japan, Mexico, New Zealand, Singapore, andSouth Africa.•Middle of the night use of zolpidem. We have two issued U.S. patents that expire no sooner than 2025, one pending U.S. patent application and 15foreign patents or applications. Patents have been granted in South Africa, New Zealand and Singapore.• Applications co-owned with SPI. We have one pending U.S. patent application, which is co-owned with SPI pursuant to the Supply Agreementbetween us and SPI, covering the compositions containing a key Intermezzo excipient. Under the Supply Agreement, we have a royalty-free, fullypaid-up exclusive license with respect to this patent application, with a right to grant sublicenses, for products incorporating both this key excipientand zolpidem. This license survives the termination of the Supply Agreement.The active pharmaceutical ingredient in TO-2070, dihydroergotamine (DHE), and other ingredients in TO-2070, have been known and used for years. DHE itself is no longer subject to patent protection. We have one pending U.S. patent application, which is co-owned with SNBL pursuant to a LicenseAgreement between us and SNBL, directed to particular intranasal powder formulations of DHE and uses of the formulations, that cover TO-2070 and itsuses in treating migraine. Under the License Agreement, we have an exclusive, royalty-bearing license, with a right to sublicense, with respect to this patentapplication, for products that include TO-2070, and uses thereof in humans. There can be no assurance that any patents will issue that cover the TO-2070formulation and/or methods of using TO-2070, or that any patents that issue will prevent14Table of Contentsothers from marketing formulations using the same active and other ingredients in similar but different formulations for the same indication. The patent positions of pharmaceutical companies are generally uncertain and involve complex legal, scientific and factual questions. In addition, thecoverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, we do not know whether any of our patentapplications will result in the issuance of patents or, if any of our issued patents will provide significant proprietary protection or will be circumvented orchallenged and found to be unenforceable or invalid. In limited instances, patent applications in the United States and certain other jurisdictions aremaintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, wecannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedingsdeclared by the U.S. Patent and Trademark Office to determine priority of invention or in opposition proceedings in a foreign patent office, any of which couldresult in substantial cost to us, even if the eventual outcome is favorable. There can be no assurance that a court of competent jurisdiction would hold thepatents, if issued, valid. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third partiesor require us to cease using such technology. To the extent we determine it to be prudent, we intend to bring litigation against third parties that we believe areinfringing our patents.The Hatch-Waxman Act permits the FDA to approve ANDAs for generic versions of brand name drugs like Intermezzo. Following the commerciallaunch of Intermezzo in April 2012, we received multiple notifications of ANDA filings referencing Intermezzo. See "Legal Proceedings."We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independentlydevelop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology or that we canmeaningfully protect our trade secrets. However, we believe that the substantial costs and resources required to develop technological innovations will help usprotect our products.We require our employees, consultants and members of our scientific advisory board to execute confidentiality agreements upon the commencement ofemployment, consulting or collaborative relationships with us. These agreements provide that all confidential information developed or made known during thecourse of the relationship with us be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, theagreements provide that all inventions resulting from work performed for us, utilizing the property or relating to our business and conceived or completed bythe individual during employment shall be our exclusive property to the extent permitted by applicable law. There can be no assurance, however, that theseagreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.EmployeesAs of March 12, 2014, we had 8 employees, 1 of whom holds a Ph.D. A total of 2 employees were engaged in research and development and 6 were inadministration and finance. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have not experiencedany work stoppages and we consider our relations with our employees to be satisfactory.Merger of Novacea, Inc. and Transcept Pharmaceuticals, Inc.Transcept Pharmaceuticals, Inc., or Transcept, was incorporated in Delaware in 2001 as Novacea, Inc., or Novacea. Novacea previously traded on TheNASDAQ Global Market under the ticker symbol “NOVC.” On January 30, 2009, Novacea completed a business combination, or merger, with a privatelyheld company, Transcept Pharmaceuticals, Inc., or TPI, pursuant to which TPI became a wholly-owned subsidiary of Novacea and the corporate name ofNovacea was changed to “Transcept Pharmaceuticals, Inc.”Trading of Transcept Pharmaceuticals, Inc. securities on The NASDAQ Global Market under the ticker symbol “TSPT” commenced on February 2,2009.In this Annual Report, “Transcept,” “the Company,” “we,” “our” and “us” refer to the public company formerly known as Novacea and now knownas Transcept Pharmaceuticals, Inc., and, as successor to the business of TPI, includes activities taking place with respect to the business of TPI prior to themerger of TPI and Novacea, as applicable.Available InformationAvailability of Reports. We are a reporting company under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and file reports,proxy statements and other information with the Securities and Exchange Commission, or SEC. The public may read and copy any of our filings at theSEC’s Public Reference Room at 100 F Street N.E., Washington, D.C.15Table of Contents20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Because we make filings with theSEC electronically, you may access this information at the SEC’s Internet site: www.sec.gov. This site contains reports, proxies and information statementsand other information regarding issuers that file electronically with the SEC.Web Site Access. Our internet web site address is www.transcept.com. We make available, free of charge at the “Investors” portion of our web site,annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Reportsof beneficial ownership filed pursuant to Section 16(a) of the Exchange Act are also available on our web site. Information in, or that can be accessed through,this web site is not part of this annual report on Form 10-K.Item 1A.Risk FactorsInvesting in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and allinformation contained in this report before you decide to purchase our common stock. If any of the possible adverse events described below actuallyoccurs, we may be unable to conduct our business as currently planned and our financial condition and operating results could be harmed. Inaddition, the trading price of our common stock could decline due to the occurrence of any of the events described below, and you may lose all or partof your investment.Our strategic initiatives and process may not be successful.We have implemented operating cost reductions and organizational restructuring, including a recent reduction in our workforce, to reduce overall cashburn and facilitate our pursuit of strategic initiatives. We have engaged a financial and strategic advisor to explore a range of alternatives to enhancestockholder value, including but not limited to a sale of Transcept, a business combination or collaboration, joint development and partnership opportunities,a distribution of all or a significant amount of cash to stockholders, and liquidation of the Company. Our strategic process is both active and ongoing andincludes a range of interactions with transaction counterparties. We believe it is in our stockholders' best interest to allow sufficient opportunity to pursue andconsummate one or more such transactions and to consider additional alternatives that may materialize in the near future, before making a decision regarding aliquidation of the Company. While we have devoted, and expect to continue devoting, substantial time and resources to exploring strategic alternatives, therecan be no assurance that such activities will result in any agreements or transactions that will enhance stockholder value. Further, any strategic transactionthat is completed ultimately may not deliver the anticipated benefits or enhance stockholder value.We have had a limited operating history that may make it difficult for you to evaluate the potential success or value of our business, and we have ahistory of incurring losses.We were founded in January 2001 under our former name, Novacea, Inc., and in January 2009 underwent a merger with Transcept Pharmaceuticals,Inc., a privately held company, or TPI, founded in 2002, which is the primary business we currently conduct. Our operations to date have been limited toorganizing and staffing, acquiring, developing and securing technology and undertaking preclinical studies and clinical trials. Furthermore, our business isnot profitable and has incurred losses in each year since the inception of TPI in 2002. Our net loss for the years ended December 31, 2013, 2012 and 2011was $27.4 million, $12.0 million and $3.9 million, respectively. We had an accumulated deficit at December 31, 2013 of $139.6 million.In November 2011, we obtained regulatory approval for the commercial sale of our lead product, Intermezzo, from the FDA. In April 2012, our U.S.marketing partner, Purdue Pharma, launched Intermezzo. We have not demonstrated over a substantial period of time the ability to meet and adhere to otherregulatory standards applicable to an FDA approved product, to conduct sales and marketing activities or to co-promote a product with a collaborationpartner, including Purdue Pharma. In September 2013, we licensed our new lead product candidate, TO-2070 for the treatment of acute migraines, which iscurrently in the early stages of development. Furthermore, we intend to continue to develop TO-2070 through the completion of preclinical safety studies, butgiven the timing of our current strategic process as described herein, we do not currently plan to initiate a Phase 1 human pharmacokinetic study, and thereforedo not expect to subsequently develop or commercialize TO-2070.We expect to continue to incur losses for the foreseeable future and we expect our accumulated deficit to increase as we continue our strategic process andcontinue the development, regulatory, and collaboration efforts with respect to Intermezzo and TO-2070. Consequently, any predictions you make about ourfuture value or viability may not be as accurate as they would be if we had a longer operating history and you could lose all or part of your investment.16The value of Transcept above our cash assets is currently dependent on the potential for commercial success of Intermezzo in the United Statesfor the treatment of middle-of-the-night awakening and the results of our preclinical safety studies for TO-2070.The market capitalization of our company approximates our cash, cash equivalents and marketable securities. Therefore any value for our stockholdersabove these cash assets is currently dependent on the potential for commercial success of Intermezzo in the United States and the results of our preclinicalsafety studies for TO-2070. Following the FDA's granting of marketing approval for the commercial sale of Intermezzo in the United States for use as-neededfor the treatment of insomnia when a middle-of-the-night awakening is followed by difficulty returning to sleep, Purdue Pharma exercised its option tocommercialize Intermezzo and subsequently launched commercial sales of Intermezzo in the United States in April 2012. In November 2012, Purdue Pharma'sDTC campaign included the reduction of the sales force dedicated exclusively to the promotion of Intermezzo from 275 to 90 sales representatives. In May2013, Purdue Pharma announced that they would no longer be utilizing the 90 sales representatives that were dedicated to promoting Intermezzo. In December2013, Purdue Pharma announced that it intended to discontinue the use of the Purdue Pharma sales force to actively market Intermezzo to healthcareprofessionals during the first quarter of 2014.Our sole product candidate, TO-2070 is currently in early stages of development. We intend to continue to develop TO-2070 through the completion ofpreclinical safety studies, but given the timing of our current strategic process as described herein, we do not currently plan to initiate a phase 1 humanpharmacokinetic study.Because we do not have a product candidate that has advanced into a pivotal trial or received regulatory approval for commercial sale, the value ofTranscept in a strategic transaction may be dependent on the potential for successful commercialization of Intermezzo in the United States and the successfulcompletion of preclinical safety studies of TO-2070. If Purdue Pharma, or a future acquiror of Intermezzo, does not successfully commercialize Intermezzo inthe United States or value the potential for commercial success, and/or TO-2070 is not successful in preclinical safety studies, the value of our business in astrategic transaction may be seriously harmed.We are substantially dependent upon the efforts of Purdue Pharma to commercialize Intermezzo in the United States and will be dependent on theefforts of other collaboration partners if we enter into future strategic collaborations.The success of sales of Intermezzo in the United States is dependent on the ability of Purdue Pharma to successfully commercialize Intermezzo pursuantto the Collaboration Agreement. The terms of the Collaboration Agreement provide that Purdue Pharma can terminate the agreement for any reason at any timeupon advance notice of 180 days. If the Collaboration Agreement is terminated, our business and our ability to generate revenue from sales of Intermezzo willbe substantially harmed. If the Collaboration Agreement is terminated and we determine to commercialize Intermezzo, we will be required to develop our ownsales and marketing organization, fund any future clinical studies and other required regulatory activities (including any post-approval studies), and bearincreased litigation expenses due to ANDA proceedings. Alternatively, we may enter into another strategic collaboration in order to commercialize Intermezzo inthe United States. We do not currently have the infrastructure in place or adequate resources to launch a commercial product and implementing suchinfrastructure would require substantial time and resources and such efforts may not be successful.The manner in which Purdue Pharma commercializes Intermezzo, including the amount and timing of Purdue Pharma's investment in commercialactivities and pricing of Intermezzo, will have a significant impact on the ultimate success of Intermezzo in the United States, and the success of the overallcommercial arrangement with Purdue Pharma. If Purdue Pharma deems Intermezzo to have insufficient market potential, they may continue to decrease theircommercialization efforts, which would likely result in decreased sales of Intermezzo and negatively impact our business and operating results. For example,in December 2013, Purdue Pharma notified us that it intends to discontinue use of the Purdue sales force to actively market Intermezzo to healthcareprofessionals during the first quarter of 2014.If Purdue Pharma is not successful in increasing sales of Intermezzo our stock price may decline and the value of Transcept in a strategic transactionmay decrease. The outcome of Purdue Pharma's efforts to increase sales of Intermezzo could also have an effect on investors' perception of potential sales ofIntermezzo outside the United States, which could also cause a decline in our stock price and may make it more difficult for us to enter into strategictransactions outside the United States.Assuming the Collaboration Agreement remains effective, Purdue Pharma is responsible for conducting post-approval studies of Intermezzo and bearsthe cost associated with such studies. The planning and execution of these studies, if any, will be primarily the responsibility of Purdue Pharma, and may notbe carried out in accordance with our preferences, or could yield results that are detrimental to Purdue Pharma's sales of Intermezzo in the United States ordetrimental to our efforts to develop or commercialize Intermezzo outside the United States.If we decide to enter into a strategic collaboration covering our products, our ability to receive any significant revenue under such arrangements will bedependent on the efforts of the collaboration partner and may result in lower levels of income17than if we marketed or developed our product candidates entirely on our own. Our collaboration partner may not fulfill its obligations or carry out marketingactivities for the product candidates as diligently as we would like. We could also become involved in disputes with our collaboration partner, which couldlead to delays in or termination of commercialization programs and time-consuming and expensive litigation or arbitration. If a collaboration partner terminatesor breaches its agreement, or otherwise fails to complete its obligations in a timely manner, the chances of successfully developing or marketing our productcandidates would be materially and adversely affected.Our anticipated preclinical trials may fail to demonstrate adequately the safety of TO-2070, which could decrease the value of Transcept in astrategic transaction.Before regulatory approvals for the commercial sale of TO-2070 is obtained, TO-2070 must be demonstrated through lengthy, complex and expensivepreclinical testing and clinical trials to be both safe and effective for use in each target indication. Although we intend to develop TO-2070 through thecompletion of preclinical safety studies, but currently not including the initiation of a Phase 1 human pharmacokinetic study, our trial results may benegatively affected by factors that had not been fully anticipated prior to commencement of the trial. Such trials may fail to demonstrate that TO-2070 is safewhen used as directed or even when misused. Further, based on results at any stage of these trials, we may decide to repeat or redesign a trial, or evendiscontinue development of TO-2070.If TO-2070 is not shown to be safe in our preclinical trials, the resulting delays in conducting associated non-clinical testing and clinical trials couldhave a material adverse effect on the value of Transcept in a strategic transaction.We are engaged in litigation to protect our intellectual property from potential generic manufacturers of Intermezzo and any future products, andan unsuccessful outcome could harm our business and/or dissuade a potential acquiror of the asset.The Hatch-Waxman Act permits the FDA to approve Abbreviated New Drug Applications, or ANDAs, for generic versions of brand name drugs likeIntermezzo. We refer to this process as the “ANDA process.” The ANDA process permits competitor companies to obtain marketing approval for a drugproduct with the same active ingredient, dosage form, strength, route of administration, and labeling as the approved brand name drug, but without having toconduct and submit clinical studies to establish the safety and efficacy of the proposed generic product. In place of such clinical studies, an ANDA applicantusually needs only to submit data demonstrating that its product is bioequivalent to the brand name product, usually based on pharmacokinetic studies.Following the commercial launch of Intermezzo in April 2012, companies are able to submit an ANDA application for a generic version of Intermezzo at anytime pursuant to the Hatch-Waxman Act.The Hatch-Waxman Act requires an applicant for a drug product that relies, in whole or in part, on the FDA's prior approval of Intermezzo, to notify usof its application if the applicant is seeking to market its product prior to the expiration of the patents that claim Intermezzo. This notice is required to contain adetailed factual and legal statement explaining the basis for the applicant's opinion that the proposed product does not infringe our patents, that our patents areinvalid, or both. Pursuant to the Collaboration Agreement, Purdue Pharma then has the option of bringing a patent infringement suit in federal district courtagainst each company seeking approval for its product within 45 days from the date of receipt of each notice. Pursuant to the Collaboration Agreement, ifPurdue Pharma chooses to file a patent infringement suit, we may decide whether to join Purdue Pharma as a named party in such lawsuit, or if PurduePharma chooses not to file patent infringement claims within the required 45 days, we may choose to do so on our own behalf. If such a suit is commencedwithin this 45 day period, we will be entitled to receive a 30 month stay on FDA's ability to give final approval to any of the proposed products that referenceIntermezzo. The stay may be shortened or lengthened if either party fails to cooperate in the litigation and it may be terminated if the court decides the case inless than 30 months. If the litigation is resolved in favor of the applicant before the expiration of the 30 month period, the stay will be immediately lifted and theFDA's review of the application may be completed. Such litigation is often time-consuming and costly, and may result in generic competition if such patent(s)are not upheld or if the generic competitor is found not to infringe such patent(s).We have received multiple notifications of ANDA filings referencing Intermezzo. See "Legal Proceedings." The filing of these and any future ANDAapplications referencing Intermezzo could have an adverse impact on our stock price, and litigation, if any, to enforce our patents is likely to requiresignificant management attention and may require substantial capital resources. If the patents covering Intermezzo are not upheld in litigation or if the genericcompetitor is found to not infringe these patents, the resulting generic competition for Intermezzo would have a material adverse effect on our revenue andresults of operations. Moreover, the existence of these ANDA filings and/or potential litigation may dissuade a potential acquiror of Intermezzo or prevent theconsummation of a strategic transaction.Intermezzo and TO-2070 face substantial competition from companies with established products.Intermezzo has been approved for use as-needed for the treatment of insomnia when a middle-of-the-night awakening is followed by difficulty returningto sleep, an indication that we believe represents an opportunity within the broader insomnia therapeutic market. The insomnia market is large, deeplycommercialized and characterized by intense competition among18generic products and large, established pharmaceutical companies with well-funded, well-staffed and experienced sales and marketing organizations, as wellas far greater name recognition than we or Purdue Pharma have.Intermezzo competes in this large market against well-established branded products with a history of deep market penetration and significant advertisingsupport, as well as with new market entrants and generic competitors selling zolpidem and other sleep aids at a fraction of the price at which Purdue Pharmasells Intermezzo.Intermezzo is the first sleep aid approved by the FDA specifically for use as needed for the treatment of insomnia when a middle-of-the-night awakeningis followed by difficulty returning to sleep. We are not aware of any product candidate that has successfully completed the clinical trials required for approvalfor such indication. However, currently approved and marketed seven- to eight-hour therapeutics may be prescribed by doctors and used by patients to treatthis condition when used to deliver a prophylactic dose of a sleep aid at the beginning of the night.In 2010, we sponsored an epidemiology study conducted by Dr. Ronald Kessler that sought to quantify the extent of the off-label middle-of-the-night useof seven- to eight-hour sleep aids. The study suggested that approximately 11% of all hypnotic users sometimes take their sleep aid in the middle of the night inorder to return to sleep, and that approximately 50% of those hypnotic users who reported middle-of-the-night awakening as their most bothersome insomniasymptom sometimes take their bedtime sleep aid in the middle of the night. Despite the fact that currently available sleep aids are not approved to be taken inthe middle of the night, these findings suggest the possibility that some patients may use, or continue to use, these products, or their low cost generic versions,rather than Intermezzo. In addition, anecdotal evidence suggests that some patients currently split low cost generic tablets for off-label use in the middle of thenight, despite the fact that these patients have no instruction as to the proper dose or how long they should stay in bed and refrain from driving.The most widely prescribed prescription sleep aids in the United States are generic forms of Ambien® and Ambien CR®, which were originallydeveloped by sanofi-aventis, and are available from multiple generic manufacturers. EdluarTM, a sublingual tablet containing zolpidem, was launched in theU.S. market by Meda Pharmaceuticals, Inc. in September 2009. ZolpimistTM, an orally administered spray containing zolpidem, was launched by ECRPharmaceuticals Company, Inc., a wholly-owned subsidiary of Hi-Tech Pharmacal Co., Inc., in February 2011. EdluarTM and ZolpimistTM employ the same10 mg and 5 mg zolpidem doses as generic Ambien® and are designed to be used in the same manner at bedtime to promote sleep onset.Lunesta® (eszopiclone), marketed by Sunovion Pharmaceuticals Inc., a subsidiary of Dainippon-Sumitomo Pharma Co. Ltd., and Rozerem®(ramelteon), marketed by Takeda Pharmaceuticals Company Limited, can similarly treat middle-of-the-night awakenings by providing a prophylactic dose atbedtime in order to avoid a middle-of-the-night awakening. Also, short duration products such as Sonata®, which uses the active ingredient zaleplon and ismarketed by Pfizer, Inc., have been used off-label for the as-needed treatment of middle-of-the-night awakenings. In September 2010, Silenor® becamecommercially available in the United States. Silenor® is a low dose version of doxepin intended for use at bedtime for the treatment of both transient (shortterm) and chronic (long term) insomnia characterized by difficulty with sleep maintenance in both adults and elderly patients. Silenor® is marketed by PernixTherapeutics, Inc. Other drugs, such as the antidepressant generic trazodone, are also widely prescribed off-label for the treatment of insomnia.If Purdue Pharma is unsuccessful in achieving market acceptance for Intermezzo with physicians and patients due to competing products, it wouldlikely have a material adverse effect on our business, results of operations, financial condition and prospects.In addition, TO-2070 is our sole product candidate for the treatment of acute migraine. Even if TO-2070 is successfully developed, any productsderived from TO-2070 will face a large and differentiated market for the treatment of migraine, which includes generic drugs such as ibuprofen andacetaminophen, triptans and ergots.Other companies may develop new products to compete with Intermezzo or TO-2070.We are aware of several companies that have stated that they intend to develop new products for the treatment of middle-of-the-night awakenings.NovaDel Pharma, Inc. has indicated that it has commenced development of a low-dose version of Zolpimist™ for the treatment of middle-of-the-nightawakenings with the intent to enter such product candidate into clinical trials, and Somnus Therapeutics Inc. has indicated that it is similarly targetingtreatment of middle-of-the-night awakenings with development of its controlled-release zaleplon formulation that would be dosed at bedtime, SKP-1041.There are many other companies working to develop new products and other therapies to treat insomnia. Several of these products are in late stageclinical trials. In June 2012, Merck and Co., Inc. announced positive Phase 3 data from two pivotal trials of an investigational new drug. Merck filed an NDAwith the U.S. Food and Drug Administration in 2012. In January 2010, Vanda Pharmaceuticals Inc. received an orphan drug designation from the FDA forVEC-162 (tasimelteon), a melatonin agonist, for treatment of non-24 hour sleep/wake disorder in blind individuals without light perception. Vanda may seekapproval for additional, broader insomnia indications for this product candidate. In January 2014, Vanda announced FDA19approval of Hetlioz for non-24. Additionally, if approved for the acute treatment of migraine, we anticipate that TO-2070 would compete against other marketedmigraine therapies and may compete with products currently under development by both large and small companies.The majority of marketed prescription products for treatment of acute migraine in the United States are in the triptan class in tablet, orally-disintegratingtablet, nasal spray and injectable formulations. The largest selling triptan in units is sumatriptan, which goes by the brand name Imitrex. There are at least sixother branded triptan therapies being sold by pharmaceutical and biotechnology companies.TO-2070 will face intense competition from inexpensive generic versions of sumatriptan and generic versions of other branded products of competitorsthat have lost or will lose their patent exclusivity. In addition, we expect other triptan patents to expire between 2013 and 2017. Many of these products aremanufactured and marketed by large pharmaceutical companies and are well accepted by physicians, patients and third party payors. Because of the lowcost, health insurers likely would require or encourage use of, a generic triptan prior to TO-2070.In July 2009, Zogenix, Inc.’s Sumavel DosePro needle-free sumatriptan was approved by the FDA for the acute treatment of migraine and clusterheadache. Alternative formulations of DHE include Migranal, which is nasally delivered, and which may become generically available prior to anycommercial introduction of TO-2070. In addition to marketed migraine medications, both large and small companies have migraine product candidates invarious stages of clinical development. These include Levadex from Allergan, Inc., an inhaled formulation of DHE, and an intranasal powder formulation ofsumatriptan from Optinose, both for the treatment of acute migraine. It is believed that Allergan, Inc. is working with the FDA to resolve manufacturing issuesprior to an anticipated approval in 2014. Allergan also markets Botox, which is marketed for the treatment of chronic migraine. OptiNose US Inc. announcedpositive results from a 200 patient Phase III trial in November 2012 and has partnered their product with Avanir Pharmaceuticals, Inc.Furthermore, new developments, including the development of other drug technologies and methods of treating conditions, occur in thebiopharmaceutical industry at a rapid pace, and may negatively affect the commercial prospects of Intermezzo and TO-2070.Many potential competitors, either alone or together with their partners, have substantially greater financial resources, research and developmentprograms, clinical trial and regulatory experience, expertise in prosecution of intellectual property rights, and manufacturing, distribution and sales andmarketing capabilities than us and our collaboration partner. As a result of such factors, our competitors may:•develop product candidates and market products that are less expensive, safer, more effective or easier to use than Intermezzo and/or TO-2070;•commercialize competing products, including generic versions of Intermezzo or any future products derived from TO-2070;•initiate or withstand substantial price competition more successfully than we can;•have greater success in recruiting skilled scientific workers and experienced sales and marketing personnel from the limited pool ofavailable talent;•more effectively negotiate third party licenses and strategic collaborations; and•take advantage of acquisition or other opportunities more readily than us or our collaboration partner.Our products may never achieve market acceptance, despite obtaining FDA approval.Despite obtaining FDA regulatory approval for commercial sale, the commercial success of our products will depend upon, among other things,acceptance by physicians, patients and managed care payers. Market acceptance of, and demand for, any products that we develop and that arecommercialized by us or our collaboration partner will depend on many factors, including:•the ability to provide acceptable evidence of safety and efficacy of our products for their indication;•the effectiveness of our or a collaboration partner's sales, marketing and distribution strategies;•the availability, relative cost and relative efficacy and safety of alternative and competing treatments including the existence of generic orbranded competition;•the ability to obtain adequate pricing and sufficient insurance coverage and reimbursement;•motivating physicians to identify middle-of-the-night awakenings as an important manifestation of insomnia;•building awareness among physicians and patients of our products as the right treatment option;20•the ease of administration of our products; and•the ability to produce commercial quantities sufficient to meet demand.If our products fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business.If we do not successfully consummate a strategic transaction or complete a liquidation of the company, we will require substantial additionalfunding and may need to curtail operations if we have insufficient capital.We had cash, cash equivalents and marketable securities of $70.0 million at December 31, 2013. We expect our negative cash flows from operations tocontinue for the foreseeable future. While we are exploring a range of alternatives to enhance stockholder value, including a sale of Transcept, a businesscombination, collaboration, joint development and partnership opportunities, and distribution of all or a significant amount of cash to our stockholders, ouroperating plan may change or ability to consummate a transaction or liquidation may be delayed.We currently believe that our available cash, cash equivalents and marketable securities and interest income will be sufficient to fund our anticipatedlevels of operations for at least the next twelve months. However, if our current operating plans change we will require substantial additional funding to operate.As such, our future capital requirements will depend on many factors, including:•our ability to identify and consummate a strategic transaction or liquidate the company;•the timing and nature of any strategic transactions that we undertake, including, but not limited to potential joint developments orpartnerships;•the ability of Purdue Pharma to successfully commercialize Intermezzo in the United States;•the level of Purdue Pharma's commercialization efforts with respect to Intermezzo;•whether, as a result of our strategic and financial review with Leerink Swann LLC, we enter into a partnership or business combination, orreturn capital to our stockholders;•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including in connectionwith ANDA proceedings relating to Intermezzo;•the cost of conducting preclinical trials, but not initiating a Phase 1 human pharmacokinetic study, with respect to TO-2070;•the timing and amount of milestone and royalty payments to SNBL under the License Agreement for TO-2070;•the potential costs associated with Intermezzo if our existing Collaboration Agreement with Purdue is terminated, including the cost toreplace Purdue Pharma's sales and marketing capabilities, the costs associated with the conduct of Phase IV clinical trials required by theFDA, and the increased costs to us of litigation expense in connection with ANDA proceedings related to Intermezzo; the receipt of milestoneand other payments, if any, from Purdue Pharma under the Collaboration Agreement;•the effect of competing technological and market developments; and•the cost incurred in responding to disruptive actions by activist stockholders.Having an insufficient level of capital may require us to significantly curtail one or more of our development, licensing or acquisition programs,which could have a negative impact on our financial condition and our ability to successfully pursue our business strategy.We may be unable to utilize our net operating loss carry forwards to reduce future possible tax payments.We have substantial federal and state net operating losses, or NOLs, for income tax purposes. Subject to certain requirements, we may “carry forward”our federal NOLs, for up to 20 years to offset future taxable income and reduce our income tax liability. For state income tax purposes, the NOL period rangesfrom five to 20 years. Our ability to utilize these NOLs will depend upon the availability of future taxable income during the carryforward period and, assuch, there is no assurance we will be able to realize such tax savings. As of December 31, 2013, we had cumulative federal NOLs of approximately $97million.Our ability to utilize NOLs could be further limited if we were to experience an “ownership change,” as defined under Section 382 of the Internal RevenueCode and similar state provisions. In general, an ownership change would occur if stockholders that own (or are deemed to own) at least five percent or more ofour outstanding common stock increased their cumulative ownership in us by more than 50 percentage points over their lowest ownership percentage within arolling three-year period. Subject to certain adjustments, the occurrence of such a change in our ownership would generally limit the amount21of NOLs we could utilize in a given year to the aggregate fair market value of our common stock immediately prior to the ownership change, multiplied by thelong-term tax-exempt interest rate in effect for the month of the ownership change.The determination of whether an ownership change has occurred for purposes of Section 382 is complex and requires significant judgment. Theoccurrence of such an ownership change would accelerate cash tax payments we could be required to make and would likely result in a substantial portion ofour NOLs expiring before we could fully utilize them. As a result, any restriction on our ability to utilize these NOLs could have a material adverse impact onour business, financial condition and future cash flows.In September 2013, our Board of Directors adopted a tax benefit preservation plan, or the Tax Benefit Preservation Plan, to help preserve the value of ournet operating losses and other deferred tax benefits. The Tax Benefit Preservation Plan is triggered by acquisitions of our common stock that would result in astockholder owning 4.99% or more of our common stock, or any existing holder of 4.99% or more of our common stock acquiring additional shares, bysubstantially diluting the ownership interest of any such stockholder unless the stockholder obtains an exemption from our Board of Directors.Although the Tax Benefit Preservation Plan is intended to reduce the likelihood of an adverse ownership change under Section 382, the Tax BenefitPreservation Plan may not prevent such an ownership change from occurring and does not protect against all transactions that could cause an ownershipchange, such as sales of our common stock by certain greater than 5% stockholders or transactions that occurred prior to the adoption of the Tax BenefitPreservation Plan. Accordingly, we cannot assure you that an ownership change under Section 382 will not occur and significantly limit the use of our NOLs.Furthermore, the Tax Benefit Preservation Plan will terminate in September 2014 unless our stockholders approve the plan prior to such date. If the valueof our NOLs is compromised or we are otherwise unable to utilize our NOLs, our results of operations could be harmed.Governmental and third party payors may impose restrictions on reimbursement or pricing controls that could limit product revenue.The continuing efforts of government and third party payors to contain or reduce the costs of health care through various means may reduce potentialrevenue that may be received from sales of our products. In particular, third party insurance coverage may not be available to patients for Intermezzo or otherfuture products, including those derived from TO-2070, if any, especially in light of the availability of low-cost generic zolpidem and analgesic therapeutics,regardless of the fact that such products are not specifically designed or indicated to specifically treat middle-of-the-night awakening or acute migraine,respectively. Government and third party payors could also impose conditions on reimbursement, price controls and other conditions that must be met bypatients prior to providing coverage for use of our products. For example, insurers may establish a “step-edit” system that requires a patient to utilize a lowerprice alternative product prior to becoming eligible for reimbursement of a higher price product. If government and third party payors do not provide adequatecoverage and reimbursement levels for our products, or if price controls, prior authorization or step-edit systems are enacted, our royalties and/or productrevenue will suffer. Also, potential revenue based on sales to Federal government customers, including the Departments of Veterans Affairs and Defense, willbe limited given that Intermezzo will be subject to statutory price constraints that apply to innovator products (those approved by the FDA under NDAs). Inaddition, we are subject to the requirements of the Medicaid Drug Rebate Program, the Public Health Service's 340B drug pricing discount program, theMedicare Part D Coverage Gap Discount Program, and other regulatory requirements including an Affordable Care Act requirement that manufacturers ofbranded prescription drugs pay an annual fee to the Federal government. Each manufacturer's fee is calculated based on the dollar value of its sales to certainfederal programs and the aggregate dollar value of all branded prescription drug sales by covered manufacturers. A manufacturer's fee will be its prorated shareof the industry's total fee obligation (approximately $2.8 billion in 2013 and set to increase in following years), based on the ratio of its sales to the total salesby manufacturers to these same programs. We cannot predict our share of this fee because it will be determined in part on other entities' sales to the relevantprograms.Negative publicity and documented side effects concerning products used to treat patients in the insomnia market may harm commercialization ofIntermezzo.Products containing zolpidem, the active ingredient in Intermezzo, are widely marketed. Zolpidem use has been linked to negative effects, such assleepwalking and amnesia, and has the potential to cause physical or psychological dependence. Furthermore, zolpidem is classified as a Schedule IVcontrolled substance under the Controlled Substances Act, and is subject to certain packaging, prescription and purchase volume limitations. There can be noassurance that additional negative publicity or increased governmental controls on the use of zolpidem or other compounds used in products for the insomniamarket would not inhibit or prevent commercialization of Intermezzo. Furthermore, negative information arising out of clinical trials, post-market adverseevent reporting or publicity concerning zolpidem and other hypnotic pharmaceuticals could cause the FDA to make approval or marketing of new products forthe insomnia market more difficult by requiring additional pre- or post-market studies or different non-clinical or clinical studies or taking other actions, outof safety or other concerns, or could lead to22reduced consumer usage of sleep aids, including zolpidem products and Intermezzo. For example, in January 2013, the FDA took steps to ensure that patientsare warned that the use of zolpidem products intended to be taken at bedtime may negatively affect patient driving ability the morning after dosing.Our products will be subject to ongoing regulatory requirements and may face regulatory or enforcement action.Our products, together with related third party manufacturing facilities and processes, post-approval clinical data, and advertising and promotionalactivities for the product, will be subject to significant review, oversight and ongoing and changing regulation by the FDA. Failure to comply with regulatoryrequirements may subject us, or Purdue Pharma or other collaborators, to administrative and judicially-imposed sanctions. These may include warningletters, adverse publicity, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production,refusal to approve pending product marketing applications, import alerts placing a hold on the importation of drug products and drug substances, andwithdrawal of product approvals. Even if we receive regulatory approval to market a particular product candidate, the approval could be conditioned on ourconducting additional costly post-approval studies or could limit the indicated uses included in our labeling. The FDA has the authority to require certain post-market studies, including post-market studies to further evaluate the safety of the drug and the use of the drug in certain patient populations, includingpediatric and geriatric populations. For example, as part of the approval of Intermezzo, the FDA required us to conduct a post-market study of the ability ofpatients to comply with our dosing instructions in an actual-use setting. Moreover, the product may later be found to cause adverse effects that limit or preventits widespread use, force us or our marketing partner to withdraw it from the market or impede or delay the ability to obtain regulatory approvals in additionalcountries. The FDA also requested that all manufacturers of sedative-hypnotic pharmaceutical products modify their product labeling to include stronglanguage concerning potential risks. These risks include severe allergic reactions and complex sleep-related behaviors, which include sleep-driving. The FDAalso recommended that pharmaceutical manufacturers of sedative-hypnotics conduct clinical studies to investigate the frequency with which sleep-driving andother complex behaviors occur in association with individual drug products, and to deliver to the FDA information related to the effect, if any, their drugproducts may have on next day driving safety. Our ongoing regulatory requirements may also change from time to time, potentially harming or making costlierour commercialization efforts. For example, in January 2013, the FDA required the manufacturers of certain zolpidem-based prescription sleep aids other thanIntermezzo to reduce the recommended dose for such products. Although we were not subject to such mandatory dose reduction, we cannot guarantee that ourexisting regulatory requirements will not change and consequently harm our business.If manufacturers supplying our products fail to produce in the volumes and quality that are required on a timely basis, or to comply with stringentregulations applicable to pharmaceutical manufacturers, there may be delays in the commercialization of or an inability to meet demand forIntermezzo or delays in the development of future product candidates, if any, and we may lose potential revenue.Neither we nor Purdue Pharma manufacture Intermezzo and we do not currently have plans to develop the capacity to manufacture any product orproduct candidates. We have a primary manufacturing and supply agreement with Patheon, Inc. to manufacture a supply of Intermezzo for use outside theUnited States, and Purdue Pharma has entered into an agreement with Patheon to manufacture and supply Intermezzo for use in the United States. We andPurdue Pharma currently have arrangements to use Sharp Corporation as a primary packager of Intermezzo. Purdue Pharma relies upon SPI Pharma, Inc. as asupplier for certain key excipients contained within Intermezzo and as the sole supplier for one such excipient, Pharmaburst®. If we obtain approval to sellIntermezzo outside the U.S. territory, we would likely also rely on SPI Pharma as a supplier for the same excipients. In addition, Purdue Pharma relies uponTeva Pharmaceutical Industries Ltd., API Division (formerly Plantex USA, Inc.) as the sole source for a special form of zolpidem tartrate, which is the activepharmaceutical ingredient of Intermezzo. Purdue Pharma is dependent upon these manufacturers for the commercial supply of Intermezzo in the United States.The realization of any of the risks described here would have a significant impact on Purdue Pharma's commercialization efforts for Intermezzo, or ourability to generate revenue under the Collaboration Agreement. In the event we commercialize Intermezzo outside the U.S. territory, we would likely also rely onthe same key manufacturers and suppliers as Purdue Pharma intends to use to commercialize Intermezzo in the U.S. territory.SNBL has agreed pursuant to the License Agreement to supply its nasal drug delivery device to us to conduct development activities for non-registrationstudies. However, under the License Agreement we are responsible for all clinical and commercial manufacture and supply of products derived from TO-2070.We do not own or operate manufacturing facilities for clinical or commercial manufacture of TO-2070, which includes drug substance and drug packaging,including the components of the SNBL nasal drug delivery device. We have limited personnel with experience in drug manufacturing and we lack thecapabilities to manufacture TO-2070 on a clinical or commercial scale. We expect to outsource all manufacturing and packaging of TO-2070 to third parties,including SNBL. In addition, we do not currently have the necessary agreements with23third-party manufacturers for the long-term commercial supply of TO-2070. We may be unable to enter into agreements for commercial supply with suchthird-party manufacturers, or may be unable to do so on acceptable terms. Even if we enter into these agreements or, for those agreements that we have alreadyentered into, the various manufacturers of TO-2070 will likely be single source suppliers to us for a significant period of time. We may not be able to establishadditional sources of supply for our products prior to commercialization. Such suppliers are subject to regulatory requirements covering manufacturing,testing, quality control and record keeping relating to our product candidates, and are subject to pre-approval and ongoing inspections by the regulatoryagencies. Failure by any of our suppliers to comply with applicable regulations may result in long delays and interruptions to our manufacturing capacitywhile we seek to secure another supplier that meets all regulatory requirements.The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advancedmanufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scalingup initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate andquality assurance testing, shortages of qualified personnel, and compliance with strictly enforced federal, state and foreign regulations. Third-partymanufacturers and key suppliers may not perform as agreed, may terminate their agreements, or may experience manufacturing difficulties due to resourceconstraints or as a result of labor disputes, unstable political environments at foreign facilities or financial difficulties. For example, Purdue Pharma's supplierof zolpidem tartrate with its manufacturing facility in Israel may face geopolitical risk that could prevent it from providing supplies from such facility.Additionally, third-party manufacturers and key suppliers may become subject to claims of infringement of intellectual property rights of others, which couldcause them to incur substantial expenses, and, if such claims were successful, could cause them to incur substantial damages or cease production of ourproducts or product components. In addition, several of the suppliers of Intermezzo have only one facility qualified to supply key components of Intermezzo,and transferring such supply to an alternate site could take substantial time and resources. Any interruption of supply from such facilities could materiallyimpair the ability to manufacture Intermezzo, which may harm Purdue Pharma's ability to commercialize Intermezzo in the United States and impair ourability to generate revenue from Intermezzo through our collaboration with Purdue Pharma. Furthermore, as noted above, in the event we commercializeIntermezzo outside the U.S. territory, we would likely also rely on the same key manufacturers and suppliers as Purdue Pharma intends to use tocommercialize Intermezzo in the U.S. territory. These manufacturers and suppliers may also choose, or be required, to seek licenses from the claimant, whichmay not be available on acceptable terms or at all. If these manufacturers or key suppliers were to encounter any of these difficulties, or otherwise fail tocomply with their contractual obligations, our ability to launch Intermezzo in the United States through our collaboration with Purdue Pharma or, if we chooseto commercialize Intermezzo accordingly, outside of the United States, or any other product candidate, if approved, would be jeopardized. Even if we were ableto launch a product, these difficulties could cause increases in the prices we or our collaborators pay for supply of such product and its components whichcould substantially hinder or prevent commercialization efforts.In addition, all manufacturers and suppliers of pharmaceutical products must comply with current good manufacturing practice, or cGMP,requirements enforced by the FDA through its facilities inspection program. The FDA is likely to conduct inspections of third-party manufacturer and keysupplier facilities as part of its review of any of our NDAs. If third-party manufacturers and key suppliers are not in compliance with cGMP requirements, itmay result in a delay of approval, particularly if these sites are supplying single source ingredients required for the manufacture of Intermezzo. These cGMPrequirements include quality control, quality assurance and the maintenance of records and documentation. Furthermore, regulatory qualifications ofmanufacturing facilities are applied on the basis of the specific facility being used to produce supplies. As a result, if one of these manufacturers shiftsproduction from one facility to another, the new facility must go through a complete regulatory qualification process and be approved by regulatory authoritiesprior to being used for commercial supply. Manufacturers may be unable to comply with these cGMP requirements and with other FDA, state and foreignregulatory requirements. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay inproduct approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to a third-partymanufacturer or key supplier failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for our productcandidates and, even if such approval is obtained, any resulting products may not be successfully commercialized.There are no alternate manufacturers qualified at this time with respect to the commercial supply of Intermezzo, nor are there alternate manufacturersidentified or qualified with respect to the commercial supply of several of the key ingredients and packaging materials used in Intermezzo. If manufacturers arerequired to be changed, prior approval by the FDA and comparable foreign regulators would be required and Purdue Pharma would likely incur significantcosts and expend significant efforts to educate the new manufacturer with respect to, or to help the new manufacturer independently develop, the processesnecessary for production. If we exercise our right to co-promote Intermezzo to psychiatrists, we may also incur such costs and expend such efforts to ensurecommercial supply of Intermezzo. Manufacturing and supply switching costs in the pharmaceutical industry can be very high, and switching manufacturersor key suppliers can frequently take 12 to 18 months to24complete, although in certain circumstances such a switch may be significantly delayed or prevented by regulatory and other factors.Any of these factors could cause the delay or suspension of commercialization of our products, hinder or delay future regulatory submissions and/orrequired regulatory approvals, or entail higher costs or result in an inability to effectively commercialize our products. Furthermore, if manufacturers fail todeliver the required commercial quantities of raw materials, including the active pharmaceutical ingredient, key excipients or finished product on a timelybasis and at commercially reasonable prices, we or our strategic partners, including Purdue Pharma, would be unable to meet demand for our products and wewould lose potential revenue.The commercial success of our products depends, in part, on meeting the conditions for market exclusivity under Section 505 of the Federal Food,Drug and Cosmetic Act, or FFDCA.We have been granted approval of a NDA for Intermezzo submitted under Section 505(b)(2) of the FFDCA, enacted as part of the Drug PriceCompetition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act. Section 505(b)(2) permits applicants to rely in part onclinical and non-clinical studies conducted by third parties. Specifically, with respect to Intermezzo, we relied in part on third party data concerning zolpidem,which is the active ingredient in Intermezzo and in the previously approved insomnia products Ambien® and Ambien CR®.In connection with the approval of the Intermezzo NDA, the FDA has granted three years of Hatch-Waxman marketing exclusivity for Intermezzo. Underthis form of exclusivity, the FDA is precluded from approving an abbreviated new drug application (ANDA) for a generic of Intermezzo, i.e., a productcandidate that the FDA views as a therapeutically equivalent drug product having the same conditions of use as Intermezzo (for example, the same labeling, thesame dosage form and route of administration, the same strength and the same bioavailability as Intermezzo). Marketing exclusivity for Intermezzo alsoprecludes the FDA from approving 505(b)(2) applications for proposed drug products having the same or similar conditions of use as Intermezzo, includingapplications that rely on Intermezzo as the reference product. The exclusivity lasts for a period of three years from the date of Intermezzo approval, or untilNovember 2014, though the FDA may accept and commence review of ANDAs and 505(b)(2) NDAs during the three-year period. However, the three-yearexclusivity period may not prevent FDA from approving an original NDA that relies only on its own data to support the approval. In addition, we havereceived multiple notifications of ANDA filings for generic versions of Intermezzo. See "Legal Proceedings." An ANDA with a Paragraph IV certificationindicates that the ANDA applicant is seeking approval for a generic version of Intermezzo and is challenging the enforceability of one or more of the drugproduct or method of use patents that claim Intermezzo.We have not yet sought nor been approved for market exclusivity under the FFDCA for TO-2070. If we are unable to attain such approval, we wouldbecome solely reliant upon Transcept and SNBL patents and patent applications to maintain market exclusivity. If Intermezzo does not maintain marketexclusivity under the FFDCA, including due to existing or future ANDAs, it would likely have a material adverse effect on our business, results of operations,financial condition and prospects.We rely on third parties to conduct our non-clinical and clinical trials. If these third parties do not perform as contractually required or asotherwise expected, we may not be able to obtain regulatory approval for our current and future product candidates, if any.We do not currently conduct non-clinical and clinical trials on our own and instead rely on third parties, such as contract research organizations,medical institutions, clinical investigators and contract laboratories, to assist us with our non-clinical and clinical trials. We, and our third parties, are alsorequired to comply with regulations and standards, commonly referred to as Good Clinical Practice, for conducting, recording and reporting the results ofclinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. If these third parties donot successfully carry out their duties with regard to our products in development or fail to successfully carry out their duties to us as they relate to meetingfuture regulatory obligations or expected deadlines, if the third parties need to be replaced, or if the quality or accuracy of the data these third parties obtainedduring the development of a product candidate is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for otherreasons, our non-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtainregulatory approval for a product candidate.Intermezzo may never receive regulatory approval outside of the United States.In order to market and commercialize Intermezzo outside of the United States, we and any future partners or acquirors of Intermezzo must establish andcomply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries andcan involve additional pre-clinical studies and clinical trials and additional administrative review periods. For example, European regulatory authoritiesgenerally require clinical testing comparing the efficacy of the new drug to an existing drug prior to granting approval. The time required to obtain approval in25other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailedin this “Risk Factor” section regarding FDA approval in the United States, as well as other risks. Regulatory approval in one country does not ensureregulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process inother countries.We may face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for ourproducts.The use of a product candidate, including TO-2070, in preclinical or clinical trials and the sale of any products for which we obtain marketingapproval, including Intermezzo, exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we will incursubstantial liabilities. We are also obligated under certain circumstances to indemnify suppliers and others with whom we have contractual relationships forproduct liability claims such entities might incur with respect to our products and product candidates. Regardless of merit or eventual outcome, liabilityclaims may result in:•decreased demand for our products;•impairment of our business reputation;•withdrawal of clinical trial participants;•costs of related litigation;•substantial monetary awards to patients or other claimants;•loss of revenue; and•the inability to commercialize future product candidates.Under our Collaboration Agreement with Purdue Pharma, we remain liable for 50% of the cost of defending against any product liability or personal oreconomic injury claims. In addition, we and Purdue Pharma have agreed to allocate any losses for such claims on a comparative fault basis but in the absenceof such determination have agreed to split such losses equally. Although we currently have product liability insurance coverage for our clinical trials withlimits that we believe are customary and adequate to provide us with coverage for foreseeable risks associated with our development efforts, this insurancecoverage may not reimburse us or may be insufficient to reimburse us for the actual expenses or losses we may suffer. Moreover, insurance coverage isbecoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protectus against losses due to liability. We have product liability insurance covering the sale of Intermezzo in the United States.We depend on key personnel and if we are not able to retain them, our business will suffer.We are highly dependent on the principal members of our management and scientific staff, including but not limited to Glenn A. Oclassen, our Presidentand Chief Executive Officer, Nikhilesh N. Singh, Ph.D., our Senior Vice President and Chief Scientific Officer, and John A. Kollins, our Senior VicePresident and Chief Business Officer. The competition for skilled personnel among biopharmaceutical companies in the San Francisco Bay Area is intenseand the employment services of our scientific, management and other executive officers may be terminated at-will. If we lose one or more of these keyemployees, our ability to implement and execute our business strategy successfully could be seriously harmed. Replacing key employees may be difficult andmay take an extended period of time because of the limited number of individuals in the biopharmaceutical industry with the breadth of skills and experiencerequired to develop, gain regulatory approval of and commercialize products successfully.The commercial success, if any, of our products depends, in part, on certain patent rights and rights we are seeking or may seek through certainpatent applications.The potential commercial success of Intermezzo depends in part on patents that have been issued to us from the U.S. Patent and Trademark Office, orUSPTO, covering the formulation and use of Intermezzo that expire no earlier than February 2025. In addition, we have pending certain foreign equivalentpatent applications. We may also seek patents related to TO-2070.The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patentapplications that we own or license may fail to result in issued patents in the United States or in foreign countries. Even if patents do successfully issue, thirdparties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Forexample, the active, and many of the26inactive, ingredients in Intermezzo, including generically manufactured zolpidem, has been known in the pharmaceutical art for many years. The zolpidemcomposition of matter is no longer subject to patent protection. Accordingly, certain of our patents for Intermezzo are directed to particular formulations fordelivering zolpidem. Although we believe our formulation and the use of Intermezzo are patentable, and such patents have the potential to provide a competitiveadvantage, these patents may not prevent others from marketing formulations using the same active and inactive ingredients in similar but differentformulations. Additionally, from time to time, we may become aware of one or more third party patents that relate to our product candidates. For example, weare aware of a third party patent that relates to methods and devices for delivering DHE to migraine patients. Should a license to such a third party patentbecome necessary, we cannot predict whether we or our partner(s) would be able to obtain a license, or if a license were available, whether it would be availableon commercially reasonable terms. While there can be no certainty as to the outcome of any litigation, we believe if such patent is asserted against us, we havevalid defenses to such a claim. However, if such patent has, or other third party patents that we may become aware of have, a valid claim relating to our use ofa product or product candidate, and a license under the applicable patent is unavailable on commercially reasonable terms, or at all, our ability tocommercialize our products may be impaired or delayed, which could in turn significantly harm our business.Moreover, if our patents are successfully challenged and ruled to be invalid and/or unenforceable, we would be exposed to direct competition from low-priced generic products.There can be no assurance that our pending patent applications and applications we may file in the future, or those applications we may license fromthird parties, will result in patents being issued in a timely manner, or at all. Even if patents are issued, the claims in such patents may not issue in a formthat will be advantageous to us, may not cover our product candidates and their unique features, and may not provide us with proprietary protection orcompetitive advantages. For instance, with Intermezzo, competitors may be able to engineer around our formulation patents and applications with alternateformulations that deliver therapeutic effects sufficiently similar to Intermezzo to warrant approval under existing FDA standards for generic product approvals.Accordingly, other drug companies may be able to develop generic versions of our products even if we are able to maintain our current proprietary rights.Alternatively, other drug companies can challenge the validity of our patents and seek to gain marketing approval for generic versions of our products.For example, drug makers may attempt to introduce low-dose zolpidem products similar to Intermezzo immediately after the expiration of Hatch-Waxmanmarketing exclusivity and prior to the expiration of patents that may be issued relating to our respective products by challenging the validity of our patents orcertifying that their competitive products do not infringe our patents.Generic drug manufacturers routinely initiate challenges during the Hatch-Waxman marketing exclusivity period. We have received multiple notificationsof ANDA filings for generic versions of Intermezzo. See “Legal Proceedings.” If we or Purdue Pharma initiate timely patent litigation against a generic or505(b)(2) sponsor who seeks to challenge one or more of the patents that claim Intermezzo, we would be entitled to a regulatory stay that prohibits finalapproval of the generic or 505(b)(2) product for 30 months from the date we receive notice of the challenge to our patents. That stay may be terminated if we orPurdue Pharma do not succeed in maintaining litigation against the generic or 505(b)(2) applicant. In addition, if a generic or 505(b)(2) applicant formulatesaround our patents, we may not be able to initiate Hatch-Waxman patent litigation and, as a result, there would be no 30 month regulatory stay on FDA'sability to give final approval to the generic or 505(b)(2) application.In addition, among other limitations, certain of our patents that protect Intermezzo are limited in scope to certain uses and formulations of the activeingredient zolpidem, so potential competitors could develop similar products using active pharmaceutical ingredients other than zolpidem. Any patents thathave been allowed, that we have obtained or that we do obtain may be challenged by re-examination, opposition, or other administrative proceeding, or may bechallenged in litigation, and such challenges could result in a determination that the patent is invalid and/or unenforceable.Failure to obtain effective patent protection for Intermezzo or TO-2070 would allow for products to be marketed by competitors that would underminesales, marketing and collaboration efforts for our product candidates, and reduce or eliminate our revenue. In addition, both the patent application process andthe process of managing patent disputes can be time consuming and expensive.27If we are unable to maintain and enforce our proprietary rights, we may not be able to compete effectively or operate profitably.Our commercial success will depend, in part, on obtaining and maintaining patent protection, trade secret protection and regulatory protection of ourproprietary technology and information as well as successfully defending against third party challenges to our proprietary technology and information. We willbe able to protect our proprietary technology and information from use by third parties only to the extent that we have valid and enforceable patents, tradesecrets or regulatory protection to cover them and we have exclusive rights to utilize them.Our commercial success will continue to depend in part on the patent rights we own, the patent rights we have licensed, the patent rights of our suppliersand the patent rights we plan to obtain related to future products we may market. Our success also depends on our and our licensors' and suppliers' ability tomaintain these patent rights against third party challenges to their validity, scope or enforceability. Further, if we were to in-license intellectual property, wemay not fully control the patent prosecution of the patents and patent applications we have licensed. There is a risk that licensors to us will not devote the sameresources or attention to the prosecution of the licensed patent applications as we would if we controlled the prosecution of the patent applications, and theresulting patent protection, if any, may not be as strong or comprehensive as if we had prosecuted the applications ourselves. The patent positions ofbiopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved.No consistent policy regarding the breadth of claims allowed in such companies' patents has emerged to date in the United States. The patent situation outsidethe United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries maydiminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in thirdparty patents. For example:•we or our licensors might not have been the first to make the inventions covered by pending patent applications and issued patents;•we or our licensors might not have been the first to file patent applications for these inventions;•others may independently develop similar or alternative technologies or duplicate any of our technologies;•it is possible that none of our pending patent applications or any pending patent applications of our licensors will result in issued patents;•our patents, if issued, and the issued patents of our licensors may not provide a basis for commercially viable products, or may notprovide us with any competitive advantages, or may be challenged and invalidated by third parties;•we may not develop additional proprietary technologies or product candidates that are patentable; or•the patents of others may have an adverse effect on our business.We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, tradesecrets are difficult to protect. While we seek to protect confidential information, in part, by confidentiality agreements with our employees, consultants,contractors, or scientific and other advisors, they may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that athird party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. Inaddition, courts outside the United States are sometimes less willing to protect trade secrets.If we are not able to defend the patent or trade secret protection position of our technologies and product candidates, then we will not be able to excludecompetitors from developing or marketing competing products, and we may not generate enough revenue from product sales, if any, to justify the cost ofdevelopment of our product candidates and to achieve or maintain profitability.If we are sued for infringing intellectual property rights of other parties, such litigation will be costly and time consuming, and an unfavorableoutcome would have a significant adverse effect on our business.Although we believe that we would have valid defenses to allegations that our current product and product candidate, production methods and otheractivities infringe the valid and enforceable intellectual property rights of any third parties of which we are aware, we cannot be certain that a third party willnot challenge our position in the future. Other parties may own patent rights that might be infringed by our products or other activities, or other parties mayclaim that their patent rights are infringed by excipients manufactured by others and contained in our products. There has been, and we believe that there willcontinue to be, significant litigation and demands for licenses in the life sciences industry regarding patent and other intellectual property rights. Competitorsor other patent holders may assert that our products and the methods we employ are covered by their patents. These parties could bring claims against us thatwould cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages or possibly prevent us fromcommercializing our product28candidates. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or salesof the product or product candidate that is the subject of the suit.As a result of patent infringement claims, or in order to avoid potential claims, we may choose to seek, or be required to seek, a license from the thirdparty and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if wewere able to obtain a license, the rights may be non-exclusive, which would give competitors access to the same intellectual property. Ultimately, we could beprevented from commercializing a product, or be forced to cease some aspect of our business operations if, as a result of actual or threatened patentinfringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.These risks of intellectual property infringement are similarly faced by our suppliers and collaborators, which could hinder or prevent them frommanufacturing or commercializing our products.We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.In the event a competitor infringes upon one of our patents or other intellectual property rights, litigation to enforce our intellectual property rights or todefend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention frommanagement. Under the Collaboration Agreement, Purdue Pharma has the right, but not the obligation, to bring action against a party engaged in infringementof our patents covering Intermezzo, and we are required to share 40% of the costs related to all such actions up to an aggregate cap of $1.0 million per calendaryear and $4.0 million over the term of the agreement. We may not have sufficient resources to enforce our intellectual property rights or to defend our patentsagainst challenges from others. For example, we have received multiple notifications of ANDA filings referencing Intermezzo. See "Legal Proceedings."The pharmaceutical industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. Wecould therefore become subject to litigation that could be costly, result in the diversion of management's time and efforts, and require us to pay damages.Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Our competitors may assert thatthey own U.S. or foreign patents containing claims that cover our products, components of our products, or the methods we employ in making or using ourproducts. In addition, we may become a party to an interference proceeding declared by the USPTO to determine the priority of inventions. Because patentapplications can take many years to issue, there may be pending applications of which we are unaware, which may later result in issued patents that containclaims that cover our products. There could also be existing patents, of which we are unaware, that contain claims that cover one or more components of ourproducts. As the number of participants in our industry increases, the possibility of patent infringement claims against us also increases.Any interference proceeding, litigation, or other assertion of claims against us may cause us to incur substantial costs, place a significant strain on ourfinancial resources, divert the attention of management from our core business and harm our reputation. If the relevant patents were upheld as valid andenforceable and we were found to infringe, we could be required to pay substantial damages and/or royalties and could be prevented from selling our productsunless we could obtain a license or were able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if atall. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may be unable to make, use, sell, or otherwisecommercialize one or more of our products. In addition, if we were found to willfully infringe, we could be required to pay treble damages, among otherpenalties.If we fail to comply with our obligations in the agreements under which we license rights to products or technology from third parties, we couldlose license rights that are important to our business.We are a party to a number of agreements that include technology licenses that are important to our business and expect to enter into additional licenses inthe future. For example, we have a License Agreement with SNBL relating to TO-2070 and hold licenses from SPI relating to key excipients used in themanufacture of Intermezzo. If we fail to comply with these agreements, the licensor may have the right to terminate the license, in which event we and ourcollaboration partners would not be able to market products covered by the license, including Intermezzo and any products derived from TO-2070.We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of formeremployers.Certain of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including competitors orpotential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we ourselves haveinadvertently or otherwise used or disclosed trade secrets or other proprietary information of former employers. Litigation may be necessary to defend againstthese claims. If we fail in defending such29claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their workproduct could hamper or prevent our or a collaboration partner's ability to develop or commercialize certain potential products, which could severely harm ourbusiness. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.If our agreements with employees, consultants, advisors and corporate partners fail to protect our intellectual property, proprietary information ortrade secrets, it could have a significant adverse effect on us.We have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual propertyassignment agreements with our employees, consultants, advisors and corporate partners. However, such agreements may not be enforceable or may notprovide meaningful protection for all of our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of theagreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether thesteps we have taken to prevent such disclosure are, or will be, adequate. Furthermore, the laws of some foreign countries may not protect our intellectualproperty rights to the same extent as do the laws of the United States.Our operations involve hazardous materials, which could subject us to significant liabilities.Our research and development processes involve the controlled use of hazardous materials, including chemicals. Our operations produce hazardouswaste products. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws andregulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper orunauthorized release of, or exposure of individuals, including employees, to hazardous materials. In addition, claimants may sue us for injury orcontamination that results from our use of these materials and our liability may exceed our total assets. We maintain limited insurance for the use of hazardousmaterials which may not be adequate to cover any claims. Compliance with environmental and other laws and regulations may be expensive and current orfuture regulations may impair our research, development or production efforts.Risks Related to Our Common StockWe may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline invalue.There are a number of reasons why we might fail to meet financial guidance or other expectations about our business, including, but not limited to, thefollowing:•the failure of our strategic initiatives to enhance stockholder value or delay in the consummation of a strategic transaction or liquidation;•the effectiveness of the sales, marketing and distribution efforts by Purdue Pharma in the United States and overall success of Purdue Pharma'scommercialization efforts in the United States;•delays or unexpected changes in Purdue Pharma's plan to invest in and support the sales and marketing of Intermezzo;•unexpected difficulties in Purdue Pharma's efforts to commercialize Intermezzo in the United States; •lower than expected pricing and reimbursement levels, or no reimbursement at all, for Intermezzo in the United States;•the use of currently available sleep aids that are not approved to be taken in the middle of the night;•negative developments or setbacks in our efforts to seek marketing approval for Intermezzo outside of the United States;•FDA approval of generic versions of Intermezzo or negative developments in any ongoing ANDA proceedings;•current and future competitive products that have or obtain greater acceptance in the market than Intermezzo;•if only a subset of or no affected patients respond to therapy with Intermezzo or future products, if any;•negative publicity about the results of our clinical studies, or those of others with similar or related products may reduce demand for Intermezzo orfuture products, if any;•the inability to sell a product at the price we expect; or•the inability to supply enough product to meet demand.30If we fail to meet our revenue and/or expense projections and/or other financial guidance for any reason, our stock could decline in value.Our stock price is volatile.The market price of our common stock is subject to significant fluctuations. During the 12-month period ended December 31, 2013, the sales price ofour common stock on The NASDAQ Global Market ranged from a high of $6.77 in February 2013 to a low of $2.52 in August 2013. Market prices forsecurities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. The volatility of themarket price of our common stock is exacerbated by the low trading volume of our common stock and the high proportion of our shares held by insiders.Some of the factors that may cause the market price of our common stock to fluctuate include:•announcements related to our strategic transaction process including but not limited to a potential business combination, collaborationarrangements or liquidation of Transcept, and the timing thereof;•the perception of our prospects for successful commercialization of Intermezzo by Purdue Pharma, and further development of TO-2070,including the costs associated with development and commercialization;•announcements by us or Purdue Pharma regarding the commercialization and/or marketing efforts of Intermezzo or by us regarding thedevelopment efforts of TO-2070;•the termination by Purdue Pharma of the Collaboration Agreement, the termination by SNBL of the License Agreement, or the termination ofother future collaboration, partnering or license agreements;•the failure of our products to achieve commercial success, including due to competition from generic versions, or the perception by investorsthat commercial success may not be achieved;•issues in manufacturing our products;•the entry into any in-licensing agreements securing licenses, patents or development rights;•the results of any future preclinical trials of TO-2070;•the entry into, or termination of, key agreements, including additional commercial partner agreements;•the initiation of, material developments in, or conclusion of litigation to enforce or defend our intellectual property rights or defend against theintellectual property rights of others;•announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significantcontracts, commercial relationships or capital commitments;•adverse publicity relating to the insomnia or migraine market, including with respect to other products and potential products in suchmarkets;•the introduction of technological innovations or new therapies that compete with our potential products;•the loss of key employees;•changes in estimates or recommendations by securities analysts, if any, who cover our common stock;•future sales of our common stock;•general and industry-specific economic conditions that may affect our research and development expenditures;•changes in the structure of health care payment systems, including changes to prescription drug reimbursement levels; and•period-to-period fluctuations in financial results.Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individualcompanies. These broad market fluctuations may also adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company's securities, stockholders have often instituted class action securitieslitigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, whichcould significantly harm our profitability and reputation.31If securities or industry analysts do not publish research or reports or publish inaccurate or unfavorable research about us, our business or ourstock, our stock price and trading volume could decline.The trading market for our common stock is influenced by the research and reports that securities or industry analysts publish about us, our businessand our stock. As of December 31, 2013, we had research coverage by four securities analysts. If any of the analysts who cover us downgrades our stock orpublishes inaccurate or unfavorable research regarding us or our business model, technology or stock performance, our stock price would likely decline. Ifone or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turncould cause our stock price or trading volume to decline. Moreover, the unpredictability of our financial results likely reduces the certainty, and thereforereliability, of the forecasts by securities or industry analysts of our future financial results, adding to the potential volatility of our stock price.Future sales of our common stock may cause our stock price to decline and impede our ability to raise capital.Our executive officers and directors beneficially own or control approximately 14.4% of our approximately 18.8 million outstanding shares of commonstock as of December 31, 2013 and an additional 11.1% is beneficially owned by a venture capital firm in which one of our directors is a partner.Sales into the public market by our officers, directors and their affiliates, or other major stockholders, of a substantial number of shares, or theexpectation that such sales may occur, could significantly reduce the market price of our common stock. In addition, certain of our executive officers mayestablish predetermined selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, or the Exchange Act, for the purpose of effecting sales ofcommon stock.If any such sales occur, are expected to occur or a large number of our shares are sold in the public market, the trading price of our common stock coulddecline. Further, any such decline or expectation could impede our ability to raise capital in the future through the sale of equity securities under terms that arefavorable to us, or at all.Raising additional funds by issuing securities or through licensing arrangements may cause dilution to existing stockholders, restrict ouroperations or require us to relinquish proprietary rights.Additional financing may not be available to us when we need it or may not be available on favorable terms. To the extent that we raise additional capitalby issuing equity securities, our existing stockholders' ownership will be diluted and the terms of any new equity securities may have preferences over ourcommon stock. Any debt financing we enter into may involve covenants that restrict our operations. These restrictive covenants may include limitations onadditional borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem our stock ormake investments. In addition, if we raise additional funds through licensing arrangements, it may be necessary to relinquish potentially valuable rights topotential products or proprietary technologies, or grant licenses on terms that are not favorable to us.Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 couldhave a material adverse effect on our stock price.Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require an annual management assessment of theeffectiveness of our internal control over financial reporting and, depending on our public float, a report by our independent registered public accounting firmattesting to the effectiveness of our internal control over financial reporting at the end of the fiscal year. If we fail to maintain the adequacy of our internalcontrol over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we canconclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002and the related rules and regulations of the SEC. If we cannot in the future favorably assess, or, if required, our independent registered public accounting firmis unable to provide an unqualified attestation report on, the effectiveness of our internal control over financial reporting, investor confidence in the reliabilityof our financial reports may be adversely affected, which could have a material adverse effect on our stock price.Anti-takeover provisions in the Collaboration Agreement with Purdue Pharma, in our charter documents and under Delaware law could make anacquisition of us more difficult and may prevent attempts by stockholders to replace or remove management.Provisions in the Collaboration Agreement with Purdue Pharma, our certificate of incorporation and our bylaws may delay or prevent an acquisition or achange in management. The provisions in the Collaboration Agreement include an agreement with Purdue Pharma that prevents Purdue Pharma from acquiringabove a certain percentage of our stock and engaging in certain other activities for a limited period of time following the commercial launch of Intermezzo thatmay lead to an acquisition of our company without our consent. In addition, our co-promote option pursuant to the Collaboration Agreement cannot betransferred to a third party, except under a limited circumstance at the discretion of Purdue Pharma, which may significantly reduce the value of our shares toa potential acquirer. Such provisions in our charter documents include a classified board of directors, a prohibition on actions by written consent ofstockholders and the ability of our board32of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions ofSection 203 of the Delaware General Corporation Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging orcombining with us unless certain conditions are met. Although we believe most of these provisions collectively will provide for an opportunity to receive higherbids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by somestockholders. In addition, these provisions may frustrate or prevent any attempts by stockholders to replace or remove the then-current management bymaking it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.In addition, we are exploring a range of alternatives to enhance stockholder value, including but not limited to a sale of Transcept, a businesscombination or collaboration, joint development and partnership opportunities, a distribution of all or a significant amount of cash to stockholders, andliquidation of the Company. Our strategic process is both active and ongoing and includes a range of interactions with transaction counterparties. We believe itis in our stockholders' best interest to allow sufficient opportunity to pursue and consummate one or more such transactions and to consider additionalalternatives that may materialize in the near future, before making a decision regarding a liquidation of the Company. The provisions described above mayprevent us from successfully pursuing such a strategic transaction, which may therefore result in a liquidation of the Company.Furthermore, in September 2013, our board of directors adopted the Tax Benefit Preservation Plan to help preserve the value of our net operating lossesand other deferred tax benefits. At December 31, 2013, we had cumulative NOLs of approximately $97 million, which NOLs can be utilized in certaincircumstances to offset future U.S. taxable income. The Tax Benefit Preservation Plan is intended to act as a deterrent to any person acquiring sufficient sharesof our common stock to jeopardize the value of the NOLs; however, it was not adopted as an anti-takeover measure, and once the deferred tax assets have beenfully used, our board of directors intends to terminate the Tax Benefit Preservation Plan.We have never paid dividends on our capital stock, and do not currently anticipate that we will pay any cash dividends in the near future.We have not paid cash dividends on any of our classes of capital stock to date. While we do not currently expect to pay any cash dividends in thefuture, we have engaged a financial and strategic advisor to explore a range of strategic alternatives to enhance stockholder value, which may include a returnof capital to our stockholders. Otherwise, capital appreciation, if any, of our common stock will likely be the sole source of gain, if any, as a result of holdingshares of our common stock, for the foreseeable future.Item 1B.Unresolved Staff CommentsNone.Item 2.PropertiesOur operational headquarters is located in Point Richmond, California, where we lease approximately 11,600 square feet of space under a lease thatexpires in August 2014. Approximately 3,000 square feet of the Point Richmond space is product development laboratory space and the remainder is generaloffice space.We believe our current facilities are suitable and adequate for our current needs.Item 3.Legal ProceedingsANDA Litigation - IntermezzoIn July 2012, we received notifications from three companies, Actavis Elizabeth LLC (Actavis), Watson Laboratories, Inc. - Florida (Watson), andNovel Laboratories, Inc. (Novel), in September 2012 from each of Par Pharmaceutical, Inc. and Par Formulations Private Ltd. (together, the Par Entities), inFebruary 2013 from Dr. Reddy's Laboratories, Inc. and Dr. Reddy's Laboratories, Ltd. (together, Dr. Reddy's), and in July 2013 from TWi Pharmaceuticals,Inc. (TWi) stating that each has filed with the FDA an Abbreviated New Drug Application, or ANDA, that references Intermezzo.•Actavis & Watson: In the July 2012 notifications, Actavis and Watson indicated that each company's ANDA includes Paragraph IV patentcertifications to our U.S. Patent Nos. 7,658,945 (expiring April 15, 2027) and 7,682,628 (expiring February 16, 2025) (together, the “'945 and'628 Patents”). On November 28, 2012, Watson withdrew its ANDA, and, as a result of such withdrawal, on December 18, 2012, we and Purdueagreed to voluntarily dismiss the action without prejudice and on December 20, 2012 a court order was entered to such effect. The dismissal ofWatson's ANDA had no33effect on the ANDA filed by Actavis, a wholly owned subsidiary of Watson Pharmaceuticals, Inc. On January 24, 2013, Actavis notified us that ithas included Paragraph IV patent certifications to our U.S. Patent Nos. 8,242,131 (expiring August 20, 2029) and 8,252,809 (expiring February16, 2025) (together, the “'131 and '809 Patents”).•Novel: In the July 2012 notifications, Novel indicated that its ANDA includes Paragraph IV patent certifications to the '945 and '628 Patents. OnDecember 10, 2012, Novel notified us that it has included Paragraph IV patent certifications to the '131 and '809 Patents.•Par Entities: The ANDAs submitted by the Par Entities each include Paragraph IV patent certifications to the '945, '628, '131 and '809 Patents.•Dr. Reddy's: The ANDA submitted by Dr. Reddy's includes Paragraph IV patent certifications to the '945, '628, '131 and '809 Patents.