##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from
to. Commission File Number: 000-50642 Memory Pharmaceuticals Corp.  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    04-336475
(I.R.S. Employer
Identification No.)100 Philips Parkway, Montvale, New Jersey
(Address of Principal Executive Offices)
    
    07645
(Zip Code)
 Registrants telephone number, including area code: 201-802-7100 None  Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes o No x   Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x As of May 17, 2004, the registrant had 20,203,696 shares of Common Stock,
$0.001 par value per share, outstanding.




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MEMORY PHARMACEUTICALS CORP. Table of Contents PagePart I. Financial InformationItem 1.
    
    Unaudited Financial StatementsBalance Sheets as of March 31, 2004 and December 31, 2003
    
    
    2Statements of Operations for the three months ended March 31, 2004 and 2003
    
    
    3Statements of Cash Flows for the three months ended March 31, 2004 and 2003
    
    
    4Notes to Unaudited Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29Part II. Other InformationItem 2.
    
    Changes in Securities and Use of Proceeds
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    31Signatures
    
    
    
    
    32CERTIFICATIONCERTIFICATIONCERTIFICATION
  (Continued) 1




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Part I. Financial Information 
 Item 1. Unaudited Financial Statements MEMORY PHARMACEUTICALS CORP. 
 BALANCE SHEETS
 (in thousands, except for share and per share amounts)
 March 31,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,634
    
    
    $
    30,107Receivables
    
    
    
    
    
    
    2,019Prepaid and other current assets
    
    
    3,078
    
    
    
    1,664Total current assets
    
    
    26,712
    
    
    
    33,790Property and equipment, net
    
    
    10,449
    
    
    
    9,085Restricted cash
    
    
    505
    
    
    
    505Other assets
    
    
    46
    
    
    
    54Total assets
    
    $
    37,712
    
    
    $
    43,434LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    981
    
    
    $
    1,754Accrued expenses
    
    
    3,136
    
    
    
    3,103Current portion of equipment notes payable
    
    
    1,929
    
    
    
    1,675Deferred revenue  current
    
    
    2,982
    
    
    
    2,982Total current liabilities
    
    
    9,028
    
    
    
    9,514Equipment notes payable, less current portion
    
    
    2,248
    
    
    
    2,112Deferred revenue  long-term
    
    
    16,245
    
    
    
    16,990Total liabilities
    
    
    27,521
    
    
    
    28,616Redeemable convertible preferred stock, Series A, B, C, D and R;
$0.001 par value per share;Authorized 39,217,908 shares at March 31, 2004 and December 31, 2003
    
    
    86,750
    
    
    
    86,598Accrued dividends on redeemable convertible preferred stock
    
    
    19,442
    
    
    
    17,677Total redeemable convertible preferred stock
and accrued dividends
    
    
    106,192
    
    
    
    104,275Stockholders deficit:Common stock, $0.001 par value per share. Authorized 17,758,666 shares
at March 31, 2004 and December 31, 2003; issued and outstanding
1,149,016 at March 31, 2004 and 1,138,203 at December 31, 2003
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    6,548
    
    
    
    5,410Accumulated deficit
    
    
    (101,065
    )
    
    
    (94,316
    )Deferred compensation
    
    
    (1,485
    )
    
    
    (552
    )Total stockholders deficit
    
    
    (96,001
    )
    
    
    (89,457
    )Total liabilities and stockholders deficit
    
    $
    37,712
    
    
    $
    43,434
 See accompanying notes to financial statements. (Continued) 2




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MEMORY PHARMACEUTICALS CORP. 
 STATEMENTS OF OPERATIONS
 (in thousands, except for share and per share amounts)
 (unaudited)
 Three Months EndedMarch 31,2004
    
    2003Revenue
    
    $
    2,371
    
    
    $
    1,723Operating costs and expenses:Research and development
    
    
    5,815
    
    
    
    5,394General and administrative
    
    
    1,378
    
    
    
    964Total operating costs and expenses
    
    
    7,193
    
    
    
    6,358Loss from operations
    
    
    (4,822
    )
    
    
    (4,635
    )Interest:Income
    
    
    97
    
    
    
    123Expense
    
    
    (105
    )
    
    
    (116
    )Interest (expense) income, net
    
    
    (8
    )
    
    
    7Net loss before income taxes
    
    

    (4,830
    )
    
    
    (4,628
    )Income taxes
    
    
    2
    
    
    
    6Net loss
    
    
    (4,832
    )
    
    
    (4,634
    )Less redeemable convertible preferred stock dividends and accretion
    
    
    1,917
    
    
    
    1,665Net loss attributable to common stockholders
    
    $
    (6,749
    )
    
    $
    (6,299
    )Basic and diluted net loss per common share
    
    $
    (5.89
    )
    
    $
    (8.41
    )Basic and diluted weighted average number of common shares
outstanding
    
    
    1,146,307
    
    
    
    749,182Proforma basic and diluted net loss per common share
    
    $
    (0.33
    )
    
    $
    (0.35
    )Proforma basic and diluted weighted average number of common
shares outstanding
    
    
    14,443,270
    
    
    
    13,118,683
 See accompanying notes to financial statements. (Continued) 3




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MEMORY PHARMACEUTICALS CORP. 
 STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Three Months EndedMarch 31,2004
    
    2003Cash flows used in operating activities:Net loss
    
    $
    (4,832
    )
    
    $
    (4,634
    )Adjustments to reconcile net loss to
net cash used in operating activities:Depreciation and amortization
    
    
    464
    
    
    
    423Non-cash stock based compensation
    
    
    197
    
    
    
    11Changes in operating accounts:Receivables
    
    
    2,019
    
    
    
