THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT IS SUBJECT TO THE TERMS OF THAT CERTAIN INTERCREDITOR AGREEMENT (as defined below). INTELLECTUAL PROPERTY SECURITY AGREEMENT

EXHIBIT 10.3

THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT IS SUBJECT TO THE TERMS OF THAT CERTAIN INTERCREDITOR AGREEMENT (as defined below).

INTELLECTUAL PROPERTY SECURITY AGREEMENT

This Intellectual Property Security Agreement (“IP Security Agreement”) is made as of August 13, 2010, by and between ARYx Therapeutics, Inc., a Delaware corporation (“Debtor”), and the lenders listed on the signature pages hereto (each, a “Lender” and, collectively, the “Lenders”).

RECITALS

A.                                   Debtor is indebted to Lenders for loans advanced and other financial accommodations provided pursuant to that certain Secured Note and Warrant Purchase Agreement dated August 13, 2010 (“Purchase Agreement”).

B.                                     Debtor has granted a security interest in certain intangible property to Lenders for purposes of securing the obligations of Debtor to Lenders, pursuant to that certain Security Agreement dated August 13, 2010 (“Security Agreement”).

C.                                     In consideration of value and other financial accommodations provided by Lenders and on account of amounts due Lenders, Debtor has agreed to grant Lenders the security interests in Debtor’s intellectual property on the terms set forth herein.

NOW, THEREFORE, the parties hereto agree as follows:

1.                                      Definitions.  The following capitalized terms shall mean the following in this Agreement.

1.1                               “Intercreditor Agreement” has the meaning ascribed to the term in the Purchase Agreement.

1.2                               “IP Collateral” means all of the following now or hereafter existing, created or acquired or held by Debtor:

(a)                                  Any and all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, including, without limitation, those set forth on Exhibit A attached hereto and incorporated herein by this reference (collectively, the “Copyrights”);

(b)                                 Any and all trade secrets, any and all intellectual property rights in computer software and computer software products, and any other proprietary rights to any process, method or technology of any kind or nature;

(c)                                  Any and all design rights which may be available to Debtor;

(d)                                 All patents, patent applications and like protections including, without limitation, those set forth on Exhibit B attached hereto and incorporated herein by this reference together with all improvements, extensions, reissues, substitutes, continuations, continuations-in-part, divisionals, patents of addition, re-examinations and renewals thereof, and patents issuing therefrom, and any other proprietary rights related to any of the foregoing (including, without limitation, remedies against infringements thereof and rights of protection of an interest therein under the laws of all jurisdictions) and any and all foreign counterparts of any of the foregoing (collectively, the “Patents”);

(e)                                  All trademark and service ▇▇▇▇ rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Debtor connected with and symbolized by such trademarks, including, without limitation, those set forth on Exhibit C attached hereto and incorporated herein by this reference together with all extensions, reissues, substitutes, continuations, and renewals thereof, and any other proprietary rights related to any of the foregoing (including, without limitation, remedies against infringements thereof and rights of protection of an interest therein under the laws of all jurisdictions) and any and all foreign counterparts of any of the foregoing; (collectively, the “Trademarks”);

(f)                                    Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to ▇▇▇ for and collect such damages for said use or infringement of the intellectual property rights identified above;

(g)                                 All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights;

(h)                                 All amendments, renewals and extensions of any of the Copyrights, Patents or Trademarks; and

(i)                                     Any and all proceeds, products, replacements, additions, accessions and substitutions of or with respect to any of the foregoing, including, without limitation, all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing.

1.3                               “LCP” means Lighthouse Capital Partners V, L.P.

1.4                               “Loan Documents” has the meaning ascribed to the term in the Purchase Agreement.

1.5                               “Secured Obligations” has the meaning ascribed to the term in the Security Agreement.

2.                                      Grant of Junior Security Interest.  As collateral security for the prompt and complete payment and performance of all of Debtor’s present or future indebtedness, obligations and liabilities to Lenders, including without limitation, the Secured Obligations, Debtor hereby transfers, conveys and grants a security interest in and mortgages to Lenders, as security, in and to Debtor’s entire right, title and interest in, to and under the IP Collateral.

3.                                      Authorization and Request.  Debtor authorizes and requests that the Registrar of Copyrights and the Commissioner of Patents and Trademarks record this IP Security Agreement.