•TWi: The ANDA submitted by TWi includes Paragraph IV patent certifications to the '945, '628, '131 and '809 Patents.In August 2012, August 2012, September 2012, and October 2012, respectively, we joined Purdue Pharma in filing actions against Actavis, Watsonand certain of their affiliates, Novel, and the Par Entities, in each action alleging patent infringement and seeking injunctive and other relief. In December2012, we and Purdue Pharma agreed to voluntarily dismiss the action against Watson without prejudice following its withdrawal of its ANDA application onNovember 28, 2012. On December 20, 2012, a court order was entered to such effect. The dismissal of Watson's ANDA had no effect on the ANDA filed byActavis, a wholly owned subsidiary of Watson Pharmaceuticals, Inc. After receiving the supplemental notifications referenced above, we and Purdue Pharmaamended our pending complaints against Actavis and Novel to also allege infringement of the '131 and '809 patents, as well as the '628 patent previouslyasserted against those companies. The actions against the Par Entities alleged infringement of the '131 and '809 patents. In September 2013, we and PurduePharma agreed to voluntarily dismiss the action against one of the two Par Entities, Par Formulations Private Ltd., following that Par Entity’s withdrawal of itsANDA. The action against the other Par Entity, Par Pharmaceutical, Inc., remains pending and continues to allege infringement of the ‘131 and ‘809 patents.In April 2013, we joined Purdue Pharma in filing an action against Dr. Reddy's, alleging patent infringement of the '628, '131, and '809 patents, and seekinginjunctive and other relief. The New Jersey court has consolidated our actions against each of the above-referenced generic companies into a single action.In August 2013, we joined Purdue Pharma in filing two actions against TWi. The first action against TWi was filed on August 20, 2013 in the U.S.District Court for the District of New Jersey, and the second action against TWi was filed on August 22, 2013 in the U.S. District Court for the NorthernDistrict of Illinois. Each action alleges patent infringement of the ‘131 and ‘809 patents, and seeks injunctive and other relief. On October 17, 2013, TWi filedanswers and counterclaims in both New Jersey and Illinois, in both cases seeking declarations of non-infringement and invalidity as to the ‘945, ‘628, ‘131,and ‘809 patents, as well as other relief. On January 13, 2014, the Illinois action against TWi was stayed pending dismissal of the New Jersey action againstTWi, or further order of the Illinois court. On January 24, 2014, we and Purdue provided TWi with a covenant not to sue TWi based on its current ANDAformulation under the ’945 or ’628 patents, and on February 28, 2014, we and Purdue filed a motion to dismiss TWi’s counterclaims pertaining to the ’945or ’628 patents based on the tendering of that covenant not to sue. TWi has stated that it intends to oppose that motion.On February 26, 2014, the New Jersey court consolidated our action against TWi with the existing consolidated action referenced above againstActavis, Novel, Par Pharmaceutical, and Dr. Reddy’s.Patent Term Adjustment SuitIn January 2013, we and Purdue Pharma filed suit in the Eastern District of Virginia against the USPTO in connection with certain changes to theLeahy-Smith America Invents Act. We and Purdue Pharma are seeking recalculation of the patent term adjustment of the '131 Patent. Purdue Pharma hasagreed to bear the costs and expenses associated with this litigation. In June of 2013, the judge granted a joint motion to stay the proceedings pending a finaldecision on appeal by the Federal Circuit in Exelixis, Inc. v. Rea, No. 2013-11 75 (Fed. Cir.), and Exelixis, Inc. v. Rea, No. 2013-11 98 (Fed. Cir.).Derivative SuitIn October 2013, one of our stockholders, Retrophin, Inc., filed a purported derivative suit against our Board of Directors in the Court of Chanceryof the State of Delaware purporting to assert claims on behalf of Transcept, and alleging that our Board of Directors approved and paid excessivecompensation to our directors. In January 2014, this case was dismissed by the Court of Chancery following Retrophin's voluntary submission of a stipulatedorder of dismissal.From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe there is no other litigation pending thatcould have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition.34Table of ContentsItem 4.Mine Safety DisclosuresNone.35Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock is currently traded on The NASDAQ Global Market under the symbol “TSPT.” Prior to February 2, 2009, our common stock wastraded under the symbol “NOVC.” On January 30, 2009, in connection with the merger of Novacea and TPI, we completed a reverse stock split pursuant towhich each five shares of our common stock was converted into one share of our common stock. The share-related information presented in this AnnualReport on Form 10-K has been adjusted to reflect the reverse stock split.The following table sets forth the range of high and low sales prices of our common stock for the quarterly periods indicated as reported by TheNASDAQ Global Market. Sales Price High LowYear ended December 31, 2012 First quarter$10.59 $7.77Second quarter$12.99 $5.81Third quarter$6.81 $5.09Fourth quarter$5.56 $4.10Year ended December 31, 2013 First quarter$6.77 $4.50Second quarter$5.09 $2.81Third quarter$3.90 $2.52Fourth quarter$3.90 $3.03On January 30, 2009, Novacea completed a business combination with TPI. Novacea securities listed on The NASDAQ Global Market, trading underthe ticker symbol “NOVC,” were suspended for trading as of the close of business on Friday, January 30, 2009 and trading of Transcept securities on TheNASDAQ Global Market under the ticker symbol “TSPT” commenced on Monday, February 2, 2009.The closing price of our common stock as reported by The NASDAQ Global Market on March 12, 2014 was $3.21 per share. As of March 12, 2014,there were approximately 45 holders of record of our common stock.Dividend PolicyNo dividends have been declared or paid on our common stock. We do not anticipate that we will pay any cash dividends on our common stock in theforeseeable future, other than pursuant to any strategic transactions we may undertake.Recent Sales of Unregistered SecuritiesWe did not sell any unregistered securities during the fourth quarter of fiscal 2013.Issuer Purchases of Equity SecuritiesThere were no repurchases of our common stock during the fourth quarter of fiscal 2013.36Table of ContentsPerformance GraphPresented below is a line graph comparing the yearly percentage change in the cumulative total return on the Company’s Common Stock to thecumulative total return of the NASDAQ Composite Index and the NASDAQ Biotech Index for the period commencing on December 31, 2008 and ending onDecember 31, 2013.The graph assumes that $100 was invested in the Company’s Common Stock, the NASDAQ Composite Index and the NASDAQ Biotech Index onDecember 31, 2008 and that all dividends were reinvested the date of payment without payment of any commissions. We have not declared or paid anydividends on our common stock. The performance of our common stock shown in the graph below represents past performance and should not be consideredan indication of future performance.Comparison of Five Year Cumulative Total ReturnAmong Transcept Pharmaceuticals, Inc., the NASDAQ Composite Index and the NASDAQ Biotechnology Index37Table of ContentsItem 6.Selected Financial DataThe following selected financial data has been derived from our audited financial statements. The information below is not necessarily indicative of theresults of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and Item 1A, “Risk Factors,” of this Annual Report on Form 10-K, and the financial statements and related notes thereto included in Item 8 ofthis Annual Report on Form 10-K, in order to fully understand factors that may affect the comparability of the information presented below. All per shareamounts reflect the conversion of TPI common stock to our common stock on January 30, 2009 at the rate of 0.14134 shares of common stock, after givingeffect to the 1-for-5 reverse stock split, for each share of TPI common stock outstanding on January 30, 2009. For the year ended December 31, 2013 2012 2011 2010 2009 (in thousands, except per share data)Statements of operations data Net revenue$(5,074) $9,597 $19,694 $12,500 $5,208Operating expenses: Research and development6,904 11,191 11,273 10,684 9,005General and administrative12,431 10,263 12,185 11,038 16,050Merger related transaction costs— — — — 2,224Goodwill impairment2,962 — — — —Total operating expenses22,297 21,454 23,458 21,722 27,279Loss from operations(27,371) (11,857) (3,764) (9,222) (22,071)Interest and other income (expense), net(75) (159) (116) (81) 271Net loss$(27,446) $(12,016) $(3,880) $(9,303) $(21,800)Basic and diluted net loss per share attributable to common stockholders$(1.46) $(0.70) $(0.29) $(0.69) $(1.79)Weighted average common shares outstanding18,772 17,052 13,534 13,416 12,166 As of December 31, 2013 2012 2011 2010 2009 (in thousands)Selected Balance Sheet Data Cash, cash equivalents, marketable securities and restricted cash$70,245 $85,475 $62,562 $68,171 $89,102Total assets73,670 98,056 69,151 73,807 95,218Working capital71,699 92,303 62,498 59,775 74,293Common stock and additional paid-in capital211,276 207,496 165,817 160,023 157,943Accumulated deficit(139,556) (112,110) (100,094) (96,214) (86,911)Total stockholders’ equity71,742 95,393 65,752 63,811 71,07138Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain statements that are notstrictly historical and are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a highdegree of risk and uncertainty. Actual results may differ materially from those projected in the forward-looking statements due to other risks anduncertainties. All forward-looking statements included in this section are based on information available to us as of the date hereof, and we assume noobligation to update any such forward-looking statement, except as required by law.Company OverviewWe are a specialty pharmaceutical company focused on the development and commercialization of proprietary products that address important therapeuticneeds in the field of neuroscience. We have one commercial product, Intermezzo® (zolpidem tartrate) sublingual tablet C-IV for the treatment of insomnia relatedto middle-of-the-night awakenings, and our lead product candidate is TO-2070, a novel, rapidly absorbed treatment for acute migraine incorporatingdihydroergotamine (DHE) as the active drug.Strategic Initiatives and ProcessIn 2013, we engaged a financial and strategic advisor to explore a range of alternatives to enhance stockholder value, including but not limited to a sale ofTranscept, a business combination or collaboration, joint development and partnership opportunities, a distribution of all or a significant amount of cash tostockholders, and liquidation of the Company. Our strategic process is both active and ongoing and includes a range of interactions with transactioncounterparties. We believe it is in our stockholders' best interest to allow sufficient opportunity to pursue and consummate one or more such transactions andto consider additional alternatives that may materialize in the near future, before making a decision regarding a liquidation of the Company.In connection with our strategic process, we have implemented operating cost reductions and organizational restructuring, including a recent reduction in ourworkforce, to reduce overall cash burn and facilitate our pursuit of strategic initiatives. We continue to work with Purdue Pharmaceuticals L.P., or PurduePharma, our U.S. marketing partner for Intermezzo, to develop and implement strategies to maximize the value of Intermezzo. We intend to continue to developTO-2070 through the completion of preclinical safety studies, but given the timing of our current strategic process as described herein, we do not currentlyintend to initiate a Phase 1 human pharmacokinetic study.Intermezzo® (zolpidem tartrate) sublingual tablet C-IVOur first approved product, Intermezzo (zolpidem tartrate) sublingual tablet, is a sublingual formulation of zolpidem approved for use as needed for thetreatment of insomnia when a middle-of-the-night awakening is followed by difficulty returning to sleep. Intermezzo is the first and only sleep aid approved bythe FDA for this indication.In July 2009, we entered into the Collaboration Agreement with Purdue Pharma that grants an exclusive license to Purdue Pharma to commercialize Intermezzoin the United States and pursuant to which:◦Purdue Pharma paid us a $25.0 million non-refundable license fee in August 2009;◦Purdue Pharma paid us a $10.0 million non-refundable intellectual property milestone in December 2011 when the first of two issuedformulation patents was listed in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations, or Orange Book;◦Purdue Pharma paid us a $10.0 million non-refundable intellectual property milestone in August 2012 when the first of two issued method-of-use patents was listed in the FDA's Orange Book;◦We transferred the Intermezzo New Drug Application (“NDA”) to Purdue Pharma, and Purdue Pharma is obligated to assume the expenseassociated with maintaining the NDA and further development of Intermezzo in the United States, including any expense associated with post-approval studies;◦Purdue Pharma is obligated to commercialize Intermezzo in the United States at its expense using commercially reasonable efforts;◦Purdue Pharma is obligated to pay us tiered base royalties on net sales of Intermezzo in the United States ranging from the mid-teens up to themid-20% level. The base royalty is tiered depending upon the achievement of certain fixed net sales thresholds by Purdue Pharma, which netsales levels reset each year for the purpose of calculating the royalty; and39Table of Contents◦Purdue Pharma is obligated to pay us up to an additional $70.0 million upon the achievement of certain net sales targets for Intermezzo in theUnited States.We began earning royalty revenue during 2012, upon commercial launch of Intermezzo in April 2012. We earned $1.7 million and $0.8 million for the yearsended December 31, 2013 and 2012, respectively. In December 2013, Purdue Pharma notified us that it intends to discontinue use of the Purdue sales force toactively market Intermezzo to healthcare professionals during the first quarter of 2014.On November 21, 2012, we agreed to contribute $10.0 million to Purdue Pharma's $29.0 million national direct-to-consumer advertising campaign, includingdigital, print and television advertising to support Intermezzo commercialization. We initially recorded the $10.0 million payment to Purdue Pharma as aprepaid expense. We are recognizing this payment as an offset against revenue as the advertising costs are incurred. At December 31, 2013, Purdue Pharmaestimates that approximately $1.8 million of the Company's original contribution will be returned due to reduced overall DTC campaign spending.Accordingly, $1.8 million is recorded as a receivable at December 31, 2013.For the years ended December 31, 2013 and 2012, this revenue offset totaled $6.8 million and $1.4 million. There are no prepaid advertising costs atDecember 31, 2013.TO-2070: a developmental product candidate for migraine treatmentIn September 2013, we entered into the License Agreement with Shin Nippon Biomedical Laboratories Ltd., or SNBL, pursuant to which SNBL granted usan exclusive worldwide license to commercialize SNBL's proprietary nasal drug delivery technology to develop TO-2070. We are developing TO-2070 as atreatment for acute migraine using SNBL’s proprietary nasal powder drug delivery system. Under the License Agreement, we are required to fund, lead and beresponsible for product development, preparing and submitting regulatory filings and obtaining and maintaining regulatory approval with respect to TO-2070.Pursuant to the License Agreement, we have incurred an upfront nonrefundable technology license fee of $1.0 million, and we are also obligated to pay:•up to $6.5 million upon the occurrence of certain development milestones, including NDA approval of TO-2070 by the FDA,•up to $35.0 million in commercialization milestone payments tied to the achievement of specified annual sales levels of TO-2070, and•tiered, low double-digit royalties on annual net sales of TO-2070.We intend to continue to develop TO-2070 through the completion of preclinical safety studies, but given the timing of our current strategic process asdescribed herein, we do not currently intend to initiate a Phase 1 human pharmacokinetic study.TO-2061: an investigational product for adjunctive therapy in patients with obsessive compulsive disorderIn March 2011, we announced that we had started a Phase 2 clinical trial of TO-2061, an investigational product for adjunctive therapy in patients withobsessive compulsive disorder and our only product candidate in active clinical development. In December 2012, we announced that this trial did not meet itsprimary endpoint. Based on this result, we discontinued the clinical development of TO-2061.Net Loss and ProfitabilityWe have incurred net losses since inception as we have devoted substantially all of our resources to research and development, including contractmanufacturing and clinical trials. As of December 31, 2013, we had an accumulated deficit of $139.6 million. Our net loss for the years ended December 31,2013, 2012, and 2011 was $27.4 million, $12.0 million, and $3.9 million, respectively. As of December 31, 2013, we had cash, cash equivalents, andmarketable securities of $70.0 million and working capital of $71.7 million.Prior to the fourth quarter of 2011, our only source of revenue has been the receipt in August 2009 of a $25.0 million non-refundable license fee receivedpursuant to our Collaboration Agreement with Purdue Pharma. Through June 30, 2011, we recognized revenue from the license fee ratably over an estimated24-month period beginning in August 2009 and ending in July 2011 as this represented the estimated period during which we had significant participatoryobligations under the Collaboration Agreement. During the quarter ended September 30, 2011, we re-assessed the time period over which the remaining $1.04million of deferred revenue at June 30, 2011 was recognized, and we recorded the remaining revenue through November 30, 2011, based on FDA approval ofIntermezzo and the completion of our participatory obligations under the Collaboration Agreement. During each of 2011 and 2012, we received $10.0 million inintellectual property milestone payments and during 2012, we began receiving royalty revenue pursuant to our Collaboration Agreement with Purdue Pharma.40Table of ContentsFinancial Operations OverviewNet revenueWe began earning royalty revenue upon commercial launch of Intermezzo in April 2012. Royalty revenue earned during the years ended December 31, 2013and 2012 was $1.7 million and $0.8 million, respectively. Royalty revenue is derived from net sales of Intermezzo generated by Purdue Pharma to wholesalers.Royalty revenue was offset by $6.8 million and $1.4 million for the years ended December 31, 2013 and 2012, respectively, related to a $10.0 millioncontribution by Transcept in December 2012 to the Intermezzo DTC advertising campaign. Revenue during 2012 also included a $10.0 million milestonepayment under our Collaboration Agreement with Purdue Pharma for the listing of our method-of-use patents in the FDA's Orange Book.Through June 30, 2011, we recognized revenue from the $25 million non-refundable license fee ratably over an estimated 24-month period beginning in August2009 and ending in July 2011 as this represented the estimated period during which we had significant participatory obligations under the CollaborationAgreement. During the quarter ended September 30, 2011, we re-assessed the time period over which the remaining $1.04 million of deferred revenue at June30, 2011 was recognized, and we recorded the remaining revenue through November 30, 2011, based on FDA approval of Intermezzo and the completion ofour participatory obligations under the Collaboration Agreement. The revenue recognized in connection with the license fee during the year ended December 31,2011 was $7.3 million. There was no similar license fee during 2013 or 2012. During the fourth quarter of 2011, we received a $10 million milestone paymentunder our Collaboration Agreement with Purdue Pharma for the listing of our formulation patents in the FDA's Orange Book. We have no additionalperformance obligations under the Collaboration Agreement related to these milestone payments. Revenue during 2011 also included $1.7 million forreimbursement of certain manufacturing-related costs.Research and Development ExpenseResearch and development expense represented approximately 31%, 52% and 48% of total operating expenses for the years ended December 31, 2013, 2012,and 2011, respectively. Research and development costs are expensed as incurred. Research and development expense consists of expenses incurred inidentifying, researching, developing and testing product candidates. These expenses primarily consist of the following:•salaries, benefits, travel and related expense for personnel associated with research and development activities;•fees paid to professional service providers for services related to the conduct and analysis of pre-clinical and clinical trials;•contract manufacturing costs for formulations used in clinical trials and pre-commercial manufacturing and packaging costs;•fees paid to consultants to evaluate product in-licensing or acquisition opportunities, to advise us on the development of internally generated newproduct concepts, the development of TO-2070 and the wind down of TO-2061;•laboratory supplies and materials;•depreciation of equipment; and•allocated costs of facilities and infrastructure.General and Administrative ExpenseGeneral and administrative expense consists primarily of salaries and related expense for personnel in executive, marketing, finance and accounting,information technology and human resource functions. Other costs include facility costs not otherwise included in research and development expense andprofessional fees for legal and accounting services.41Table of ContentsResults of OperationsComparison of the Years Ended December 31, 2013 and 2012The following table summarizes results of operations with respect to the items set forth below for the years ended December 31, 2013 and 2012, in thousands,together with the percentage change in those items. Year ended December 31, Favorable % 2013 2012 (Unfavorable) ChangeNet revenue $(5,074) $9,597 $(14,671) (153)%Research and development expense 6,904 11,191 4,287 38 %General and administrative expense 12,431 10,263 (2,168) (21)%Goodwill impairment 2,962 — (2,962) —Net revenueNegative net revenue of $5.1 million for the year ended December 31, 2013 consisted of $1.7 million in royalty revenue offset by $6.8 million of advertisingexpense paid to Purdue Pharma. In December 2012, we contributed $10.0 million to Purdue Pharma's Intermezzo direct-to-consumer advertising campaign.This contribution is recognized as an offset against revenue as the advertising costs are incurred. Revenue recorded for the year ended December 31, 2012consisted of a $10.0 million milestone payment under our Collaboration Agreement with Purdue Pharma for the listing of our method of use patent in theFDA's Orange Book; $0.8 million of Intermezzo royalty revenue; and $0.2 million representing a non-refundable payment from Purdue Pharma and anassociated company for the right to negotiate for the commercialization of Intermezzo in Mexico and Canada partially offset by $1.4 million of advertisingexpense paid to Purdue Pharma.Research and Development ExpenseResearch and development expense decreased 38% to $6.9 million for the year ended December 31, 2013 from $11.2 million for the comparable period in2012. The decrease of approximately $4.3 million is primarily attributable to:•$6.4 million reduction due to the winding down of the TO-2061 development program, which was terminated in December 2012; and•$0.9 million reduction in personnel costs and associated travel and entertainment due to a significant reduction in staff.These decreases were partially offset by:•$2.5 million of expense associated with our TO-2070 project; and•$0.5 million of severance, related benefit and stock option modification expense related to the January and November 2013 reductions in force.General and Administrative ExpenseGeneral and administrative expense has increased by 21% to $12.4 million for the year ended December 31, 2013 from $10.3 million for the comparableperiod in 2012. The increase of approximately $2.1 million is primarily attributable to:•$1.2 million increase in professional fees, primarily associated with ANDA patent litigation and a special shareholder meeting;•$0.6 million of severance, related benefit and stock option modification expense related to the January and November 2013 reductions in force; and•$0.3 million of increased non-cash stock option compensation.Goodwill impairmentWe recorded a goodwill impairment charge of $3.0 million during the year ended December 31, 2013. During the second quarter of 2013, several eventsoccurred which indicated that the carrying amount of goodwill exceeded the fair value of the reporting unit, including:•the approximately 30% decline in Intermezzo prescriptions at June 30, 2013 from the peak of the direct-to-consumer ("DTC") advertising campaign,which was substantially completed in April 2013; and•the May 2013 termination by Purdue of 90 contract sales representatives dedicated exclusively to promoting Intermezzo, resulting in reliance solelyon Purdue's existing analgesics sales force of approximately 525 sales representatives.42Table of ContentsAs a result of these factors, we experienced a 37% decline in our stock price during the quarter ended June 30, 2013. The decline in stock price resulted in amarket capitalization of approximately $56.7 million at June 30, 2013 which, when compared to our stockholders' equity of $79.9 million, and inconsideration of the early nature of ongoing internal research and development, the progress of new product search and evaluation efforts and the decliningsales of Intermezzo, was an indication of impairment under step one of the goodwill impairment testing accounting guidance.The impairment analysis indicated that the entire goodwill balance of $3.0 million was impaired, which was recognized during the three-months ended June30, 2013. We have not previously recognized any impairment of goodwill.Comparison of the Years Ended December 31, 2012 and 2011Results of OperationsThe following table summarizes results of operations with respect to the items set forth below for the years ended December 31, 2012 and December 31, 2011,in thousands, together with the percentage change in those items. Year ended December 31, Favorable % 2012 2011 (Unfavorable) ChangeNet revenue $9,597 $19,694 $(10,097) (51)%Research and development expense 11,191 11,273 82 1 %General and administrative expense 10,263 12,185 1,922 16 %Net revenueNet revenue decreased 51% to $9.6 million for the year ended December 31, 2012 from $19.7 million for the comparable period in 2011 and consisted of thefollowing:•$10.0 million of milestone payments received in August 2012 and December 2011, respectively. The patent-related milestones were substantive andat-risk given the inherent uncertainty and risks associated with obtaining patent approval from the U.S. Patent and Trademark Office andsubsequent listing in the FDA's Orange Book in addition to the inherent uncertainty and risks associated with obtaining FDA approval forIntermezzo and the opportunity for Purdue Pharma to terminate the Collaboration Agreement after its review of the terms of the FDA approval. Wehave no additional performance obligations under the Collaboration Agreement related to these milestone payments.•a non-refundable payment from Purdue Pharma and an associated company for the right to negotiate for the commercialization of Intermezzo inMexico and Canada of $0.2 million and $0.7 million in 2012 and 2011, respectively; and•2012 also included:◦$0.8 million of royalty revenue recorded in connection with the April 2012 commercial launch of Intermezzo; and◦$1.4 million of advertising costs paid to Purdue Pharma recorded as a revenue offset. In December 2012, we contributed $10.0 million toPurdue Pharma's Intermezzo direct-to-consumer advertising campaign. This contribution is being recognized as an offset against revenue asthe advertising costs are incurred.•2011 also included:◦recognition of the remaining $7.3 million of license fee revenue related to a non-refundable license fee received from Purdue Pharma. Therewas no similar revenue during 2012; and◦$1.7 million for the reimbursement of certain manufacturing-related costs.Research and Development ExpenseResearch and development expense decreased 1% to $11.2 million for the year ended December 31, 2012 from $11.3 million for the comparable period in2011. The decrease of approximately $0.1 million for the year ended December 31, 2012 is primarily attributable to:•a decrease of $2.1 million in personnel costs, related expenses and other general expenses, including severance and benefit continuation expense ofapproximately $0.6 million incurred in 2011 in connection with the restructuring announced in July 2011, and a decrease of $0.3 million in stock-based compensation associated with performance-based options. We43Table of Contentsbegan recording compensation expense related to performance-based options upon FDA approval of Intermezzo on November 23, 2011, when thevesting was deemed to be probable; and•a decrease of $0.7 million of costs related to the Intermezzo development program, principally due to the FDA approval of the Intermezzo NDA inNovember 2011.These decreases were partially offset by an increase of $2.7 million of costs related to the TO-2061 development program for our Phase 2 clinical trial.General and Administrative ExpenseGeneral and administrative expense decreased 16% to $10.3 million for the year ended December 31, 2012 from $12.2 million for the comparable period in2011. The approximately $1.9 million decrease is primarily attributable to:•a decrease of $2.4 million in personnel costs and related expenses, primarily due to 2011 severance and benefit continuation expense of approximately$0.7 million incurred in connection with the restructuring announced in July 2011, 2011 stock-based compensation expense of approximately $0.2million to modify the terms of certain stock options previously granted to two members of our Board of Directors to align and extend the exerciseperiod of the options after the directors' end of service to us in June 2011 and $0.8 million of stock-based compensation associated with performance-based options. We began recording compensation expense related to performance-based options upon FDA approval of Intermezzo on November 23,2011, when the vesting was deemed to be probable; and•a $0.1 million reduction in facilities and related costs due to the termination of one of our property leases and reductions in other general facilitiescosts.These decreases are partially offset by a $0.6 million increase in professional fees, including market research, legal and third party consulting.Liquidity and Capital ResourcesAt December 31, 2013, we had cash, cash equivalents and marketable securities of $70.0 million.Sources of LiquidityPrior to 2009, we financed our operations primarily through private placements of preferred stock (subsequently converted to common stock), debt financingand interest income. On August 4, 2009, we received a $25 million non-refundable license fee from Purdue Pharma in connection with our entry into theCollaboration Agreement. In December 2011, we received a $10 million milestone payment from Purdue Pharma in accordance with the CollaborationAgreement.On May 1, 2012 we completed a public offering of 4.5 million shares of our common stock at a public offering price of $9.00 per share. Net proceeds to usfrom the public offering were approximately $37.7 million after deducting underwriting discounts and commissions and offering expenses.In August 2012, we received an additional $10.0 million milestone payment from Purdue Pharma in connection with the Collaboration Agreement.Purdue Pharma launched Intermezzo in April 2012 and we began recognizing royalty revenue during the second quarter of 2012.The following table summarizes our cash provided by (used in) operating, investing and financing activities (in thousands): Year Ended December 31, 2013 2012 2011 Net cash used in operating activities $(14,817) $(15,205) $(5,707)Net cash (used in) provided by investing activities (15,061) 5,170 1,266Net cash provided by financing activities 445 38,744 1,380Net Cash Used in Operating ActivitiesNet cash used in operating activities for the years ended December 31, 2013, 2012 and 2011 was $14.8 million, $15.2 million and $5.7 million, respectively.Net cash used in operating activities during each of these years consisted primarily of our net loss adjusted for non-cash items such as depreciation,amortization, stock-based compensation charges, goodwill impairment and non-cash interest expense, as well as net changes in working capital. Net changesin working capital during 2011 included $7.3 million of revenue recognition resulting in a decrease in deferred revenue. Net cash used in operating activitieswas44Table of Contentspartially offset during 2012 and 2011 by a $10 million milestone payment received in each year from Purdue Pharma in accordance with our CollaborationAgreement.Net Cash Used in or Provided by Investing ActivitiesNet cash used in investing activities was $15.1 million for the year ended December 31, 2013. Net cash provided by investing activities was $5.2 million and$1.3 million for the years ended December 31, 2012, and 2011, respectively. Net cash used by investing activities during 2013 was primarily attributable topurchases of marketable securities, net of maturities. Net cash provided by investing activities during 2012 and 2011 was primarily attributable to maturitiesof marketable securities, net of purchases. Uses of cash in investing activities in all periods included net purchases of property and equipment.Net Cash Provided by Financing ActivitiesNet cash provided by financing activities during the year ended December 31, 2013, 2012 and 2011 was $0.4 million, $38.7 million and $1.4 million,respectively. On May 1, 2012 we completed a public offering of 4.5 million shares of our common stock at a public offering price of $9.00 per share. Netproceeds to us from the public offering were approximately $37.7 million after deducting underwriting discounts and commissions and offering expenses. Netcash provided by financing activities during each of the years also included common stock issuances in connection with stock option exercises.Capital ResourcesWe expect our cash, cash equivalents, and marketable securities of $70.0 million at December 31, 2013, will be sufficient to satisfy our liquidity requirementsfor at least the next twelve months. We believe our investments in cash equivalents and marketable securities are highly rated and highly liquid.While we are exploring a range of alternatives to enhance stockholder value, including a sale of Transcept, a business combination, collaboration, jointdevelopment and partnership opportunities, and distribution of all or a significant amount of cash to our stockholders, our operating plan may change orability to consummate a transaction or liquidation may be delayed. However, if our current operating plans change, we will require substantial additionalfunding to operate. As such, our future capital requirements will depend on many factors, including:•our ability to identify and consummate a strategic transaction or liquidate the company;•the timing and nature of any strategic transactions that we undertake including, but not limited to, potential joint developments orpartnerships;•the ability of Purdue Pharma to successfully commercialize Intermezzo in the United States;•the level of Purdue Pharma's commercialization efforts with respect to Intermezzo;•whether, as a result of our strategic and financial review with Leerink Swann LLC, we enter into a partnership or business combination, orreturn capital to our stockholders;•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including in connectionwith ANDA proceedings relating to Intermezzo;•the cost of conducting preclinical trials, but not initiating a Phase 1 human pharmacokinetic study, with respect to TO-2070;•the timing and amount of milestone and royalty payments to SNBL under the License Agreement for TO-2070;•the potential costs associated with Intermezzo if our existing Collaboration Agreement with Purdue is terminated, including the cost toreplace Purdue Pharma's sales and marketing capabilities, the costs associated with the conduct of Phase IV clinical trials required by theFDA, and the increased costs to us of litigation expense in connection with ANDA proceedings related to Intermezzo; the receipt of milestoneand other payments, if any, from Purdue Pharma under the Collaboration Agreement;•the effect of competing technological and market developments; and•the cost incurred in responding to disruptive actions by activist stockholders.Additional funding may not be available at the time needed on commercially reasonable terms, if at all.45Table of ContentsOff-Balance Sheet ArrangementsSince inception, we have not engaged in any off-balance sheet financing activities, including the use of structured finance, special purpose entities or variableinterest entities.ContingenciesThere are no legal proceedings or other matters as of December 31, 2013 that are expected to have a material adverse effect on our financial position, results ofoperations or cash flows.Contractual Obligations and CommitmentsOur contractual obligations and commitments as of December 31, 2013 consists of $0.1 million of future minimum lease payments under an operating leasefor 11,600 square feet of space used for our current corporate facilities in Point Richmond, California. The lease terminates on August 31, 2014.Recently Adopted Accounting StandardsNone.Critical Accounting PoliciesThis discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been preparedin accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to makeestimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date ofthe financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We baseour estimates on historical experience and on various other factors that we believed were reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Therefore, actual results coulddiffer materially from those estimates under different assumptions or conditions.Significant accounting policies are described in Note 1 to the Financial Statements included in Item 8 of this Annual Report on Form 10-K. Some of theseaccounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates on matters that are inherentlyuncertain. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of ourfinancial statements.Revenue RecognitionWe apply the revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, and FASB ASCTopic 605 Revenue Recognition, sub-topic 25 Multiple-Element Arrangements.Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the deliveredcomponent has stand-alone value to the customer. Consideration received is allocated among the separate units of accounting based on their respective fairvalues, or if fair value is not determinable, based on the Company's best estimate of selling price. Applicable revenue recognition criteria are then applied toeach of the units.Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) transfer of technologyhas been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. For each source of revenue, we comply with the above revenue recognition criteria in the following manner:•Up-front license payments are assessed to determine whether or not the licensee is able to obtain any stand-alone value from the license. Where this isnot the case, we do not consider the license deliverable to be a separate unit of accounting, and the revenue is deferred with revenue recognition for thelicense fee assessed in conjunction with the other deliverables that constitute the combined unit of accounting. When the period of deferral cannot bespecifically identified from the related agreements, management estimates the period based upon provisions contained within the agreement and otherrelevant facts. We periodically review the estimated involvement period, which could impact the deferral period and, therefore, the timing and theamount of revenue recognized. It is possible that future adjustments will be made if actual conditions differ from our current plan and involvementassumptions;•Payments received that are related to substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement of themilestone or event specified in the underlying contracts, which represents the culmination of the46earnings process. Amounts received in advance, if any, are recorded as deferred revenue until the milestone is reached; and•Royalty revenue from sales of our licensed products, if and when approved for marketing by the appropriate regulatory agency, will be recognized asearned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured. Clinical TrialsWe accrue and expense costs for clinical trial activities performed by third parties, including clinical research organizations and clinical investigators, basedupon estimates made of the work completed as of the reporting date, in accordance with agreements established with contract research organizations andclinical trial sites and the agreed upon fee to be paid for the services. We determine these estimates through discussion with internal personnel and outsideservice providers as to the progress or stage of completion of the trials or services. If the actual timing of performance of services or the level of effort variesfrom these estimates, the accrual will be adjusted accordingly. Costs of setting up clinical trial sites for participation in the trials are expensed as the activitiesare performed. Clinical trial site costs related to patient enrollment are accrued as patients are entered into the trial and reduced by any initial payment made tothe clinical trial site when the first patient is enrolled. We adjust the estimates as actual costs become known. Through December 31, 2013, differences betweenactual and estimated activity levels for any particular study have not been material. However, if management does not receive complete and accurateinformation from vendors or underestimates activity levels associated with a study at a given point in time, we would have to record additional and potentiallysignificant research and development expenses in future periods.Stock-Based CompensationWe recognize stock based compensation in accordance with ASC Topic 718, Compensation - Stock Compensation, or ASC Topic 718. ASC Topic 718requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on thedate of grant and to recognize the cost over the period during which the employee is required to provide service in exchange for the award. Additionally, we arerequired to include an estimate of the number of awards that will be forfeited in calculating compensation costs, which are recognized over the requisite serviceperiod of the awards on a straight-line basis.Measurement and recognition of share-based compensation under ASC Topic 718 involve significant estimates and subjective inputs. The grant date fair valueof stock option awards is determined using an option valuation model, such as the Black-Scholes model that we used, and the amount of expense recognizedduring the period is affected by many complex and subjective assumptions. These assumptions include estimates of our future volatility, employee exercisebehavior, the expected term of the stock options, the number of options expected to ultimately vest, and the probability of achieving performance conditions, asapplicable. Until the merger with Novacea, our stock did not have a readily available market. Consequently, expected future volatility is derived from theweighted average of our historical volatility post-merger and the historical volatilities of several unrelated public companies within the specialty pharmaceuticalindustry. When making the selection of our industry peer companies to be used in the volatility calculation, consideration is given to the stage of development,size and financial leverage of potential comparable companies. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant forzero coupon U.S. Treasury notes with maturities approximately equal to each grant's expected life. The assumed dividend yield was based on our expectationsof not paying dividends in the foreseeable future, other than pursuant to any strategic transactions we may undertake. The expected option term calculationincorporates historical employee exercise behavior and post-vesting employee termination rates. Prior to the year ended December 31, 2013, given our limitedhistory to accurately estimate the expected lives for the various employee groups, we used the “simplified” method as provided by Staff Accounting BulletinNo. 107, Share Based Payment. The “simplified” method is calculated as the average of the time-to-vesting and the contractual life of the options. For 2013,we continued to use the "simplified" method, but including all data on our historical experience to date, adjusted for our vesting schedules. Stock-basedcompensation recorded in our Statements of Operations is based on awards expected to ultimately vest and has been reduced for estimated forfeitures.Estimated forfeitures may differ from actual forfeiture rates which would affect the amount of expense recognized during the period. Share-based compensationis adjusted to reflect the value of options which ultimately vest as such amounts become known in future periods.If in the future, our management determines that another method is more reasonable, or if another method for calculating these input assumptions is prescribedby authoritative guidance, and, therefore, should be used to estimate volatility or expected life, the fair value calculated for our stock options could changesignificantly. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. Stock-basedcompensation expense affects both our research and development expense and general and administrative expense.There is inherent uncertainty in these estimates and if we had made different assumptions than those described above, the amount of stock-basedcompensation expense, net loss and net loss per share amounts could have been significantly different.47No related tax benefits of stock-based compensation costs have been recognized since our inception.Fair Value MeasurementsOn January 1, 2008, we adopted ASC Topic 820, Fair Value Measurements and Disclosures (formerly SFAS No. 157) as it applies to our financial assetsand financial liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair valuemeasurements. Fair value is defined as the estimated exit price received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date rather than on an entry price which represents the purchase price of an asset or liability. ASC Topic 820 establishes a fairvalue hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:•Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchygives the highest priority to Level 1 inputs.•Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quotedprices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the fullterm of the assets or liabilities.•Level 3 - Unobservable inputs (i.e. inputs that reflect the reporting entity's own assumptions about the assumptions that market participants woulduse in estimating the fair value of an asset or liability) are used when little or no market data is available. The fair value hierarchy gives the lowestpriority to Level 3 inputs.A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. Level 1 securities include highly liquidmoney market funds. If quoted market prices are not available for the specific security, then we estimate fair value by using pricing models, quoted prices ofsecurities with similar characteristics or discounted cash flows. Level 2 instruments include commercial paper, U.S. corporate debt, and U.S. governmentsponsored enterprise issues. In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3within the valuation hierarchy.During the year ended December 31, 2013, there were no significant changes to the valuation models used for purposes of determining the fair value of Level 2assets.Item 7A.Quantitative and Qualitative Disclosures About Market RiskOur exposure to market risk is confined to cash, cash equivalents and marketable securities which have contractual maturities of eighteen months orless, bear interest rates at fixed rates and are denominated in, and pay interest in, U.S. dollars. The goals of our investment policy are preservation of capital,fulfillment of liquidity needs, maximization of investment performance and fiduciary control of cash and investments. Investments are classified as available-for-sale. We do not use derivative financial instruments in our investment portfolio. To achieve our goals, we invest excess cash in securities with differentmaturities to match projected cash needs and limit concentration of credit risk by diversifying investments among a variety of high credit-quality issuers,including U.S. government agencies, corporate debt obligations, taxable and tax-exempt pre-refunded municipal debt obligations and money market funds.There is no limit to the percentage of investments that may be maintained in U.S. Treasury debt obligations, U.S. agency debt obligations, or SEC-registeredmoney market funds. The portfolio includes marketable securities with active secondary or resale markets to ensure portfolio liquidity, and we regularlyreview our portfolio against our policy. A hypothetical 100 basis point increase in interest rates would result in an approximate $341,000 decrease in the fairvalue of our marketable securities at December 31, 2013.48Table of ContentsItem 8.Financial Statements and Supplementary DataIndex to Financial Statements PageReport of Independent Registered Public Accounting Firm50Consolidated Balance Sheets51Consolidated Statements of Operations and Comprehensive Loss52Consolidated Statement of Stockholders’ Equity53Consolidated Statements of Cash Flows54Notes to Consolidated Financial Statements5549Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders of Transcept Pharmaceuticals, Inc.We have audited the accompanying consolidated balance sheets of Transcept Pharmaceuticals, Inc. as of December 31, 2013 and 2012, and the relatedconsolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were notengaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby 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 TransceptPharmaceuticals, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the periodended December 31, 2013, in conformity with U.S. generally accepted accounting principles./s/ Ernst & Young LLPRedwood City, CaliforniaMarch 14, 201450Table of ContentsTranscept Pharmaceuticals, Inc.Consolidated Balance Sheets(in thousands, except for share and par value) December 31, 2013 2012Assets Current assets: Cash and cash equivalents$9,935 $39,368Marketable securities60,110 45,907Prepaid advertising— 8,571Prepaid and other current assets3,382 920Restricted cash200 200Total current assets73,627 94,966Property and equipment, net43 128Goodwill— 2,962Total assets$73,670 $98,056Liabilities and stockholders’ equity Current liabilities: Accounts payable$413 $1,001Accrued liabilities1,515 1,639Other liabilities, short-term portion— 23Total current liabilities1,928 2,663Commitments and contingencies Stockholders’ equity: Preferred stock: Undesignated preferred stock: $0.001 par value; 4,000,000 and 5,000,000 shares authorized at December31, 2013 and 2012, respectively; no shares issued and outstanding.— —Series A Junior participating preferred stock: $0.001 par value; 1,000,000 shares authorized at December31, 2013; no shares issued and outstanding at December 31, 2013. No shares were authorized, issued oroutstanding at December 31, 2012.— —Common stock: $0.001 par value; 100,000,000 shares authorized; 18,842,388 and 18,676,396 sharesissued and outstanding at December 31, 2013 and 2012, respectively.19 19Additional paid-in capital211,257 207,477Accumulated deficit(139,556) (112,110)Accumulated other comprehensive income22 7Total stockholders’ equity71,742 95,393Total liabilities and stockholders’ equity$73,670 $98,056See accompanying notes.51Table of ContentsTranscept Pharmaceuticals, Inc.Consolidated Statements of Operations and Comprehensive Loss(in thousands, except per share amounts) Year Ended December 31, 2013 2012 2011Revenue: Gross royalty revenue$1,697 $776 $—Gross license fee revenue— — 7,292Gross milestone revenue— 10,000 10,000Gross other revenue50 250 2,402Advertising expense - Purdue Pharma(6,821) (1,429) —Net revenue(5,074) 9,597 19,694Operating expenses: Research and development6,904 11,191 11,273General and administrative12,431 10,263 12,185Goodwill impairment2,962 — —Total operating expenses22,297 21,454 23,458Loss from operations(27,371) (11,857) (3,764)Interest and other income (expense), net(75) (159) (116)Net loss$(27,446) $(12,016) $(3,880)Basic and diluted net loss per share$(1.46) $(0.70) $(0.29)Weighted average shares outstanding18,772 17,052 13,534 Comprehensive loss: Net loss$(27,446) $(12,016) $(3,880)Changes in unrealized gain (loss) on marketable securities15 (22) 27Comprehensive loss$(27,431) $(12,038) $(3,853)See accompanying notes.52Table of ContentsTranscept Pharmaceuticals, Inc.Consolidated Statement of Stockholders’ Equity(in thousands) Common Stock AdditionalPaid-InCapital AccumulatedDeficit Accumulated OtherComprehensiveIncome Total Stockholders’Equity Shares Amount Balance at December 31, 2010 13,450 $13 $160,010 $(96,214) $2 $63,811Exercise of options to purchase common stock 442 1 1,333 — — 1,334Employee stock purchase under Employee stock purchase plan 8 — 46 — — 46Stock-based compensation related to: Employee stock option grants — — 3,677 — — 3,677Non-employee stock option grants — — 355 — — 355Employee stock purchase plan — — 22 — — 22Stock option modifications — — 351 — — 351Vested restricted stock 5 — 9 — — 9Net loss — — — (3,880) — (3,880)Unrealized gain on marketable securities — — — — 27 27Balance at December 31, 2011 13,905 14 165,803 (100,094) 29 65,752Exercise of options to purchase common stock 266 — 1,069 — — 1,069Employee stock purchases under Employee stock purchase plan 5 — 28 — — 28Stock-based compensation related to: Employee stock option grants — — 2,696 — — 2,696Non-employee stock option grants — — 187 — — 187Employee stock purchase plan — — 18 — — 18Stock option modifications — — 28 — — 28May 1, 2012 sale of common stock, net of offering costs of $2,848 4,500 5 37,648 — — 37,653Net loss — — — (12,016) — (12,016)Unrealized loss on marketable securities — — — — (22) (22)Balance at December 31, 2012 18,676 19 207,477 (112,110) 7 95,393Exercise of options to purchase common stock 162 — 435 — — 435Employee stock purchases under Employee stock purchase plan 4 — 10 — — 10Stock-based compensation related to: Employee stock option grants — — 3,028 — — 3,028Non-employee stock option grants — — 84 — — 84Employee stock purchase plan — — 6 — — 6Stock option modifications — — 217 — — 217Net loss — — — (27,446) — (27,446)Unrealized gain on marketable securities — — — — 15 15Balance at December 31, 2013 18,842 $19 $211,257 $(139,556) $22 $71,742See accompanying notes.53Table of ContentsTranscept Pharmaceuticals, Inc.Consolidated Statements of Cash Flows(in thousands) Year Ended December 31, 2013 2012 2011Operating activities Net loss$(27,446) $(12,016) $(3,880)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization90 229 357Stock-based compensation3,335 2,929 4,405Amortization of lease liability— (191) (316)(Gain) loss on disposals of fixed assets(25) — 2Impairment of goodwill2,962 — —Amortization of premium on available for sale securities893 561 1,250Changes in operating assets and liabilities: Prepaid and other current assets6,109 (6,211) (2,023)Other assets— 38 770Accounts payable(588) 14 389Accrued and other liabilities(147) (558) 631Deferred revenue— — (7,292)Net cash used in operating activities(14,817) (15,205) (5,707)Investing activities Purchases of property and equipment, net20 (43) (59)Purchases of marketable securities(69,811) (41,037) (52,175)Maturities of marketable securities54,730 46,250 53,500Net cash (used in) provided by investing activities(15,061) 5,170 1,266Financing activities Proceeds from issuance of common stock, net445 38,744 1,380Net cash provided by financing activities445 38,744 1,380Net (decrease) increase in cash and cash equivalents(29,433) 28,709 (3,061)Cash and cash equivalents at beginning of period39,368 10,659 13,720Cash and cash equivalents at end of period$9,935 $39,368 $10,659Supplemental disclosure of cash flow information Cash paid during the year for interest$1 $5 $9See accompanying notes.54Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting PoliciesTranscept Pharmaceuticals, Inc. (the “Company”) is a specialty pharmaceutical company focused on the development and commercialization ofproprietary products that address important therapeutic needs in the field of neuroscience. The Company's lead development candidate is TO-2070, a novel,rapidly absorbed treatment for acute migraine incorporating dihydroergotamine (DHE) as the active drug, which Transcept intends to develop through thecompletion of preclinical safety studies, but currently not including the initiation of a Phase 1 human pharmacokinetic study. Intermezzo® (zolpidem tartrate)sublingual tablet C-IV is the first FDA approved Transcept product. Purdue Pharmaceutical Products L.P. (“Purdue Pharma”) holds commercialization anddevelopment rights for Intermezzo in the United States. The Company operates in one business segment.In 2013, the Company engaged a financial and strategic advisor to explore a range of alternatives to enhance stockholder value, including but not limitedto a sale of Transcept, a business combination or collaboration, joint development and partnership opportunities, a distribution of all or a significant amountof cash to stockholders, and liquidation of the Company. The strategic process is both active and ongoing and includes a range of interactions with transactioncounterparties. Thus the Company believes it is in the best interest of the stockholders of the Company to allow sufficient opportunity to pursue andconsummate one or more of such transactions, and to consider additional alternatives that may materialize in the near future, before making a decisionregarding a liquidation of the Company.Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on historical experience andon assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates. Management makes estimateswhen preparing the financial statements including those relating to revenue recognition, clinical trials expense, advertising expense, and stock-basedcompensation.Significant Accounting PoliciesPrinciples of ConsolidationThe accompanying consolidated financial statements include the results of operations of Transcept Pharmaceuticals, Inc. and its wholly-ownedsubsidiary, Transcept Pharma, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.Cash and Cash EquivalentsThe Company invests its excess cash in bank deposits, money market accounts, and other marketable securities. The Company considers all highlyliquid investments purchased with a maturity of three months or less from the date of purchase to be cash equivalents. Cash equivalents are carried at fairvalue. The Company invests in money market securities in a U.S. bank and is exposed to credit risk in the event of default by the financial institution to theextent of amounts recorded on the balance sheet.Restricted cash consists of a Certificate of Deposit (“CD”) which functions as security for the Company’s credit cards with the domestic financialinstitution that issued the credit cards. The CD will remain as security concurrent with the continuation of the Company credit card program.Marketable SecuritiesAll marketable securities have been classified as “available-for-sale” and are carried at fair value as determined based upon quoted market prices.Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such designation as of eachbalance sheet date. Management views its investment portfolio as available for use in current operations and, accordingly, has reflected all such investments ascurrent assets although the stated maturity of individual investments may be one year or more beyond the balance sheet date. Unrealized gains and losses areincluded in accumulated other comprehensive loss and reported as a separate component of stockholders’ equity. Realized gains and losses and declines invalue judged to be other-than-temporary, if any, on available-for-sale securities are included in other income (expense), net. The cost of securities sold is basedon the specific identification method. Interest on marketable securities is included in interest income. The net carrying value of debt securities classified asavailable-for-sale is adjusted for55Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)amortization of premiums and accretion of discounts to maturity over the estimated life of the security. Such amortization is computed under the effectiveinterest method and included in interest income.Property and EquipmentProperty and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range fromtwo to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term.Long-Lived AssetsLong-lived assets include property and equipment. The carrying value of long-lived assets is reviewed for impairment whenever events or changes incircumstances indicate that the asset may not be recoverable. An impairment loss is recognized when the total of estimated future cash flows expected to resultfrom the use of the asset and its eventual disposition is less than its carrying amount or appraised value, as appropriate. Through December 31, 2013, therehave been no such impairments.GoodwillGoodwill is not subject to amortization, but is tested for impairment on an annual basis during the third quarter or whenever events or changes incircumstances indicate the carrying amount of these assets may not be recoverable. Goodwill impairment testing is a two-step process and performed on areporting unit level. In the first step, the Company conducts an assessment of qualitative factors to determine whether it is more likely than not that the fairvalue of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of its reporting unit isless than its carrying amount, it then conducts the second step, a two-part test for impairment of goodwill. The Company first compares the fair value of itsreporting units to their carrying values. If the fair values of the reporting units exceed the carrying value of the net assets, goodwill is not considered impairedand no further analysis is required. If the carrying values of the net assets exceed the fair values of the reporting units, then the second part of the impairmenttest must be performed in order to determine the implied fair value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value, then animpairment loss equal to the difference would be recorded. For 2012, the Company performed its annual goodwill impairment analysis as of September 30,2012 and concluded that goodwill was not impaired. The Company operates in one reporting unit and believes that its market capitalization is indicative of thefair value of the Company.During the second quarter of 2013, several events occurred that indicated that the carrying amount of goodwill exceeded the fair value of the reportingunit, including:•the approximately 30% decline in Intermezzo prescriptions at June 30, 2013 from the peak of the direct-to-consumer ("DTC") advertising campaign,which was substantially completed in April 2013; and•the May 2013 termination by Purdue of 90 contract sales representatives dedicated exclusively to promoting Intermezzo, resulting in reliance solelyon Purdue's existing analgesics sales force of approximately 525 sales representatives.As a result of these and other factors, the Company experienced a 37% decline in its stock price during the quarter ended June 30, 2013. The decline instock price resulted in a market capitalization of approximately $56.7 million at June 30, 2013 which, when compared to the Company's stockholders' equityof $79.9 million, and in consideration of the early nature of ongoing internal research and development, the progress of new product search and evaluationefforts and the declining sales of Intermezzo, was an indication of impairment under step one of the goodwill impairment testing accounting guidance.Step two of the goodwill test consisted of comparing the fair value of the Company to its carrying value at June 30, 2013. If the carrying value exceedsfair value, then a hypothetical purchase price exercise is to be performed to determine the amount, if any, of goodwill impairment. In determining the fair valueof the Company, management considered the Company's market capitalization, including any premium that would be necessary for an acquirer to obtaincontrol of the Company, as well as net cash and investments on hand at June 30, 2013. In each of these scenarios, the carrying value of the Company exceededits fair value in excess of the carrying value of goodwill.The impairment analysis indicated that the entire goodwill balance of approximately $3.0 million was impaired, which was recognized during the three-months ended June 30, 2013. No previous impairments of goodwill had been recognized by the Company.56Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)Revenue RecognitionRevenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the deliveredcomponent has stand-alone value to the customer. Consideration received is allocated among the separate units of accounting based on their relative fair valuesor if fair value is not determinable, based on the Company’s best estimate of selling price. Applicable revenue recognition criteria are then applied to each of theunits.Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) transfer oftechnology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.For each source of revenue, the Company complies with the above revenue recognition criteria in the following manner:•Up-front license payments are assessed to determine whether or not the licensee is able to obtain any stand-alone value from the license. Wherethis is not the case, the Company does not consider the license deliverable to be a separate unit of accounting, and the revenue is deferred withrevenue recognition for the license fee assessed in conjunction with the other deliverables that constitute the combined unit of accounting. Whenthe period of deferral cannot be specifically identified from the agreement, management estimates the period based upon provisions containedwithin the related agreements and other relevant facts. The Company periodically reviews the estimated involvement period, which could impactthe deferral period and, therefore, the timing and the amount of revenue recognized. It is possible that future adjustments will be made if actualconditions differ from the Company’s current plan and involvement assumptions;•Payments received that are related to substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement of themilestone or event specified in the underlying contracts, which represents the culmination of the earnings process. Amounts received in advance,if any, are recorded as deferred revenue until the milestone is reached; and•Royalty revenue from sales of the Company’s licensed product is recognized as earned in accordance with the contract terms when royalties fromlicensees can be estimated and collectability is reasonably assured.Research and Development CostsResearch and development costs are expensed as incurred. Research and development costs consist of salaries and benefits, travel and related expenses,lab supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on behalf of the Company.AdvertisingThe Company expenses non-direct response advertising as incurred. Advertising expense consists of the Company's $10.0 million contribution toPurdue Pharma's national direct-to-consumer advertising campaign (the “Program”), including digital, print and television advertising to support Intermezzocommercialization. The Company initially recorded the $10.0 million payment to Purdue Pharma as a prepaid expense. This payment was recognized as theadvertising costs were incurred. As this payment was made directly to Purdue Pharma, recognition of the expense is recorded as an offset to revenue. AtDecember 31, 2013, Purdue Pharma estimates that approximately $1.8 million of the Company's original contribution will be returned due to reduced overallDTC campaign spending. Accordingly, $1.8 million is recorded as a receivable on the accompanying consolidated balance sheet and included in prepaid andother current assets at December 31, 2013.For the years ended December 31, 2013 and 2012, the offset to revenue totaled $6.8 million and $1.4 million, respectively. There were no remainingprepaid advertising costs at December 31, 2013. Prepaid advertising costs at December 31, 2012 were $8.6 million.Clinical TrialsThe Company accrues and expenses costs for clinical trial activities performed by third parties, including clinical research organizations and clinicalinvestigators, based upon estimates made of the work completed as of the reporting date, in accordance with agreements established with contract researchorganizations and clinical trial sites and the agreed upon fee to be paid for the services. The Company determines these estimates through discussion withinternal personnel and outside service providers as to the progress or stage of completion of the trials or services. Costs of setting up clinical trial sites forparticipation in the trials are expensed immediately as research and development expenses. Clinical trial site costs related to57Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)patient enrollment are accrued as patients are entered into the trial and reduced by any initial payment made to the clinical trial site when the first patient isenrolled.Stock-Based CompensationThe Company records stock-based compensation of stock options granted to employees and directors and of employee stock purchase plan shares byestimating the fair value of stock-based awards using the Black-Scholes option pricing model and amortizing the fair value of the stock based awards grantedover the applicable vesting period. The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-couponbonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation ofnot paying dividends in the foreseeable future, other than pursuant to any strategic transactions it may undertake. The expected option term calculationincorporates historical employee exercise behavior and post-vesting employee termination rates. Prior to the year ended December 31, 2013, the weighted-averageexpected life of the options was calculated using the simplified method as prescribed by the Securities and Exchange Commission (“SEC”) Staff AccountingBulletin No. 107 and No. 110 (“SAB No. 107 and 110”). This decision was based on the lack of relevant historical data due to the Company’s limitedhistorical experience. In addition, due to the Company’s limited historical data, the estimated volatility also reflects the application of SAB No. 107 and 110,using the weighted average of the Company’s historical volatility post-Merger and the historical volatility of several unrelated public companies within thespecialty pharmaceutical industry. Additionally, the Company is required to include an estimate of the number of awards that will be forfeited in calculatingcompensation costs, which are recognized over the requisite service period of the awards on a straight-line basis. No related tax benefits of stock-basedcompensation costs have been recognized since the Company’s inception.Equity instruments, consisting of stock options and warrants granted to consultants, are accounted for at the fair value of the consideration received orthe fair value of the equity instrument issued, as calculated using the Black-Scholes model. The measurement of stock-based compensation is subject toperiodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period over which services are received.Income TaxesThe Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based ondifferences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to bein effect when the differences are expected to reverse. Uncertain tax positions are evaluated in accordance with this topic and if appropriate, the amount ofunrecognized tax benefits are recorded within deferred tax assets. Valuation allowances are established when necessary to reduce deferred tax assets to theamounts expected to be realized. Currently, there is no provision for income taxes as the Company has incurred operating losses to date. Tax-related interest andpenalties, if any, are recorded as other expenses. To date, the Company has incurred no tax-related interest or penalties.Warrants to Purchase Common StockDuring 2012, 94,556 of the Company's outstanding warrants expired unexercised. The remaining 61,451 warrants have an exercise price of $8.136per share and will, if not exercised, expire in 2016.Concentration of Credit RiskFinancial instruments that are potentially subject to concentration of credit risk consist primarily of cash, cash equivalents, and marketable securities.The Company’s investment policy restricts investments to high-quality investments and limits the amounts invested with any one issuer other than U.S.Treasury debt obligations, U.S. agency debt obligations, or Securities and Exchange Commission (“SEC”) registered money market funds. The goals of theCompany's investment policy are as follows: preservation of capital, fulfillment of liquidity needs, maximization of investment performance and fiduciarycontrol of cash and investments. The Company’s exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes inthe general level of United States interest rates, particularly because the majority of the Company’s investments are in short-term debt securities.Concentration of RiskThe Company is dependent on Purdue Pharma to market and sell Intermezzo from which all of its royalty and milestone revenue to date has beenderived.58Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)2. Results of OperationsNet Loss Per ShareBasic net loss per share is computed by dividing net loss by the weighted average number of vested shares outstanding during the period. Diluted netloss per share is computed by giving effect to all potential dilutive common securities, including options, warrants and common stock subject to repurchase.For all periods presented in this report, stock options, warrants and common stock subject to repurchase were not included in the computation of diluted netloss per share because such inclusion would have had an antidilutive effect.The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts): 2013 2012 2011Numerator: Net loss$(27,446) $(12,016) $(3,880)Denominator: Weighted average common shares outstanding18,772 17,052 13,535Less: Weighted average common shares subject to repurchase— — (1)Denominator for basic and diluted net loss per share18,772 17,052 13,534Basic and diluted net loss per share$(1.46) $(0.70) $(0.29)The following outstanding shares subject to options and warrants to purchase common stock were antidilutive due to a net loss in the periods presentedand, therefore, were excluded from the dilutive securities computation as of the dates indicated below (in thousands): December 31, 2013 2012 2011Excluded potentially dilutive securities (1): Shares subject to options to purchase common stock4,175 2,986 2,877Shares subject to warrants to purchase common stock61 61 156Total4,236 3,047 3,033(1)The number of shares is based on the maximum number of shares issuable on exercise or conversion of the related securities as of the period end. Suchamounts have not been adjusted for the treasury stock method or weighted average outstanding calculations as required if the securities were dilutive.59Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)3. Available-for-Sale SecuritiesThe following is a summary of available-for-sale debt securities recognized as cash and cash equivalents, marketable securities, or restricted cash inthe Company's consolidated balance sheets. Estimated fair values of available-for-sale securities are generally based on prices obtained from commercialpricing services (in thousands): December 31, 2013 AmortizedCost UnrealizedGains UnrealizedLosses EstimatedFair ValueCertificates of deposit$200 $— $— $200Money market funds769 — — 769Commercial paper12,910 — — 12,910Corporate notes16,704 9 — 16,713Government sponsored enterprise issues36,157 10 — 36,167U.S. Treasury securities3,228 3 — 3,231 $69,968 $22 $— $69,990 December 31, 2012 AmortizedCost UnrealizedGains UnrealizedLosses EstimatedFair ValueCertificates of deposit$200 $— $— $200Money market funds27 — — 27Commercial paper23,932 — — 23,932Corporate notes6,294 — — 6,294Government sponsored enterprise issues36,575 2 — 36,577U.S. Treasury securities17,308 5 — 17,313 $84,336 $7 $— $84,343The following table summarizes the classification of the available-for-sale securities on the Company's consolidated balance sheets (in thousands): December 31, 2013 2012Cash and cash equivalents $9,680 $38,236Marketable securities 60,110 45,907Restricted cash 200 200 $69,990 $84,343 There were no sales of available-for-sale marketable securities during 2013 or 2012.Based on the fair value of the Company’s marketable securities at December 31, 2013, $3.2 million had a maturity of between one and two years, andthe remaining $56.9 million had maturities of one year or less.4. Fair ValueThe Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal ormost advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.The Company's valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data fromindependent sources, while unobservable inputs reflect the Company's market assumptions. The Company classifies these inputs into the followinghierarchy:60Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)•Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair valuehierarchy gives the highest priority to Level 1 inputs.•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quotedprices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially thefull term of the assets or liabilities.•Level 3—Unobservable inputs (i.e. inputs that reflect the reporting entity’s own assumptions about the assumptions that market participantswould use in estimating the fair value of an asset or liability) are used when little or no market data is available. The fair value hierarchy givesthe lowest priority to Level 3 inputs.A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair valuemeasurement. Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. Level 1 securities includehighly liquid money market funds. If quoted market prices are not available for the specific security, then the Company estimates fair value by using pricingmodels, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 instruments include commercial paper, U.S. corporate debt,and U.S. government sponsored enterprise issues. There are no Level 3 assets in the periods presented.The estimated fair values of the Company's financial assets (cash equivalents and marketable securities) as of as of December 31, 2013 (in thousands): Fair Value Measurements at Reporting Date Using December 31, 2013QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Assets Certificates of deposit$200 $200 $— $—Money market funds769 769 — —Commercial paper12,910 — 12,910 —Corporate notes16,713 — 16,713 —Government sponsored enterprise issues36,167 — 36,167 —U.S. Treasury securities3,231 — 3,231 — $69,990 $969 $69,021 $—The estimated fair values of the Company's financial assets (cash equivalents and marketable securities) as of December 31, 2012 (in thousands): Fair Value Measurements at Reporting Date Using December 31, 2012 QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Assets Certificates of deposit$200 $200 $— $—Money market funds27 27 — —Commercial paper23,932 — 23,932 —Corporate notes6,294 — 6,294 —Government sponsored enterprise issues36,577 — 36,577 —U.S. Treasury securities17,313 — 17,313 — $84,343 $227 $84,116 $—61Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)During the years ended December 31, 2013 and 2012, there were no significant changes to the valuation models used for purposes of determining the fairvalue of Level 2 assets. No other assets and liabilities were carried at fair value as of December 31, 2013.Level 2 securities are priced using quoted market prices for similar instruments, nonbinding market prices that are corroborated by observable marketdata, or discounted cash flow techniques. There were no transfers of assets between different fair-value levels during the periods presented.5. Prepaid and other current assetsPrepaid and other current assets consisted of the following (in thousands): December 31, 2013 2012Receivable from Purdue Pharma$2,680 $92Prepaid expenses423 563Interest receivable243 168Other current assets36 97 $3,382 $920The receivable from Purdue Pharma at December 31, 2013 and 2012 includes royalty revenue derived from Net Sales of Intermezzo generated by PurduePharma to wholesalers. The receivable from Purdue Pharma at December 31, 2013 also includes $1.8 million of the Company's original $10.0 millioncontribution to Purdue Pharma's DTC campaign due to reduced overall DTC campaign spending as well as a receivable for reimbursement of certain legalexpenses related to Intermezzo patent infringement litigation.6. Property and Equipment, NetProperty and equipment consisted of the following (in thousands): December 31, 2013 2012Computer equipment and software$408 $579Furniture and fixtures415 577Research equipment675 797Leasehold improvements441 629Construction in progress2 5 1,941 2,587Less accumulated depreciation and amortization(1,898) (2,459)Property and equipment, net$43 $128The Company recorded depreciation and amortization expense of $0.1 million, $0.2 million and $0.4 million for the years ended December 31, 2013,2012 and 2011, respectively.7. Commitments and ContingenciesLeasesIn February 2006, the Company signed an operating lease for its corporate offices that included approximately 11,600 square feet of office andlaboratory space in Point Richmond, California. The lease term is for seven years, commencing on June 1, 2006. In June 2007, the Company amended thisoperating lease to add approximately 3,000 square feet of additional office space. The lease term of this amendment coincides with the original lease agreement,with a separate commencement date of September 12, 2007. As part of this amendment, the landlord agreed to contribute $0.1 million toward the costs oftenant improvements for the additional space. This landlord contribution is being amortized on a straight-line basis over the term of the lease as a reduction torent expense. On March 6, 2013, the Company extended its lease agreement for 11,60062Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)square feet of space in its current facility in Point Richmond, California by one year through May 31, 2014. On February 18, 2014, the lease was extended toAugust 31, 2014.On February 20, 2009, the Company signed an operating lease for 12,257 square feet of general office space in Point Richmond, California. The leaseterm commenced in March 2009 and terminated on May 31, 2011. In conjunction with restructuring its operations upon signing the Collaboration Agreementdiscussed in Note 9, the Company vacated this property in August 2009 and recorded a charge to rent expense of $0.3 million related to the fair value of theremaining lease payments reduced by estimated sublease income. This liability was amortized using the effective interest method over the remaining life of thelease, which terminated on May 31, 2011.Future minimum payments under the remaining lease as of December 31, 2013 total $124,000 and will be due within one year of such date. Rent expense, net of sublease income as applicable, for the years ended December 31, 2013, 2012 and 2011 was $0.3 million, $0.2 million and $0.3million, respectively. Sublease income for the years ended December 31, 2012 and 2011 was $0.3 million and $0.5 million, respectively and was recorded asan offset against rent expense. There was no sublease income for the year ended December 31, 2013.Indemnity AgreementsThe Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits. The Company believes the fair value ofthese indemnification agreements is minimal. Accordingly, the Company has not recognized any liabilities relating to these agreements as of December 31,2013.Legal ProceedingsIn July 2012, the Company received notifications from three companies, Actavis Elizabeth LLC (Actavis), Watson Laboratories, Inc. - Florida(Watson), and Novel Laboratories, Inc. (Novel), in September 2012, from each of Par Pharmaceutical, Inc. and Par Formulations Private Ltd. (together, thePar Entities), in February 2013 from Dr. Reddy's Laboratories, Inc. and Dr. Reddy's Laboratories, Ltd. (together, Dr. Reddy's), and in July 2013 from TWiPharmaceuticals, Inc. (TWi) stating that each has filed with the FDA an Abbreviated New Drug Application, or ANDA, that references Intermezzo.•Actavis & Watson: In the July 2012 notifications, Actavis and Watson indicated that each company's ANDA includes Paragraph IV patentcertifications to our U.S. Patent Nos. 7,658,945 (expiring April 15, 2027) and 7,682,628 (expiring February 16, 2025) (together, the “'945 and'628 Patents”). On November 28, 2012, Watson withdrew its ANDA, and, as a result of such withdrawal, on December 18, 2012, the Companyand Purdue agreed to voluntarily dismiss the action without prejudice and on December 20, 2012 a court order was entered to such effect. Thedismissal of Watson's ANDA had no effect on the ANDA filed by Actavis, a wholly owned subsidiary of Watson Pharmaceuticals, Inc. On January24, 2013, Actavis notified the Company that it has included Paragraph IV patent certifications to Transcept's U.S. Patent Nos. 8,242,131 (expiringAugust 20, 2029) and 8,252,809 (expiring February 16, 2025) (together, the “'131 and '809 Patents”).•Novel: In the July 2012 notifications, Novel indicated that its ANDA includes Paragraph IV patent certifications to the '945 and '628 Patents. OnDecember 10, 2012, Novel notified the Company that it has included Paragraph IV patent certifications to the '131 and '809 Patents.•Par Entities: The ANDAs submitted by the Par Entities each include Paragraph IV patent certifications to the '945, '628, '131 and '809 Patents.•Dr. Reddy's: The ANDA submitted by Dr. Reddy's includes Paragraph IV patent certifications to the '945, '628, '131 and '809 Patents.•TWi: The ANDA submitted by TWi includes Paragraph IV patent certifications to the '945, '628, '131 and '809 Patents.In August 2012, August 2012, September 2012, and October 2012, respectively, the Company joined Purdue Pharma in filing actions againstActavis, Watson and certain of their affiliates, Novel, and the Par Entities, in the U.S. District Court for the District of New Jersey, in each action allegingpatent infringement and seeking injunctive and other relief. In December 2012, the Company and Purdue Pharma agreed to voluntarily dismiss the actionagainst Watson following its withdrawal of its ANDA. After receiving the supplemental notifications referenced above, the Company and Purdue Pharmaamended their pending complaints against Actavis and Novel to also allege infringement of the '131 and '809 patents, as well as the '628 patent previouslyasserted against those companies. The actions against the Par Entities alleged infringement of the '131 and '80963Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)patents. In September 2013, the Company and Purdue Pharma agreed to voluntarily dismiss the action against one of the two Par Entities, Par FormulationsPrivate Ltd., following that Par Entity’s withdrawal of its ANDA. The action against the other Par Entity, Par Pharmaceutical, Inc., remains pending andcontinues to allege infringement of the ‘131 and ‘809 patents. In April 2013, the Company joined Purdue Pharma in filing an action in the U.S. District Courtfor the District of New Jersey against Dr. Reddy's, alleging patent infringement of the '628, '131 and '809 patents, and seeking injunctive and other relief. TheNew Jersey court has consolidated the Company's actions against each of the above-referenced generic companies into a single action.In August 2013, the Company joined Purdue Pharma in filing two actions against TWi. The first action against TWi was filed on August 20, 2013in the U.S. District Court for the District of New Jersey, and the second action against TWi was filed on August 22, 2013 in the U.S. District Court for theNorthern District of Illinois. Each action alleges patent infringement of the ‘131 and ‘809 patents, and seeks injunctive and other relief. On October 17, 2013,TWi filed answers and counterclaims in both New Jersey and Illinois, in both cases seeking declarations of non-infringement and invalidity as to the ‘945,‘628, ‘131, and ‘809 patents, as well as other relief. On January 13, 2014, the Illinois action against TWi was stayed pending dismissal of the New Jerseyaction against TWi, or further order of the Illinois court. On January 24, 2014, the Company and Purdue provided TWi with a covenant not to sue TWibased on its current ANDA formulation under the ’945 or ’628 patents, and on February 28, 2014, the Company and Purdue filed a motion to dismissTWi’s counterclaims pertaining to the ’945 or ’628 patents based on the tendering of that covenant not to sue. TWi has stated that it intends to oppose thatmotion.On February 26, 2014, the New Jersey court consolidated the Company's action against TWi with the existing consolidated action referenced aboveagainst Actavis, Novel, Par Pharmaceutical, and Dr. Reddy’s.Patent Term Adjustment Suit In January 2013, the Company and Purdue Pharma filed suit in the Eastern District of Virginia against the United States Patent and TrademarkOffice, or USPTO, in connection with certain changes to the Leahy-Smith America Invents Act. The Company and Purdue Pharma are seeking a recalculationof the patent term adjustment of the '131 Patent. Purdue Pharma has agreed to bear the costs and expenses associated with this litigation. In June of 2013, thejudge granted a joint motion to stay the proceedings pending a final decision on appeal by the Federal Circuit in Exelixis, Inc. v. Rea, No. 2013-11 75 (Fed.Cir.), and Exelixis, Inc. v. Rea, No. 20 13-11 98 (Fed. Cir.).Derivative SuitIn October 2013, one of the Company’s stockholders, Retrophin, Inc., filed a purported derivative suit against the Company’s Board of Directors inthe Court of Chancery of the State of Delaware purporting to assert claims on behalf of the Company, and alleging that the Board of Directors approved andpaid excessive compensation to its directors. In January 2014, this case was dismissed by the Court of Chancery following Retrophin's voluntary submissionof a stipulated order of dismissal. From time to time the Company is involved in legal proceedings arising in the ordinary course of business. The Company believes there is no otherlitigation pending that could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition. The Companydoes not believe that any of the above matters will result in a liability that is probable or estimable at December 31, 2013.8. Accrued LiabilitiesAccrued liabilities consist of the following (in thousands): December 31, 2013 2012Accrued payroll and related$337 $50Accrued vacation pay78 138Accrued professional fees522 513Accrued franchise taxes—Delaware36 36Accrued clinical trials— 735Other accrued liabilities542 167 $1,515 $1,63964Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)9. Collaboration AgreementsIntermezzoIn July 2009, the Company entered into the Collaboration Agreement with Purdue Pharma that grants an exclusive license to Purdue Pharma tocommercialize Intermezzo in the United States and pursuant to which:◦Purdue Pharma paid a $25.0 million non-refundable license fee in August 2009;◦Purdue Pharma paid a $10.0 million non-refundable intellectual property milestone in December 2011 when the first of two issued formulationpatents was listed in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations, or Orange Book;◦Purdue Pharma paid a $10.0 million non-refundable intellectual property milestone in August 2012 when the first of two issued method of usepatents was listed in the FDA's Orange Book;◦The Company transferred the Intermezzo New Drug Application (“NDA”) to Purdue Pharma, and Purdue Pharma is obligated to assume theexpense associated with maintaining the NDA and further development of Intermezzo in the United States, including any expense associatedwith post-approval studies;◦Purdue Pharma is obligated to commercialize Intermezzo in the United States at its expense using commercially reasonable efforts;◦Purdue Pharma is obligated to pay the Company tiered base royalties on net sales of Intermezzo in the United States ranging from the mid-teensup to the mid-20% level. The base royalty is tiered depending upon the achievement of certain fixed net sales thresholds by Purdue Pharma,which net sales levels reset each year for the purpose of calculating the royalty; and◦Purdue Pharma is obligated to pay the Company up to an additional $70.0 million upon the achievement of certain net sales targets forIntermezzo in the United States.The Company has retained an option to co-promote Intermezzo to psychiatrists in the United States. The option can be exercised as late as August 2015.The Company may begin promotion to psychiatrists 8 to 15 months after option exercise. The exact timing of when the Company begins promoting topsychiatrists is determined by the calendar month in which the option exercise notice is delivered to Purdue Pharma. If the Company exercises the co-promoteoption and enters the marketplace, it is entitled to receive an additional co-promote royalty from Purdue Pharma on net sales that are generated by psychiatristprescriptions. Had the Company chosen to exercise the option as soon as it was eligible, it could have begun promoting to psychiatrists in May 2013 andreceived a co-promote royalty of 40%. The co-promote royalty rate declines on a straight-line basis to approximately 22% if the Company does not beginpromoting to psychiatrists until November 2016, at which time the right to co-promote expires. Net sales qualifying for this additional co-promote royalty arelimited by an annual cap of 15% of total Intermezzo annual net sales in the United States. The co-promote option cannot be transferred to a third party, exceptunder a limited circumstance at the discretion of Purdue Pharma.Purdue Pharma has the right to terminate the Collaboration Agreement at any time upon advance notice of 180 days. The Company's co-promote optionmay also be terminated by Purdue Pharma upon the Company's acquisition by a third party or in the event of entry of generic competition to Intermezzo. Theroyalty payments discussed above are subject to reduction in connection with, among other things, the entry of generic competition to Intermezzo. TheCollaboration Agreement expires on the later of 15 years from the date of first commercial sale in the United States or the expiration of patent claims related toIntermezzo. The Collaboration Agreement is also subject to termination by Purdue Pharma in the event of FDA or governmental action that materially impairsPurdue Pharma's ability to commercialize Intermezzo or the occurrence of a serious event with respect to the safety of Intermezzo. The Collaboration Agreementmay also be terminated by the Company upon Purdue Pharma commencing an action that challenges the validity of Intermezzo related patents. The Companyalso has the right to terminate the Collaboration Agreement immediately if Purdue Pharma is excluded from participation in federal healthcare programs. TheCollaboration Agreement may also be terminated by either party in the event of a material breach by or insolvency of the other party. In December 2013, PurduePharma announced that it intended to discontinue the use of the Purdue Pharma sales force to actively market Intermezzo to healthcare professionals during thefirst quarter of 2014.The Company began earning royalty revenue upon commercial launch of Intermezzo in April 2012. Royalty revenue earned during the years endedDecember 31, 2013 and 2012 was $1.7 million and $0.8 million, respectively.The Company recorded as revenue $10.0 million of milestone payments that were received in August 2012 and December 2011, respectively. The patent-related milestones were substantive and at-risk given the inherent uncertainty and risks associated with obtaining patent approval from the U.S. Patent andTrademark Office and subsequent listing in the FDA's65Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)Orange Book in addition to the inherent uncertainty and risks associated obtaining FDA approval for Intermezzo and the opportunity for Purdue Pharma toterminate the Collaboration Agreement after its review of the terms of the FDA approval. The Company has no additional performance obligations under theCollaboration Agreement related to these milestone payments.The Company also granted Purdue Pharma and an associated company the right to negotiate for the commercialization of Intermezzo in Mexico during2013 and retained rights to commercialize Intermezzo in the rest of the world. The Company recognized revenue of $0.1 million for the year endedDecember 31, 2013. During 2012 and 2011, the Company granted Purdue Pharma and an associated company the right to negotiate for the commercializationof Intermezzo in Mexico and Canada, respectively, and retained rights to commercialize Intermezzo in the rest of the world. The Company recognized revenueof $0.2 million and $0.7 million in Gross other revenue for the years ended 2012 and 2011, respectively, associated with these rights.Through June 30, 2011, the Company recognized revenue from the $25 million non-refundable license fee ratably over an estimated 24-month periodbeginning in August 2009 and ending in July 2011 as this represented the estimated period during which the Company had significant participatoryobligations under the Collaboration Agreement. During the quarter ended September 30, 2011, the Company re-assessed the time period over which theremaining $1.04 million of deferred revenue at June 30, 2011 was recognized, and the Company recorded the remaining revenue through November 30, 2011based on FDA approval of Intermezzo and the completion of the Company’s participatory obligations under the Collaboration Agreement. Revenue recognizedin connection with the license fee during the year ended December 31, 2011 was $7.3 million.On November 21, 2012, the Company agreed to contribute $10.0 million to Purdue Pharma's $29.0 million national direct-to-consumer ("DTC")advertising campaign, including digital, print and television advertising to support Intermezzo commercialization. The Company initially recorded the $10.0million payment to Purdue as a prepaid expense. The Company recognized this payment as an offset to revenue as the advertising costs were incurred. AtDecember 31, 2013, Purdue Pharma estimates that approximately $1.8 million of the Company's original contribution will be returned due to reduced overallDTC campaign spending. Accordingly, $1.8 million is recorded as a receivable and included in prepaid and other current assets at December 31, 2013.For the years ended December 31, 2013 and 2012, the offset to revenue totaled $6.8 million and $1.4 million. There were no prepaid advertising costs atDecember 31, 2013. Prepaid advertising costs at December 31, 2012 were $8.6 million.TO-2070: a developmental product candidate for migraine treatmentIn September 2013, the Company entered into the License Agreement with Shin Nippon Biomedical Laboratories Ltd. ("SNBL") pursuant to whichSNBL granted the Company an exclusive worldwide license to commercialize SNBL's proprietary nasal drug delivery technology to develop TO-2070. TheCompany is developing TO-2070 as a treatment for acute migraine using SNBL’s proprietary nasal powder drug delivery system. Under the LicenseAgreement, the Company is required to fund, lead and be responsible for product development, preparing and submitting regulatory filings and obtaining andmaintaining regulatory approval with respect to TO-2070. Pursuant to the License Agreement, the Company has incurred an upfront nonrefundable technologylicense fee of $1.0 million, and is also obligated to pay:•up to $6.5 million upon the occurrence of certain development milestones, including NDA approval of TO-2070 by the FDA,•up to $35.0 million in commercialization milestone payments tied to the achievement of specified annual sales levels of TO-2070, and•tiered, low double-digit royalties on annual net sales of TO-2070.Under the License Agreement, the Company is responsible for the clinical and commercial manufacture, supply, and distribution of TO-2070 products.SNBL has agreed to supply its nasal drug delivery device to the Company to conduct development activities for non-registration studies, and has the right offirst negotiation to be the Company's exclusive supplier for devices for any registration studies and for incorporation into commercial TO-2070 products underthe License Agreement thereafter.The License Agreement terminates on a country-by-country basis upon the later of (i) the expiration of the last patent licensed under the LicenseAgreement in such country and (ii) 15 years from the first commercial sale in such country. The License Agreement may also be terminated (i) by either partyupon 90 days' written notice in connection with an uncured material breach of the License Agreement, (ii) by either party upon insolvency of the other party,(iii) immediately by SNBL if66Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)the Company challenges the validity of the patents licensed under the License Agreement, or (iv) by the Company at its convenience upon 90 days' priornotice.The $1.0 million license fee was recorded as research and development expense during the year ended December 31, 2013 because the licensedtechnology was incomplete and has no alternative future use. Payments to SNBL that relate to pre-approval development milestones will be recognized asresearch and development expense when incurred.10. RestructuringOn November 13, 2013, the Company implemented a reduction of 43% of its remaining workforce, which resulted in $0.9 million of expenses whichprimarily consisted of severance charges. The November 2013 reduction plan was intended to reduce the Company's operating costs in connection with theimplementation of the Company's strategic initiatives. Of the $0.6 million cash portion, $0.3 million was paid during the quarter ended December 31, 2013with the remaining expected to be paid during the first quarter of 2014.On January 2, 2013, the Company implemented a reduction of 29% of its workforce, which resulted in $0.3 million of expenses which primarilyconsisted of severance charges. The January 2013 reduction plan carried out a realignment of the Company's workforce and operations upon termination of itsclinical development of TO-2061. The severance was paid during the quarter ended March 31, 2013 and no additional charges are expected to be incurredunder this reduction in force.On July 15, 2011, the Company implemented a reduction of approximately 45% of the Company’s workforce. The reduction plan carried out arealignment of the Company’s workforce and operations after receipt of the July 14, 2011 Intermezzo® Complete Response Letter from the FDA. Employeessubject to the workforce reduction plan were eligible for one-time severance benefits and option modifications that resulted in expense of approximately $1.2million in total, the $1.0 million cash portion of which was paid out during the third quarter of 2011.11. Stockholders’ EquityCapital StockThe authorized capital stock of the Company consists of 100,000,000 shares of common stock, par value $0.001 per share, 4,000,000 shares ofundesignated preferred stock, par value $0.001 per share, and 1,000,000 shares of Series A Junior Participating Preferred Stock, par value $0.001. There areno shares of preferred stock or Series A Junior Participating Preferred Stock issued or outstanding.Preferred Stock Purchase RightsOn September 13, 2013, the Company's Board of Directors adopted a tax benefit preservation plan to help preserve the value of certain deferred taxbenefits, including those generated by net operating losses and net unrealized built-in losses. The Company’s ability to use these tax benefits would besubstantially limited if it were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code. Holders of the Company’scommon stock of record on September 27, 2013 received preferred stock purchase rights ("Rights") that initially trade together with the Company’s commonstock and are not exercisable. As long as the Rights are attached to the common stock, the Company will issue one Right (subject to adjustment) with each newshare of the common stock so that all such shares will have attached Rights. When exercisable, each Right will entitle the registered holder to purchase from theCompany one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share (the “Series A Preferred”), of the Companyat a price of $14.24 per one one-hundredth of a share of Series A Preferred, subject to adjustment.The plan, subject to limited exceptions, provides that any stockholder or group that acquires beneficial ownership of 4.99% or more of the Company’ssecurities without the approval of the Company's Board of Directors would be subject to significant dilution of its holdings. In addition, subject to limitedexceptions, any existing 4.99% or greater stockholder that acquires beneficial ownership of any additional shares of the Company’s securities without theapproval of the Board of Directors would also be subject to dilution. In both cases, such person would be deemed to be an “acquiring person” for purposes ofthe tax plan.In the event that a person becomes an "Acquiring Person" under the plan, subject to certain exceptions, the Rights, other than Rights that are or wereacquired or beneficially owned by the Acquiring Person (which Rights will thereafter be null and void), will become exercisable for the Company’s commonstock having a market value equal to twice the exercise price of the Right. The Board of Directors has established procedures to consider requests to exemptcertain acquisitions of the Company’s securities from the plan if the Board of Directors determines that doing so would not limit or impair the availability ofthe tax benefits or is otherwise in the best interests of the Company.67Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)Common StockOn May 1, 2012, the Company completed a public offering of 4.5 million shares of its common stock at a public offering price of $9.00 per share. Netproceeds to the Company from the public offering were approximately $37.7 million after deducting underwriting discounts, commissions and offeringexpenses.Stock OptionsVarious employees, directors and consultants have been granted options to purchase common shares under equity incentive plans adopted in 2001, 2002and 2006 (the “2001 Plan”, the “2002 Plan” and the “2006 Plan”). The 2001 Plan provided for the granting of incentive and non-statutory stock options toemployees, officers, directors, and non-employees of the Company. The 2002 Plan provided for the granting of incentive and non-statutory stock options toemployees, officers, directors, and consultants of the Company. Incentive stock options under all of these plans may be granted with exercise prices of not lessthan estimated fair value, and non-statutory stock options may be granted with an exercise price of not less than 85% of the estimated fair value of thecommon stock on the date of grant. Stock options granted to a stockholder owning more than 10% of voting stock of the Company must have an exercise priceof not less than 110% of the estimated fair value of the common stock on the date of grant. The Company estimated the fair value of common stock until theCompany became publicly traded. Stock options are generally granted with terms of up to ten years and vest over a period of four years. At December 31,2013, there were no shares available for future grant under either the 2001 or the 2002 Plans. The 2006 Plan became effective upon the completion of the Company’s initial public offering in 2006, and was amended and restated on June 2, 2010upon approval by the stockholders of the Company (the “Amended and Restated 2006 Plan”). The Amended and Restated 2006 Plan will terminate on June 2,2020. The Amended and Restated 2006 Plan provides for the granting of incentive stock options, non-statutory stock options, restricted stock, performanceshare awards, performance stock units, dividend equivalents, restricted stock units, stock payments, deferred stock, performance-based awards and stockappreciation rights. The employee stock options generally vest over four years, are exercisable over a period not to exceed the contractual term of ten years fromthe date the stock options are issued and are granted at prices equal to the fair value of the Company’s common stock on the grant date.Stock option and restricted stock unit exercises are settled with newly issued common stock from the Amended and Restated 2006 Plan’s previouslyauthorized and available pool of shares. A total of 500,000 shares of common stock was originally authorized for issuance pursuant to the 2006 Plan, plus thenumber of shares of the Company’s common stock available for issuance under the 2001 Plan that were not subject to outstanding options, as of the effectivedate of the 2006 Plan (including shares that are subject to stock options outstanding under the 2001 Plan that expired, were canceled or otherwise terminatedunexercised, or shares that otherwise would have reverted to the share reserve of the 2001 Plan following the effective date of the 2006 Plan). The number ofshares of common stock reserved for issuance under the Amended and Restated 2006 Plan increases automatically on the first day of each fiscal year by anumber of shares equal to the least of: (i) 5.0% of shares of the Company’s common stock outstanding on such date; (ii) 1,500,000 shares; or (iii) a smallernumber determined by the Company’s Board of Directors. This provision resulted in an additional 942,119, 933,819 and 695,225 of the Company’scommon stock becoming available for issuance on January 1, 2014, January 1, 2013, and January 1, 2012, respectively. The maximum aggregate number ofshares that may be issued pursuant to incentive stock options under the Amended and Restated 2006 Plan is 25,000,000.At December 31, 2013, stock options to purchase 2,677,128 shares of common stock were vested and exercisable and 424,252 shares remain availablefor future grant under the Amended and Restated 2006 Plan.68Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)The following table summarizes the Company’s stock option activity and related information through December 31, 2013: Options Outstanding Number ofSharesAvailablefor GrantNumber ofShares Weighted-AverageExercisePrice PerShareBalance at December 31, 2010832,686 2,344,767 $7.482Options authorized672,488 — Options granted(1,502,750) 1,502,750 $5.253Options exercised— (441,963) $3.018Options forfeited529,044 (529,044) $12.083Balance at December 31, 2011531,468 2,876,510 $6.157Options authorized695,225 — Options granted(790,500) 790,500 $7.610Options exercised— (266,522) $4.010Options forfeited414,308 (414,308) $13.0422001 Plan shares expired(8,643) — Balance at December 31, 2012841,858 2,986,180 $5.794Options authorized933,819 — Options granted(1,935,000) 1,935,000 $4.292Options exercised— (162,133) $2.681Options forfeited583,575 (583,575) $5.625Balance at December 31, 2013424,252 4,175,472 $5.242The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $0.3 million, $1.0 million and $2.3million, respectively. The amount of cash received from exercise of stock options during the years ended December 31, 2013, 2012 and 2011 was $0.4million, $1.1 million and $1.3 million, respectively.Additional information related to the status of options at December 31, 2013 is as follows: Shares Weighted-AverageExercise PricePer Share Weighted-AverageRemainingContractual Life(Years) AggregateIntrinsicValue(in thousands)Outstanding4,175,472 $5.242 6.24 $1,243Vested and exercisable2,677,128 $5.363 4.72 $1,008The intrinsic value of options is the fair value of the Company’s stock at December 31, 2013 less the per share exercise price of the option multiplied bythe number of