    (500
    )Prepaid and other current assets
    
    
    (1,414
    )
    
    
    80Other assets
    
    
    8
    
    
    
    7Accounts payable
    
    
    (773
    )
    
    
    (1,455
    )Accrued expenses
    
    
    33
    
    
    
    (1,170
    )Deferred revenue
    
    
    (745
    )
    
    
    1,652Net cash used in operating activities
    
    
    (5,043
    )
    
    
    (5,586
    )Cash flows used in investing activities:Additions to property and equipment
    
    
    (1,828
    )
    
    
    (291
    )Change in restricted cash
    
    
    
    
    
    
    (1
    )Net cash used in investing activities
    
    
    (1,828
    )
    
    
    (292
    )Cash flows provided by financing activities:Proceeds from issuance of common stock
    
    
    8
    
    
    
    18Proceeds from equipment notes payable
    
    
    960
    
    
    
    1,038Principal repayment equipment notes payable
    
    
    (570
    )
    
    
    (464
    )Net cash provided by financing activities
    
    
    398
    
    
    
    592Net decrease in cash and cash equivalents
    
    
    (6,473
    )
    
    
    (5,286
    )Cash and cash equivalents, beginning of period
    
    
    30,107
    
    
    
    29,474Cash and cash equivalents, end of period
    
    $
    23,634
    
    
    $
    24,188Supplemental cash flow information:Cash paid for interest
    
    $
    105
    
    
    $
    116Cash paid for taxes
    
    
    4
    
    
    
    16Accrued dividends on redeemable convertible preferred stock
    
    
    1,765
    
    
    
    1,565Accretion of redeemable convertible preferred stock to liquidation value
    
    
    152
    
    
    
    100
 See accompanying notes to financial statements. (Continued) 4




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MEMORY PHARMACEUTICALS CORP. 
 NOTES TO UNAUDITED FINANCIAL STATEMENTS
(in thousands, except for share and per share amounts)
  (1)
    
    Basis of PresentationMemory Pharmaceuticals Corporation (the Company) is a biopharmaceutical
company focused on the development of innovative drug candidates for the
treatment of a broad range of central nervous system, or CNS, conditions
that exhibit significant impairment of memory and other cognitive
functions. These conditions include neurological diseases associated with
aging, such as Alzheimers disease, vascular dementia and mild cognitive
impairment, or MCI, and also include certain psychiatric disorders such as
depression and schizophrenia.The unaudited financial statements included herein have been prepared from
the books and records of the Company pursuant to the rules and regulations
of the Securities and Exchange Commission for reporting on Form 10-Q.
Certain information and footnote disclosures normally included in complete
financial statements prepared in accordance with accounting principles
generally accepted in the United States (GAAP) have been condensed or
omitted pursuant to such rules and regulations. The interim financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Companys registration statement on Form S-1,
as amended (File No. 333-111474), which was declared effective by the
Securities and Exchange Commission on April 5, 2004.Interim results may not be indicative of the results that may be expected
for the year. In the opinion of management, all adjustments considered
necessary for a fair presentation of these interim statements have been
included and are of a normal and recurring nature.(2)
    
    Stock-Based CompensationThe Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations
including Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March
2000, to account for its fixed-plan employee stock options. Under this
method, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure,established accounting
and disclosure requirements using a fair-value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No. 123 and
No. 148, the Company has elected to continue to apply the
intrinsic-value-based method of accounting for employee stock options
described above, and has adopted only the disclosure requirements of SFAS
No. 148.The Company accounts for stock options and warrants granted to
non-employees based on the fair value of the stock option or warrant. The
factor that most affects the accounting for stock-based compensation is the
fair value of the Companys common stock at the measurement date. As of
March 31, 2004, the Companys common stock was not publicly traded. As a
result, in valuing the Companys common stock, stock options and warrants
in this Form 10-Q, the Company considered the pricing of private equity
sales, company-specific events, independent valuations, economic trends and
the rights and preferences of the security being valued. (Continued) 5




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The following table illustrates the effect on net income if the fair-value
based method had been applied to all outstanding and unvested awards each
period. The assumptions used to value the awards are included herein. Three Months ended March 31,2004
    
    2003Net loss attributable to common stockholders, as reported
    
    $
    (6,749
    )
    
    $
    (6,299
    )Add: Stock-based employee compensation expense
included in reported net loss
    
    
    197
    
    
    
    11Deduct: Employee stock-based compensation
expense under fair-value method
    
    
    (215
    )
    
    
    (57
    )Pro forma net loss attributable to common stockholders
    
    $
    (6,767
    )
    
    $
    (6,345
    )Pro forma basic and diluted net loss per common share
    
    $
    (5.90
    )
    
    $
    (8.47
    )
  The per share weighted average fair value of stock options granted during
the first quarter 2004 and 2003 was determined using the Black-Scholes
option-pricing model with the following weighted average assumptions: 60%
volatility, expected dividend yield of 0%, an expected life of five years
and risk-free interest rates of 3.2% and 3.5%, respectively. These
assumptions resulted in weighted-average fair values of $11.97 and $0.42
per share for stock options granted in the first quarter 2004 and 2003,
respectively.Stock OptionsDuring the first quarter of 2004, the Company granted 100,000 stock options
to an employee at an exercise price of $2.70 per share pursuant to the 1998
Employee, Director and Consultant Stock Option Plan. Deferred compensation
expense of $1,130 attributable to the intrinsic value of the options
granted was measured at the measurement date for the grant. Compensation
expense is recognized ratably over the vesting period. The Company
recognized $197 of compensation expense during the first quarter 2004.(3)
    