4.                                      Covenants and Warranties.  Debtor represents, warrants, covenants and agrees as follows:

4.1                               Debtor is now the sole owner of the IP Collateral, except for the non-exclusive licenses granted by Debtor to its customers in the ordinary and normal course of business as now conducted;

4.2                               Performance of this IP Security Agreement does not conflict with or result in a breach of any agreement to which Debtor is a party or by which Debtor is bound, except to the extent that certain intellectual property agreements prohibit the assignment of the rights thereunder to a third party without the licensor’s or other party’s consent and this IP Security Agreement constitutes an assignment;

4.3                               During the term of this IP Security Agreement, Debtor shall not without Lenders’ prior written authorization sell, transfer, assign or otherwise encumber any interest in the IP Collateral, except (i) for non-exclusive licenses granted by Debtor in the ordinary and normal course of its business as now conducted or as set forth in this IP Security Agreement; (ii) security interest in favor of LCP; and (iii) subject to Debtor’s execution of appropriate documents, in a form acceptable to Lenders, to perfect or continue the perfection of Lenders’ interest in the IP Collateral, or transfers to affiliates of Debtor;

4.4                               To its knowledge, each of the Patents is valid and enforceable, and no part of the IP Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the IP Collateral violates the rights of any third party;

4.5                               Debtor shall advise Lenders of any material changes in the composition of the IP Collateral by identifying such material changes in the Quarterly Report (as hereinafter defined), including but not limited to any subsequent ownership right of Debtor in or to any Copyright, Patent or Trademark not specified in this IP Security Agreement;

4.6                               Debtor shall (i) protect, defend and maintain the validity and enforceability of the Copyrights, Patents and Trademarks, (ii) use its best efforts to detect infringements of the Copyrights, Patents and Trademarks and promptly advise Lenders in writing of material infringements detected and (iii) not allow any Copyrights, Patents or Trademarks to be abandoned, forfeited or dedicated to the public without the written consent of Lenders, which shall not be unreasonably withheld, unless Debtor determines that reasonable business practices suggest that abandonment is appropriate;

4.7                               Debtor shall promptly register the most recent version of Debtor’s material Copyrights, Patents and Trademarks if not so already registered, as Lenders may reasonably request from time to time based on its review of the Quarterly Report (as hereinafter defined) and shall, from time to time, execute and file such other instruments, and take such further actions as Lenders may reasonably request from time to time to perfect or continue the perfection of Lenders’ interest in the IP Collateral;

4.8                               This IP Security Agreement creates, and in the case of after acquired IP Collateral, this IP Security Agreement will create at the time Debtor first has rights in such after acquired IP Collateral, in favor of Lenders valid and perfected security interests in the IP Collateral in the United States securing the payment and performance of all present or future indebtedness, obligations and liabilities of Debtor to Lenders, including, without limitation, such indebtedness, obligations and liabilities under the Purchase Agreement and the other Loan Documents, upon the filing of financing statements in the appropriate filing office;

4.9                               To its knowledge, except for, and upon, the filings with, as applicable, (1) the United States Patent and Trademark office with respect to the Patents and Trademarks, (2) the Register of Copyrights with respect to the Copyrights and (3) the UCC Division of the Secretary of State of Delaware, necessary to perfect the security interests created hereunder, and except as has been already made or obtained, no authorization, approval or other action by, and no notice to or filing with, any United States governmental authority or United States regulatory body is required either (a) for the grant by Debtor of the security interests granted hereby or for the execution, delivery or performance of this IP Security Agreement by Debtor in the United States or (b) for the perfection in the United States or the exercise by Lenders of its rights and remedies hereunder;

4.10                        All information heretofore, herein or hereafter supplied to Lenders by or on behalf of Debtor with respect to the IP Collateral is accurate and complete in all material respects;

4.11                        Debtor shall not enter into any agreement that would materially impair or conflict with Debtor’s obligations hereunder without Lenders’ prior written authorization, which authorization

shall not be unreasonably withheld.  Debtor shall not permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Debtor’s rights and interests in any property included within the definition of the IP Collateral acquired under such contracts;

4.12                        Upon any executive officer of Debtor obtaining actual knowledge thereof, Debtor will promptly notify Lenders in writing of any event that materially adversely affects the value of any IP Collateral, the ability of Debtor to dispose of any IP Collateral or the rights and remedies of Lenders in relation thereto, including the levy of any legal process against any of the IP Collateral; and

4.13                        Within ten (10) days of the date hereof, Debtor shall, with respect to all U.S. Patents (and Patent applications) listed on Exhibit B cause to be filed and recorded recordation notices at the United States Patent and Trademark Office of the assignments evidencing the ownership of such Patents and patent applications in the sole name of the Debtor.