shares.69Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)The following table summarizes information about stock options outstanding as of December 31, 2013:Options OutstandingRange of Exercise PricesNumber Outstanding Number Exercisable Weighted- AverageRemainingContractual Life(Years)$0.8844 - $2.1225360,143 360,143 2.34$2.6800399,687 399,687 5.29$2.9300 - $3.3000751,529 181,860 8.38$4.0328 - $4.7600286,853 267,408 4.17$5.4000815,832 303,702 7.84$6.0500 - $8.0700221,494 108,785 8.17$8.0900447,520 249,121 6.77$8.1800 - $8.2000422,123 340,079 5.36$8.2100 - $14.0000470,291 466,343 4.47 4,175,472 2,677,128 6.24Stock Compensation PlansThe Company has recorded compensation expense for employee stock-based awards, excluding compensation expense for stock option modificationsdescribed below, of approximately $3.0 million, $2.7 million and $3.7 million during 2013, 2012 and 2011, respectively.On January 14, 2010, the Company granted 225,500 options in the aggregate to select employees and one consultant that vested 50% upon approval bythe U.S. Food and Drug Administration (“FDA”) of Intermezzo and the remaining 50% vested on the first anniversary of any such approval; provided in eachcase, such approval occurred no later than January 14, 2012. The fair value of these options at grant date was $5.79 per share or approximately $1.3 million.On August 24, 2011, the Company granted 803,750 options in the aggregate to employees and one consultant that vested 50% upon approval by the U.S.Food and Drug Administration (“FDA”) of Intermezzo and the remaining 50% vested on the first anniversary of any such approval; provided in each case,such approval occurred no later than August 24, 2013. These options automatically expire should the Board of Directors decide to cease development ofIntermezzo or if Intermezzo approval is not received on or prior to August 24, 2013. The fair value of these options at grant date was $1.90 per share orapproximately $1.5 million. The Company began recognizing compensation expense relating to both sets of performance-based options upon FDA approval ofIntermezzo on November 23, 2011, when the vesting was deemed to be probable. Total expense related to employee performance-based options recognizedduring 2012 and 2011 was $0.6 million and $1.7 million, respectively, which is included in the above total employee-related stock option compensation.The following table shows the range of assumptions used to compute the fair value of employee options granted during the years ended December 31,2013, 2012 and 2011 using the Black-Scholes option pricing model: Year Ended December 31, 2013 2012 2011Risk-free interest rate0.69 to 1.59% 0.79 - 1.00% 1.16 - 2.95%Expected life of the options4.73 - 5.37 years 5.27 - 6.08 years 5.27 - 6.08 yearsDividend yieldNone None NoneVolatility75.92 to 86.24% 82.07 - 89.71% 80.99 - 95.70%The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar tothose of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in theforeseeable future, other than pursuant to any strategic transactions the Company may undertake. The expected option term calculation incorporates historicalemployee exercise behavior and post-vesting employee termination rates. Prior to the year ended December 31, 2013, the weighted-average expected life of theoptions was calculated using the simplified method as prescribed by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107and No. 110 (“SAB No. 107 and 110”). This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. Inaddition, due to the Company’s70Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)limited historical data, the estimated volatility also reflects the application of SAB No. 107 and 110, using the weighted average of the Company’s historicalvolatility post-Merger and the historical volatility of several unrelated public companies within the specialty pharmaceutical industry.The weighted-average grant-date fair value of stock options granted to employees during the years ended December 31, 2013, 2012 and 2011 was$2.826, $5.299 and $3.718 per share, respectively. As of December 31, 2013, there is approximately $4.4 million of total unrecognized compensation costrelated to the unvested share-based compensation arrangements granted under the Company’s equity incentive plans. The remaining unrecognizedcompensation cost, will be recognized over a weighted-average period of 2.76 years.As discussed in Note 1, the Company accounts for stock options granted to persons other than employees or directors at the fair value of theconsideration received or the fair value of the equity instrument issued using the Black-Scholes option-pricing model. Stock options granted to such personsand stock options that are modified and continue to vest when an employee has a change in employment status are subject to periodic revaluation over theirvesting terms. The Company recognizes the resulting stock-based compensation expense during the service period over which the non-employee providesservices to the Company. In connection with the issuance of options to purchase shares of common stock to non-employees, the Company recorded total stock-based compensation totaling approximately $0.1 million for the year ended December 31, 2013. Stock-based compensation for the year ended December 31,2012 was approximately $0.2 million, including $32,000 related to performance based options as described below, and expense for the year endedDecember 31, 2011 was $0.4 million including $0.2 million related to performance based options.During 2013, the Company granted 35,000 options to purchase shares of common stock to two non-employees with an exercise price of $5.40 per share,vesting over four years; and 20,000 options to purchase shares of common stock to one non-employee with an exercise price of $6.07 per share, vesting overone year. During 2012, the Company granted 70,000 options to purchase shares of common stock to two non-employees with an exercise price of $8.09 pershare, vesting over four years. During 2011, the Company granted 25,000 options to purchase shares of common stock to one non-employee with an exerciseprice of $8.20 per share, vesting over four years and 38,750 options to purchase shares of common stock with an exercise price of $2.68 per share, of which50% vested upon approval by the FDA of Intermezzo on November 23, 2011 and the remaining 50% vest on November 23, 2012. During 2010, the Companygranted 35,800 options to purchase shares of common stock to one non-employee with an exercise price of $8.21 per share. Of these shares, 23,700 vest overfour years. Of the remaining 12,100 options to purchase shares of common stock, 50% vested upon approval by the FDA of Intermezzo on November 23,2011 and the remaining 50% vest on November 23, 2012.The following table shows the range of assumptions used to compute the stock-based compensation costs for stock options granted to non-employeesduring the years ended December 31, 2013, 2012, and 2011 using the Black-Scholes option pricing model: Year Ended December 31, 2013 2012 2011Risk-free interest rate1.01 to 2.84% 0.95 - 2.23% 1.35 - 3.47%Expected life of the options 6.00 to 9.92 years 6.25 - 9.92 years 7.26 - 9.92 yearsDividend yieldNone None NoneVolatility74.76 to 83.31% 75.87 - 89.21% 76.68 - 93.19%Modification of Employee Stock-Based AwardsDuring the year ended December 31, 2011, the Company modified the terms of stock options previously granted to thirteen of its employees inconnection with a reduction in force. The modifications included accelerated vesting of certain options and extension of the exercise period after terminationwith respect to certain of the options. These modifications resulted in additional compensation expense of $0.2 million that was recognized during 2011.Additionally, during the year ended December 31, 2011, the Company modified the terms of certain stock options previously granted to two members of itsBoard of Directors to align and extend the exercise period of the options after the directors’ end of service to the Company in June 2011. These modificationsresulted in additional compensation expense of $0.2 million that was recognized during 2011. The Company accounted for the modifications of stock optionawards in accordance with the provisions of ASC Topic 718.During the year ended December 31, 2012, the Company modified the terms of stock options previously granted to an employee upon retirement toextend the exercise period of the options upon the end of service to the Company in May 2012. Additionally, the Company modified the terms of stock optionspreviously granted to a member of its Board of Directors to71Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)accelerate vesting of the option upon the director's anticipated end of service to the Company in April 2012. These modifications resulted in additionalcompensation expense of $28,000 that was recognized during 2012.During the year ended December 31, 2013, the Company modified the terms of stock options previously granted to twelve of its employees in connectionwith a reduction in force. The modifications included accelerated vesting of certain options and extension of the exercise period after termination with respect tocertain of the options. Additionally, the Company modified the terms of stock options previously granted to one member of its Board of Directors to acceleratevesting of the options upon the director's end of service to the Company on December 31, 2013. These modifications resulted in additional compensationexpense of $0.2 million that was recognized during 2013.Employee Stock Purchase PlanOn June 3, 2009, at the annual meeting of stockholders, the stockholders of the Company approved the 2009 Employee Stock Purchase Plan (“ESPP”).The number of shares available for issuance over the term of the ESPP is limited to 500,000 shares. The ESPP is designed to allow eligible employees of theCompany to purchase shares of common stock through periodic payroll deductions. The price of common stock purchased under the ESPP is equal to 85%of the lower of the fair market value of the common stock on the commencement date of each offering period or the specified purchase date. The following table summarized the Company’s ESPP activity through December 31, 2013: Numberof SharesAvailablefor Grant Numberof SharesGranted Weighted-AverageGrant DateFair ValueBalance at December 31, 2010455,805 44,195 Purchases(8,119) 8,119 $3.245Balance at December 31, 2011447,686 52,314 Purchases(5,359) 5,359 $1.979Balance at December 31, 2012442,327 57,673 Purchases(3,859) 3,859 $2.516Balance at December 31, 2013438,468 61,532 The following table shows the range of assumptions used to compute the share-based compensation costs for the ESPP during the years endedDecember 31, 2013, 2012 and 2011 using the Black-Scholes option pricing model: Year Ended December 31, 2013 2012 2011Risk-free interest rate0.08 to 0.14% 0.13 - 0.14% 0.05 - 0.11%Expected life of the options0.50 years 0.50 years 0.50 yearsDividend yieldNone None NoneVolatility49.64 to 56.46% 49.64 - 61.94% 40.64 - 147.47%The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar tothose of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in theforeseeable future, other than pursuant to any strategic transactions the Company may undertake. The weighted-average expected life is based on the durationof time in the purchase period. The estimated volatility is calculated using the Company’s historical volatility. The Company has recognized compensationexpense for employee stock-based purchase plan awards of approximately $6,000, $18,000 and $22,000 during 2013, 2012 and 2011, respectively.72Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)Reserved SharesAt December 31, 2013, the Company has reserved shares of common stock for future issuance as follows: Number ofSharesEmployee stock purchase plan438,468Stock option plans: Subject to outstanding options4,175,472Available for future grants424,252Warrants61,451Total5,099,64312. Income taxesThere is no provision for income taxes because the Company has incurred operating losses since inception. Income tax expense (benefit) differed from theamounts computed by applying the U.S. federal income tax rate of 35% to pretax losses from operations as a result of the following (in thousands): For the year ended December 31, 2013 2012 2011Computed tax benefit at federal statutory rate$(9,606) $(4,206) $(1,358)State tax benefit, net of effect on Federal income taxes(1,577) (690) (223)State tax credits, net of Federal benefit(76) (105) (121)Federal tax credits(37) — (365)Permanent differences: Nondeductible stock option expense284 467 180State tax effect from permanent differences224 79 17Goodwill impairment1,037 — —Other42 16 (79)Change in valuation allowance10,046 4,476 2,805Other, net(337) (37) (856)Total tax expense$— $— $—73Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxassets are as follows (in thousands): December 31, 2013 2012Current deferred tax assets$115 $185Valuation Allowance—current115 185Total current deferred assets— —Non-current deferred tax assets: Net operating loss carryforwards36,846 29,384Depreciation142 203Research and development credits3,225 2,750Capitalized research and development expense10,782 9,503Stock-based compensation3,213 2,252 54,208 44,092Valuation allowance—non-current54,208 44,092Total non-current deferred tax assets— —Total deferred tax assets$— $—Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferredtax assets have been fully offset by a valuation allowance. The valuation allowance increased by $10.0 million during 2013 and $4.5 million during 2012.As of December 31, 2013, the Company had federal net operating loss carryforwards of approximately $93.8 million, which expire in the years 2022through 2032 if not utilized. The Company had net operating loss carryforwards for state income tax purposes of $85.0 million, which expire in the years2014 through 2032 if not utilized.The Company has carryforwards from the federal Credit for Increasing Research Expenditures of approximately $2.1 million which expire in years2023 through 2032. The Company also has state credit carryforwards of approximately $1.7 million that carry forward indefinitely.As a result of certain realization requirements of ASC Topic 718, the table of deferred tax assets and liabilities shown above does not include certaindeferred tax assets at December 31, 2013 that arose directly from tax deductions related to equity compensation in excess of compensation recognized forfinancial reporting purposes. Equity will be increased by approximately $0.9 million if and when such deferred tax assets are ultimately realized.Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership changelimitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of netoperating losses and credits before utilization.The Company adopted ASC Topic 740, subtopic 10-50-15, Unrecognized Tax Benefit Related Disclosures (formerly FASB Interpretation 48,Accounting for Uncertainty in Income Taxes) on January 1, 2007. There were no unrecognized income tax benefits at December 31, 2013 and December 31,2012. There is no accrued interest or penalties associated with any unrecognized tax benefits.The Company files U.S. and state income tax returns with varying statutes of limitations. The tax years from inception in 2002 forward remain open toexamination due to the carryover of unused net operating losses and tax credits.13. Supplemental Financial InformationQuarterly Results of Operations (Unaudited)The following table presents the unaudited statements of operations data for each of the eight quarters in the period ended December 31, 2013. Theinformation has been presented on the same basis as the audited financial statements and all necessary adjustments, consisting only of normal recurringadjustments, have been included in the amounts below to present fairly the74Table of ContentsTranscept Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (continued)unaudited quarterly results when read in conjunction with the audited financial statements and related notes. The operating results for any quarter should notbe relied upon as necessarily indicative of results for any future period.Unaudited Quarterly Results of Operations(in thousands, except per share amounts) Three months ended March 31,2013 June 30,2013 September 30,2013 December 31,2013 Total for year2013Revenue: Gross royalty revenue$482 $481 $418 $316 $1,697Gross other revenue— — 50 — 50Advertising expense - Purdue Pharma(6,312) (283) (86) (140) (6,821)Net revenue(5,830) 198 382 176 (5,074)Operating expenses: Research and development1,843 898 2,410 1,753 6,904General and administrative2,802 3,030 2,658 3,941 12,431 Goodwill impairment— 2,962 — — 2,962Total operating expenses4,645 6,890 5,068 5,694 22,297Loss from operations(10,475) (6,692) (4,686) (5,518) (27,371)Interest and other income (expense), net(25) (16) (17) (17) (75)Net loss$(10,500) $(6,708) $(4,703) $(5,535) $(27,446)Net loss per share: Basic and diluted$(0.56) $(0.36) $(0.25) $(0.29) $(1.46)Weighted average common shares outstanding: Basic and diluted18,703 18,757 18,782 18,842 18,772Comprehensive loss$(10,500) $(6,724) $(4,663) $(5,544) $(27,431) Three months ended March 31,2012 June 30,2012 September 30,2012 December 31,2012 Total for year2012Revenue: Gross royalty revenue$— $493 $190 $93 $776Gross milestone revenue— — 10,000 — 10,000Gross other revenue— — 250 — 250Advertising expense - Purdue Pharma— — — (1,429) (1,429)Net revenue— 493 10,440 (1,336) 9,597Operating expenses: Research and development2,357 2,859 3,057 2,918 11,191General and administrative2,784 2,731 2,483 2,265 10,263Total operating expenses5,141 5,590 5,540 5,183 21,454(Loss) income from operations(5,141) (5,097) 4,900 (6,519) (11,857)Interest and other income (expense), net(36) (43) (45) (35) (159)Net (loss) income$(5,177) $(5,140) $4,855 $(6,554) $(12,016)Net (loss) income per share: Basic$(0.37) $(0.30) $0.26 $(0.35) $(0.70)Diluted$(0.37) $(0.30) $0.25 $(0.35) $(0.70)Weighted average common shares outstanding: Basic13,925 17,053 18,568 18,628 17,052Diluted13,925 17,053 19,232 18,628 17,052Comprehensive (loss) income$(5,206) $(5,142) $4,862 $(6,552) $(12,038)75Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.Item 9A.Controls and ProceduresDisclosure Controls and ProceduresOur management evaluated, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, theeffectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, ourChief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurancelevel to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in Securities and Exchange Commission, or SEC, rules and forms, and that such information isaccumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.Management's Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internalcontrol that is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles.Management assessed our internal control over financial reporting as of December 31, 2013, the end of our last fiscal year. Management based itsassessment on criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission (1992 Framework). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financialreporting controls, process documentation, accounting policies and our overall control environment.Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2013 to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordancewith generally accepted accounting principles.Changes in Internal Control over Financial ReportingThere have not been any changes in our internal controls over financial reporting (as such item is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during our fiscal quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internalcontrols over financial reporting.Inherent Limitations on the Effectiveness of ControlsA control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls aremet. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within acompany have been detected. Accordingly, our controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of ourcontrol system are met.Item 9B.Other InformationNone.76Table of ContentsPART III Item 10.Directors, Executive Officers and Corporate GovernanceDIRECTORS AND EXECUTIVE OFFICERSThe following table sets forth the ages and present positions for each of our directors and executive officers as of February 28, 2014.NameAgePositionGlenn A. Oclassen70President, Chief Executive Officer, Chairman of the Board of Directors, ClassII DirectorNikhilesh N. Singh, Ph.D.55Senior Vice President, Chief Scientific OfficerJohn A. Kollins51Senior Vice President, Chief Business OfficerLeone D. Patterson51Vice President, Chief Financial OfficerThomas J. Dietz, Ph.D. (1)(2)50Class I DirectorThomas D. Kiley (3)70Class III DirectorMatthew M. Loar50Class II DirectorJake R. Nunn (2)43Class II DirectorG. Kirk Raab (1)(2)78Lead Independent Director, Class III DirectorFrederick J. Ruegsegger (1)(3)58Class I Director (1)Member of the Audit Committee(2)Member of the Compensation Committee(3)Member of the Nominating and Corporate Governance CommitteeClass I consists of Frederick J. Ruegsegger and Thomas J. Dietz, each of whom was elected to serve until the 2016 Annual Meeting of Stockholders oruntil their respective successor has been duly elected and qualified.Class II consists of Glenn A. Oclassen, Jake R. Nunn and Matthew M. Loar. Messrs. Oclassen and Nunn were elected to serve until the 2014 AnnualMeeting of Stockholders or until their respective successor has been duly elected and qualified. Mr. Loar was appointed by the Board of Directors to serve as adirector of the Company until the next Annual Meeting of Stockholders in 2014.Class III consists of Thomas D. Kiley and G. Kirk Raab, each of whom was elected to serve until the 2015 Annual Meeting of Stockholders or until theirrespective successor has been duly elected and qualified.There is no family relationship among any of our directors or executive officers. The biographical information with respect to executive officers anddirectors set forth below has been furnished by the respective individuals.Glenn A. Oclassen. Mr. Oclassen has served as our President and Chief Executive Officer, and as a director, since completion of the merger betweenTPI and Novacea in January 2009. Prior to completion of the merger, Mr. Oclassen served as the President and Chief Executive Officer of TPI and as amember of the TPI board of directors since July 2003. Prior to co-founding TPI, from 1997 to 1999 he was the President and Chief Executive Officer ofNextDerm Inc., a dermatology company founded by Mr. Oclassen that was acquired in 1999 by Procyte Corp. From 1986 to 1992, Mr. Oclassen was theFounder, President and Chief Executive Officer of Oclassen Pharmaceuticals, Inc., a dermatologic drug development and marketing company. He served asChairman from 1992 to February 1997, at which time the company was acquired by Watson Pharmaceuticals, Inc. Mr. Oclassen holds a B.S. in zoologyfrom San Diego State University. We believe Mr. Oclassen’s qualifications to sit on our Board include his pharmaceutical industry experience in multiplecapacities from sales and marketing to chief executive positions, including ten years as our President and Chief Executive Officer (inclusive of his service withTPI).In connection with the restructuring of our Board announced in November 2013, Mr. Oclassen replaced Mr. Raab as Chairman of the Board, effectiveDecember 31, 2013.Nikhilesh N. Singh, Ph.D. Dr. Singh has served as our Senior Vice President and Chief Scientific Officer since completion of the merger between TPIand Novacea in January 2009. Prior to completion of the merger, Dr. Singh served as Senior Vice President and Chief Scientific Officer of TPI since January2007, and previously served as Vice President and77Table of ContentsChief Scientific Officer of TPI from July 2003 to December 2006 and as a member of the TPI board of directors from July 2003 to November 2005. Prior to co-founding TPI, Dr. Singh served in various roles relating to the development, commercialization and marketing of pharmaceutical products at Procter &Gamble Co., a manufacturer of consumer goods and pharmaceuticals, from August 1987 until June 1995, G. D. Searle & Co., a life sciences company thatis currently part of Pfizer Inc., from July 1995 until December 1998, and Watson Pharmaceuticals Inc., a pharmaceuticals manufacturer, from January1999 until October 2001. Dr. Singh holds a B.S. and M.S. in Pharmacy from the University of Bombay, India, and a Ph.D. in Pharmaceutical Sciencesfrom the University of Alberta, Canada.John A. Kollins. Mr. Kollins has served as our Senior Vice President and Chief Business Officer since June 2012. Prior to that, Mr. Kollins was themanaging director and founder of Parnassus Advisors, a life sciences advisory firm, from September 2011 to May 2012 and was a managing director andsenior advisor at Locust Walk Partners, a life sciences advisory firm, from December 2009 to September 2011. From March 2007 to October 2009, he servedsuccessively as Chief Business Officer, Chief Operating Officer, and Chief Executive Officer and a director of OXiGENE, a publicly-held biopharmaceuticalcompany. From 2005 to 2007, Mr. Kollins was a consultant to healthcare investment firms and life sciences companies. Mr. Kollins has also served inexecutive, business development and product management roles at various biopharmaceutical companies, including CovX, Renovis and ElanPharmaceuticals. Mr. Kollins holds a B.S.E. in mechanical engineering and materials science from Duke University and an M.B.A. from the University ofVirginia.Leone D. Patterson. Ms. Patterson has served as our Vice President and Chief Financial Officer since June 2012. Prior to that, Ms. Patterson was VicePresident and Corporate Controller of NetApp, a data storage company, from November 2010 to June 2012. Ms. Patterson was Vice President of Finance atExelixis, a biotechnology company, from July 2007 to November 2010. Prior to that, Ms. Patterson served as Vice President of Global Business Planning andAnalysis of the Vaccines and Diagnostics Division of Novartis AG, a pharmaceutical company, from April 2006 to July 2007. From 1999 to 2006, she heldseveral positions, including Vice President, Corporate Controller at Chiron, a biotechnology company. From 1989 to 1999, Ms. Patterson worked in the auditpractice of accounting firm KPMG. Ms. Patterson holds a B.S. in business administration and accounting from Chapman University and an ExecutiveM.B.A. from St. Mary’s College. Ms. Patterson is also a Certified Public Accountant (inactive).Thomas J. Dietz, Ph.D. Dr. Dietz has been a member of our Board since his appointment on April 10, 2013. Dr. Dietz has served as Chairman andCEO of Waypoint Holdings, LLC, a financial services firm, since December 2010. Dr. Dietz was previously co-CEO and then CEO and a director of PacificGrowth Equities, LLC, an investment bank and institutional brokerage firm, from 2004 to January 2009, when the firm was acquired by WedbushSecurities, a financial services firm. Dr. Dietz subsequently served as head of the investment banking division at Wedbush until November 2010. Dr. Dietzjoined Pacific Growth in 1993 and served in various roles, including senior roles in equities research and investment banking, prior to taking the CEO rolethere. Previously, Dr. Dietz was a member of the research faculty in the Department of Medicine, University of California, San Francisco and the VA MedicalCenter. Dr. Dietz holds a Ph.D. in molecular biology and biochemistry from Washington University in St. Louis. We believe Dr. Dietz’s qualifications to sit onour Board include his medical and research backgrounds and extensive experience in the financial services industry.Thomas D. Kiley, Esq. Mr. Kiley has been a member of our Board since completion of the merger between TPI and Novacea in January 2009. Prior tocompletion of the merger, Mr. Kiley was a member of the TPI board of directors since January 2004. Since 1988 he has been an attorney, consultant andinvestor. From 1980 to 1988, he was an officer of Genentech, Inc., a biotechnology company, serving variously as Vice President and General Counsel, VicePresident for Legal Affairs and Vice President for Corporate Development. Mr. Kiley is also a director of Ceres, Inc., a publicly-held agricultural biotechnologycompany, and was director of Geron Corporation, a publicly-held biopharmaceutical company, until May 2013. Mr. Kiley holds a B.S. in ChemicalEngineering from Pennsylvania State University and a J.D. from George Washington University. We believe Mr. Kiley’s qualifications to sit on our Boardinclude his specialized knowledge of intellectual property matters for life science companies, his experience variously as a board member and general counselfor other public companies and his understanding of Transcept and its intellectual property strategy gained during ten years of service to us (inclusive of hisservice on behalf of TPI and on the TPI board of directors).Matthew M. Loar. Mr. Loar has been a member of our Board of Directors since his appointment on December 16, 2013. Mr. Loar has been anindependent financial consultant to companies in the biopharmaceutical industry since 2010. In addition, he has served as Acting Chief Executive andFinancial Officer of Neurobiological Technologies, Inc. (NTI), a biopharmaceutical company, since February 2010, and has served on NTI’s board ofdirectors since NTI’s stockholders approved a plan of voluntary dissolution in 2009. Mr. Loar previously served as Chief Financial Officer of NTI fromApril 2008 to December 2009. He was also Chief Financial Officer of Virolab, Inc. from May 2011 to August 2012. Before joining NTI, Mr. Loar was ChiefFinancial Officer of Osteologix, Inc. and Genelabs Technologies, Inc. Mr. Loar holds a B.A. in Legal Studies from the University of California, Berkeley. Mr. Loar is a Certified Public Accountant (inactive) in California. We78Table of Contentsbelieve Mr. Loar is qualified to sit on our Board of Directors due to his extensive financial and accounting experience in the life sciences industry.Jake R. Nunn. Mr. Nunn has been a member of our Board since completion of the merger between TPI and Novacea in January 2009. Mr. Nunn hasbeen a Partner at New Enterprise Associates, Inc., a venture capital firm, since June 2006. From January 2001 to June 2006, he was a partner and analyst forthe MPM BioEquities Fund, a public life sciences fund at MPM Capital, a venture capital firm. Mr. Nunn holds a B.A. in economics from DartmouthCollege and an M.B.A. from the Stanford University Graduate School of Business. Mr. Nunn holds the Chartered Financial Analyst designation and is amember of the CFA Society of San Francisco. Mr. Nunn is also a director of Hyperion Therapeutics and Trevina, Inc., both publicly-held biopharmaceuticalcompanies. We believe Mr. Nunn’s qualifications to sit on our Board include his thirteen years of experience as a partner and analyst with life science industryventure capital firms, his experience as a member of other boards of directors in the industry, and his expertise as a CFA charterholder.G. Kirk Raab. Mr. Raab has been a member of our Board, serving as Chairman of the Board, since completion of the merger between TPI and Novaceain January 2009. Prior to completion of the merger, Mr. Raab was a member of the TPI board of directors since October 2003, serving as Chairman of theBoard since November 2005. From 1985 to 1995, Mr. Raab served variously as President, Chief Operating Officer, Director and Chief Executive Officer ofGenentech, Inc., a biotechnology company. From 1981 to 1985, Mr. Raab served as President, Chief Operating Officer and a Director of Abbott Laboratories,a biopharmaceutical company. Since 1995, Mr. Raab has been involved with over 15 public and privately held biotechnology companies, serving aschairman of the board of directors for many of them. Mr. Raab holds a B.A. in political science from Colgate University where he is a Trustee Emeritus. Webelieve Mr. Raab’s qualifications to sit on our Board include his multidisciplined and principal executive officer experience in the life science industry obtainedwith companies that are considered leaders in our industry and the substantial understanding of Transcept he has gained during his ten years of service to us(inclusive of his service on the TPI board of directors).In connection with the restructuring of our Board announced in November 2013, Mr. Raab resigned as Chairman of the Board and is instead serving asLead Independent Director, effective December 31, 2013.Frederick J. Ruegsegger. Mr. Ruegsegger has been a member of our Board since completion of the merger between TPI and Novacea in January 2009.Prior to completion of the merger, Mr. Ruegsegger was a member of the Novacea board of directors since February 2008. Mr. Ruegsegger has been a managingdirector of Four Oaks Partners, a transaction advisory firm, since April 2012. Mr. Ruegsegger served as chief financial officer of Sterigenics International,Inc., a sterilization technology company, from June 2004 until September 2011. Prior to that, Mr. Ruegsegger served as chief financial officer and chief of staffof Sterigenics’ former parent company, Ion Beam Applications, from May 2002 to June 2004. From October 2000 to May 2002, Mr. Ruegsegger providedfinancial and general management services, generally as a consultant, to a variety of companies including CentPharm, LLC and Phaethon Communications.Mr. Ruegsegger holds a B.S. in Economics from the University of Illinois and a Masters in Management from the J.L. Kellogg Graduate School ofManagement at Northwestern University. We believe Mr. Ruegsegger’s qualifications to sit on our Board include the financial experience he has gainedthroughout his career, his qualification as our “audit committee financial expert” under SEC rules and his role as a chief financial officer of a publicly-heldcompany.Section 16(a) Beneficial Ownership Reporting ComplianceSection 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equitysecurities, to file reports of ownership and changes in ownership with the SEC. Such officers, directors and ten-percent stockholders are also required by SECrules to furnish us with copies of all forms that they file pursuant to Section 16(a). Based on our review of the copies of such forms received by it and writtenrepresentations from certain reporting persons, we believe that during fiscal 2013, our executive officers, directors and ten-percent stockholders complied withall other applicable filing requirements.CORPORATE GOVERNANCEOur Board of Directors believes that good corporate governance is important to ensure that Transcept is managed for the long-term benefit of ourstockholders. This section describes key corporate governance guidelines and practices that we have adopted. Complete copies of the committee charters andCode of Business Conduct and Ethics described below are available in the “Corporate Governance” section of the “Investors” page of our website,www.transcept.com. Alternatively, you can request a copy of any of these documents by writing to Transcept Pharmaceuticals, Inc., 1003 West Cutting Blvd.,Suite 110, Point Richmond, California 94804, Attention: Investor Relations.79Table of ContentsCorporate Governance GuidelinesThe Board of Directors has adopted corporate governance guidelines to assist the Board in the exercise of its duties and responsibilities and to serve thebest interests of our company and our stockholders. These guidelines, which provide a framework for the conduct of the Board’s business, provide that: • the principal responsibility of the directors is to oversee our management; • a majority of the members of the Board be independent directors; • the independent directors meet regularly in executive session without non-independent directors present; • directors have full and free access to management and, as necessary and appropriate, independent advisors; • new directors participate in an orientation program and all directors are expected to participate in continuing director education on an ongoingbasis; and • at least annually, the Board and its committees conduct a self-evaluation to determine whether they are functioning effectively.Board Leadership StructureThe Board of Directors maintained as separate the roles of chairman of the board and chief executive officer until January 1, 2014. We believe independentdirectors and management can have different perspectives and roles in strategy development. Our independent directors bring experience, oversight andexpertise from outside the company and industry, while our chief executive officer, in addition to such qualities, also brings company-specific experience andexpertise. Beginning in 2014, we restructured our Board to combine the roles of chairman and chief executive officer as part of our preparation for exploringstrategic alternatives. We have selected a lead independent director in order to promote the consideration of different perspectives to aid in our strategicdevelopment and increases the Board’s ability to oversee the affairs of Transcept. The Board of Directors views these benefits as effective tools to strengthencorporate governance.Risk OversightManagement is primarily responsible for managing risks that Transcept may face in the ordinary course of operating our business. The Board activelyoversees potential risks and our risk management activities by receiving operational and strategic presentations from management which include discussionsof key risks to the business. In addition, the Board has delegated risk oversight to each of its key committees within their areas of responsibility. For example,the Audit Committee assists the Board in its risk oversight function by reviewing and discussing with management our legal risks, system of disclosurecontrols, the internal controls over financial reporting and risks associated with our cash investment policies. The Nominating and Corporate GovernanceCommittee assists the Board in its risk oversight function by periodically reviewing and discussing with management important governance and associatedregulatory compliance issues. The Compensation Committee assists the Board in its risk oversight function by overseeing strategies with respect to ourincentive compensation programs and key employee retention issues. We believe that the Board of Directors leadership structure facilitates the division of riskmanagement oversight responsibilities among the Board committees and enhances the Board’s efficiency in fulfilling its oversight function with respect todifferent business risks and risk mitigation practices.Board CommitteesThe Board of Directors has three standing committees: the Audit Committee, the Compensation Committee and the Nominating and Corporate GovernanceCommittee. Each of these committees operates under a written charter adopted by the Board, current copies of which are posted on the “Corporate Governance”section of the “Investors” page of our website, www.transcept.com.Audit CommitteeThe responsibilities of the Audit Committee include the following:•overseeing our accounting and financial reporting processes and audits of our financial statements;•assisting the Board in oversight and monitoring of:•the integrity of our financial statements,•our compliance with legal and regulatory requirements under applicable securities law,•the independent registered public accounting firms’ qualifications, independence and performance, and80Table of Contents•our systems of disclosure controls and internal accounting and financial controls;•preparing a report in our annual proxy statement in accordance with the rules of the SEC;•providing the Board with the results of its monitoring and recommendations derived from its responsibilities; and•providing the Board such additional information and materials as it may deem necessary to make the Board aware of significant financial mattersthat come to its attention and that require the attention of the Board.Management has the primary responsibility for our financial statements and the reporting process including our system of internal accounting andfinancial controls.In 2013, the Audit Committee consisted of Mr. Ruegsegger, who serves as its chairman, Mr. Raab and Christopher Ehrlich, our former director. InJanuary 2014, Dr. Dietz joined the Audit Committee. The Board of Directors has determined that Mr. Ruegsegger is an “audit committee financial expert” asdefined in the SEC rules. The Audit Committee held five meetings during 2013.Compensation CommitteeResponsibilitiesThe responsibilities of the Compensation Committee include the following:•reviewing and determining all forms of compensation to be provided to our executive officers;•establishing and reviewing general policies relating to compensation, benefits and all bonus and equity compensation for all employees; and•producing an annual report on executive compensation for inclusion in our proxy materials in accordance with the rules of the SEC.Refer to “Compensation Discussion and Analysis” for more information about our Compensation Committee and its processes and procedures.In 2013, the Compensation Committee consisted of Mr. Ehrlich, our former director, who served as its chairman, Mr. Nunn and Mr. Raab. TheCompensation Committee held two meetings during 2013 and acted five times by unanimous written consent. In January 2014, Dr. Dietz joined theCompensation Committee and Mr. Nunn was appointed its chairman.Nominating and Corporate Governance Committee and Director NominationsThe responsibilities of the Nominating and Corporate Governance Committee relating to the nomination of directors include the following:•considering and approving all nominees for membership on the Board, including the slate of nominees to be proposed by the Board to ourstockholders for election at an annual stockholders’ meeting and any nominees to be elected or appointed by the Board to fill interim directorvacancies;•evaluating all proposed director nominees;•evaluating incumbent directors before recommending re-nomination; and•recommending all approved candidates to the Board for appointment or nomination to our stockholders.The Nominating and Corporate Governance Committee selects as candidates to the Board of Directors for appointment or nomination individuals of highpersonal and professional integrity and ability who can contribute to the Board of Directors’ effectiveness in serving the interests of our stockholders. Directornominees are expected to have considerable management experience that would be relevant to our current and expected future business directions, a track recordof accomplishment and a commitment to ethical business practices. The Nominations and Corporate Governance Committee also considers diversity inprofessional experience and skill sets in identifying nominees for director. The Board of Directors, along with the Nominating and Corporate GovernanceCommittee, utilizes its own resources to identify qualified candidates that meet these criteria to join the Board of Directors and may, in the future, use anexecutive recruiting firm to assist in the identification and evaluation of such81Table of Contentsqualified candidates. For these services, an executive recruiting firm would be paid a fee. The Nominating and Corporate Governance Committee has notestablished a procedure for considering nominees for director nominated by our stockholders. The Board of Directors and Nominating and CorporateGovernance Committee believe that they can identify appropriate candidates to our Board of Directors. Stockholders may nominate candidates for director inaccordance with the advance notice and other procedures contained in our bylaws.The responsibilities of the Nominating and Corporate Governance Committee relating to corporate governance include the following:•developing and recommending to the Board the governance principles applicable to us;•overseeing the evaluation of our Board and management;•recommending director nominees for each committee of our Board;•monitoring and reviewing compliance with our Code of Business Conduct and Ethics;•developing and recommending director conflict of interest policy applicable to our directors; and•reviewing performance of the committees of the Board, and making recommendations regarding committee organization, membership, function andeffectiveness.The Nominating and Corporate Governance Committee consists of Mr. Kiley, who serves as its chairman, and Mr. Ruegsegger. The Nominating andCorporate Governance Committee held one meeting during 2013 and acted one time by unanimous written consent.Board Attendance at Board and Stockholder MeetingsThe Board of Directors held a total of nineteen meetings during 2013 and acted twice by unanimous written consent. No director serving throughout 2013attended fewer than 75% of the aggregate of all meetings of the Board and the committees of the Board upon which such director served during the period ofsuch director's service.We do not have a formal policy regarding attendance by members of the Board at our annual meeting of stockholders, but directors are encouraged to attend.Six of the seven individuals then serving on our Board attended our 2013 annual meeting of stockholders.Communicating with the Board of DirectorsIn accordance with our policies regarding communication to non-management members of the Board of Directors, stockholders may communicate withsuch members by sending an email to the Chairman of the Board of Directors at Chairman@transcept.com. The Chairman of the Board of Directors monitorssuch communications and provides summaries at regularly scheduled meetings of the Board of Directors. Where the nature of the communication warrants,the Chairman of the Board of Directors may determine, in his judgment as considered appropriate, to obtain the more immediate attention of the appropriatecommittee of the Board of Directors or non-management director, of independent advisors or of management.Code of Business Conduct and EthicsOur Board of Directors has adopted a code of business conduct and ethics. The code of business conduct applies to all of our employees, officers anddirectors. The full texts of our codes of business conduct and ethics are posted on our website at http://www.transcept.com under the Investors section. Weintend to disclose future amendments to our codes of business conduct and ethics, or certain waivers of such provisions, at the same location on our websiteidentified above and also in public filings. The inclusion of our website address in this report does not include or incorporate by reference the information onour website into this report.82Table of ContentsItem 11.Executive CompensationCOMPENSATION DISCUSSION AND ANALYSISOverviewThis executive summary provides a discussion of how the Compensation Committee views the link between pay and performance for our namedexecutive officers with respect to 2013, and includes additional information with respect to 2012 to provide context. For the purposes of this CompensationDiscussion and Analysis, compensation tables and narrative discussion, our named executive officers for 2013 consist of:•Glenn A. Oclassen, President and Chief Executive Officer,•Nikhilesh N. Singh, Ph.D., Senior Vice President, Chief Scientific Officer,•John A. Kollins, Senior Vice President, Chief Business Officer,•Leone D. Patterson, Vice President and Chief Financial Officer, and•Thomas P. Soloway, former Executive Vice President, Chief Operating Officer.On December 4, 2013, Transcept announced that Mr. Oclassen was appointed as Chairman of the Board of Directors and continues as Chief ExecutiveOfficer. Mr. Soloway resigned his employment with the Company as Executive Vice President and Chief Operating Officer, effective December 31, 2013.Business Highlights that Affected Compensation Actions Taken in 2012 and 2013In February 2013, the Compensation Committee, at the recommendation of Mr. Oclassen and after consultation with Compensia, took the following step:•maintained executive salaries, at approximately the 50th percentile of our 2013 peer group;•continued a cash incentive bonus program for 2013; and•awarded annual stock options with standard vesting over four years.In July 2013, the Compensation Committee, at the recommendation of Mr. Oclassen and after consultation with Compensia, took the following steps:•awarded stock options with standard vesting over four years, however in the event of the executives termination Without Cause or the executivesresignation for Good Reason within one year following a Change of Control, the exercise period would be extended to the earlier of (i) the third anniversaryof the executives termination date or (ii) the original expiration of the applicable stock option;•in the event of a Change of Control, we extended the severance benefit period for Mr. Kollins and Ms. Patterson; and•renewed the severance agreements for Messrs. Oclassen and Soloway, and Dr. Singh.In July 2013, the Compensation Committee granted stock options that were intended to align management and shareholder interests accordingly and torecognize the limited retention value associated with the vast majority of the outstanding stock options with no intrinsic value at that time, especially asTranscept began exploring various strategic alternatives.Advisory Vote on Executive CompensationAt the 2011 annual meeting of stockholders, our stockholders approved, on an advisory basis, the compensation of our named executive officers, with agreater than 99% approval rate for our say-on-pay resolution. As a result, the Compensation Committee continues to apply similar compensation philosophiesto those it has used in previous years in determining executive compensation. The Compensation Committee will continue to consider the outcome of our say-on-pay votes when making future compensation decisions for the named executive officers.Also at the 2011 annual meeting of stockholders, our stockholders provided strong support for holding advisory “say-on-pay” votes every three years,with approximately 70% of votes cast in favor of holding an advisory vote every three years. Consistent with the stated preference of a majority of ourstockholders and the Board of Directors’ recommendation, the Board of Directors determined that we will hold a “say-on-pay” vote every three years. Our nextadvisory vote on compensation will be held at the 2014 annual meeting of stockholders.83Table of ContentsExecutive Compensation PhilosophyOur executive compensation program impacts all employees by establishing a general framework for compensation and creating a work environmentfocused on expectations, goals and rewards. Because the performance of every employee is important to our overall success, the Compensation Committee ismindful of the impact executive compensation and incentive programs have on all employees.We maintain our headquarters and operations in the San Francisco Bay area, which has a high cost of living and a highly competitive employmentenvironment. Specifically, numerous life science and other high-growth and commercial companies are nearby and compete for the same personnel that weseek to recruit, motivate and retain. In addition, the business cycle in the life science industry is typically much longer than other commercial industriesrequiring long-term dedication from employees. We recognize that highly qualified executives and other skilled professionals have many career opportunitiesand that their choices to join or stay with us rest in part with the mix of compensation being paid. In reconciling these considerations, the CompensationCommittee strives to act in our, and our stockholders’, long-term best interests, and believes that our executive compensation program strongly alignsmanagement with the long-term interests of our stockholders.We aim to attract, retain and motivate top performers in our industry and have developed a compensation philosophy intended to achieve these goals. Tocompensate for ongoing performance throughout the year, we generally target executive officer base salaries at or near the 50th percentile for similar positions inour peer group companies. We believe that this is an important target for retaining top performers. In addition, our compensation program is designed to rewardperformance by making a significant portion of the potential compensation of all executive officers contingent on the achievement of our business objectivesand the creation of value for our shareholders. In rewarding performance, we have historically sought to incentivize long-term corporate and individualperformance and provided special incentives when we need to achieve specific short-term goals. To achieve these aims, we have adopted a general philosophyof targeting total target cash compensation (base salary plus target bonus) at approximately the 50th percentile, and long-term equity compensation between the50th and 75th percentile of our peer group companies. To determine the percentile of long-term equity compensation, we typically consider a blend of the percentof company granted methodology and the Black Scholes Equity Value methodology, in each case vs. our peer group as supplemented with third party surveydata for those positions where our peer group does not have sufficient data for comparison. We believe that these targets align management with shareholderinterest by rewarding executives for making decisions and achieving milestones that drive long term value creation. Each of these targets is evaluated annuallyby the Compensation Committee, and a subjective decision is made regarding general progress in our business and the applicability of each of these targets inlight of such progress.To date, we have not structured our compensation elements for executive officers so as to target each separate component at a specific percentage of totaldirect compensation for the year. The determination of the Compensation Committee as to the appropriate use and weight of each component of executivecompensation has been historically subjective, based on its view of the relative importance of each component in meeting overall company objectives.Objectives of the Executive Compensation ProgramOur executive compensation program is designed to achieve three primary objectives:•provide competitive compensation to attract, retain and motivate top talent;•foster collaboration among our executive team and promote the achievement of annual strategic objectives by linking compensation to the achievementof shared corporate performance goals and individual objectives that support corporate goals; and•align compensation with stockholders and reward the creation of stockholder value.Compensation Elements and PurposeIn 2013, executive compensation at the company consisted of the following elements:•Base salary: Compensation for ongoing performance throughout the year.