    Net Loss Per ShareDiluted weighted average shares outstanding exclude shares underlying the
Companys redeemable convertible preferred stock, stock options and
warrants, since the effects would be antidilutive. Such shares are
summarized as follows: Three Months Ended March 31,2004
    
    2003Common stock options
    
    
    2,483,597
    
    
    
    2,608,910Warrants
    
    
    164,514
    
    
    
    56,192Redeemable convertible preferred stock
    
    
    13,295,427
    
    
    
    12,369,501Total
    
    
    15,943,538
    
    
    
    15,034,603
  Pro Forma Net Loss Per Share  The pro forma basic and diluted net loss per share attributable to common
stockholders and related shares reflect the automatic conversion of
redeemable convertible preferred stock into common stock upon the
completion of the initial public offering on April 8, 2004, using the as
converted method from the beginning of the quarter ended March 31, 2004.
Pro forma adjustments have been computed assuming the initial public
offering was consummated at the beginning of the quarter ended March 31,
2004. (Continued) 6




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The following table reconciles the net loss attributable to common
stockholders used in the computation of basic and diluted net loss per
share to the pro forma net loss attributable to common stockholders: Three Months ended March 31,2004
    
    2003Net loss attributable to common stockholders, as reported
    
    $
    (6,749
    )
    
    $
    (6,299
    )Reversal of accrued preferred dividends
    
    
    1,765
    
    
    
    1,565Reversal of accretion of issuance costs
    
    
    152
    
    
    
    100Pro forma net loss attributable to common stockholders
    
    $
    (4,832
    )
    
    $
    (4,634
    )
  The following table reconciles the weighted average number of common shares
used in the computation of basic and diluted weighted average common shares
outstanding to the pro forma basic and diluted weighted average number of
common shares outstanding: Three Months ended March 31,2004
    
    2003Basic and diluted weighted average number of common shares outstanding
    
    
    1,146,307
    
    
    
    749,182Weighted average number of common shares assuming the conversion of
all redeemable convertible preferred stock and exercise of certain
warrants at the date of original issuance
    
    
    13,296,963
    
    
    
    12,369,501Pro forma basic and diluted weighted average common shares
outstanding
    
    
    14,443,270
    
    
    
    13,118,683
  (4)
    
    Redeemable Convertible Preferred Stock  The following table summarizes the redeemable convertible preferred stock
outstanding, by series, as of March 31, 2004: Liquidation
    
    
    
    
    
    CommonShares
    
    Carrying
    
    value per
    
    Conversion
    
    stockSeries
    
    Date Issued
    
    Outstanding
    
    Amount (1)
    
    share
    
    ratio
    
    equivalentsA
    
    April 1998
    
    
    1,000,000
    
    
    $
    987
    
    
    $
    1.00
    
    
    
    0.3333
    
    
    
    333,332B
    
    December 1998, March 1999
    
    
    6,142,857
    
    
    
    10,732
    
    
    $
    1.75
    
    
    
    0.3333
    
    
    
    2,047,615C (2)
    
    June, August 2000
    
    
    10,000,000
    
    
    
    24,976
    
    
    $
    2.50
    
    
    
    0.3559
    
    
    
    3,558,521D
    
    March, April 2002
    
    
    19,290,130
    
    
    
    40,536
    
    
    $
    2.15
    
    
    
    0.3333
    
    
    
    6,430,033Roche(3)
    
    September 2003
    
    
    2,777,778
    
    
    
    9,519
    
    
    $
    3.60
    
    
    
    0.3333
    
    
    
    925,926$
    86,750
    
    
    
    
    
    
    
    
    
    
    
    13,295,427
  (1)
    
    The proceeds from the issuance of Series A, Series B, Series C,
Series D and Series Roche redeemable convertible preferred stock were
reduced by closing costs of $33, $45, $59, $1,695 and $0,
respectively.(2)
    
    As a result of the Companys issuance of Series D redeemable
convertible preferred stock at a price per share less than $2.50, the
conversion ratio of the number of shares of common stock into which
each share of Series C was convertible was adjusted so that each share
of Series C was convertible into (Continued) 7




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0.3559 shares of common stock. Pursuant to this anti-dilution
provision, the conversion of Series C would have resulted in the
issuance of an additional 225,195 shares of common stock on March 31,
2004.(3)
    
    For $10,000, the Company issued 2,777,778 shares of Series Roche
redeemable convertible preferred stock and 347,222 warrants to
purchase common stock at $4.32 per share to Roche. The $10,000 in
proceeds was allocated to redeemable convertible preferred stock and
additional paid-in capital based on the relative fair value of the
preferred stock and the warrants.  Accrued DividendsDividends on the Series A, Series B, Series C, Series D and Series Roche
redeemable convertible preferred stock accrued at an annual rate of 8%,
whether or not funds were legally available or dividends were declared by
the board of directors. The Company had accrued dividends of $19,442 and
$17,677 for all outstanding redeemable preferred securities as of March 31,
2004 and December 31, 2003, respectively. Upon the closing of the
Companys initial public offering on April 8, 2004, all of our preferred
stock converted into common stock, and all related accrued dividends were
forfeited.Initial Public OfferingUpon the conclusion of the Companys initial public offering, all of the
outstanding shares of the Companys redeemable convertible preferred stock,
including accrued but unpaid dividends, were automatically converted into
13,295,427 shares of the Companys common stock. Additionally, 1,536
 shares of the Companys common stock were issued upon the net share settled
exercise of warrants, which occurred immediately prior to the closing of
the initial public offering.(5)
    