5.                                      Lenders’ Rights.  Subject to the terms of the Intercreditor Agreement, Lenders shall have the right, but not the obligation, to take, at Debtor’s sole expense, any actions that Debtor is required under this IP Security Agreement to take but which Debtor fails to take, after fifteen (15) days’ notice to Debtor.  Debtor shall reimburse and indemnify Lenders for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 5.

6.                                      Inspection Rights.  Debtor hereby grants to Lenders and their employees, representatives and agent’s the right to visit once per calendar year (unless an Event of Default has occurred and is continuing), during reasonable hours upon prior reasonable written notice to Debtor, any of Debtor’s plants and facilities that manufacture, install or store products (or that have done so during the prior six-month period) that are sold utilizing any of the IP Collateral, and to inspect the products and quality control records relating thereto upon reasonable written notice to Debtor and as often as may be reasonably requested.

7.                                      Further Assurances; Attorney In Fact. Subject to the terms of the Intercreditor Agreement:

7.1                               On a quarterly basis, Debtor agrees to deliver to Lenders a report, in form acceptable to Lenders and certified by an officer of Debtor, which lists all Copyrights, Patents and Trademarks that are material to the operation of Debtor’s business on an on-going basis, and in which Lenders do not already have perfected security interests (the “Quarterly Report”); provided, however, Debtor may provide a general description of the Copyrights by type.

7.2                               On a continuing basis, Debtor will make, execute, acknowledge and deliver, and file and record in the proper filing and recording places in the United States, all such instruments, including appropriate financing and continuation statements and collateral agreements and filings with the United States Patent and Trademark Office and the Register of Copyrights, and take all such action as may reasonably be necessary or advisable, or as reasonably requested by Lenders, to perfect Lenders’ security interest in all Copyrights, Patents and Trademarks, which Lenders reasonably identify pursuant to Section 4.7 above as material to the operation of Debtor’s business on an on-going basis or the value of the IP Collateral, and otherwise to carry out the intent and purposes of this IP Security Agreement, or for assuring and confirming to Lenders the grant or perfection of a security interests in all IP Collateral.

7.3                               Debtor hereby irrevocably appoints Lenders as Debtor’s attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor, from time to time in Lenders’ discretion, to take any of the following actions and to execute any of the following instruments (i) modify, in its reasonable discretion, this IP Security Agreement without first obtaining Debtor’s approval of or

signature to such modification by amending Exhibit A, Exhibit B or Exhibit C hereof, as appropriate, to include reference to any material right, title or interest in any Copyrights, Patents or Trademarks acquired by Debtor after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Debtor no longer has or claims any right, title or interest, (ii) file, in its reasonable discretion, one or more financing or continuation statements and amendments thereto, relative to any of the IP Collateral without the signature of Debtor where permitted by law and (iii) after the occurrence and during the continuance of an Event of Default, to transfer the IP Collateral into the name of any or all Lenders or a third party to the extent permitted under the California Uniform Commercial Code.

8.                                      Events of Default.  The occurrence of any of the following shall constitute an “Event of Default” under this IP Security Agreement:

8.1                               An Event of Default occurs under the Purchase Agreement or any of the other Loan Documents;

8.2                               Debtor breaches any warranty or agreement in any material respect made by Debtor in this IP Security Agreement and, as to any breach that is capable of cure, Debtor fails to cure such breach within thirty (30) days of the occurrence of such breach;

8.3                               Debtor shall fail to comply with the covenant set forth in Section 4 hereof; and

8.4                               Any default under that certain Oxford Loan and Security Agreement No. 4521, dated as of March 28, 2005, by and between the Grantor and LCP, as amended, modified or supplement from time to time.