•Cash incentive bonus program: A cash bonus program to recognize and reward annual performance, including the achievement of overall companyobjectives and individual goals. •Time-vested stock option awards: Equity compensation to provide an incentive to manage the company from the perspective of an owner with anequity stake in the business and reward the creation of shareholder value. 84Table of Contents•Severance and change-in-control benefits: Remuneration paid to executive officers in the event of a qualifying termination in connection with a change-in-control of the company or an involuntary employment termination to provide security to our executive officers and enable them to focus on theirduties for the Company and maximize value for shareholders.•Other benefits: Employee benefit plans, in which all employees participate, to enhance retention and workplace morale.Process for Determining Executive CompensationDuring 2013, the Compensation Committee was responsible for evaluating the compensation of our executive officers and making recommendations to thenon-employee members of the Board of Directors for discussion and approval. Since May 1, 2011, the Compensation Committee has consisted of ChristopherB. Ehrlich, as its chairman, Jake R. Nunn and G. Kirk Raab. However, on December 31, 2013, Mr. Ehrlich stepped down as a Transcept Board memberand was replaced by Thomas J. Dietz on the Compensation Committee. Mr. Nunn became the Chairman of the Compensation Committee at that time.To aid the Compensation Committee in its responsibilities, the Chief Executive Officer and Chief Operating Officer provide the Compensation Committeewith a variety of information, including analyses relating to our overall corporate performance, the individual performance of executive officers andcompensation recommendations for all executive officers based on industry compensation surveys and internal equity. Neither the Chief Executive Officer northe Chief Operating Officer participates in the Compensation Committee’s deliberations or decisions with regard to his respective compensation terms. Prior toMr. Oclassen being appointed as the Chairman of the Board, the Chairman of the Board participated in the process for determining the Chief ExecutiveOfficer’s compensation. For 2014 compensatory decisions, it is expected that the Lead Independent Director of the Board will participate in the process fordetermining the Chief Executive Officer's compensation. Also upon the Chief Operating Officer's departure on December 31, 2013, the Chief Financial Officerassumed the Chief Operating Officer's responsibilities for advising on compensation matters.In late 2012 the Compensation Committee engaged Compensia to assess matters relating to executive compensation plans, evaluate our compensationpolicies and practices, report to the Compensation Committee on its findings, and to make recommendations for compensation adjustments. In January 2013,our Compensation Committee completed 2012 performance reviews of our executive officers and implemented compensation adjustments to be effective forfiscal 2013. For purposes of comparison with other public companies, Compensia recommended, and the Compensation Committee approved, a group of peercompanies that generally included one or more of the following characteristics:•Similar business models◦The development or commercialization of products for primary care markets with a large pharma marketing partner.◦The development for, or recent launch of, a product to a specialty market.◦The development or marketing of established drug products in new dosage forms or delivery systems.•Similar market capitalizations◦With the exception of MAP Pharmaceuticals, Inc. that has served as a Transcept peer for several years, all 2013 peer companies were lessthan $500 million in market capitalization at the time the peer group was assembled.•Geography◦2013 peer group companies were primarily, but not exclusively, California based.85Table of ContentsThe peer group used to determine 2013 compensation was as follows:• Alexza Pharmaceuticals, Inc.• MAP Pharmaceuticals, Inc.• AMAG Pharmaceuticals, Inc.• Orexigen Therapeutics, Inc.• Anacor Pharmaceuticals, Inc.• Pacira Pharmaceuticals, Inc.• Avanir Pharmaceuticals, Inc.• Sangamo BioSciences, Inc.• Cadence Pharmaceuticals, Inc.• Savient Pharmaceuticals, Inc.• Corcept Therapeutics, Incorporated.• Somaxon Pharmaceuticals, Inc.• Cytokinetics, Incorporated.• Vanda Pharmaceuticals Inc.• Depomed, Inc.• XenoPort, Inc.• Dyax Corp.• Zogenix, Inc.• Horizon Pharma, Inc. Between 2012 and 2013 Compensia recommended, and the Compensation Committee approved, a change in companies determined to be peers forpurposes of evaluating executive compensation. 2012 peers that were removed in 2013 include: Adolor Corporation, Allos Therapeutics, Inc., ArenaPharmaceuticals, Inc, and VIVUS, Inc. Adolor Corporation and Allos Therapeutics, Inc. were removed because they were acquired in 2012 and ArenaPharmaceuticals and VIVUS, Inc. were deemed no longer relevant peers due to changes in market capitalization that made them less desirable choices, or itwas determined that the other companies with more similar business models or geographic locations made them more suitable choices. To replace and augmentthe peers that were removed, new companies added to the 2013 peer group included: Anacor Pharmaceuticals, Inc., Corcept Therapeutics, Incorporated,Cytokinetics, Incorporated, Depomed, Inc., Horizon Pharma, Inc., and Sangamo BioSciences, Inc.In cases where peer group compensation data is not available, the Compensation Committee reviews market data from the Radford Life Sciences Surveyreflecting a broad set of life science companies in the United States with 50 to 150 employees.2013 Executive Compensation ProgramBase SalaryAfter consideration of executive salary data provided to the Compensation Committee by Compensia, which showed current base salaries atapproximately the 50th percentile of our peer group, and Mr. Oclassen's recommendation, the Compensation Committee recommended to the Board ofDirectors, and the Board of Directors in turn determined to not change executive base salaries for 2013.Officer2013 Base SalaryGlenn A. Oclassen$560,000Thomas P. Soloway$350,000Nikhilesh N. Singh$350,000John A. Kollins$340,000Leone D. Patterson$315,000Cash Incentive Bonus ProgramOur cash incentive bonus program is intended to incentivize management to achieve shorter term goals by targeting a percentage of base salary that can beearned for achieving performance criteria. Mr. Oclassen recommended to the Compensation Committee that bonus targets for the management team, other thanhis own, be set at the 50th percentile of similarly situated executives in our 2013 peer group. This recommendation placed our target cash compensation (basesalary plus target bonus) at approximately the 50th percentile of target cash compensation for our 2013 peer group, a number that is consistent with ourcompensation philosophy. The Compensation Committee then separately deliberated and determined a recommended bonus target for Mr. Oclassen, afterwhich it made a recommendation to the Board of Directors for the bonus for all executive officers. After consideration the Board of Directors determined tomaintain the target bonus for all executives at the 50th percentile of our 2013 peer group as follows:86Table of Contents•Mr. Oclassen: 50% of base salary•Mr. Soloway: 40% of base salary•Dr. Singh: 40% of base salary•Mr. Kollins: 35% of base salary•Ms. Patterson: 35% of base salaryFor 2013, Mr. Oclassen's bonus payment eligibility was to be based 100% on the achievement of corporate goals. Bonus payment eligibility for ourremaining named executive officers was to be based 70% on the achievement of 2013 corporate objectives and 30% determined on a discretionary basis subjectto individual performance and contribution, as determined by the Chief Executive Officer and recommended to the Compensation Committee. TheCompensation Committee determined that no bonus would be paid to the named executive officers unless the corporate goals were determined to have beenachieved at a 60% or greater level based on assigned weightings to each of the corporate objectives. The Compensation Committee retained discretion todetermine that portion of the bonus that would be paid if the corporate goals were achieved at a level between 60% and 100%. The Compensation Committeeretained discretion to change the bonus structure and the bonus payouts as it considered appropriate if during the course of the year business objectiveschanged, although such discretion was not used in 2013.The Board set the 2013 corporate goals in a manner that would require significant effort by our executives and would not be expected to be easily achievedin the ordinary course of business. 2013 corporate goals and their respective weighting were as follows:•Pipeline development goal:•Develop in-house and/or sign an in-licensing agreement for at least two new products: 85%•Intermezzo goals:•Progress toward our goal of having Purdue Pharma return Intermezzo under terms deemed by the Board of Directors to be favorable toTranscept: 15%In January 2014 the Board of Directors met to determine bonus payments under the cash incentive bonus program for calendar year 2013 performance.Upon the recommendations of both Mr. Oclassen and the Compensation Committee, the Board of Directors did not approve any awards to executives underthe 2013 cash incentive bonus plan. In making such determination, the Board of Directors evaluated corporate performance against predetermined goals andobjectives and determined that Corporate goals were met at the 35% level. In making this determination, the Board considered the progress made with respect tovarious business development activities and new product initiatives. Along with not achieving the threshold of 60%, the Board more importantly consideredthe Company’s share price, shareholder dissatisfaction and the Company's inability to come to an agreement with Purdue Pharma about the future ofIntermezzo in deciding that no bonus would be paid to our named executive officers. Since it did not impact the bonus paid, no assessment of individualperformance in respect of the 2013 cash incentive bonus plan was made.Stock Option AwardsWe believe that stock option awards are an effective means of aligning the interests of executives and stockholders, rewarding executives for achievingsuccess over the long term and providing executives an incentive to remain with us. We grant options to new executives upon the commencement of theiremployment, and after becoming a public company in 2009, we adopted an annual grant timetable that is part of our annual review process.In granting stock options to our executives, we consider an executive’s existing option grants and equity holdings, including factors such as the totalpercentage of the company’s capital stock represented by those option grants and holdings and the extent to which these grants and holdings are vested. As aguiding philosophy, we begin our analysis by targeting an annual equity grant for each executive between the 50th and 75th percentile as compared to our peergroup companies, or third party survey data for those positions where our peer group does not have sufficient data for comparison. Using this analysis as aframework, and based upon our desire to promote an egalitarian team ethic, we reallocate stock option grants among similarly situated classes of executivesbased on title, such as Senior Vice President or Vice President, so that similarly titled executives are awarded similar grants.The typical vesting schedule for initial stock option grants to our employees includes vesting of 25% of the shares subject to the option at one year, andequal monthly vesting of the remaining shares subject to the option thereafter over the next 36 months. After an initial stock option grant is made to anyemployee, subsequent option grants typically vest in equal monthly installments over a total of 48 months. The Compensation Committee retains the discretionto grant additional options to executive officers as a reward for exceptional performance, or to incentivize the achievement of specific short term objectives.87Table of Contents2013 Annual Stock Option GrantsIn January 2013, as part of our annual stock option grant process, our Compensation Committee recommended to our Board of Directors, and ourBoard of Directors granted, the named executive officers options to purchase our Common Stock as indicated in the table below. All such stock options weregranted pursuant to our 2006 Incentive Award Plan. Options granted to the named executive officers had an exercise price of $5.40 per share, the closing priceof our Common Stock on the date of grant. The options vest in equal monthly installments over a 48-month period, subject to continuous active service to usduring such period.The size of these grants was determined based on the recommendations of Compensia and the Compensation Committee’s guideline to grant equityincentives to our overall executive team between the 50th and 75th percentile of our peer group. Although our named executives have an overall equitycompensation target that ranges from the 50th to the 75th percentile, an individual executive’s equity compensation will be influenced by additionalconsiderations such as the scope of the executive’s role; the executive’s experience, qualifications, and skills; individual performance; and our desire topromote equality among our similarly situated executives. In analyzing the 50th to 75th percentile range for equity compensation at our peer group companies,Compensia used an equal blend of the Black-Scholes valuation method and a method that compares the percentage of the shares outstanding represented byequity grants. Annual stock option awards to our Named Executive Officers in 2013 were as follows:NameShares Subject to OptionGlenn A. Oclassen250,000Thomas P. Soloway140,000Nikhilesh N. Singh, Ph.D.120,000John A. Kollins90,000Leone D. Patterson80,000Annual stock option grants for Named Executive Officers were all between the 50th and 75th percentile of the 2013 peer group, a range consistent with ourpre-established guidelines.Stock Option Grants in July 2013On July 15, 2013, the Compensation Committee recommended to the Board of Directors and the Board of Directors then approved the following stockoption grants to the Named Executive Officers:NameShares Subject toOptionGlenn A. Oclassen225,000Thomas P. Soloway115,000Nikhilesh N. Singh, Ph.D.115,000John A. Kollins115,000Leone D. Patterson115,000The stock options were granted under the Company's 2006 Incentive Award Plan at an exercise price of $2.93 per share and vest monthly thereafter inequal increments over 48 months and are exercisable over the life of the stock option. In the event of a Change of Control, these options will remain exercisableuntil the earlier of (i) the third anniversary of the executive's termination date or (ii) the original expiration date of the applicable option. The July 2013 stockoptions were intended to align management and shareholder interests accordingly and to recognize the limited retention value associated with the vast majorityof the outstanding stock options with no intrinsic value at that time, especially as Transcept began exploring various strategic alternatives. Compensiaperformed an analysis to advise the Compensation Committee on the appropriateness of the total cash and stock option compensation under a Change inControl scenario and determined that post this stock option grant and other changes to severance agreements, Transcept would fall within the 50th percentile ofmarket practices under a Change of Control scenario, which aligns with our overall compensation objectives.Severance AgreementsWe believe that concerns about potential job loss or the possibility or occurrence of a change-in-control of the company can create uncertainty for ourexecutive officers that may unduly affect their performance. For example, fear of an involuntary termination of employment without cause, such as in the eventof a reduction in force or position elimination may lead to the untimely departure of a key employee. In addition, the possibility of a change-in-control of thecompany may create uncertainty88Table of Contentsfor executives regarding their continued employment by us because such transactions frequently result in changes in senior management.Consequently, in 2009 the Compensation Committee approved our entry into Change of Control and Severance Benefits Agreements with our executiveofficers, including our named executive officers, to ensure that this protection was consistent with our peer companies and market practices. We believe thatthese agreements ensure the continued attention and dedication of our executive officers, including our named executive officers, to their assigned duties, and,thus, help ensure that they act in the best interests of our stockholders. These agreements also help to mitigate the risk of a potential job loss, as well asprovide additional incentives to our executive officers to remain employed with us.These agreements provide that each executive officer, including each named executive officer, will receive certain severance benefits if his or heremployment is terminated without “cause” or he or she resigns for “good reason” (as those terms are defined in the agreements), within 12 months after achange-in-control of the company (as such term is defined in the agreements), or if his or her employment is terminated without cause, other than within 12months after a change-in-control of the company. Any severance benefit received under such circumstances is only payable after such executive officer hassigned a general release of claims against the Company and its affiliates. Where an executive’s employment is terminated without cause, the applicablepayment amounts and benefit levels differ depending upon whether or not such termination occurs within 12 months after a change-in-control. The agreementsalso provide for full acceleration of vesting of equity incentive awards in the event of a qualifying termination or resignation of employment within 12 monthsafter a change-in-control. Also, certain stock options are eligible for extended exercisability as specified by the Board of Directors.For additional information on the specific terms and conditions of these agreements, and estimated potential payments and benefits under thesearrangements in connection with qualifying terminations or resignations, see the discussion in this Item 11 under the heading “Transcept SeveranceAgreements.”Other BenefitsExecutive officers are eligible to participate in all our employee benefit plans, such as medical, dental, vision, group life, disability, and accidental deathand dismemberment insurance, our 401(k) plan, and our Employee Stock Purchase Plan, in each case on the same basis as other employees, subject toapplicable law. We also provide vacation and other paid holidays to all employees, including executive officers, which we believe are comparable to thoseprovided at peer companies.Accounting and Tax ConsiderationsSection 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, places a limit of $1.0 million on the amount of compensation that wemay deduct as a business expense in any year with respect to our chief executive officer and certain other highly paid executive officers. While theCompensation Committee has not adopted a formal policy regarding tax deductibility of compensation paid to our executive officers, the compensationcommittee intends to consider tax deductibility under Section 162(m) as a factor in compensation decisions.Code Section 409A imposes additional taxes on certain non-qualified deferred compensation arrangements that do not comply with its requirements. Theserequirements regulate an individual’s election to defer compensation and the individual’s selection of the timing and form of distribution of the deferredcompensation. Code Section 409A generally also provides that distributions of deferred compensation only can be made on or following the occurrence ofcertain events (e.g., the individual’s separation from service, a predetermined date or fixed schedule, a change-in-control, or the individual’s death ordisability). For certain executives, Code Section 409A requires that such individual’s distribution of certain non-qualified deferred compensation amountscommence no earlier than six months after such officer’s separation from service. We have and will continue to endeavor to structure our compensationarrangements to be exempt from or comply with Code Section 409A so as to avoid the adverse tax consequences associated therewith. We have not providedany executives or other employees with any gross-up in connection with Section 409A of the Code.89Table of ContentsReport of the Compensation Committee of the Board of DirectorsThe Compensation Committee of Transcept has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) ofRegulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that theCompensation Discussion and Analysis be included in this Annual Report of Form 10-K for the fiscal year ended December 31, 2013. Respectfully Submitted By:MEMBERS OF THE COMPENSATIONCOMMITTEE Jake R. Nunn, Compensation CommitteeChairmanG. Kirk RaabThomas J. DietzDated: March 14, 2014The information contained above under the caption “Report of the Compensation Committee of the Board of Directors” shall not be deemed to be solicitingmaterial or to be filed with the SEC, nor shall such information be incorporated by reference this Annual Report on Form 10-K into any future filing under theSecurities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.Compensation Policies and Practices As They Relate to Risk ManagementWe believe that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect onour business. In addition, the Compensation Committee believes that the mix and design of the elements of executive compensation do not encourage ouremployees to take excessive risk. Specifically, the Compensation Committee reviewed the following design features of our compensation programs that guardagainst excessive risk-taking:•our compensation program is designed to provide a balanced mix of annual and long-term compensation in order to encourage actions that are in ourshareholders’ interests in both the short and long-term;•base salaries are consistent with market practices such that our employees are not motivated to take excessive risks to achieve a reasonable level offinancial security; and•our long-term incentive compensation employs multi-year vesting to facilitate long-term alignment with shareholders.90Table of ContentsEXECUTIVE COMPENSATIONThe following table provides information regarding the compensation of our named executive officers for 2013.Summary Compensation Table Non-Equity Name and Option Incentive Plan All Other Principal PositionYear Salary Bonus Awards Compensation Compensation Total ($) ($)(1) ($) ($) ($) ($) Glenn A. Oclassen 2013 560,000 — 1,339,655 — — 1,899,655President and Chief 2012 551,250 — 1,012,518 — — 1,563,768Executive Officer 2011 450,833 — 1,175,720 227,500 — 1,854,053 Nikhilesh N. Singh, Ph.D. 2013 350,000 — 656,039 — — 1,006,039Sr. Vice President and 2012 347,417 — 337,506 — — 684,923Chief Scientific Officer 2011 315,750 — 483,505 111,650 — 910,905 John A. Kollins 2013 340,000 — 545,441 — — 885,441Sr. Vice President, 2012 198,333 — 696,049 — 82,857 977,239Chief Business Officer Leone D. Patterson 2013 315,000 — 508,575 — — 823,575Vice President, Chief 2012 157,500 — 394,263 — — 551,763Financial Officer Thomas P. Soloway (2) 2013 350,000 — 792,629 — 11,442(3)1,154,071Former Exec. Vice President, 2012 347,167 — 337,506 — — 684,673Chief Operating Officer2011 313,000 — 483,505 110,600 — 907,105 (1)The amounts in this column represent the grant date fair value of options awarded during the respective year as well as any stock modified during the respective year computed inaccordance with ASC Topic 718. Assumptions used in calculating the valuation of option awards are described in Note 11 to the Financial Statements in our Annual Report on Form10-K for the year ended December 31, 2013.(2)Mr. Soloway resigned his position as Executive Vice President, Chief Operating Officer effective as of December 31, 2013.(3)Represents vacation payout upon termination.91Table of ContentsGrants of Plan-Based AwardsThe following table provides information regarding grants of plan based awards to each of the named executive officers during the year endedDecember 31, 2013. The options granted to the named executive officers were granted under the Amended and Restated 2006 Incentive Award Plan.Name All Other Option Estimated Future Payouts Awards: Exercise Under Non-Equity Incentive Number of or Base Plan Awards Securities Price of GrantGrantThreshold Target Underlying Option Date Fair Date (1) ($) (2) ($) Options (3) Awards ($) Value (4) ($) Glenn A. Oclassen 168,000 280,000 1/7/2013 250,000 5.40 921,650 7/15/2013 225,000 2.93 418,005 Nikhilesh N. Singh, Ph.D. 84,000 140,000 1/7/2013 120,000 5.40 442,392 7/15/2013 115,000 2.93 213,647 John A. Kollins 71,400 119,000 1/7/2013 90,000 5.40 331,794 7/15/2013 115,000 2.93 213,647 Leone D. Patterson 66,150 110,250 1/7/2013 80,000 5.40 294,928 7/15/2013 115,000 2.93 213,647 Thomas P. Soloway 84,000 140,000 1/7/2013 140,000 5.40 516,124 7/15/2013 115,000 2.93 213,647 (1)Corporate goals must be achieved at 60% for any bonus payouts to occur. This amount represents 60% of total potential payout under the Transcept annual incentive bonus planfor the year ended December 31, 2013.(2)Represents the target potential payout at 100% under the Transcept annual incentive bonus plan for the year ended December 31, 2013. On January 21, 2014, upon managementrecommendation and after considering corporate performance against predetermined goals and objectives, including a decline in the Company’s stock price and the Company's limitedsuccess in achieving against the 2013 goals approved by the Board, the Board did not approve any cash bonus awards earning in respect of 2013 for the named executives.(3)See "Outstanding Equity Awards at Fiscal Year-End" table below for vesting information for these option grants.(4)The amounts in this column represent the grant date fair value of options awarded computed in accordance with ASC Topic 718. Assumptions used in calculating the valuation ofoption awards are described in Note 11 to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.92Table of ContentsOutstanding Equity Awards at Fiscal Year-EndThe following table presents certain information concerning the outstanding option awards held as of December 31, 2013 by each of the named executiveofficers. Option Awards Number of Number of Securities Securities Underlying Underlying Unexercised Unexercised Vesting OptionOption Options (#) Options (#) Commencement ExerciseExpirationName Exercisable Unexercisable Date Price ($)Date Glenn A. Oclassen 9,958 — 0.88 3/15/2016 87,398 — 1.77 4/4/2017 90,000 — 4.14 2/12/2019 109,470 2,330(1) 1/14/2010 8.21 1/14/2020 59,000 — 8.21 1/14/2020 107,666 44,334(1) 2/2/2011 8.20 2/2/2021 155,000 — 2.68 8/24/2021 82,500 97,500(1) 2/1/2012 8.09 2/1/2022 57,291 192,709(1) 1/7/2013 5.40 1/7/2023 23,437 201,563(1) 7/15/2013 2.93 7/15/2023 Nikhilesh N. Singh, Ph.D. 59,599 — 0.88 3/15/2016 102,088 — 1.77 4/4/2017 42,000 — 4.14 2/12/2019 46,314 986(1) 1/14/2010 8.21 1/14/2020 24,100 — 8.21 1/14/2020 41,083 16,917(1) 2/2/2011 8.20 2/2/2021 77,500 — 2.68 8/24/2021 27,500 32,500(1) 2/1/2012 8.09 2/1/2022 27,500 92,500(1) 1/7/2013 5.40 1/7/2023 11,979 103,021(1) 7/15/2013 2.93 7/15/2023 John A. Kollins 22,916 27,084(1) 2/1/2012 8.09 2/1/2022 31,875 53,125(2) 6/20/2012 6.11 6/20/2022 20,625 69,375(1) 1/7/2013 5.40 1/7/2023 11,979 103,021(1) 7/15/2013 2.93 7/15/2023 Leone D. Patterson 33,750 56,250(2) 6/25/2012 6.05 6/25/2022 18,333 61,667(1) 1/7/2013 5.40 1/7/2023 11,979 103,021(1) 7/15/2013 2.93 7/15/2023 Thomas P. Soloway 29,157 — 0.88 3/15/2016 52,509 — 1.77 4/4/2017 42,000 — 4.14 2/12/2019 47,300 — 8.21 1/14/2020 24,100 — 8.21 1/14/2020 55,583 — 8.20 2/2/2021 38,750 — 2.68 8/24/2021 42,500 — 8.09 2/1/2022 67,083 — 5.40 1/7/2023 40,729 — 2.93 7/15/2023 (1)Vests in substantially equal installments on each monthly anniversary of the vesting commencement date over four years, subject to continuous service through eachsuch date.(2)Subject to four year vesting, where 25% of the shares subject to the option vests on the first anniversary of the vesting commencement date and the remaining sharessubject to the option vests in substantially equal monthly installments thereafter for the next 36 months, subject to continuous service through each such date.93Table of ContentsOptions Exercised and Stock VestedThere were no exercises of options during fiscal 2013 by any of the named executive officers. None of our named executive officers held stock awardsduring fiscal 2013.Pension Benefits and Nonqualified Deferred CompensationWe do not provide any pension or nonqualified deferred compensation benefits to our named executive officers.Transcept Severance AgreementsWe entered into Change of Control and Severance Benefits Agreements with each of our named executive officers. Each of these agreements provides forthe executive officer to remain an at-will employee, has a term of five years, and contains provisions that allow for the timing of payments under theagreements to be altered in order to prevent certain adverse tax consequences under Section 409A of the Internal Revenue Code of 1986.Definitions“Cause” under these agreements means any one or more of the following:•conviction of (or pleading guilty or no contest to) any felony or any crime involving moral turpitude;•participation in any material fraud, material act of dishonesty, or other act of intentional and material misconduct against Transcept;•intentionally damaging or willfully misappropriating any property of Transcept that in any case has a material adverse effect on us;•materially breaching any fiduciary, statutory, or contractual duty owed to us;•regularly and materially failing to diligently and successfully perform the executive’s duties;•failing to cooperate with us in any investigation or proceeding by any governmental or similar authority or as otherwise authorized by the Board ofDirectors or a committee thereof; and•being found liable in an SEC action and/or being disqualified by the SEC from serving in an executive role.“Good Reason” under these agreements means that the executive resigns his or her role with us if one of the following has taken place without theexecutive’s consent, has not been cured within 30 days of the executive providing written notice to our Board of Directors, and the executive’s resignation iseffective within 60 days after expiration of the 30-day cure period:•there is a material reduction in the executive’s base annual salary;•there is a material change in the executive’s position or responsibilities (including the person or persons to whom the executive has reportingresponsibilities) that represents an adverse change from the executive’s position or responsibilities from those in effect at any time within 90 dayspreceding the change of control; provided, however, that a change of control which results in the subsequent conversion of Transcept to a division orunit of the acquiring corporation will not by itself result in a material reduction in the executive’s level of responsibility;•the executive is required to relocate his or her principal place of employment to a facility or location that would increase the executive’s one-waycommute distance by more than 35 miles;•we materially breach our obligations under any then-effective employment agreement with the executive; and•an acquirer, successor or assignee of Transcept fails to assume and perform, in any material respect, our obligations under the employmentagreement.“Change of Control” under these agreements means:•a transaction or series of transactions (other than a public offering through a registration statement filed with the SEC) whereby any person orpersons directly or indirectly acquires beneficial ownership of securities of Transcept possessing more than 50% of the total combined voting powerof our securities outstanding immediately after such acquisition; or•any period of two consecutive years during which individuals who constitute a majority of our Board of Directors at the beginning of such two yearperiod, together with any new directors whose election by the Board or nomination for election by our stockholders was approved by a vote of at leasttwo-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination forelection was previously so approved, cease for any reason to constitute a majority of the Board; or94Table of Contents•the consummation by us of a merger, consolidation, reorganization, business combination, sale or disposition of all or substantially all of our assetsin a single transaction or series of related transactions, or the acquisition of assets or stock of another entity, in each case other than in a transaction:▪which results in the voting securities of Transcept outstanding immediately before the transaction continuing to represent at least a majorityof the combined voting power of the successor entity’s outstanding voting securities immediately after the transaction; and▪after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the successorentity, not including such persons who prior to consummation of the transaction owned enough securities to represent 50% of the votingsecurities of the successor entity following consummation of the transaction; or•Our stockholders approve a liquidation or dissolution of Transcept.Material Severance Terms Pertaining to Named Executive Officers Set forth below are descriptions of material severance terms pertaining to our named executive officers.Glenn A. OclassenIn the event that we terminate Mr. Oclassen’s employment without cause or Mr. Oclassen resigns for good reason, in either case within 12 months after achange of control, Mr. Oclassen will receive, subject to Mr. Oclassen executing and not revoking a general release of claims against the Company and itsaffiliates within 60 days following the termination date, a single lump sum severance payment equal to his then-effective annual salary, continued payment ofpremiums for group health benefits until the earlier of 12 months after termination or the date upon which Mr. Oclassen and his eligible dependents becomecovered under similar plans, and the vesting of 100% of Mr. Oclassen’s then-outstanding unvested equity awards. Additionally, options designated by theBoard or the Board's Compensation Committee as being eligible for extended exercisability shall remain exercisable until the earlier of (i) the third anniversaryof his termination date or (b) the original expiration date of the applicable option.In the event that we terminate Mr. Oclassen’s employment without cause other than within 12 months after a change of control, Mr. Oclassen will receive,subject to Mr. Oclassen executing and not revoking a general release of claims against the Company and its affiliates within 60 days following the terminationdate, a single lump sum severance payment equal to 1.5 times his then-effective annual salary and continued payment of premiums for group health benefitsuntil the earlier of 18 months after termination or the date upon which Mr. Oclassen and his eligible dependents become covered under similar plans.Nikhilesh N. SinghIn the event that we terminate Dr. Singh’s employment without cause or Dr. Singh resigns for good reason, in either case within 12 months after a changeof control, Dr. Singh will receive, subject to Dr. Singh executing and not revoking a general release of claims against the Company and its affiliates within 60days following the termination date, a single lump sum severance payment equal to 1.5 times his then-effective annual salary, continued payment ofpremiums for group health benefits until the earlier of 18 months after termination or the date upon which Dr. Singh and his eligible dependents becomecovered under similar plans, and the vesting of 100% of Dr. Singh’s then-outstanding unvested equity awards. Additionally, options designated by the Boardor the Board's Compensation Committee as being eligible for extended exercisability shall remain exercisable until the earlier of (i) the third anniversary of histermination date or (b) the original expiration date of the applicable option.In the event that we terminate Dr. Singh’s employment without cause other than within 12 months after a change of control, Dr. Singh will receive, subjectto Dr. Singh executing and not revoking a general release of claims against the Company and its affiliates within 60 days following the termination date, asingle lump sum severance payment equal to his then-effective annual salary and continued payment of premiums for group health benefits until the earlier of12 months after termination or the date upon which Dr. Singh and his eligible dependents become covered under similar plans.John A. KollinsIn the event that the Company terminates Mr. Kollins’ employment without cause or Mr. Kollins resigns for good reason, in either case within 12 monthsof a change of control, Mr. Kollins will receive, subject to Mr. Kollins executing and not revoking a general release of claims against the Company and itsaffiliates within 60 days following the termination date, a single lump sum severance payment equal to 1.5 times his then-effective annual salary, continuedpayment of premiums for group health benefits until the earlier of 18 months after termination or the date upon which Mr. Kollins and his eligible dependentsbecome covered under similar plans, and the vesting of 100% of Mr. Kollins’ then-outstanding unvested equity awards. Additionally, options designated bythe Board or the Board's Compensation Committee as being eligible for extended exercisability shall remain exercisable until the earlier of (i) the thirdanniversary of his termination date or (b) the original expiration date of the applicable option.95Table of ContentsIn the event that the Company terminates Mr. Kollins’ employment without cause other than within 12 months after a change of control, Mr. Kollins willreceive, subject to Mr. Kollins executing and not revoking a general release of claims against the Company and its affiliates within 60 days following thetermination date, a single lump sum severance payment equal to his then-effective annual salary and continued payment of premiums for group health benefitsuntil the earlier of 12 months after termination or the date upon which Mr. Kollins and his eligible dependents become covered under similar plans.Leone D. PattersonIn the event that the Company terminates Ms. Patterson’s employment without cause or Ms. Patterson resigns for good reason, in either case within 12months of a change of control, Ms. Patterson will receive, subject to Ms. Patterson executing and not revoking a general release of claims against the Companyand its affiliates within 60 days following the termination date, a single lump sum severance payment equal to 1.5 times her then-effective annual salary,continued payment of premiums for group health benefits until the earlier of 18 months after termination or the date upon which Ms. Patterson and her eligibledependents become covered under similar plans, and the vesting of 100% of Ms. Patterson’s then-outstanding unvested equity awards. Additionally, optionsdesignated by the Board or the Board's Compensation Committee as being eligible for extended exercisability shall remain exercisable until the earlier of (i) thethird anniversary of her termination date or (b) the original expiration date of the applicable option.In the event that the Company terminates Ms. Patterson’s employment without cause other than within 12 months after a change of control, Ms. Pattersonwill receive, subject to Ms. Patterson executing and not revoking a general release of claims against the Company and its affiliates within 60 days following thetermination date, a single lump sum severance payment equal to her then-effective annual salary and continued payment of premiums for group health benefitsuntil the earlier of 12 months after termination or the date upon which Ms. Patterson and her eligible dependents become covered under similar plans.Thomas P. SolowayThe Company entered into a consulting agreement with Mr. Soloway under which the Conmany shall pay Mr. Soloway a monthly retainer of $12,000 for4 months after Mr. Soloway's termination date of December 31, 2013 for certain consulting and transitional services. In addition, the Company accelerated byone year the vesting for all unvested stock options outstanding for Mr. Soloway and provided him an exercise period of six months from his termination dateof December 31, 2013.Potential Payments upon TerminationWithin Twelve Months After a Change of ControlBased upon a hypothetical termination date of December 31, 2013, assuming that the above-described Change of Control and Severance BenefitsAgreements were in place as of such date, and that the named executive officers were terminated without cause or resigned their positions for good reasonwithin 12 months after a change of control of Transcept, our named executive officers would have been entitled to the following payments and benefits: Lump Sum Salary -Accelerated Vesting of Maximum Continued Value of Extended Based SeveranceUnvested Equity Payment of COBRA Exercise Period on NamePayment (1) ($)Awards (2) ($) Premiums (3) ($) Specific Grants (4) ($) Total ($) Glenn A. Oclassen560,00086,672 19,068 89,820 755,560Nikhilesh N. Singh, Ph.D.525,00044,299 36,631 45,905 651,835John A. Kollins510,00044,299 36,631 45,905 636,835Leone D. Patterson472,50044,299 13,198 45,905 575,902 (1)Represents Mr. Oclassen’s annual base salary for 2013, and 1.5 times Dr. Singh’s, Mr. Kollins' and Ms. Patterson's annual base salaries for fiscal year 2013.(2)Represents the excess, if any, of $3.36, which was the most recent closing price of our Common Stock on December 31, 2013, over the option exercise price with respect to allunvested options held by each named executive officer as of the date hereof.(3)Represents continued payments of monthly health premiums for 12 months for Mr. Oclassen, and 18 months for Dr. Singh, Mr. Kollins and Ms. Patterson.(4)Represents the difference in the Black-Scholes value of options eligible for an extended exercise period of three years upon a Change of Control. Assumptions used in calculatingthe valuation of option awards are described in Note 11 to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.96Table of ContentsOther Than Within Twelve Months After a Change of ControlBased upon a hypothetical termination date of December 31, 2013, assuming that the above-described Change of Control and Severance BenefitsAgreements were in place as of such date, and that the named executive officers were terminated without cause other than within 12 months of a change ofcontrol of Transcept, our named executive officers would have been entitled to the following payments and benefits: Lump Sum Salary -Maximum Continued Based SeverancePayment of COBRA NamePayment (1) ($)Premiums (2) ($) Total ($) Glenn A. Oclassen840,00028,603 868,603Nikhilesh N. Singh, Ph.D.350,00024,421 374,421John A. Kollins340,00024,421 364,421Leone D. Patterson315,0008,799 323,799 (1)Represents 1.5 times Mr. Oclassen’s annual base salary for 2013 and the annual base salaries for 2013 for each of Dr. Singh, Mr. Kollins and Ms. Patterson.(2)Represents continued payments of monthly health premiums for 18 months for Mr. Oclassen and 12 months for Dr. Singh, Mr. Kollins and Ms. Patterson.As noted above, the Company entered into a consulting agreement with Mr. Soloway under which the Company shall pay Mr. Soloway a monthly retainerof $12,000 for 4 months after Mr. Soloway's termination date of December 31, 2013 for certain consulting and transitional services. In addition, the Companyaccelerated by one year the vesting for all unvested stock options outstanding for Mr. Soloway and provided him an exercise period of six months from histermination date of December 31, 2013. Total compensation to be received under this contract is $48,000 and the value of the stock option modification wasapproximately $63,000. Assumptions used in calculating the valuation of the option modification are described in Note 11 to the Financial Statements in ourAnnual Report on Form 10-K.DIRECTOR COMPENSATION2013 Director CompensationThe following table sets forth, for the year ended December 31, 2013, a summary of compensation for all non-employee directors: Fees Earned Option or Paid inAwards (1)Total Cash ($) ($) ($)Thomas J. Dietz 33,261 174,167(2)207,428Christopher B. Ehrlich 58,000 91,979(3)149,979Thomas D. Kiley 96,000 47,959(4)143,959Matthew M. Loar 1,739 55,103(5)56,842Jake R. Nunn 45,000 47,959(4)92,959G. Kirk Raab 201,000 222,031(6)423,031Frederick J. Ruegsegger 59,000 47,959(7)106,959(1)The amounts in this column represent the grant date fair value of options awarded by us during 2013 or the fair value of option modification, if any, computed inaccordance with ASC Topic 718. Assumptions used in calculating the valuation of option awards are described in Note 11 to the Financial Statements in our AnnualReport on Form 10-K for the year ended December 31, 2013, incorporated herein by reference.(2)Dr. Dietz had options to purchase 45,000 shares of our Common Stock outstanding at December 31, 2013, with exercise prices ranging between $4.76 and $6.07 pershare, of which 22,221 were exercisable.(3)Mr. Ehrlich had options to purchase 56,900 shares of our Common Stock outstanding at December 31, 2013 with exercise prices ranging between $4.50 and $8.85 pershare, all of which were exercisable. All of Mr. Ehrlich's outstanding options became fully vested upon termination on December 31, 2013.(4)Messrs. Kiley and Nunn each had options to purchase 43,400 shares of our Common Stock outstanding at December 31, 2013, with exercise prices ranging between$4.50 and $8.85 per share, of which 42,275 were exercisable.(5)Mr. Loar had options to purchase 25,000 shares of our Common Stock outstanding at December 31, 2013, with exercise prices of $3.30 per share, none of which wereexercisable.(6)Mr. Raab had options to purchase 188,000 shares of our Common Stock outstanding at December 31, 2013, with exercise prices ranging between $4.50 and $8.21 pershare, of which 106,092 were exercisable.97Table of Contents(7)Mr. Ruegsegger had options to purchase an aggregate of 47,400 shares of our Common Stock outstanding at December 31, 2013, with exercise prices ranging between$4.14 and $14.00 per share, of which 46,275 were exercisable.Director Compensation PlansCash CompensationIn June 2010, the Board of Directors approved the Second Amended and Restated Independent Director Cash Compensation Policy for non-employeedirectors, which amended our Amended and Restated Independent Director Cash Compensation Policy adopted in February 2009. The Second Amended andRestated Independent Director Cash Compensation Policy provides for payment of $40,000 per year for service as a director in addition to the following:•$16,000 per year for service as chairperson of the Audit Committee;•$12,000 per year for service as chairperson of the Compensation Committee;•$6,000 per year for service as chairperson of the Nominating and Corporate Governance Committee;•$6,000 per year for service as a non-chairperson member of the Audit Committee;•$5,000 per year for service as a non-chairperson member of the Compensation Committee; and•$3,000 per year for service as a non-chairperson member of the Nominating and Corporate Governance Committee. No director who also serves as an employee of Transcept, currently only Mr. Oclassen, receives compensation for services rendered as a director.The Board of Directors has also approved additional annual cash compensation to Messrs. Raab and Kiley of $150,000 and $50,000, respectively, fortheir anticipated contributions to Transcept as Chairman of the Board of Directors and Board advisor to us on intellectual property matters, respectively. Wealso reimburse non-employee directors for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors or any committee of theBoard of Directors.On November 13, 2013, we announced a corporate restructuring plan, which included a restructuring of our Board and reduction in compensation tocertain directors. In connection with this restructuring, effective December 31, 2013, Mr. Oclassen shall replace Mr. Raab as Chairman of the Board, andMr. Raab shall instead serve as Lead Independent Director. Mr. Raab’s annual cash compensation shall decrease by $150,000, offset by $10,000 for hisservice as Lead Independent Director. Mr. Oclassen will not receive compensation for his service as Chairman of the Board. In addition, Mr. Ehrlich resignedfrom the Board, effective December 31, 2013 and Mr. Kiley's additional cash compensation as a Board advisor for intellectual property matters was decreasedto zero, effective December 31, 2013.Equity CompensationIn June 2010, we replaced the Amended and Restated Independent Director Equity Compensation Policy with the Second Amended and RestatedIndependent Director Equity Compensation Policy.Pursuant to the Second Amended and Restated Independent Director Equity Compensation Policy, which went into effect in June 2010, non-employeedirectors are granted the following initial and annual, automatic, non-discretionary nonqualified stock options to purchase shares of Common Stock:•Each new non-employee director receives an automatic grant for an option to purchase 10,000 shares of Common Stock as of the date he or she firstbecomes a non-employee director that vests in equal monthly installments over three years, subject to the director’s continuous service through eachvesting date. Effective April 2013, the Board of Directors approved the Fourth Amended and Restated Independent Director Equity CompensationPolicy to increase the number of shares covered by the initial automatic option grant to 25,000 beginning in 2013.•A non-employee director who is first appointed Chairman of the Board of Directors also receives an additional automatic option grant to purchasesuch number of shares of Common Stock as the Board shall determine as of the date he or she becomes Chairman of the Board of Directors thatvests in equal monthly installments over three years, subject to the director’s continuous service through each vesting date.