    License Agreements and CollaborationsBayer AGIn June 2001, the Company entered into an exclusive license agreement with
Bayer AG (Bayer). Under the agreement, the Company has been granted an
exclusive worldwide license to Bayers know-how and patents to
commercialize and market a drug candidate to treat dementia. As of March
31, 2004, the Company has paid $1,000 in upfront and milestone payments
under this agreement. The Company is also required to make milestone
payments to Bayer and pay royalties to Bayer on proceeds received by the
Company from the sale of any products.Hoffmann-LaRoche (2002 Collaboration)In July 2002, the Company executed a Research Collaboration and License
Agreement (2002 Roche Agreement) with F. Hoffmann-LaRoche
Ltd./Hoffmann-La Roche Inc. (Roche) for the development of PDE4
inhibitors for neurological and psychiatric indications, and potential
other indications. Under the 2002 Roche Agreement, the Company granted
Roche a worldwide, exclusive, sublicensable license to the Companys patent
rights and know-how with respect to any PDE4 inhibitor for the prevention
and treatment of diseases, in all indications, for either human or
veterinary use.Under the 2002 Roche Agreement as of March 31, 2004, Roche made an $8,000
upfront license payment and two $2,000 milestone payments. Roche will make
future payments based on the Company achieving certain developmental
milestones. The agreement provides for Roche to pay the Company $1,500 for
contract research and to make quarterly payments of $875 over a two-year
period for research collaboration efforts.During the first quarter of 2004, the Company recognized revenue of $1,287
under the 2002 Roche Agreement, representing $412 related to the upfront
license payment and milestone payments received as of March 31, 2004, which
is being amortized over the expected development period of 7.5 years from
the (Continued) 8




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date of the collaboration, and $875 related to the funding of the research
collaboration. During the first quarter of 2003, the Company recognized
revenue of $1,723 under the 2002 Roche Agreement, representing $348 related
to the upfront license payment and a milestone payment received during the
first quarter 2003, which are being amortized over the expected development
period, and $1,375 related to the funding of the research collaboration.Hoffmann-LaRoche (2003 Collaboration)In September 2003, the Company entered into a second collaboration
agreement with Roche (2003 Roche Agreement). Under the 2003 Roche
agreement, the Company granted Roche the right, on a compound-by-compound
basis, to obtain an exclusive, worldwide, sublicensable license to the
Companys patent rights and know-how for any nicotinic alpha-7 partial
agonist that the Company develops during the five years following the
commencement of the collaboration.Under the 2003 Roche Agreement, Roche made a $10,000 upfront payment and
will make future payments based on the Company achieving certain
developmental milestones. Additionally, the agreement provides for Roche
to make quarterly payments of $750 over a two-year period for research
collaboration efforts.During the first quarter of 2004, the Company recognized revenue of $1,084
under the 2003 Roche Agreement, representing $334 related to the upfront
license payment, which is being amortized over the expected development
period of 7.5 years from the date of the collaboration, and $750 related to
the funding of the research collaboration.(6)
    
    Consulting AgreementsIn April 1998, the Company entered into a consulting agreement with one of
the founders of the Company for an initial term of four years, with the
option of being extended automatically for additional periods of one year.
Under the agreement, the Company is obligated to pay a consulting fee
during each of the one-year terms. Additionally, the Company was
required to provide additional options to the consultant upon the issuance
of new securities to ensure the founder maintained a 4.9216% ownership in
the Company, which obligation expired upon completion of the initial public
offering. Upon the closing of the initial public
offering, the Company issued 117,187 additional options with an exercise
price equal to the initial public offering price of $7.00, as a result of
which the Company will recognize $437 of compensation expense in the second
quarter of 2004.The Company has entered into consulting arrangements with research
consultants and scientific advisory board members for various consulting
services. The terms of these agreements do not exceed two years and
generally require the Company to pay consulting fees on a monthly or
quarterly basis as services are provided.(7)
    