9.                                      Remedies.  Upon the occurrence and during the continuance of an Event of Default, Lenders shall have the right to exercise all the remedies of a secured party under the California Uniform Commercial Code, including, without limitation, the right to require Debtor to assemble the IP Collateral and any tangible property in which any Lender has security interests and to make it available to Lenders at a place designated by Lenders.  Lenders shall have a nonexclusive, royalty free license to use the Copyrights, Patents and Trademarks to the extent reasonably necessary to permit Lenders to exercise its rights and remedies upon the occurrence and during the continuance of an Event of Default.  Debtor will pay any expenses (including reasonable attorneys’ fees) incurred by Lenders in connection with the exercise of any of Lenders’ rights hereunder, including, without limitation, any expense incurred in disposing of the IP Collateral.  All of Lenders’ rights and remedies with respect to the IP Collateral shall be cumulative.  This Section 9 is subject to the terms of the Intercreditor Agreement.

10.                               Indemnity.  Debtor agrees to defend, indemnify and hold harmless Lenders and their officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this IP Security Agreement and (b) all losses or expenses in any way suffered, incurred, or paid by any of them as a result of or in any way arising out of, following or consequential to transactions between any or all Lenders and Debtor, whether under this IP Security Agreement or otherwise (including, without limitation, reasonable attorneys’ fees and reasonable expenses), except for claims and losses described in clauses (a) and (b), arising from or out of the gross negligence or willful misconduct of any Lender.

11.                               Termination.  At such time as Debtor shall completely satisfy all of the obligations secured hereunder or otherwise pursuant to the terms of the Loan Documents, Lenders shall execute and deliver to Debtor all deeds, assignments and other instruments as may be necessary or proper to terminate the security interests granted hereunder, subject to any disposition thereof which may have been made by Lenders pursuant hereto.

12.                               No Failure or Delay.  No failure or delay on the part of Lenders, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof.

13.                               Attorneys’ Fees. Debtor shall pay Lenders on demand all reasonable attorneys and/or legal fees and all other costs and expenses incurred by Lenders in enforcing Lenders’ rights under this IP Security Agreement, including without limitation all costs of preserving or disposing of the IP Collateral.

14.                               Amendments.  This IP Security Agreement may be amended only by a written instrument signed by Lenders.

15.                               Counterparts.  This IP Security Agreement may be executed in any number of counterparts, each of which when so delivered shall be deemed an original, but all such counterparts shall constitute but one and the same instrument.  This IP Security Agreement shall become effective upon the execution of a counterpart hereof or thereof by each of the parties hereto and telephonic notification that such executed counterparts has been received by Debtor and each Lender.

16.                               Governing Law; Jurisdiction; Jury Waiver.  This IP Security Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law.  Debtor and Lenders consent to the exclusive jurisdiction of any state or federal court located in San Francisco County, California.  DEBTOR AND LENDERS EACH WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS IP SECURITY AGREEMENT AND ANY OTHER LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.

17.                               Conflict.  In the event of a conflict between any term and/or provision contained in this IP Security Agreement with any term and/or provision contained in any of the Loan Documents, the term and/or provision of the Purchase Agreement shall govern.

REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK

IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement on the day and year first above written.

“Debtor”

ARYx THERAEUTICS, INC.

SIGNATURE PAGE TO ARYx THERAPEUTICS, INC.

BRIDGE INTELLECTUAL PROPERTY SECURITY AGREEMENT

SIGNATURE PAGE TO ARYx THERAPEUTICS, INC.

BRIDGE INTELLECTUAL PROPERTY SECURITY AGREEMENT

SIGNATURE PAGE TO ARYx THERAPEUTICS, INC.

BRIDGE INTELLECTUAL PROPERTY SECURITY AGREEMENT

SIGNATURE PAGE TO ARYx THERAPEUTICS, INC.

BRIDGE INTELLECTUAL PROPERTY SECURITY AGREEMENT

Exhibit A

COPYRIGHTS

1.                                       REGISTERED: List titles below or indicate “None”

None.

2.                                       UNREGISTERED: List titles below or indicate “None”

None.

3.                                       APPLICATIONS IN PROCESS: List titles, applicable dates, application numbers, etc. below or indicate “None”

None.

Exhibit B

PATENTS