•On the date of the first regularly scheduled Compensation Committee meeting of each year commencing in 2011, each individual who continues toserve as a non-employee director on such date receives an automatic option grant to purchase 7,000 shares of Common Stock, provided that suchindividual has served as a non-employee director of Transcept for at least six months. This option vests in equal monthly installments over 12months following the date of grant, subject to the director’s continuous service through each vesting date. Effective January 2013, the Board ofDirectors approved the Third Amended and Restated Independent Director Equity Compensation Policy to increase the number of shares covered bythe automatic option grant to 13,500, beginning in 2013.98Table of Contents•On the date of the first regularly scheduled Compensation Committee meeting of each year commencing in 2011, each non-employee director servingas Chairman of the Board of Directors who continues to serve as Chairman of the Board of Directors on such date also receives an automatic optiongrant to purchase such number of shares of Common Stock as the Board shall determine, provided that such individual has served as Chairman ofthe Board of Directors for at least six months. This option vests in equal monthly installments over 12 months following the date of grant, orotherwise determined by the Board of Directors, subject to the director’s continuous service through each vesting date.The exercise price of each option granted to a non-employee director under the above independent director equity compensation policies is equal to theclosing trading price of our Common Stock on the date of grant, or the last trading day immediately preceding the date of grant if the date of grant is not atrading day, of the shares of Common Stock covered by the option. Options have a maximum term of 10 years measured from the grant date, subject totermination in the event of the optionee’s cessation of board service.The independent director equity compensation policy provides that an optionee has a 12-month period following a cessation of board service in which toexercise any outstanding vested options issued under such policy, except in the case of a director’s retirement provided the director has reached the age of 62,in which case the options will be exercisable for an 18-month period following the director’s retirement. Options granted to non-employee directors under theabove plans will fully vest and become immediately exercisable upon a change-in-control of Transcept. In addition, options held by any director who retireswhile serving as a member of the board after reaching the age of 62 will fully vest and become immediately exercisable upon such director’s retirement.Compensation Committee Interlocks and Insider ParticipationIn 2013, Messrs. Ehrlich, our former director, Nunn and Raab served on the Compensation Committee. No member of the Compensation Committee orexecutive officer of Transcept has served as a member of the board of directors or compensation committee of any entity that has one or more executive officersserving as a member of our Board of Directors or Compensation Committee. Since the formation of the Compensation Committee, none of its members hasbeen an officer or employee of Transcept either during or prior to such member’s serving on the Compensation Committee.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe following table provides certain information with respect to all of our equity compensation plans in effect as of December 31, 2013.Plan CategoryNumber ofSecurities tobe IssuedUponExercise ofOutstandingOptions andWarrants Weighted-AverageExercisePrice ofOutstandingOptions andWarrants Number ofSecuritiesRemainingAvailable forFutureIssuanceUnder EquityCompensationPlans (1) Equity compensation plans approved by stockholders4,175,472(2)$5.24(3)862,720(4)Equity compensation plans not approved by stockholders61,451 $8.14 — Total4,236,923 $5.28 862,720 (1)The number of authorized shares under the Amended and Restated 2006 Equity Incentive Plan, or the Amended and Restated 2006 Plan, automaticallyincreases on January 1 of each year by a number of shares equal to the lesser of (i) 1,500,000 shares, (ii) 5.0% of the outstanding shares on the last dayof the immediately preceding fiscal year, or (iii) an amount determined by the Board of Directors.(2)Includes 4,175,472 shares relating to outstanding options.(3)Represents the weighted-average exercise price of outstanding options.(4)Includes 438,468 shares available under the 2009 Employee Stock Purchase Plan and 424,252 shares available under the 2006 Plan.99Table of ContentsSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTThe following table sets forth certain information with respect to the beneficial ownership of our Common Stock as of February 28, 2014 for:•each person, or group of affiliated persons, who are known by us to beneficially own more than 5% of our outstanding shares of CommonStock;•each of our directors as of February 28, 2014;•each of our named executive officers; and•all of our current directors and executive officers as a group.The number of shares beneficially owned by each entity, person, director or executive officer is determined under the rules of the SEC and theinformation is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as towhich the individual has the sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 daysof February 28, 2014, through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole investment and voting power,or shares such powers with his or her spouse, with respect to the shares set forth in the following table.The percentage of ownership is based on 18,842,888 shares of Common Stock outstanding on February 28, 2014, adjusted as required by the rulespromulgated by the SEC to determine beneficial ownership. We do not know of any arrangements, including any pledge by any person of securities ofTranscept, the operation of which may at a subsequent date result in a change of control of Transcept. Unless otherwise noted, the address of each directorand current and former executive officer of Transcept is c/o Transcept Pharmaceuticals, Inc., 1003 West Cutting Blvd., Suite 110, Point Richmond,California 94804.NameAmount andNature ofBeneficialOwnership (1) Percentage ofBeneficialOwnership 5% Stockholders Entities Affiliated with Roumell Entities (2)2 Wisconsin Circle, Suite 660Chevy Chase, Maryland 208152,196,141 11.7% Entities Affiliated with New Enterprise Associates (3)1954 Greenspring Drive, Suite 600Timonium, MD 210932,086,755 11.1% Entities Affiliated with InterWest Partners Entities (4)2710 Sand Hill Road, Suite 200Menlo Park, CA 940251,983,884 10.5% Entities Affiliated with SC Fundamentals (5)747 Third Avenue, 27th FloorNew York, NY 100221,267,115 6.7% Directors and Named Executive Officers Glenn A. Oclassen (6)1,235,556 6.3% Nikhilesh N. Singh (7)573,351 3.0% Thomas P. Soloway (8)470,945 2.4% G. Kirk Raab (9)236,802 1.2% Thomas D. Kiley (10)142,229 * John A. Kollins (11)115,728 * Leone D. Patterson (12)87,810 * Frederick J. Ruegsegger (13)62,400 * Matthew M. Loar (14)57,532 * Jake R. Nunn (15)43,400 * Thomas J. Dietz (16)28,333 * All current executive officers and directors as a group (10 persons) (17)2,583,141 12.5% * Beneficial ownership representing less than 1%.100Table of Contents1.This table is based upon information supplied by officers and directors and upon information gathered by us about principal stockholders known to usbased on Schedules 13D and 13G and related joint filing agreements, and Forms 3 and 4 filed with the SEC and includes number of shares as ofFebruary 28, 2014 along with options and warrants exercisable within 60 days of February 28, 2014.2.Comprises (a) 1,871,651 shares held by Roumell Asset Management, LLC (“RAM”), (b) 300,000 shares held by Roumell Opportunistic Value Fund (the“Fund”), and (c) 24,490 shares held by James C. Roumell. Collectively, RAM, the Fund and Mr. Roumell are the beneficial owners of a total of2,196,141 shares of the Common Stock of the Issuer. RAM is the investment advisor to the Fund. As investment advisor, RAM has investment andvoting control over the shares held by the Fund and, therefore, it is the deemed beneficial owner of shares held by the Fund. RAM has been granteddiscretionary dispositive power over its clients’ securities and in some instances has voting power over such securities. Any and all discretionaryauthority which has been delegated to RAM may be revoked in whole or in part at any time. Mr. Roumell is the President of RAM and holds a controllingpercentage of its outstanding voting securities and, as a result of his position with and ownership of securities of RAM, Mr. Roumell could be deemed thebeneficial owner of the shares held by RAM. Mr. Roumell disclaims any deemed beneficial ownership in securities held by RAM, except to the extent ofhis pecuniary interest therein.3.Comprises (a) 1,103,283 shares held by New Enterprise Associates 12, Limited Partnership (“NEA 12”), (b) 980,142 shares held by New EnterpriseAssociates 10, Limited Partnership (“NEA 10”), (c) 2,494 shares held by NEA Ventures 2007, L.P. (“Ven 2007”), and (d) 836 shares held by NEAVentures 2002, L.P. (“Ven 2002”). NEA 12 GP, LLC (“NEA 12 LLC”) is the sole general partner of NEA Partners 12, Limited Partnership (“NEAPartners 12”), which is the sole general partner of NEA 12. The individual managers of NEA 12 LLC are M. James Barrett, Peter J. Barris, ForestBaskett, Ryan D. Drant, Patrick J. Kerins, Krishna ‘Kittu’ Kolluri, and Scott D. Sandell. NEA Partners 12, NEA 12 LLC, and the individualmanagers of NEA 12 LLC share voting and dispositive power with regard to the shares directly held by NEA 12. NEA Partners 10, Limited Partnership(“NEA Partners 10”) is the sole general partner of NEA 10. The individual general partners of NEA Partners 10 are M. James Barrett, Peter J. Barris, andScott D. Sandell. NEA Partners 10 and the individual general partners of NEA Partners 10 share voting and dispositive power with regard to the sharesdirectly held by NEA 10. The shares directly held by Ven 2007 are indirectly held by Karen P. Welsh, the general partner of Ven 2007. Ms. Welsh sharesvoting and dispositive power with regard to the shares held by Ven 2007. The shares directly held by Ven 2002 are indirectly held by Pamela J. Clark, thegeneral partner of Ven 2002. Ms. Clark shares voting and dispositive power with regard to the shares held by Ven 2002.4.Comprises 1,983,884 shares held by InterWest Partners IX, L.P. InterWest Management Partners IX, LLC is the general partner of InterWest Partners IX,L.P. Philip T. Gianos, W. Stephen Holmes, Gilbert H. Kliman, and Arnold L. Oronsky are managing directors of InterWest Management Partners IX,LLC. Bruce A. Cleveland, Nina Kjellson, Khaled A. Nasr and Douglas A. Pepper are venture members of InterWest Management Partners IX, LLC.Each managing director and venture member of InterWest Management Partners IX, LLC shares voting and dispositive power with respect to shares heldby InterWest Partners IX, L.P. and disclaims beneficial ownership of such shares except to the extent of his or her pecuniary interest therein.5.Comprises (a) 1,123,381 shares held by SC Fundamental Value Fund, L.P. (the “Fund”), (b) 141,984 shares held by SC Fundamentals LLC EmployeeSavings and Profit Sharing Plan (the “Plan”) and (c) 1,750 shares held by David A. Hurwitz. Collectively, the Fund, the Plan and Mr. Hurwitz are thebeneficial owners of a total of 1,267,115 shares of our Common Stock. SC Fundamental LLC (“SCFLLC” is the general partner of the Fund). Peter M.Collery, Neil H. Koffler, John T. Bird and David A. Hurwitz, by virtue of their status as members of SCFLLC, the general partner of the Fund, may bedeemed to share with the Fund and SCFLLC the power to vote or direct the vote and to dispose or to direct to dispose the disposition of shares of CommonStock of which the Fund is the direct beneficial owner. Peter M. Collery, by virtue of his status as an executive officer of the Plan, may be deemed to sharewith the Plan the power to vote or direct the vote and to dispose or to direct to dispose the disposition of shares of Common Stock of which the Plan is thedirect beneficial owner.6.Includes 851,299 shares issuable upon exercise of options held by Mr. Oclassen within 60 days of February 28, 2014. Also includes 73,457 shares heldby Constance Oclassen, Mr. Oclassen’s wife.7.Includes 490,063 shares issuable upon exercise of options held by Dr. Singh within 60 days of February 28, 2014. Also includes 78,206 shares held bythe Singh Family Trust, for which Dr. Singh is not trustee and 295 shares held by Nikki Singh, Dr. Singh’s wife. Dr. Singh disclaims beneficialownership of the shares held by the Singh Family Trust except to the extent of his pecuniary interest therein.8.Includes 439,711 shares issuable upon exercise of options held by Mr. Soloway within 60 days of February 28, 2014. Also includes 10,401 shares heldby the Thomas P. Soloway Revocable Family Trust, for which Mr. Soloway is trustee, and 20,833 shares held by the Thomas P. Soloway 2003Irrevocable Trust, for which Mr. Soloway is not trustee. Mr. Soloway101Table of Contentsdisclaims beneficial ownership of the shares held by the Thomas P. Soloway 2003 Irrevocable Trust except to the extent of his pecuniary interest therein.9.Includes 118,218 shares issuable upon exercise of options within 60 days of February 28, 2014.10.Includes 43,400 shares issuable upon exercise of options within 60 days of February 28, 2014. Also includes 67,169 shares held by the Kiley RevocableFamily Trust, for which Mr. Kiley is trustee. Mr. Kiley disclaims beneficial ownership of these shares except to the extent of his pecuniary interesttherein.11.Includes 115,728 shares issuable upon exercise of options within 60 days of February 28, 2014.12.Includes 87,810 shares issuable upon exercise of options within 60 days of February 28, 2014.13.Includes 47,400 shares issuable upon exercise of options within 60 days of February 28, 2014.14.Includes 2,777 shares issuable upon exercise of options within 60 days of February 28, 2014.15.Includes 43,400 shares issuable upon exercise of options within 60 days of February 28, 2014. Mr. Nunn has no voting or dispositive power with regardto any of the above referenced shares held by entities affiliated with New Enterprise Associates and disclaims beneficial ownership of such shares exceptto the extent of his actual pecuniary interest therein.16.Includes 28,333 shares issuable upon exercise of options within 60 days of February 28, 2014.17.Includes 1,828,428 shares issuable upon exercise of options within 60 days of February 28, 2014.Item 13.Certain Relationships and Related Transactions, and Director IndependenceReview, Approval or Ratification of Transactions with Related PersonsPursuant to the Audit Committee charter, our policy is for the Audit Committee to review and approve any transaction, arrangement or relationship, orany series of similar transactions, arrangements or relationships in which we are to be a participant, if the amount involved exceeds $120,000 and a relatedperson had or will have a direct or indirect material interest. We have not adopted specific standards for approval of these transactions, but instead the AuditCommittee reviews each such transaction on a case-by-case basis.Transactions with Related PersonsWe entered into indemnification agreements with each of our directors and officers, which provide for the advancement of expenses under certainconditions and require us to indemnify its directors and officers to the fullest extent permitted by Delaware law.Independence of DirectorsThe Board of Directors has determined that each of our directors except for Mr. Oclassen is independent as defined under The NASDAQ Stock Marketlisting standards. The Board of Directors has also determined that each member of the Compensation Committee and Nominating and Corporate GovernanceCommittee is independent as defined under The NASDAQ Stock Market listing standards, and that each member of the Audit Committee is independent asdefined under The NASDAQ Stock Market listing standards and applicable SEC rules. In reaching its conclusions on independence, the Board of Directorsreviewed, among other factors, the relationships between the above-identified directors and certain of our investors and determined that such relationships didnot affect such directors’ independence under the standards of The NASDAQ Stock Market, or, where applicable, under SEC rules.102Table of ContentsItem 14.Principal Accountant Fees and ServicesPrincipal Accountant Fees and ServicesFees and ServicesErnst & Young LLP served as our independent registered public accounting firm for the years ended December 31, 2013 and 2012. Information providedbelow includes fees for professional services to Transcept for the years ended December 31, 2013 and 2012.Years Ended December 31, 2013 2012Audit Fees$348,662 $612,036Audit-Related Fees— —Tax Fees— —All Other Fees— —Total Fees$348,662 $612,036Audit Fees:2013 and 2012 audit fees include fees for professional services for the audit of the financial statements included in our 2013 and 2012 Annual Reports onForm 10-K, review of financial statements included in the 2013 and 2012 Quarterly Reports on Form 10-Q, fees for review of registration statements,including fees for professional services rendered in connection with the Transcept registration statements on Forms S-3 and S-8, issuance of consents and forservices that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements,except those not required by statute or regulation to be included in an audit.Audit-Related Fees:There were no audit-related fees incurred during 2013 and 2012.Tax Fees:There were no tax fees incurred during 2013 and 2012.All Other Fees:Transcept paid no other fees to Ernst & Young LLP during 2013 and 2012.Pre-Approval of Audit and Non-Audit ServicesAll auditing services and non-audit services provided to us by our independent registered public accounting firm are required to be pre-approved by theAudit Committee. Ernst & Young LLP did not provide any audit-related, tax and other services in 2013 and 2012. The pre-approval of non-audit services tobe provided by Ernst & Young LLP includes making a determination that the provision of the services is compatible with maintaining the independence ofErnst & Young LLP as an independent registered public accounting firm and would be approved in accordance with SEC rules for maintaining auditorindependence. None of the fees outlined above were approved using the “de minimis exception” under SEC rules.103PART IVItem 15.Exhibits and Financial Statement Schedules(a)(1) Financial StatementsSee Index to Financial Statements under Item 8.(a)(2) Financial Statement SchedulesFinancial statement schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is includedin the Financial Statements or notes thereto.(a)(3) ExhibitsThe exhibits listed in the Exhibit Index at the end of this Annual Report on Form 10-K are filed or incorporated by reference as part of this report.(b) ExhibitsSee Exhibits listed under Item 15(a)(3) above.(c) Financial Statement SchedulesFinancial statement schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is includedin the Financial Statements or notes thereto.104Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of Point Richmond, State of California, on the 14th day of March, 2014. Transcept Pharmaceuticals, Inc. By: /s/ GLENN A. OCLASSEN Glenn A. OclassenPresident and Chief Executive Officer105Table of ContentsPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Glenn A.Oclassen and Leone D. Patterson his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, inany and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, and other documentsin connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do andperform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes or substitute, may lawfully do or cause to be done by virtuehereof.IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his/her name.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant andin the capacities and on the dates indicated.Signature Title Date /s/ Glenn A. Oclassen President, Chief Executive Officer, and Chairman of theBoard of Directors March 14, 2014Glenn A. Oclassen (Principal Executive Officer) /s/ Leone D. Patterson Vice President, Finance and Chief Financial Officer March 14, 2014Leone D. Patterson (Principal Financial and Accounting Officer) /s/ Thomas J. Dietz Director March 14, 2014Thomas J. Dietz, Ph.D. /s/ Thomas D. Kiley Director March 14, 2014Thomas D. Kiley /s/ Matthew M. Loar Director March 14, 2014Matthew M. Loar /s/ Jake R. Nunn Director March 14, 2014Jake R. Nunn /s/ G. Kirk Raab Lead Independent Director March 14, 2014G. Kirk Raab /s/ Frederick J. Ruegsegger Director March 14, 2014Frederick J. Ruegsegger 106Table of ContentsExhibit IndexExhibit No. Description of Exhibit 3.1(1) Amended and Restated Certificate of Incorporation of Transcept Pharmaceuticals, Inc. 3.2(1) Bylaws of Transcept Pharmaceuticals, Inc., as amended. 3.3(17) Certificate of Designations of Series A Junior Participating Preferred Stock of Transcept Pharmaceuticals, Inc. 4.1(2) Specimen Common Stock certificate of Transcept Pharmaceuticals, Inc. 4.2(2) Form of Preferred Stock Purchase Warrant issued to certain TPI investors as of March 21, 2005. 4.3(2) Preferred Stock Purchase Warrant issued by TPI to Hercules Technology Growth Capital, Inc., dated as of April 13, 2006. 4.4(3) 2005 Amended and Restated Investor Rights Agreement, dated as of December 21, 2005, by and between Novacea and purchasers ofNovacea Series A, Series B and Series C Preferred Stock. 4.5(9) Amended and Restated Investor Rights Agreement, dated as of February 27, 2007, by and between TPI and purchasers of TPI Series A,Series B, Series C and Series D Preferred Stock. 4.6(9) Termination Agreement, dated as of January 26, 2009, by and between TPI and purchasers of TPI Series A, Series B, Series C and SeriesD Preferred Stock. 4.7(17) Tax Benefit Preservation Plan, dated as of September 13, 2013, between Transcept Pharmaceuticals, Inc. and American Stock Transfer &Trust Company, LLC and related documents. 10.1(3)+ Novacea 2001 Stock Option Plan and forms of agreements relating thereto. 10.2(10)+ 2006 Equity Incentive Plan, as amended and restated. 10.3(11)+ Form of Option Agreement under 2006 Incentive Award Plan. 10.4(2)+ TPI Amended and Restated 2002 Stock Option Plan and forms of agreements relating thereto. 10.5(7)+ Transcept Pharmaceuticals, Inc. 2009 Employee Stock Purchase Plan. 10.6(3) Loan and Security Agreement, by and between Transcept Pharmaceuticals, Inc. and Hercules Technology Growth Capital, Inc. dated as ofApril 13, 2006. 10.7(3) Secured Promissory Note issued to Hercules Technology Growth Capital, Inc., dated as of May 31, 2006. 10.8(2) Lease, by and between TPI and Point Richmond R&D Associates, L.P., dated as of February 22, 2006. 10.9(2) First Amendment to Lease, by and between TPI and Point Richmond R&D Associates, L.P., dated as of June 27, 2007. 10.10(4) Second Amendment to Lease, by and between Transcept Pharmaceuticals, Inc. and Point Richmond R&D Associates, L.P., dated as ofFebruary 20, 2009. 10.11(16) Third Amendment to Lease, by and between Transcept Pharmaceuticals, Inc. and Point Richmond R&D Associates, L.P., dated as ofMarch 6, 2013. 10.12 Fourth Amendment to Lease, by and between Transcept Pharmaceuticals, Inc. and Point Richmond R&D Associates, L.P., dated as ofFebruary 18, 2014. 10.13(4) Lease, by and between Transcept and Point Richmond R&D Associates II, LLC, dated as of February 20, 2009. 10.14(13)+ Offer Letter dated May 29, 2012, by and between Transcept Pharmaceuticals, Inc. and John Kollins. 107Table of ContentsExhibit No. Description of Exhibit 10.15(16)+ Fourth Amended and Restated Director Equity Compensation Policy. 10.16(14)+ Offer Letter dated May 22, 2012, by and between Transcept Pharmaceuticals, Inc. and Leone Patterson. 10.17(5)+ Form of Indemnification Agreement for officers and non-institutional investor affiliated directors. 10.18(5)+ Form of Indemnification Agreement for institutional investor affiliated directors. 10.19+ Amended and Restated Change of Control and Severance Benefits Agreement by and between Transcept Pharmaceuticals, Inc. and Glenn A.Oclassen dated November 11, 2013. 10.20(6)+ Amended and Restated Change of Control and Severance Benefits Agreement by and between Transcept Pharmaceuticals, Inc. andNikhilesh Singh, Ph.D. dated July 15, 2013. 10.21(6)+ Amended and Restated Change of Control and Severance Benefits Agreement by and between Transcept Pharmaceuticals, Inc. and ThomasP. Soloway dated July 15, 2013. 10.22(6)+ Amended and Restated Change of Control and Severance Benefits Agreement, by and between Transcept Pharmaceuticals, Inc. and JohnKollins dated July 15, 2013. 10.23+ Amended and Restated Change of Control and Severance Benefits Agreement, by and between Transcept Pharmaceuticals, Inc. and LeonePatterson dated November 11, 2013. 10.24(8)† United States License and Collaboration Agreement by and between Transcept Pharmaceuticals, Inc. and Purdue Pharmaceutical ProductsL.P. dated July 31, 2009. 10.25(15)† First Amendment to the United States License and Collaboration Agreement by and between Transcept Pharmaceuticals, Inc. and PurduePharmaceutical Products L.P. dated November 1, 2011. 10.26(8)† Letter agreement by and between Transcept Pharmaceuticals, Inc. and Purdue Pharmaceutical Products L.P. dated July 31, 2009. 10.27(8)† Letter agreement by and between Transcept Pharmaceuticals, Inc. and LP Clover Limited dated July 31, 2009. 10.28(6)† License Agreement by and between Transcept Pharmaceuticals, Inc. and Shin Nippon Medical Laboratories, Ltd. effective September 24,2013. 21.1(12) Subsidiaries of the Registrant. 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002. 101** The following materials from Registrant’s Quarterly Report on Form 10-K for the year ended December 31, 2013, formatted in ExtensibleBusiness Reporting Language (XBRL) includes: (i) Consolidated Balance Sheets at December 31, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations and Comprehensive Loss for each of the Three Years Ended December 31, 2013, (iii) ConsolidatedStatements of Cash Flows for each of the Three Years Ended December 31, 2013, and (iv) Notes to Consolidated Financial Statements. _____________________________(1)Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2009.(2)Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2009.(3)Incorporated by reference from the Registration Statement on Form S-1, Securities and Exchange Commission file number 333-131741, filed onFebruary 10, 2006.(4)Incorporated by reference from the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2009.(5)Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 9, 2009.108Table of Contents(6)Incorporated by reference from the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 2013.(7)Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2009.(8)Incorporated by reference from the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 16, 2009.(9)Incorporated by reference from the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 14, 2010.(10)Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2010.(11)Incorporated by reference from the Registration Statement on Form S-8, Securities and Exchange Commission file number 333-172041, filed onFebruary 3, 2011.(12)Incorporated by reference from the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2010.(13)Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 4, 2012.(14)Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 26, 2012.(15)Incorporated by reference from the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.(16)Incorporated by reference from the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2013.(17)Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2013.†Confidential treatment has been granted as to certain portions, which portions have been omitted and filed separately with the Securities andExchange Commission.+Indicates management contract or compensatory plan, contract or arrangement.*The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10-K is not deemed filed with the Securities and ExchangeCommission and is not to be incorporated by reference into any filing of Transcept Pharmaceuticals, Inc. under the Securities Act of 1933, asamended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any generalincorporation language contained in such filing.**XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the SecuritiesAct of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is notsubject to liability under these sections.109FOURTH AMENDMENT TO LEASETHIS FOURTH AMENDMENT TO LEASE (the “Fourth Amendment”) is made and entered into as of February 18,2014, by and between POINT RICHMOND R&D ASSOCIATES, a California limited partnership (“Landlord”), and TRANSCEPTPHARMACEUTICALS, INC., a Delaware corporation (“Tenant”) with reference to the following facts:A. Landlord and Tenant are parties to that certain lease dated as of February 22, 2006, (the “Original Lease”), assupplemented by that certain Lease Addendum dated as of December 18, 2006, as amended by that certain First Amendment to Leasedated as of June 27, 2007 (the “First Amendment”), that certain Second Amendment to Lease dated as of February 20, 2009 (the“Second Amendment”), and that certain Third Amendment to Lease dated as of March 6, 2013 (the “Third Amendment”) (theOriginal Lease as amended by the First Amendment, the Second Amendment, and the Third Amendment, the “Existing Lease:” andthe Exiting Lease as modified by this Fourth Amendment, the “Lease”). Pursuant to the Existing Lease, Landlord has leased to TenantSuite 110 which is acknowledged to contain 11,836 rentable square feet (the “Premises”) which is located on the ground floor of thebuilding with an address of 1003 West Cutting Boulevard, Richmond, California (the “Building”).B. Landlord and Tenant now desire to modify and amend the Existing Lease to, among other things, extend the Term, as moreparticularly set forth below.NOW, THEREFORE, in consideration of the above recitals which by this reference are incorporated herein, the mutualcovenants and conditions contained herein and other valuable consideration, the receipt and sufficiency of which are herebyacknowledged, Landlord and Tenant agree as follows:1.Scope of Fourth Amendment and Defined Terms. Except as expressly provided in this Fourth Amendment, the Leaseshall remain in full force and effect. Capitalized terms used in this Fourth Amendment not otherwise defined herein shall have therespective meanings ascribed to them in the Lease. References in the Existing Lease to the “Lease” shall be references to the ExistingLease as modified by this Fourth Amendment.2. Lease Term. The parties acknowledge that the Term of the Existing Lease is scheduled to expire on May 31, 2014.Notwithstanding the foregoing, Landlord and Tenant agree that the Term shall continue thereafter on a month-to-month basis,terminable by either party on no less than sixty (60) days’ notice; provided, however, that the soonest any such notice of terminationmay be given is July 2, 2014 (which, if delivered, would cause the Term to expire as of August 31, 2014). Tenant acknowledges that ithas no further right to extend the Term or renew the Lease.3. Base Rent. Effective July 1, 2014 and continuing through the end of the Term, the monthly Base Rent payable by Tenantfor the Premises shall be the amount of $25,601.27.4. Condition of Premises. Tenant acknowledges that it has been, and continues to be, in possession of the Premises, is familiarwith the condition of the Premises and continues to occupy the Premises in its “as is, where is” condition, with all faults, without anyrepresentation, warranty1or improvement by Landlord of any kind whatsoever. Landlord represents that the Premises has not undergone inspection by a CertifiedAccess Specialist (CASp). The foregoing verification is included in this Fourth Amendment solely for the purpose of complying withCalifornia Civil Code Section 1938 and shall not in any manner affect Landlord’s and Tenant’s respective responsibilities for complianceunder the Lease.5. Brokers. Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this FourthAmendment other than Ryan Hattersley of Cushman & Wakefield. Tenant agrees to indemnify and hold Landlord harmless from anyand all claims of any other broker claiming to have represented Tenant in connection with this Fourth Amendment. Landlord herebyrepresents to Tenant that Landlord has dealt with no broker in connection with this Fourth Amendment. Landlord agrees to indemnifyand hold Tenant, its trustees, members, principals, beneficiaries, partners, officers, directors, employees and agents and the respectiveprincipals and members of any such agents harmless from any and all claims of any brokers, claiming to have represented Landlord inconnection with this Fourth Amendment.6. Entire Agreement; No Amendment. This Fourth Amendment, together with the Existing Lease, constitutes the entireagreement and understanding between the parties with respect to the subject matter of this Fourth Amendment, and shall supersede allprior written and oral agreements concerning the subject matter. This Fourth Amendment may not be amended, modified nor otherwisechanged in any respect, whatsoever, except by a writing duly executed by the authorized representatives of the parties. Except asamended by this Fourth Amendment, the Lease remains unchanged, and, as amended by this Fourth Amendment, the Lease is in fullforce and effect.7. Severability. If any provision of this Fourth Amendment or the application thereof to any person or circumstances shall beinvalid or unenforceable to any extent, the remainder of this Fourth Amendment shall not be affected and shall be enforced to thefurthest extent permitted by law.8. Counterparts; PDF. This Fourth Amendment may be executed in multiple counterparts each of which is deemed an originalbut together constitute one and the same instrument. This Fourth Amendment may be executed in so-called “pdf” format and each partyhas the right to rely upon a pdf counterpart of this Fourth Amendment signed by the other party to the same extent as if such party hadreceived an original counterpart.IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Fourth Amendment effective as of the day and yearfirst above written.2TENANT:LANDLORD:TRANSCEPT PHARMACEUTICALS, INC., a Delaware corporationPOINT RICHMOND R&D ASSOCIATES, a California limited partnershipBy: /s/ Leone Patterson Leone PattersonChief Financial Officer and VPBy: /s/ Richard K. Robbins Richard K. Robbins Managing General Partner3AMENDED AND RESTATED CHANGE OF CONTROL AND SEVERANCE BENEFITS AGREEMENTThis AMENDED AND RESTATED CHANGE OF CONTROL AND SEVERANCE BENEFITSAGREEMENT (the “Agreement”) is entered into this eleventh day of November 2013 (the “Effective Date”), betweenTRANSCEPT PHARMACEUTICALS, INC. and restates in its entirety that certain Change of Control and Severance Benefits Agreement by and between the Executive and theCompany dated as of July 15, 2013 as amended (the “Prior Agreement”). This Agreement is intended to provide Executive with thecompensation and benefits described herein upon the occurrence of specific events.WHEREAS, Executive is currently employed by the Company; andWHEREAS, the Company believes it is imperative to provide Executive with certain severance benefits in the event thatExecutive’s employment is terminated by the Company without Cause (as defined herein) in circumstances unrelated to a Change ofControl (as defined herein);WHEREAS, the Company believes it is imperative to provide Executive with certain change of control severance benefits,including certain equity acceleration, in the event that Executive’s employment is terminated by the Company without Cause (asdefined herein) or by Executive with Good Reason (as defined herein) in connection with a Change of Control (as defined herein); andWHEREAS, the Company believes it is in the best interests of the Company to amend and restate the Prior Agreement in itsentirety, such that the Prior Agreement shall be of no further force or effect as of the Effective Date.NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein, and other good and valuableconsideration, the parties hereto hereby agree as follows:1.TERM OF AGREEMENT. The term of this Agreement shall commence on the Effective Date and shall continuethrough April 30, 2017 (the “Expiration Date”), and if not amended or renewed by the Compensation Committee of the Company’sBoard of Directors (the “Compensation Committee”) prior to the Expiration Date, this Agreement shall terminate automatically onsuch Expiration Date. Notwithstanding the foregoing, the Company agrees that during the one-year period before the Expiration Date,the Compensation Committee shall undertake to review this Agreement and the severance benefits and change of control severancebenefits provided herein in good faith, with the assistance of the Company’s outside advisors and compensation consultants, in order todetermine, based upon the then current market conditions or any other factors deemed relevant by the Compensation Committee, theappropriateness of continuing this Agreement after the Expiration Date, or whether it would be more appropriate for the Company toamend or terminate this Agreement as of the Expiration Date.2. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS.(a) At-Will Employment. Executive’s employment is at-will, which means that the Company may terminate Executive’semployment at any time, with or without advance notice, and with or without Cause (as defined herein). Similarly, Executive mayresign Executive’s employmentat any time, with or without advance notice, and with or without reason. Executive shall not receive any compensation of any kind,including, without limitation, severance benefits or change of control severance benefits, following Executive’s last day of employmentwith the Company (the “Termination Date”), except as expressly provided for by this Agreement, applicable law, and/or any plandocuments governing the compensatory equity awards that have been or may be granted to Executive from time to time in the solediscretion of the Company.(b) Termination Without Cause Unrelated to a Change of Control. If: (i) Executive’s employment is terminatedwithout Cause (and other than as a result of Executive’s death or disability) at any time (except for the time period commencing on thedate of the consummation of a Change of Control and ending twelve (12) months after a Change of Control), (ii) Executive signs andallows to become effective a general release of all known and unknown claims in the form provided by the Company, which form shallbe substantially in the form attached hereto as Exhibit A) (the “Release”) within sixty (60) days after the Termination Date, and (iii)Executive fully complies with Executive’s continuing fiduciary, statutory and material contractual obligations to the Company (with a30-day opportunity to cure after notice of any such non-compliance if Executive has not, unless such non-compliance is not capable ofbeing cured); then the Company shall provide Executive with the following severance benefits (the “Severance Benefits”):(i) The Company shall make a single lump sum severance payment to Executive in an amount equal toeighteen (18) months of Executive’s Base Annual Salary, less required tax withholdings and deductions (the “SeverancePayment”). The Severance Payment will be paid within sixty (60) days after the Termination Date, but in no event later than March 15of the year following the year of the Termination Date.(ii) Provided that Executive elects continued coverage under the Consolidated Omnibus BudgetReconciliation Act of 1985, as amended (together with any state or local laws of similar effect, “COBRA”) within the time periodprovided for under COBRA, the Company will pay directly or, at its election, reimburse Executive the amount of the premiumsnecessary to continue Executive’s group health (including dental and vision) insurance coverage in effect as of the Termination Date(including coverage for Executive’s eligible dependents) for a maximum period of eighteen (18) months following the TerminationDate; provided, however, that no premium payments will be made by the Company pursuant to this paragraph following the effectivedate of Executive’s coverage by a health (including dental and vision) insurance plan of a subsequent employer or such other date onwhich Executive (and Executive’s dependents, as applicable) cease to be eligible for COBRA coverage. Executive agrees thatExecutive shall notify the Company in writing as soon as practical, but no later than 15 days after Executive receives coverage under ahealth insurance plan of a subsequent employer.(c) Termination Without Cause or Resignation for Good Reason Within Twelve Months After a Change ofControl. If: (i) Executive’s employment is terminated without Cause (and other than as a result of Executive’s death or disability), or ifExecutive resigns for Good Reason, during the time period commencing on the date of the consummation of a Change of Control andending twelve (12) months after a Change of Control, (ii) Executive signs and allows to become effective the Release within sixty (60)days after the Termination Date, and (iii) Executive fully complies with Executive’s continuing fiduciary, statutory and materialcontractual obligations to the Company (with a 30-day opportunity to cure after notice of any such non-compliance if he or she has not,unless such non-compliance is not reasonably capable of being cured); then the Companyshall provide Executive with the following change of control severance benefits (the “Change of Control Benefits”):(i) The Company shall make a single lump sum severance payment to Executive in an amount equal totwelve (12) months of Executive’s Base Annual Salary, less required tax withholdings and deductions (the “Change of ControlPayment”). The Change of Control Payment will be paid within sixty (60) days after the Termination Date, but in no event later thanMarch 15 of the year following the year of the Termination Date.(ii) Provided that Executive elects continued coverage under COBRA within the time period provided forunder COBRA, the Company will pay directly or, at its election, reimburse Executive the amount of the premiums necessary tocontinue Executive’s group health (including dental and vision) insurance coverage in effect as of the termination date of Executive’semployment (including coverage for Executive’s eligible dependents) for a maximum period of twelve (12) months following theTermination Date; provided, however, that no premium payments will be made by the Company pursuant to this paragraph followingthe effective date of Executive’s coverage by a health (including dental and vision) insurance plan of a subsequent employer or suchother date on which Executive (and Executive’s dependents, as applicable) cease to be eligible for COBRA coverage. Executive agreesthat Executive shall notify the Company in writing as soon as practical, but no later than 15 days after Executive receives coverageunder a health insurance plan of a subsequent employer.(iii) After taking into account any additional acceleration of vesting Executive may be entitled to receiveunder any other plan or agreement, the Company shall cause all outstanding equity awards then held by Executive (including, withoutlimitation, stock options, stock appreciation rights, restricted stock or similar awards) to become fully vested and, if applicable,exercisable with respect to all the shares subject thereto effective immediately prior to the Termination Date. After giving effect to anyacceleration of vesting of Executive’s outstanding equity awards, all outstanding options to purchase Company common stock then heldby Executive that are (x) vested and exercisable as of the Termination Date and (y) designated by the Board or the Board’s compensationcommittee on the date of grant of such option or anytime thereafter as being eligible for extended exercisability (such option, an“Extension Eligible Option”) shall remain exercisable until the earlier of (A) the third (3rd) anniversary of Executive’sTermination Date or (B) the original expiration date of the applicable Extension Eligible Option. If Executive has not exercised theExtension Eligible Options in accordance with the procedures set forth in Executive’s option agreements by such date, such ExtensionEligible Options shall terminate and be of no further effect. In all other respects, Executive’s equity awards shall continue to begoverned by the terms of the applicable award agreements and equity incentive plan documents and any applicable agreements betweenthe Company and Executive.(d) Deemed Resignation; No Requirement to Mitigate; Survival. Upon termination of Executive’s employment for anyreason, Executive shall be deemed to have resigned from all offices and directorships, if any, then held with the Company or any of itsaffiliates, and, at the Company’s request, Executive shall execute such documents as are necessary or desirable to effectuate suchresignations. Executive shall not be required to mitigate the amount of any payment provided for under this Agreement by seeking otheremployment or in any other manner. Notwithstanding anything to the contrary in this Agreement, the termination of Executive’semployment shall not impair the rights or obligations of any party.3. DEFINITIONS.(a) Definition of Base Annual Salary. For purposes of this Agreement, “Base Annual Salary” shall mean Executive’sannualized base salary in effect immediately prior to the Termination Date. Base Annual Salary does not include variable forms ofcompensation such as but not limited to bonuses, incentive compensation, commissions, benefits, equity, expenses, or expenseallowances.(b) Definition of Cause. For the purposes of this Agreement, “Cause” shall mean any one or more of the following:(i) Executive is convicted of (or pleads guilty or no contest to) any felony or any crime involving moralturpitude;(ii) Executive participates in any material fraud, material act of dishonesty, or other act of intentional andmaterial misconduct against the Company;(iii) Executive intentionally damages or willfully misappropriates any property of the Company that in anycase has a material adverse effect on the Company;(iv) Executive materially breaches any fiduciary, statutory, or contractual duty Executive owes to theCompany (including, but not limited to, any breach of the Company’s Confidentiality Agreement);(v) Executive regularly and materially fails to diligently and successfully perform Executive’s assignedduties;(vi) Executive fails to cooperate with the Company in any investigation or proceeding by any governmental orsimilar authority or as otherwise authorized by the Board of Directors or a committee thereof; or(vii) Executive is found liable in an SEC action and/or is disqualified by the SEC from serving in an executiverole.The determination that a termination is for Cause shall be made by the Company in its sole discretion; provided, however, that in theevent that any of the foregoing events occurs, the Company shall provide written notice to Executive making reference to this Sectiondescribing the nature of such event and Executive shall thereafter have thirty (30) days to cure such event if such event is capable ofbeing cured.(c) Definition of Good Reason. For purposes of this Agreement, “Good Reason” means that Executive resigns Executive’semployment with the Company (or any successor thereto) if and only if:(i) One of the following actions has been taken without Executive’s express written consent:(1) There is a material reduction in Executive’s Base Annual Salary from the Base Annual Salary ineffect immediately preceding the Change of Control;(2) There is a material change in Executive’s position or responsibilities (including the person orpersons to whom Executive has reporting responsibilities) that represents an adverse change from Executive’s position or responsibilitiesfrom those in effect at any time within ninety (90) days preceding the date of the Change of Control or at any time thereafter; provided,however, that a Change of Control which results in the subsequent conversion of the Company to a division or unit of the acquiringcorporation will not by itself result in a material reduction in Executive’s level of responsibility;(3) Executive is required to relocate Executive’s principal place of employment to a facility orlocation that would increase Executive’s one way commute distance by more than thirty-five (35) miles;(4) The Company (or any successor thereto) materially breaches its obligations under this Agreementor any other then-effective employment agreement with Executive; or(5) Any acquirer, successor or assignee of the Company fails to assume and perform, in any materialrespect, the obligations of the Company hereunder; and(ii) Executive provides written notice to the Company’s Board within the thirty (30) day period immediatelyfollowing such action; and(iii) Such action is not remedied by the Company within thirty (30) days following the Company’s receipt ofsuch written notice; and(iv) Executive’s resignation is effective not later than sixty (60) days after the expiration of such thirty (30)day cure period.The termination of Executive’s employment as a result of Executive’s death or disability will not be deemed to be a Good Reason.(d) Definition of Change of Control. For purposes of this Agreement, “Change of Control” shall mean:(i) A transaction or series of transactions (other than an offering of Stock to the general public through aregistration statement filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (assuch terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”)) (other than theCompany, any of its subsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a “person” that, priorto such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly orindirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Companypossessing more than 50% of the total combined voting power of the Company’s securities outstanding immediately after suchacquisition; or(ii) During any period of two consecutive years, individuals who, at the beginning of such period, constitutethe Board of Directors of the Company (the “Board”) together with any new director(s) (other than a director designated by a personwho shall have entered into an agreement with the Company to effect a transaction described in Section 3(c)(i) or Section 3(c)(ii)) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirdsof the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination forelection was previously so approved, cease for any reason to constitute a majority thereof; or(iii) The consummation by the Company (whether directly involving the Company or indirectly involvingthe Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale orother disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) theacquisition of assets or stock of another entity, in each case other than a transaction:(1) Which results in the Company’s voting securities outstanding immediately before the transactioncontinuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that,as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of theCompany’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “Successor Entity”))directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securitiesimmediately after the transaction, and(2) After which no person or group beneficially owns voting securities representing 50% or more ofthe combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of thisSection 3(c)(iii)(2) as beneficially owning 50% or more of combined voting power of the Successor Entity solely as a result of thevoting power held in the Company prior to the consummation of the transaction; or(iv) The Company’s stockholders approve a liquidation or dissolution of the Company.The Company shall have full and final authority, which shall be exercised in its discretion, to determine conclusivelywhether a Change of Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of suchChange of Control and any incidental matters relating thereto.4. COMPLIANCE WITH SECTION 409A.(a) It is intended that each installment of the payments and benefits provided for in this Agreement is a separate “payment” forpurposes of Treasury Regulation Section 1.409A-2(b)(2)(i). It is also intended that payments of the amounts set forth in this Agreementsatisfy, to the greatest extent possible, the exemptions from the application of Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”) (Section 409A of the Code, together, with any state law of similar effect, “Section 409A”) provided underTreasury Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9).(b) Notwithstanding anything in this Agreement to the contrary, any compensation or benefits payable under this Agreementthat constitutes “nonqualified deferred compensation” (“Deferred Compensation”) within the meaning of Section 409A, and which isdesignated under this Agreement as payable upon Executive’s termination of employment shall be payable only upon Executive’s“separation from service” with the Company within the meaning ofSection 409A (a “separation from service”) and, except as provided under Section 4(c) of this Agreement, any such compensation orbenefits shall not be paid or commence until the sixtieth (60th) day following Executive’s separation from service.