    Subsequent EventOn April 5, 2004, the Company completed an initial public offering. The
Company issued 5,000,000 shares of common stock on April 5, 2004 and
750,000 shares of common stock on April 20, 2004, both issuances at $7.00
per share. After deducting underwriting discounts and expenses and
estimated offering-related expenses, the initial public offering resulted
in net proceeds to the Company of approximately $35,400. In
connection with the initial public offering, all of the outstanding shares
of the Companys redeemable convertible preferred stock, including accrued
but unpaid dividends, were automatically converted into 13,295,427 shares
of the Companys common stock. Additionally, 1,536 shares of the Companys
common stock were issued upon the net share settled exercise of warrants,
which occurred immediately prior to the closing of the initial public
offering. Because the offering closed after March 31, 2004, the results of
the offering are not reflected in the accompanying unaudited financial
statements. A summary of the terms of the initial public offering can be
found in the Companys registration statement on Form S-1, as amended (File
No. 333-111474), which was declared effective by the Securities and
Exchange Commission on April 5, 2004. 9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations This quarterly report on Form 10-Q, including the following managements
discussion and analysis of financial condition and results of operations,
contains forward-looking statements that you should read in conjunction
with the financial statements and notes to
financial statements that we have included elsewhere in this report. These
statements are based on our current expectations, assumptions, estimates
and projections about our business and our industry, and involve known and
unknown risks, uncertainties, and other factors that may cause our or our
industrys results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity,
performance or achievements expressed or implied in, or contemplated by,
the forward-looking statements. Words such as believe, anticipate,
expect, intend, plan, will, may, should, estimate, predict,
potential, continue, or the negative of such terms or other similar
expressions, identify forward-looking statements. Our actual results and
the timing of events may differ significantly from the results discussed in
the forward-looking statements, and you should not place undue reliance on
these statements. Factors that might cause such a difference include those
discussed below under the heading Factors that May Affect Future Results,
as well as those discussed elsewhere in this quarterly report on Form 10-Q.
We disclaim any intent or obligation to update any forward-looking
statements as a result of developments occurring after the period covered
by this report or otherwise. Overview Since our incorporation in March 1997, we have devoted substantially all of
our resources to the discovery and development of innovative drug
candidates for the treatment of a broad range of CNS conditions that
exhibit significant impairment of memory and other cognitive functions. We
currently have four clinical and preclinical drug candidates in
development, as well as multiple drug discovery programs addressing
specific CNS targets. We seek to leverage our pipeline of early
development candidates through collaborations with leading pharmaceutical
and biotechnology companies. Our development programs target the treatment
of a variety of cognitive disorders, including Alzheimers disease,
depression and schizophrenia. We have entered into two separate collaborations with Roche for clinical
development, one for PDE4 inhibitors and the other for nicotinic alpha-7
partial agonists. As of March 31, 2004, we had received $40.3 million in
licensing fees, payments for research and development services, milestone
payments and an equity investment under these collaborations. We could
receive up to $248.0 million in milestone payments, including the license
fees previously paid and bonus payments for achieving certain sales
milestones, from these collaborations (if we achieve all of the milestones
for one neurological product and one psychiatric product under each
collaboration agreement). These amounts are in addition to payments for
research and development services, some of which have previously been paid,
and royalties, which would be payable on product sales. We may not reach
all of the milestones, in which event we would likely receive substantially
less than $248.0 million under the collaborations. In July 2001, we entered into an agreement with Bayer for the in-license of
the compound we refer to as MEM 1003. As of March 31, 2004, we had paid
$1.0 million in upfront and milestone payments under this agreement. Under
the agreement, we are additionally required to make milestone payments of
up to $19.0 million upon completion of future milestones (including a $1.0
million milestone payment which will be due upon commencement of Phase II
clinical trials) and to pay royalties on sales of any products
incorporating the licensed compound. Since our inception, we have incurred substantial losses, and as of March
31, 2004, we had an accumulated deficit of $101.1 million, of which $19.4
million related to preferred dividends that were forfeited upon the
conversion of our redeemable convertible preferred stock upon the closing
of our initial public offering on April 8, 2004. These losses and
accumulated deficit have resulted from the significant costs incurred in
the research and development of our compounds and technologies, including
payroll and payroll-related costs, manufacturing costs of preclinical and
clinical grade materials, facility and facility-related costs, 10




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preclinical study costs, clinical trial costs, and general and
administrative costs. We expect that our losses will continue, and will
likely increase substantially, for the foreseeable future as we continue to
expand our research, development, clinical trial activities and
infrastructure in support of this expansion. Because a substantial portion of our revenues for the foreseeable future
will depend on achieving development and clinical milestones, and
potentially, from entering into new collaborations, our revenue may vary
substantially from year to year and quarter to quarter. Our operating
expenses may also vary substantially from year to year and quarter to
quarter based on the timing of clinical trial patient accruals and
collaborative activities. In particular, we are exploring a potential
collaboration regarding our MEM 1003 product candidate program. If we do
not enter into such a collaboration, and decide to advance the MEM 1003
development program on our own, our research and development expenses would
increase significantly. We believe that period to period comparisons of
our results of operations are not meaningful and should not be relied on as
indicative of our future performance. Recent Developments Our registration statement on Form S-1, as amended (File No. 333-111474)
for the initial public offering of our common stock was declared effective
on April 5, 2004. Our common stock commenced trading on the Nasdaq
National Market on April 5, 2004 under the trading symbol MEMY. UBS
Securities LLC, SG Cowen Securities Corporation, Banc of America Securities
LLC and Fortis Securities Inc. were the managing underwriters. 5,750,000
 shares of common stock were sold in the offering, including shares that
were issued upon the exercise by the underwriters of their over-allotment
option on April 20, 2004, at $7.00 per share, for aggregate gross proceeds
of $40.2 million. In connection with the offering, we paid underwriters
commission of $2.8 million and incurred offering expenses estimated at $2.0
million. After deducting the underwriters commission and the estimated
offering expenses, we received net proceeds of $35.4 million from the
offering. Results of Operations Three Months Ended March 31, 2004 compared to Three Months Ended March 31, 2003
(in thousands, except for share and per share amounts) Revenue We do not currently have any commercial products for sale and do not
anticipate having any commercial products for sale within the foreseeable
future. To date, our revenue has been derived solely from our two
collaborations with Roche. Any additional revenue that we may receive in
the future is expected to consist primarily of license fees, milestone
payments, reimbursement for research and development services and royalty
payments from either Roche or from other collaborations. Revenue for the three months ended March 31, 2004 was $2,371, representing
the currently recognizable portion of licensing fees and milestone
payments, as well as payment for research and development services from
Roche. This represents a 37.6% increase from revenue of $1,723 for the
three months ended March 31, 2003, primarily attributable to a second
collaboration agreement with Roche entered into in September 2003. Research and development expense Research and development expense increased by $421, or 7.8%, to $5,815 for
the three months ended March 31, 2004 from $5,394 for the three months
ended March 31, 2003. Of this increase, $150 was attributable to higher personnel and
personnel-related costs as we increased headcount to support 11




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our discovery and development programs, $130 was attributable to an
increase in building occupancy costs and utility costs associated with
running our facility, $101 was due to maintenance and
repairs and $58 was due to the increased purchases of lab related material
and supplies. We expect that research and development expenses will
continue to increase as we increase the number of drug candidates and
indications for which we conduct preclinical tests and clinical trials. Research and development costs are charged to operations as incurred.
Research and development costs include an allocation of indirect costs of
$1,339 and $1,161 for the three months ended March 31, 2004 and 2003,
respectively. Indirect costs principally represent facility and information
technology costs. General and administrative expense General and administrative expense increased $414 or 42.9%, to $1,378 for
the three months ended March 31, 2004 from $964 for the three months ended
March 31, 2003. The increase is primarily comprised of non-cash compensation expense of
$176 related to the grant of employee stock options, $77 in higher
personnel and personnel-related costs, an increase of $51 in legal fees relating to an
increased number of patents and higher insurance premiums of $34. During the remainder of 2004, and thereafter,
we expect that general and administrative expense will increase as we add
personnel, increase investor relations activities, pay for insurance
coverage appropriate for a public company and comply with public company
reporting and other obligations. Interest income and interest expense Interest income decreased $26, or 21.1%, to $97 for the three months ended
March 31, 2004. Interest expense decreased $11, or 9.5%, to $105 for the
three months ended March 31, 2004. The decrease in interest income was
attributable to lower rates, and the decrease in interest expense was
related to paying off two existing equipment notes. Income taxes For the three months ended March 31, 2004 and 2003, we recognized $2 and $6
in state income taxes, respectively. Preferred stock dividends and accretion Preferred stock dividends and accretion increased by $252, or 15.1%, to
$1,917 for the three months ended March 31, 2004 from $1,665 for
the three months ended March 31, 2003. This
increase is attributable to the issuance of Series Roche preferred stock in
September 2003. Liquidity and capital resources At March 31, 2004, cash and cash equivalents were $23,634 as compared to
$30,107 at December 31, 2003. Our cash and cash equivalents are highly
liquid investments with a maturity of three months or less at date of
purchase and consist of time deposits and investments in money market funds
with commercial banks and financial institutions, short-term commercial
paper and government obligations. Net cash used in operating activities was $5,043 for the three months ended
March 31, 2004. Net cash used in operating activities for the three months
ended March 31, 2004 reflects primarily the net loss of $4,832,
working capital uses of $127, the recognition of $745 of deferred revenues from our
two Roche collaborations offset by non-cash charges for depreciation
expense of $464. Net cash used in investing activities for the three
months ended March 31, 2004 was $1,828, of which $794 was used for a
facility expansion and the remaining $1,034 was used to purchase additional
equipment. Net cash provided by financing activities during the three
months ended March 31, 2004 was $398 and primarily consisted of $960
generated from borrowings under equipment notes, offset by $570 in
repayment of equipment notes. 12




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The following table summarizes as of March 31, 2004, our contractual
obligations for equipment notes and operating lease payments in connection
with a lease of premises and the expansion of facilities. This table
should be read in conjunction with the notes accompanying our financial
statements. Payments due inContractual obligations
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009-2014Building contract
    
    
    1,768
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equipment notes payable
    
    
    1,735
    
    
    
    1,707
    
    
    
    877
    
    
    
    361
    
    
    
    
    
    
    
    Operating lease payments
    
    
    1,347
    
    
    
    1,849
    
    
    
    1,905
    
    
    
    1,962
    
    
    
    2,021
    
    
    
    12,057
 We have an agreement to expand our laboratory facilities by 17,662 square
feet at a cost of approximately $3,100, of which $1,768 remains to be
expended in 2004. We estimate that the additional square footage will
result in a $290 annual increase of our rent expense beginning April 2004.
The increase is reflected in the table above. In connection with our in-license agreement with Bayer for MEM 1003, we are
required to make payments up to $19,000 upon completion of future
milestones (including a $1,000 milestone payment due upon commencement of
Phase II clinical trials) and to pay royalties upon sales of products. We expect to incur losses from operations for the foreseeable future. We
expect to incur increasing research and development expenses, including
expenses related to additional preclinical statistics and clinical trials,
as well as for the hiring of personnel. We expect that our general and
administrative expenses will increase in the future as we expand our
finance and administrative staff, add infrastructure and incur additional
costs related to being a public company, including directors and officers
insurance, investor relations programs and increased professional fees. We
believe our existing cash and cash equivalents, together with the net
proceeds of our initial public offering, will be sufficient to fund our
operating expenses, repayment of equipment notes and capital equipment
requirements through year-end 2005. Our future capital requirements will
depend on many factors, including:  Ø
    
    the number of compounds and drug candidates that we advance
through the development process;Ø
    
    the success of our collaborations with Roche;Ø
    
    whether we are able to enter into a collaboration with
regard to MEM 1003 and the terms of any such collaboration;Ø
    
    our ability to establish and maintain additional collaborations;Ø
    
    the scope and results of our or our collaborators clinical trials;Ø
    
    potential in-licensing or acquisition of other compounds or technologies;Ø
    
    the timing of, and the costs involved in, obtaining regulatory approvals;Ø
    
    the availability of third parties, and the cost, to manufacture compounds for clinical trial supply;Ø
    
    the cost of commercialization activities, including product
marketing, sales and distribution; andØ
    
    the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other patent-related
costs, including litigation costs and the results of such
litigation. Currently we have no committed sources of capital other than for the
expansion of our laboratory facility noted above. To the extent our
capital resources are insufficient to meet future capital requirements, we
will need to raise additional capital by selling equity or by incurring
additional indebtedness to fund our operations. We cannot assure you that
additional equity or debt financing will be available on acceptable terms,
if at all. If adequate funds are not available, we may be required to
delay, reduce the scope of or eliminate our research and development
programs, reduce our commercialization efforts, or obtain funds through
arrangements with collaborators or others that may require us to relinquish
rights to certain drug 13