(c) Notwithstanding the foregoing, if the Company (or, if applicable, the successor entity thereto) determines that theSeverance Payment, the Change of Control Payment and/or other benefits provided under this Agreement (the “Agreement Payments”) constitute “deferred compensation” under Section 409A and Executive is, on the Termination Date, a “specified employee” of theCompany or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code, then, solely to the extentnecessary to avoid the incurrence of the adverse personal tax consequences under Section 409A, the timing of the Agreement Paymentsshall be delayed as follows: on the earlier to occur of (i) the date that is six months and one day after Executive’s “separation fromservice” (as defined above) or (ii) the date of Executive’s death (such earlier date, the “Delayed Initial Payment Date”), the Company(or the successor entity thereto, as applicable) shall (A) pay to Executive a lump sum amount equal to the sum of the AgreementPayments that Executive would otherwise have received through the Delayed Initial Payment Date if the commencement of thepayment of the Agreement Payments had not been so delayed pursuant to this Section 4(b) and (B) commence paying the balance of theAgreement Payments in accordance with the applicable payment schedules set forth in this Agreement.5. To the extent that any reimbursements under this Agreement are subject to Section 409A, any such reimbursements payable toExecutive shall be paid to Executive no later than December 31 of the year following the year in which the expense was incurred;provided, that Executive submits his or her reimbursement request promptly following the date the expense is incurred, the amount ofexpenses reimbursed in one year shall not affect the amount eligible for reimbursement in any subsequent year, other than medicalexpenses referred to in Section 105(b) of the Code, and Executive’s right to reimbursement under this Agreement will not be subject toliquidation or exchange for another benefit. INTERNAL REVENUE CODE SECTION 280G.(a) If the payments and benefits (including but not limited to payments and benefits pursuant to this Agreement) thatExecutive would receive in connection with a change of control of the Company, whether from the Company or otherwise (a“Transaction Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but forthis sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to bedetermined, before any amounts of the Transaction Payment are paid to Executive, which of the following two alternative forms ofpayment would result in Executive’s receipt, on an after-tax basis, of the greater amount of the Transaction Payment notwithstandingthat all or some portion of the Transaction Payment may be subject to the Excise Tax: (1) payment in full of the entire amount of theTransaction Payment (a “Full Payment”), or (2) payment of only a part of the Transaction Payment so that Executive receives thelargest payment possible without the imposition of the Excise Tax (a “Reduced Payment”).(b) For purposes of determining whether to make a Full Payment or a Reduced Payment, the Company shall cause to be takeninto account all applicable federal, state and local income and employment taxes and the Excise Tax (all computed at the highestapplicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such stateand local taxes). If a Reduced Payment is made, (i) Executive shall have no rights to any additional payments and/or benefits constitutingthe Transaction Payment, and (ii) reduction inpayments and/or benefits shall occur in the following order: (1) reduction of cash payments; (2) cancellation of accelerated vesting ofequity awards other than stock options; (3) cancellation of accelerated vesting of stock options; and (4) reduction of other benefits (ifany) paid to Executive. In the event that acceleration of compensation from Executive’s equity awards is to be reduced, suchacceleration of vesting shall be canceled in the reverse order of the date of grant.(c) The independent registered public accounting firm engaged by the Company for general audit purposes as of the day priorto the Termination Date shall make all determinations required to be made under this Section 5. If the independent registered publicaccounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Changeof Control, the Company shall appoint a nationally recognized independent registered public accounting firm to make the determinationsrequired hereunder. The Company shall bear all expenses with respect to the determinations by such independent registered publicaccounting firm required to be made hereunder.(d) The independent registered public accounting firm engaged to make the determinations hereunder shall provide itscalculations, together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after thedate on which Executive’s right to a Transaction Payment is triggered or such other time as reasonably requested by the Company orExecutive. If the independent registered public accounting firm determines that no Excise Tax is payable with respect to the TransactionPayment, either before or after the application of the Reduced Amount, it shall furnish the Company and Executive with detailedsupporting calculations of its determinations that no Excise Tax will be imposed with respect to such Transaction Payment. Any goodfaith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Executive.6. DISPUTE RESOLUTION. Any dispute, claim or controversy of whatever nature arising out of or relating to this Agreement,including, without limitation, any action or claim based on tort, contract or statute, or concerning the interpretation, performance, orexecution of this Agreement (including any determination of Cause or Good Reason hereunder) shall be resolved by confidential, finaland binding arbitration administered by Judicial Arbitration and Mediation Services, Inc. (“JAMS”), in San Francisco, California, beforea single arbitrator, in accordance with JAMS’ then applicable arbitration rules. Executive acknowledges that by agreeing to thisarbitration procedure, Executive and the Company waive the right to resolve any such dispute, claim or demand througha trial by jury or judge or by administrative proceeding. Executive will have the right to be represented by legal counsel at anyarbitration proceeding. The arbitrator shall: (a) have the authority to compel adequate discovery for the resolution of the dispute and toaward such relief as would otherwise be available under applicable law in a court proceeding; and (b) issue a written statement signed bythe arbitrator regarding the disposition of each claim and the relief, if any, awarded as to each claim, the reasons for the award, and thearbitrator’s essential findings and conclusions on which the award is based. Company shall bear all JAMS fees for the arbitration.Nothing in this Agreement shall prevent any of the parties from obtaining injunctive relief in court if necessary to prevent irreparableharm pending the conclusion of any arbitration. Any awards or orders in such arbitrations may be entered and enforced as judgments inany court of competent jurisdiction.7. GENERAL PROVISIONS.(a) This Agreement constitutes the complete, final and exclusive embodiment of the entire agreement between Company andExecutive with regard to the payments and benefits described herein, and it supersedes and replaces any and all other agreements(whether written or unwritten) Executive may have with the Company concerning severance benefits or change of control benefits(including but not limited to the Prior Agreement, any letter agreements issued regarding the Prior Agreement, and the provisions ofExecutive’s employment agreement or offer letter concerning severance benefits or change of control benefits); provided, however,that nothing herein shall affect any plan document or agreements governing any compensatory equity awards that have been or may begranted to Executive, which shall remain in full force and effect. This Agreement is entered into without reliance on any promise orrepresentation, written or oral, other than those expressly contained herein, and it supersedes any other such promises orrepresentations. This Agreement may not be modified or amended except in a written agreement approved by the CompensationCommittee and signed by Executive and a duly authorized officer of the Company.(b) Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective underapplicable law. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of anyother provision of this Agreement. Any invalid or unenforceable provision shall be modified so as to be rendered valid and enforceable ina manner consistent with the intent of the parties insofar as possible.(c) Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failureto assert any right Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or anyother provision or right of this Agreement.(d) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of whichtogether will constitute one and the same instrument. Facsimile signatures shall be deemed as effective as originals.(e) This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and theirrespective successors, assigns, heirs, executives and administrators, except that Executive may not assign any of Executive’s dutieshereunder and Executive may not assign any of Executive’s rights hereunder without the written consent of the Company. ThisAgreement shall be interpreted and enforced in accordance with the laws of the State of California.(f) Any ambiguity in this Agreement shall not be construed against either party as the drafter.[Signature Page Follows]IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written below./s/ Glenn A. Oclassen GLENN A. OCLASSENDate:11/22/13 TRANSCEPT PHARMACEUTICALS, INC./s/ Leone Patterson Name: Leone Patterson Title: Vice President and Chief Financial OfficerDate:11/21/13 EXHIBIT AFORM OF RELEASE AGREEMENTAs provided in the AMENDED AND RESTATED CHANGE OF CONTROL AND SEVERANCEBENEFITS AGREEMENT dated November 11, 2013 (the “Agreement”) between me and Transcept Pharmaceuticals, Inc. (the“Company”), I will be eligible for certain Severance Benefits or Change of Control Benefits if I enter into this Release Agreement(the “Release”). I am not relying on any promise or representation by the Company that is not expressly stated in the Agreement.Certain capitalized terms used in this Release are defined in the Agreement.I hereby acknowledge and reaffirm my obligations under my Confidentiality Agreement with the Company.In consideration of the Severance Benefits or Change of Control Benefits, and other consideration, provided to meunder the Agreement that I am not otherwise entitled to receive, and except as otherwise set forth in this Release, I hereby generallyand completely release the Company and its current and former directors, officers, employees, stockholders, shareholders, partners,agents, attorneys, predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns (collectively, the “ReleasedParties”) from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related toevents, acts, conduct, or omissions occurring prior to my signing this Release (collectively, the “Released Claims”). The ReleasedClaims include, but are not limited to: (1) all claims arising out of or in any way related to my employment with the Company or itsaffiliates, or the termination of that employment; (2) all claims related to my compensation or benefits, including salary, bonuses,commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownershipinterests in the Company or its affiliates; (3) all claims for breach of contract, wrongful termination, and breach of the implied covenantof good faith and fair dealing; (4) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation ofpublic policy; and (5) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of1990, the federal Age Discrimination in Employment Act of 1967 (as amended) (“ADEA”), the federal Employee Retirement IncomeSecurity Act of 1974 (as amended), the California Fair Employment and Housing Act (as amended), and the California Labor Code.Notwithstanding the foregoing, the following are not included in the Released Claims (the “Excluded Claims”):(1) any rights or claims for indemnification I may have pursuant to any written indemnification agreement with the Company to which Iam a party, the charter, bylaws, or operating agreements of the Company, or under applicable law; or (2) any rights which are notwaivable as a matter of law. In addition, nothing in this Release prevents me from filing, cooperating with, or participating in anyproceeding before the Equal Employment Opportunity Commission, the Department of Labor, the California Department of FairEmployment and Housing, or any other government agency, except that I hereby waive my right to any monetary benefits inconnection with any such claim, charge or proceeding. I hereby represent and warrant that, other than the Excluded Claims, I am notaware of any claims I have or might have against any of the Released Parties that are not included in the Released Claims.I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I alsoacknowledge that the consideration given for the Released Claims is in addition to anything of value to which I was already entitled. Ifurther acknowledge that I have been advised by this writing, as required by the ADEA, that: (1) the Released Claims do not apply toany rights or claims that arise after the date I sign this Release; (2) I should consult with an attorney prior to signing this Release(although I may choose voluntarily not to do so); (3) I have twenty-one (21) days to consider this Release (although I may choose tovoluntarily sign it sooner) [for those Executive terminated as part of a group termination, substitute the following language –I have forty-five (45) days to consider this Release (although I may choose to voluntarily sign it sooner)]; (4) I have seven(7) days following the date I sign this Release to revoke the Release by providing written notice to the Company; and (5) the Releasewill not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I signthis Release.[For those Executives terminated as part of a group termination, add the following language —I havereceived with this Release all of the information required by the ADEA, including without limitation a detailed list of the jobtitles and ages of all employees who were terminated in this group termination and the ages of all employees of theCompany in the same job classification or organizational unit who were not terminated, along with information on theeligibility factors used to select employees for the group termination and any time limits applicable to this grouptermination program].I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “Ageneral release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at thetime of executing the release, which if known by him or her must have materially affected his or her settlement with thedebtor.” I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similareffect with respect to my release of any claims I may have against the Company.I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leaveand leave benefits and protections for which I am eligible, and I have not suffered any on-the-job injury for which I have not alreadyfiled a workers’ compensation claim.I acknowledge that to become effective, I must: (1) sign and return this Release to the Company withintwenty-one (21) days for those Executives terminated as part of a group termination, substitute the following – forty-five(45) days after I am requested to sign it by the Company or its successor (as applicable); and (2) I must not revoke itthereafter.GLENN A. OCLASSEN Date: AMENDED AND RESTATED CHANGE OF CONTROL AND SEVERANCE BENEFITS AGREEMENTThis AMENDED AND RESTATED CHANGE OF CONTROL AND SEVERANCE BENEFITSAGREEMENT (the “Agreement”) is entered into this eleventh day of November 2013 (the “Effective Date”), betweenTRANSCEPT PHARMACEUTICALS, INC. (the “Company”) and Leone Patterson (“Executive”). This Agreement amendsand restates in its entirety that certain Change of Control and Severance Benefits Agreement by and between the Executive and theCompany dated as of July 15, 2013, as amended (the “Prior Agreement”). This Agreement is intended to provide Executive with thecompensation and benefits described herein upon the occurrence of specific events.WHEREAS, Executive is currently employed by the Company pursuant to the terms of Executive’s offer letter with theCompany, dated May 22, 2012 (the “Offer Letter”); andWHEREAS, the Company believes it is imperative to provide Executive with certain severance benefits in the event thatExecutive’s employment is terminated by the Company without Cause (as defined herein) in circumstances unrelated to a Change ofControl (as defined herein);WHEREAS, the Company believes it is imperative to provide Executive with certain change of control severance benefits,including certain equity acceleration, in the event that Executive’s employment is terminated by the Company without Cause (asdefined herein) or by Executive with Good Reason (as defined herein) in connection with a Change of Control (as defined herein); andWHEREAS, the Company believes it is in the best interests of the Company to amend and restate the Prior Agreement in itsentirety, such that the Prior Agreement shall be of no further force or effect as of the Effective Date.NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein, and other good and valuableconsideration, the parties hereto hereby agree as follows:1.TERM OF AGREEMENT. The term of this Agreement shall commence on the Effective Date and shall continuethrough May 22, 2017 (the “Expiration Date”), and if not amended or renewed by the Compensation Committee of the Company’sBoard of Directors (the “Compensation Committee”) prior to the Expiration Date, this Agreement shall terminate automatically onsuch Expiration Date. Notwithstanding the foregoing, the Company agrees that during the one-year period before the Expiration Date,the Compensation Committee shall undertake to review this Agreement and the severance benefits and change of control severancebenefits provided herein in good faith, with the assistance of the Company’s outside advisors and compensation consultants, in order todetermine, based upon the then current market conditions or any other factors deemed relevant by the Compensation Committee, theappropriateness of continuing this Agreement after the Expiration Date, or whether it would be more appropriate for the Company toamend or terminate this Agreement as of the Expiration Date.2. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS.(a) At-Will Employment. Executive’s employment is at-will, which means that the Company may terminate Executive’semployment at any time, with or without advance notice, and with or without Cause (as defined herein). Similarly, Executive may resign Executive’s employment at any time, with or withoutadvance notice, and with or without reason. Executive shall not receive any compensation of any kind, including, without limitation,severance benefits or change of control severance benefits, following Executive’s last day of employment with the Company (the“Termination Date”), except as expressly provided for by this Agreement, applicable law, and/or any plan documents governing thecompensatory equity awards that have been or may be granted to Executive from time to time in the sole discretion of the Company.(b) Termination Without Cause Unrelated to a Change of Control. If: (i) Executive’s employment is terminatedwithout Cause (and other than as a result of Executive’s death or disability) at any time (except for the time period commencing on thedate of the consummation of a Change of Control and ending twelve (12) months after a Change of Control), (ii) Executive signs andallows to become effective a general release of all known and unknown claims in the form provided by the Company, which form shallbe substantially in the form attached hereto as Exhibit A) (the “Release”) within sixty (60) days after the Termination Date, and (iii)Executive fully complies with Executive’s continuing fiduciary, statutory and material contractual obligations to the Company (with a30-day opportunity to cure after notice of any such non-compliance if Executive has not, unless such non-compliance is not capable ofbeing cured); then the Company shall provide Executive with the following severance benefits (the “Severance Benefits”):(i) The Company shall make a single lump sum severance payment to Executive in an amount equal totwelve (12) months of Executive’s Base Annual Salary, less required tax withholdings and deductions (the “SeverancePayment”). The Severance Payment will be paid within sixty (60) days after the Termination Date, but in no event later than March 15of the year following the year of the Termination Date.(ii) Provided that Executive elects continued coverage under the Consolidated Omnibus BudgetReconciliation Act of 1985, as amended (together with any state or local laws of similar effect, “COBRA”) within the time periodprovided for under COBRA, the Company will pay directly or, at its election, reimburse Executive the amount of the premiumsnecessary to continue Executive’s group health (including dental and vision) insurance coverage in effect as of the Termination Date(including coverage for Executive’s eligible dependents) for a maximum period of twelve (12) months following the TerminationDate; provided, however, that no premium payments will be made by the Company pursuant to this paragraph following the effectivedate of Executive’s coverage by a health (including dental and vision) insurance plan of a subsequent employer or such other date onwhich Executive (and Executive’s dependents, as applicable) cease to be eligible for COBRA coverage. Executive agrees thatExecutive shall notify the Company in writing as soon as practical, but no later than 15 days after Executive receives coverage under ahealth insurance plan of a subsequent employer.(c) Termination Without Cause or Resignation for Good Reason Within Twelve Months After a Change ofControl. If: (i) Executive’s employment is terminated without Cause (and other than as a result of Executive’s death or disability), or ifExecutive resigns for Good Reason, during the time period commencing on the date of the consummation of a Change of Control andending twelve (12) months after a Change of Control, (ii) Executive signs and allows to become effective the Release within sixty (60)days after the Termination Date, and (iii) Executive fully complies with Executive’s continuing fiduciary, statutory and materialcontractual obligations to the Company (with a 30-day opportunity to cure after notice of any such non-compliance if he or she has not, unless such non-compliance is not reasonably capable of being cured); then the Company shall provide Executive with thefollowing change of control severance benefits (the “Change of Control Benefits”):(i) The Company shall make a single lump sum severance payment to Executive in an amount equal toeighteen (18) months of Executive’s Base Annual Salary, less required tax withholdings and deductions (the “Change of ControlPayment”). The Change of Control Payment will be paid within sixty (60) days after the Termination Date, but in no event later thanMarch 15 of the year following the year of the Termination Date.(ii) Provided that Executive elects continued coverage under COBRA within the time period provided forunder COBRA, the Company will pay directly or, at its election, reimburse Executive the amount of the premiums necessary tocontinue Executive’s group health (including dental and vision) insurance coverage in effect as of the termination date of Executive’semployment (including coverage for Executive’s eligible dependents) for a maximum period of eighteen (18) months following theTermination Date; provided, however, that no premium payments will be made by the Company pursuant to this paragraph followingthe effective date of Executive’s coverage by a health (including dental and vision) insurance plan of a subsequent employer or suchother date on which Executive (and Executive’s dependents, as applicable) cease to be eligible for COBRA coverage. Executive agreesthat Executive shall notify the Company in writing as soon as practical, but no later than 15 days after Executive receives coverageunder a health insurance plan of a subsequent employer.(iii) After taking into account any additional acceleration of vesting Executive may be entitled to receiveunder any other plan or agreement, the Company shall cause all outstanding equity awards then held by Executive (including, withoutlimitation, stock options, stock appreciation rights, restricted stock or similar awards) to become fully vested and, if applicable,exercisable with respect to all the shares subject thereto effective immediately prior to the Termination Date. After giving effect to anyacceleration of vesting of Executive’s outstanding equity awards, all outstanding options to purchase Company common stock then heldby Executive that are (x) vested and exercisable as of the Termination Date and (y) designated by the Board or the Board’s compensationcommittee on the date of grant of such option or anytime thereafter as being eligible for extended exercisability (such option, an“Extension Eligible Option”) shall remain exercisable until the earlier of (A) the third (3rd) anniversary of Executive’sTermination Date or (B) the original expiration date of the applicable Extension Eligible Option. If Executive has not exercised theExtension Eligible Options in accordance with the procedures set forth in Executive’s option agreements by such date, such ExtensionEligible Options shall terminate and be of no further effect. In all other respects, Executive’s equity awards shall continue to begoverned by the terms of the applicable award agreements and equity incentive plan documents and any applicable agreements betweenthe Company and Executive.(d) Deemed Resignation; No Requirement to Mitigate; Survival. Upon termination of Executive’s employment for anyreason, Executive shall be deemed to have resigned from all offices and directorships, if any, then held with the Company or any of itsaffiliates, and, at the Company’s request, Executive shall execute such documents as are necessary or desirable to effectuate suchresignations. Executive shall not be required to mitigate the amount of any payment provided for under this Agreement by seeking otheremployment or in any other manner. Notwithstanding anything to the contrary in this Agreement, the termination of Executive’s employment shall not impair the rights or obligations of anyparty.3. DEFINITIONS.(a) Definition of Base Annual Salary. For purposes of this Agreement, “Base Annual Salary” shall mean Executive’sannualized base salary in effect immediately prior to the Termination Date. Base Annual Salary does not include variable forms ofcompensation such as but not limited to bonuses, incentive compensation, commissions, benefits, equity, expenses, or expenseallowances.(b) Definition of Cause. For the purposes of this Agreement, “Cause” shall mean any one or more of the following:(i) Executive is convicted of (or pleads guilty or no contest to) any felony or any crime involving moralturpitude;(ii) Executive participates in any material fraud, material act of dishonesty, or other act of intentional andmaterial misconduct against the Company;(iii) Executive intentionally damages or willfully misappropriates any property of the Company that in anycase has a material adverse effect on the Company;(iv) Executive materially breaches any fiduciary, statutory, or contractual duty Executive owes to theCompany (including, but not limited to, any breach of the Company’s Confidentiality Agreement);(v) Executive regularly and materially fails to diligently and successfully perform Executive’s assignedduties;(vi) Executive fails to cooperate with the Company in any investigation or proceeding by any governmental orsimilar authority or as otherwise authorized by the Board of Directors or a committee thereof; or(vii) Executive is found liable in an SEC action and/or is disqualified by the SEC from serving in an executiverole.The determination that a termination is for Cause shall be made by the Company in its sole discretion; provided, however, that in theevent that any of the foregoing events occurs, the Company shall provide written notice to Executive making reference to this Sectiondescribing the nature of such event and Executive shall thereafter have thirty (30) days to cure such event if such event is capable ofbeing cured.(c) Definition of Good Reason. For purposes of this Agreement, “Good Reason” means that Executive resigns Executive’semployment with the Company (or any successor thereto) if and only if:(i) One of the following actions has been taken without Executive’s express written consent: (1) There is a material reduction in Executive’s Base Annual Salary from the Base Annual Salary ineffect immediately preceding the Change of Control;(2) There is a material change in Executive’s position or responsibilities (including the person orpersons to whom Executive has reporting responsibilities) that represents an adverse change from Executive’s position or responsibilitiesfrom those in effect at any time within ninety (90) days preceding the date of the Change of Control or at any time thereafter; provided,however, that a Change of Control which results in the subsequent conversion of the Company to a division or unit of the acquiringcorporation will not by itself result in a material reduction in Executive’s level of responsibility;(3) Executive is required to relocate Executive’s principal place of employment to a facility orlocation that would increase Executive’s one way commute distance by more than thirty-five (35) miles; provided, however, thatExecutive’s anticipated move to the San Francisco Bay Area as specified in the Offer Letter shall not be deemed a triggering relocationunder this provision;(4) The Company (or any successor thereto) materially breaches its obligations under this Agreementor any other then-effective employment agreement with Executive; or(5) Any acquirer, successor or assignee of the Company fails to assume and perform, in any materialrespect, the obligations of the Company hereunder; and(ii) Executive provides written notice to the Company’s Board within the thirty (30) day period immediatelyfollowing such action; and(iii) Such action is not remedied by the Company within thirty (30) days following the Company’s receipt ofsuch written notice; and(iv) Executive’s resignation is effective not later than sixty (60) days after the expiration of such thirty (30)day cure period.The termination of Executive’s employment as a result of Executive’s death or disability will not be deemed to be a Good Reason.(d) Definition of Change of Control. For purposes of this Agreement, “Change of Control” shall mean:(i) A transaction or series of transactions (other than an offering of Stock to the general public through aregistration statement filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (assuch terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”)) (other than theCompany, any of its subsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a “person” that, priorto such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly orindirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Companypossessing more than 50% of the total combined voting power of the Company’s securities outstanding immediately after suchacquisition; or (ii) During any period of two consecutive years, individuals who, at the beginning of such period, constitutethe Board of Directors of the Company (the “Board”) together with any new director(s) (other than a director designated by a personwho shall have entered into an agreement with the Company to effect a transaction described in Section 3(c)(i) or Section 3(c)(ii))whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds ofthe directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination forelection was previously so approved, cease for any reason to constitute a majority thereof; or(iii) The consummation by the Company (whether directly involving the Company or indirectly involvingthe Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale orother disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) theacquisition of assets or stock of another entity, in each case other than a transaction:(1) Which results in the Company’s voting securities outstanding immediately before the transactioncontinuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that,as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of theCompany’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “Successor Entity”))directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securitiesimmediately after the transaction, and(2) After which no person or group beneficially owns voting securities representing 50% or more ofthe combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of thisSection 3(c)(iii)(2) as beneficially owning 50% or more of combined voting power of the Successor Entity solely as a result of thevoting power held in the Company prior to the consummation of the transaction; or(iv) The Company’s stockholders approve a liquidation or dissolution of the Company.The Company shall have full and final authority, which shall be exercised in its discretion, to determine conclusivelywhether a Change of Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of suchChange of Control and any incidental matters relating thereto.4. COMPLIANCE WITH SECTION 409A.(a) It is intended that each installment of the payments and benefits provided for in this Agreement is a separate “payment” forpurposes of Treasury Regulation Section 1.409A-2(b)(2)(i). It is also intended that payments of the amounts set forth in this Agreementsatisfy, to the greatest extent possible, the exemptions from the application of Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”) (Section 409A of the Code, together, with any state law of similar effect, “Section 409A”) provided underTreasury Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9). (b) Notwithstanding anything in this Agreement to the contrary, any compensation or benefits payable under this Agreementthat constitutes “nonqualified deferred compensation” (“Deferred Compensation”) within the meaning of Section 409A, and which isdesignated under this Agreement as payable upon Executive’s termination of employment shall be payable only upon Executive’s“separation from service” with the Company within the meaning of Section 409A (a “separation from service”) and, except as providedunder Section 4(c) of this Agreement, any such compensation or benefits shall not be paid or commence until the sixtieth (60th) dayfollowing Executive’s separation from service.(c) Notwithstanding the foregoing, if the Company (or, if applicable, the successor entity thereto) determines that theSeverance Payment, the Change of Control Payment and/or other benefits provided under this Agreement (the “Agreement Payments”) constitute “deferred compensation” under Section 409A and Executive is, on the Termination Date, a “specified employee” of theCompany or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code, then, solely to the extentnecessary to avoid the incurrence of the adverse personal tax consequences under Section 409A, the timing of the Agreement Paymentsshall be delayed as follows: on the earlier to occur of (i) the date that is six months and one day after Executive’s “separation fromservice” (as defined above) or (ii) the date of Executive’s death (such earlier date, the “Delayed Initial Payment Date”), the Company(or the successor entity thereto, as applicable) shall (A) pay to Executive a lump sum amount equal to the sum of the AgreementPayments that Executive would otherwise have received through the Delayed Initial Payment Date if the commencement of thepayment of the Agreement Payments had not been so delayed pursuant to this Section 4(b) and (B) commence paying the balance of theAgreement Payments in accordance with the applicable payment schedules set forth in this Agreement.5. To the extent that any reimbursements under this Agreement are subject to Section 409A, any such reimbursements payable toExecutive shall be paid to Executive no later than December 31 of the year following the year in which the expense was incurred;provided, that Executive submits his or her reimbursement request promptly following the date the expense is incurred, the amount ofexpenses reimbursed in one year shall not affect the amount eligible for reimbursement in any subsequent year, other than medicalexpenses referred to in Section 105(b) of the Code, and Executive’s right to reimbursement under this Agreement will not be subject toliquidation or exchange for another benefit. INTERNAL REVENUE CODE SECTION 280G.(a) If the payments and benefits (including but not limited to payments and benefits pursuant to this Agreement) thatExecutive would receive in connection with a change of control of the Company, whether from the Company or otherwise (a“Transaction Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but forthis sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to bedetermined, before any amounts of the Transaction Payment are paid to Executive, which of the following two alternative forms ofpayment would result in Executive’s receipt, on an after-tax basis, of the greater amount of the Transaction Payment notwithstandingthat all or some portion of the Transaction Payment may be subject to the Excise Tax: (1) payment in full of the entire amount of theTransaction Payment (a “Full Payment”), or (2) payment of only a part of the Transaction Payment so that Executive receives thelargest payment possible without the imposition of the Excise Tax (a “Reduced Payment”). (b) For purposes of determining whether to make a Full Payment or a Reduced Payment, the Company shall cause to be takeninto account all applicable federal, state and local income and employment taxes and the Excise Tax (all computed at the highestapplicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such stateand local taxes). If a Reduced Payment is made, (i) Executive shall have no rights to any additional payments and/or benefits constitutingthe Transaction Payment, and (ii) reduction in payments and/or benefits shall occur in the following order: (1) reduction of cashpayments; (2) cancellation of accelerated vesting of equity awards other than stock options; (3) cancellation of accelerated vesting ofstock options; and (4) reduction of other benefits (if any) paid to Executive. In the event that acceleration of compensation fromExecutive’s equity awards is to be reduced, such acceleration of vesting shall be canceled in the reverse order of the date of grant.(c) The independent registered public accounting firm engaged by the Company for general audit purposes as of the day priorto the Termination Date shall make all determinations required to be made under this Section 5. If the independent registered publicaccounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Changeof Control, the Company shall appoint a nationally recognized independent registered public accounting firm to make the determinationsrequired hereunder. The Company shall bear all expenses with respect to the determinations by such independent registered publicaccounting firm required to be made hereunder.(d) The independent registered public accounting firm engaged to make the determinations hereunder shall provide itscalculations, together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after thedate on which Executive’s right to a Transaction Payment is triggered or such other time as reasonably requested by the Company orExecutive. If the independent registered public accounting firm determines that no Excise Tax is payable with respect to the TransactionPayment, either before or after the application of the Reduced Amount, it shall furnish the Company and Executive with detailedsupporting calculations of its determinations that no Excise Tax will be imposed with respect to such Transaction Payment. Any goodfaith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Executive.6. DISPUTE RESOLUTION. Any dispute, claim or controversy of whatever nature arising out of or relating to this Agreement,including, without limitation, any action or claim based on tort, contract or statute, or concerning the interpretation, performance, orexecution of this Agreement (including any determination of Cause or Good Reason hereunder) shall be resolved by confidential, finaland binding arbitration administered by Judicial Arbitration and Mediation Services, Inc. (“JAMS”), in San Francisco, California, beforea single arbitrator, in accordance with JAMS’ then applicable arbitration rules. Executive acknowledges that by agreeing to thisarbitration procedure, Executive and the Company waive the right to resolve any such dispute, claim or demand througha trial by jury or judge or by administrative proceeding. Executive will have the right to be represented by legal counsel at anyarbitration proceeding. The arbitrator shall: (a) have the authority to compel adequate discovery for the resolution of the dispute and toaward such relief as would otherwise be available under applicable law in a court proceeding; and (b) issue a written statement signed bythe arbitrator regarding the disposition of each claim and the relief, if any, awarded as to each claim, the reasons for the award, and thearbitrator’s essential findings and conclusions on which the award is based. Company shall bear all JAMS fees for the arbitration.Nothing in this Agreement shall prevent any of the parties from obtaining injunctive relief in court if necessary to prevent irreparable harm pending the conclusion of any arbitration. Any awards or orders in such arbitrations may beentered and enforced as judgments in any court of competent jurisdiction.7. GENERAL PROVISIONS.(a) This Agreement constitutes the complete, final and exclusive embodiment of the entire agreement between Company andExecutive with regard to the payments and benefits described herein, and it supersedes and replaces any and all other agreements(whether written or unwritten) Executive may have with the Company concerning severance benefits or change of control benefits(including but not limited to the Prior Agreement, any letter agreements issued regarding the Prior Agreement, and the provisions ofExecutive’s Offer Letter concerning severance benefits or change of control benefits); provided, however, that nothing herein shallaffect any plan document or agreements governing any compensatory equity awards that have been or may be granted to Executive,which shall remain in full force and effect. This Agreement is entered into without reliance on any promise or representation, writtenor oral, other than those expressly contained herein, and it supersedes any other such promises or representations. This Agreement maynot be modified or amended except in a written agreement approved by the Compensation Committee and signed by Executive and aduly authorized officer of the Company.(b) Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective underapplicable law. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of anyother provision of this Agreement. Any invalid or unenforceable provision shall be modified so as to be rendered valid and enforceable ina manner consistent with the intent of the parties insofar as possible.(c) Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failureto assert any right Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or anyother provision or right of this Agreement.(d) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of whichtogether will constitute one and the same instrument. Facsimile signatures shall be deemed as effective as originals.(e) This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and theirrespective successors, assigns, heirs, executives and administrators, except that Executive may not assign any of Executive’s dutieshereunder and Executive may not assign any of Executive’s rights hereunder without the written consent of the Company. ThisAgreement shall be interpreted and enforced in accordance with the laws of the State of California.(f) Any ambiguity in this Agreement shall not be construed against either party as the drafter.[Signature Page Follows] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written below./s/ Leone Patterson LEONE PATTERSONDate:11/21/13 TRANSCEPT PHARMACEUTICALS, INC./s/ Glenn A. Oclassen Name: Glenn A. Oclassen Title: President and Chief Executive OfficerDate:11/12/13 EXHIBIT AFORM OF RELEASE AGREEMENTAs provided in the AMENDED AND RESTATED CHANGE OF CONTROL AND SEVERANCEBENEFITS AGREEMENT dated November 11, 2013 (the “Agreement”) between me and Transcept Pharmaceuticals, Inc. (the“Company”), I will be eligible for certain Severance Benefits or Change of Control Benefits if I enter into this Release Agreement(the “Release”). I am not relying on any promise or representation by the Company that is not expressly stated in the Agreement.Certain capitalized terms used in this Release are defined in the Agreement.I hereby acknowledge and reaffirm my obligations under my Confidentiality Agreement with the Company.In consideration of the Severance Benefits or Change of Control Benefits, and other consideration, provided to meunder the Agreement that I am not otherwise entitled to receive, and except as otherwise set forth in this Release, I hereby generallyand completely release the Company and its current and former directors, officers, employees, stockholders, shareholders, partners,agents, attorneys, predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns (collectively, the “ReleasedParties”) from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related toevents, acts, conduct, or omissions occurring prior to my signing this Release (collectively, the “Released Claims”). The ReleasedClaims include, but are not limited to: (1) all claims arising out of or in any way related to my employment with the Company or itsaffiliates, or the termination of that employment; (2) all claims related to my compensation or benefits, including salary, bonuses,commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownershipinterests in the Company or its affiliates; (3) all claims for breach of contract, wrongful termination, and breach of the implied covenantof good faith and fair dealing; (4) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation ofpublic policy; and (5) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of1990, the federal Age Discrimination in Employment Act of 1967 (as amended) (“ADEA”), the federal Employee Retirement IncomeSecurity Act of 1974 (as amended), the California Fair Employment and Housing Act (as amended), and the California Labor Code.Notwithstanding the foregoing, the following are not included in the Released Claims (the “Excluded Claims”):(1) any rights or claims for indemnification I may have pursuant to any written indemnification agreement with the Company to which Iam a party, the charter, bylaws, or operating agreements of the Company, or under applicable law; or (2) any rights which are notwaivable as a matter of law. In addition, nothing in this Release prevents me from filing, cooperating with, or participating in anyproceeding before the Equal Employment Opportunity Commission, the Department of Labor, the California Department of FairEmployment and Housing, or any other government agency, except that I hereby waive my right to any monetary benefits inconnection with any such claim, charge or proceeding. I hereby represent and warrant that, other than the Excluded Claims, I am notaware of any claims I have or might have against any of the Released Parties that are not included in the Released Claims. I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I alsoacknowledge that the consideration given for the Released Claims is in addition to anything of value to which I was already entitled. Ifurther acknowledge that I have been advised by this writing, as required by the ADEA, that: (1) the Released Claims do not apply toany rights or claims that arise after the date I sign this Release; (2) I should consult with an attorney prior to signing this Release(although I may choose voluntarily not to do so); (3) I have twenty-one (21) days to consider this Release (although I may choose tovoluntarily sign it sooner) [for those Executive terminated as part of a group termination, substitute the following language –I have forty-five (45) days to consider this Release (although I may choose to voluntarily sign it sooner)]; (4) I have seven(7) days following the date I sign this Release to revoke the Release by providing written notice to the Company; and (5) the Releasewill not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I signthis Release.[For those Executives terminated as part of a group termination, add the following language —I havereceived with this Release all of the information required by the ADEA, including without limitation a detailed list of the jobtitles and ages of all employees who were terminated in this group termination and the ages of all employees of theCompany in the same job classification or organizational unit who were not terminated, along with information on theeligibility factors used to select employees for the group termination and any time limits applicable to this grouptermination program].I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “Ageneral release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at thetime of executing the release, which if known by him or her must have materially affected his or her settlement with thedebtor.” I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similareffect with respect to my release of any claims I may have against the Company.I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leaveand leave benefits and protections for which I am eligible, and I have not suffered any on-the-job injury for which I have not alreadyfiled a workers’ compensation claim.I acknowledge that to become effective, I must: (1) sign and return this Release to the Company withintwenty-one (21) days [for those Executives terminated as part of a group termination, substitute the following – forty-five(45) days] after I am requested to sign it by the Company or its successor (as applicable); and (2) I must not revoke itthereafter.LEONE PATTERSON Date: Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following Registration Statements:(1)Registration Statement (Form S-3 No. 333-145840) and related Prospectus of Novacea, Inc.;(2)Registration Statement (Form S-3 No. 333-167598) and the related Prospectus of Transcept Pharmaceuticals, Inc.;(3)Registration Statement (Form S-3 No. 333-188171) and the related Prospectus of Transcept Pharmaceuticals, Inc.; and(4)Registration Statements (Forms S-8 No. 333-135506, No. 333-150869, No. 333-157927, No. 333-157929, No. 333-160222, No. 333-164468, No.333-172041, No. 333-180517 and No. 333-187254) pertaining to, the Novacea, Inc. 2006 Incentive Award Plan and the Amended 2001 Stock OptionPlan of Novacea, Inc., the Novacea, Inc. 2006 Incentive Award Plan, the Transcept Pharmaceuticals, Inc. 2006 Incentive Award Plan, the TransceptPharmaceuticals, Inc. Amended and Restated 2002 Stock Option Plan, the Transcept Pharmaceuticals, Inc. 2009 Employee Stock Purchase Plan,the Transcept Pharmaceuticals, Inc. 2006 Incentive Award Plan, and the Transcept Pharmaceuticals, Inc. Amended and Restated 2006 IncentiveAward Plan;of our report dated March 14, 2014, with respect to the consolidated financial statements of Transcept Pharmaceuticals, Inc. included in this Annual Report(Form 10-K) for the year ended December 31, 2013./s/Ernst & Young LLPRedwood City, CaliforniaMarch 14, 2014Exhibit 31.1Certification of Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Glenn A. Oclassen, certify that:1.I have reviewed this annual report on Form 10-K of Transcept Pharmaceuticals, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. Date: March 14, 2014 /s/Glenn A. Oclassen Glenn A. OclassenPresident and Chief Executive Officer(Principal Executive Officer)Exhibit 31.2Certification of Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Leone D. Patterson, certify that:1.I have reviewed this annual report on Form 10-K of Transcept Pharmaceuticals, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. Date: March 14, 2014 /s/Leone D. Patterson Leone D. PattersonVice President, Finance and ChiefFinancial Officer(Principal Financial Officer)Exhibit 32.1Certification of Chief Executive Officer and Chief Financial OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Transcept Pharmaceuticals,Inc. (the “Company”) hereby certifies, to such officer's knowledge, that:(i)the accompanying Annual Report on Form 10-K of the Company for the annual period ended December 31, 2013 (the “Report”) fullycomplies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and(ii)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 14, 2014 /s/Glenn A. Oclassen Glenn A. OclassenPresident and Chief Executive Officer(Principal Executive Officer) /s/Leone D. Patterson Leone D. PattersonVice President, Finance andChief Financial Officer(Principal Financial Officer)A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 hasbeen provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff uponrequest.This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not tobe incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether madebefore or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

Continue reading text version or see original annual report in PDF format above