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candidates that we might otherwise seek to develop or commercialize
independently. Additionally, any future equity funding may dilute the
ownership of our equity investors. Critical accounting policies Our discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, we evaluate our
estimates and judgments, including those related to revenue recognition,
accrued expenses, research and development and the fair valuation of stock
related to stock-based compensation. We base our estimates on historical
experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our
significant judgments and estimates used in the preparation of our
financial statements. Revenue recognition We recognize revenue relating to our collaborations in accordance with the
Securities and Exchange Commissions Staff Accounting Bulletin No. 104,
Revenue Recognition. Revenues under such collaborations may include the
receipt of non-refundable license fees, milestone payments and research
and development payments. Given the various types of payments to us under our collaboration
agreements, we must evaluate these agreements to determine units of
accounting for revenue recognition purposes. When we have continuing
performance obligations under the terms of a collaboration, non-refundable
license fees and performance milestone payments are recognized as revenue
ratably over the period in which we expect to obtain FDA approval of the
compound for which the milestone is paid or, in the case of an upfront
payment, the first compound anticipated to be so approved. Solely for
purposes of revenue recognition, we have estimated the period until
approval of the first compound under our 2002 and 2003 collaborations with
Roche as 7.5 years from the date of each collaboration. We periodically
review the estimated development period and, to the extent such estimate
changes, the impact of such change is recorded at that time. Deferred
revenue consists of payments received in advance of revenue recognition
under such collaborations. Payments received from collaboration partners for research and development
efforts performed by us are recognized as services are performed. Accrued expenses As part of the process of preparing financial statements, we are required
to estimate accrued expenses. This process involves identifying services
that have been performed on our behalf and estimating the level of service
performed and the associated cost incurred for such service where we have
not been invoiced or otherwise notified of actual cost. This is done as of
each balance sheet date in our financial statements. Examples of estimated
accrued expenses include:  Ø
    
    professional service fees, such as lawyers and accountants;Ø
    
    contract clinical service fees;Ø
    
    fees paid to data management organizations and
investigators in conjunction with clinical trials; and 14




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Ø
    
    fees paid to contract manufacturers in conjunction with the
production of clinical materials. In connection with the above
services, our estimates are most affected by
our projections of the timing of services provided relative to the actual
level of services incurred by such service providers. The majority of our
service providers invoice us monthly in arrears for services performed. In
the event that we do not identify certain costs that have begun to be
incurred or we under or over estimate the level of services performed or
the costs of such services, our actual expenses could differ from such
estimates. The date on which certain services commence, the level of
services performed on or before a given date, and the cost of such services
are often subjective determinations. We make these judgments based upon
the facts and circumstances known to us in accordance with accounting
principles generally accepted in the United States of America. Research and development expense Research and development expenses include the costs associated with our
internal research and development activities, including salaries and
benefits, occupancy costs and research and development conducted for us by
third parties, such as sponsored university-based research and clinical
research organizations. In addition, research and development expenses
include the cost of clinical trial drug supply shipped to our clinical
research organizations which amounts are expensed upon purchase. We account for our clinical trial costs by estimating the total cost to
treat a patient in each clinical trial and recognizing this cost as and
when the patient receives treatment, beginning when the patient enrolls in
the trial. This estimated cost includes payments to the trial site and
patient-related costs, including laboratory costs related to the conduct of
the trial. Cost per patient varies based on the type of clinical trial,
the site of the clinical trial, and the length of the treatment period for
each patient. As actual costs become known to us, we adjust our accrual;
such changes in estimate may be a material change in our clinical study
accrual, which could also materially affect our results of operations. Stock-based compensation We have elected to follow APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, in accounting for our
stock-based employee compensation plans, rather than the alternative fair
value accounting method provided for under SFAS No. 123, Accounting for
Stock-Based Compensation.In the notes to our financial statements, we
provide pro forma disclosures in accordance with SFAS No. 123, as amended
by SFAS No. 148, Accounting for Stock-Based Compensation, Transition and
Disclosure, and related pronouncements. We account for stock options and warrants granted to non-employees based on
the fair value of the stock option or warrant. The factor which most
affects the accounting for stock-based compensation is the fair value of
the common stock at the measurement date. At March 31, 2004, our common
stock was not publicly traded. As a result, in valuing our common stock,
stock options and warrants we considered the pricing of private equity
sales, company specific events, independent valuations, economic trends and
the rights and preferences of the security being valued. 15




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Factors that May Affect Future Results RISKS RELATING TO OUR BUSINESS We expect to continue to incur substantial losses, and we may never achieve
profitability. We began operations in 1998 and have a limited operating history upon which
you can evaluate our current business and our prospects. We have incurred
substantial and increasing operating losses in each year since inception,
and we may never achieve profitability. Our net loss for the quarter ended
March 31, 2004 was $4.8 million, and as of March 31, 2004, we had an
accumulated deficit of approximately $101.1 million, of which $19.4 million
related to preferred dividends that were forfeited upon the conversion of
our redeemable convertible preferred stock upon the closing of our initial
public offering on April 8, 2004. We expect to incur substantial and
increasing net losses for the foreseeable future as we increase our
spending to increase the number of our development programs and expand our
clinical trial activity, as well as increase our in-licensing arrangements,
acquire technologies and further expand our infrastructure. As a result, we
will need to generate significant revenue or obtain external financing to
pay these costs and achieve profitability. Moreover, these losses have had,
and are expected to continue to have, an adverse impact on our working
capital, total assets and stockholders equity. All of our revenue to date has been derived from license fees, milestone
payments and payments for research and development services under our two
collaborations with Roche. Additional revenue from these collaborations is
dependent on reaching specified milestones or achieving product sales,
neither of which is within our control. We have not completed development
of any drugs, and we do not expect that any drugs resulting from our or our
collaborators research and development efforts will be commercially
available for a significant number of years, if at all. We do not know
whether or when we will become profitable because of the significant
uncertainties with respect to our ability to generate revenue from the sale
of products based on our drug candidates. Our drug candidates are novel and in the early stages of development. We are a biopharmaceutical company focused on the discovery and development
of drug candidates, all of which are at an early stage of development. We
have only one drug candidate for which we have completed Phase I clinical
trials and one drug candidate for which our collaborator, Roche, is
currently conducting Phase I clinical trials. The balance of our activities
are focused on the preclinical development of two drug candidates and the
identification and optimization of compounds to address biological targets
that may be implicated in memory and other cognitive functions. Our drug
discovery and development methods are unproven and may not lead to
commercially viable drugs for any of several reasons. For example, we may
fail to identify appropriate targets or compounds, our drug candidates may
fail to be safe and effective in preclinical and clinical trials, or we may
have inadequate financial or other resources to pursue discovery and
development efforts for new drug candidates. Our drug candidates will
require significant additional development, preclinical studies and
clinical trials, regulatory clearances and additional investment by us or
our collaborators before they can be commercialized. The diseases we are targeting are poorly understood, which increases our
chances of failure. Our drug development programs principally target Alzheimers disease,
depression and schizophrenia. These diseases and their causes are poorly
understood. There are no approved drugs that treat these diseases through
the mechanisms used by our drug candidates, and there is only a limited
scientific understanding of the relationships between these diseases and
the neurological pathways targeted by our drug candidates. These
uncertainties increase the risk that one or more of our drug development
programs may fail. 16




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We may not be able to succeed in our business model of seeking to enter
into collaborations at early stages of development. We currently do not
have a collaboration partner for MEM 1003, our most clinically advanced
program. Our current strategy for developing, manufacturing and commercializing our
drug candidates includes securing collaborations with pharmaceutical and
biotechnology companies relatively early in the drug development process
and for these collaborators to undertake the advanced clinical development
and commercialization of our drug candidates. We have entered into only two
collaborations to date, both of which are with Roche and were entered into
prior to commencing clinical trials. It may be difficult for us to find
third parties that are willing to enter into collaborations for our other
drug candidates at an early stage of development or on economic terms that
are comparable to the terms of our collaborations with Roche or at all. If we are not able to continue to enter into collaborations for our drug
candidates at relatively early stages, we could be required to undertake
and fund further development, clinical trials, manufacturing and marketing
activities solely at our own expense. For example, we are currently seeking
a collaboration partner for our MEM 1003 program. If we are not able to
engage a collaboration partner prior to the commencement of Phase II
trials, which we are in the process of designing, we intend to fund the
initial Phase II trials ourselves. If initial Phase II trials are
successful, we may at that time choose to seek a collaboration partner for
our MEM 1003 program, or we may choose to continue the program at our own
expense. Failure to engage a collaboration partner for MEM 1003 following
initial Phase II clinical trials or for any other drug candidate would
substantially increase our requirements for capital, which might not be
available on favorable terms, or at all. Alternatively, we would have to
substantially reduce our development efforts, which would delay the
commercialization of our drug candidates. We are dependent upon Roche and will be dependent upon any other companies
with which we enter into collaborations to conduct clinical trials and to
manufacture, market and sell our products. Based on our strategy of securing collaborations with pharmaceutical and
biotechnology companies that would undertake later-stage clinical
development and commercialization of our products, we have entered into two
collaborations with Roche for compounds representing a substantial portion
of our drug development pipeline and representing all of our revenue to
date. We do not have day-to-day control over Roches activities, and we are
unlikely to control the activities of any other collaborators with which we
enter into agreements. Roche or any other collaborator may adhere to
criteria for determining whether to proceed with clinical development of a
particular compound that leads them to terminate a drug development program
under circumstances where we might have continued such a program. Any
collaborator may be unwilling or unable to fulfill its obligations to us,
including its development and commercialization responsibilities in respect
of our drug candidates. Our collaborators will have significant discretion
in determining the efforts and amount of resources that they dedicate to
our collaborations. Our ability to generate milestone payments and royalties from our
collaborators depends on our collaborators abilities to establish the
safety and efficacy of our drug candidates, obtain regulatory approvals and
achieve market acceptance of products developed from our drug candidates.
In addition to testing and seeking regulatory approval, we are dependent on
our collaborators for the manufacturing of clinical scale quantities of some
of our drug candidates and would be dependent on them in the future for
commercial scale manufacturing, distribution and direct sales. These third
parties may not be successful in manufacturing our drug candidates on a
commercial scale or in successfully commercializing them. Under our collaboration agreements with Roche, Roches termination rights
include the ability to terminate each collaboration with us at any time,
with or without cause, on relatively short notice. Future collaboration
partners, if any, are also likely to have the right to terminate the
collaboration on relatively short notice. If Roche or any future
collaborator terminates its collaboration with us or fails to perform or 17




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satisfy its obligations to us, the development or commercialization of our
drug candidates would be delayed and our ability to realize milestone
payments and royalty revenue would be adversely affected. Our collaborations are subject to many risks, which could prevent us from
developing and commercializing our drug candidates. We are dependent on Roche and any other collaborators that we engage in the
future for drug development and commercialization. Additional risks that we
face in connection with our collaborations include the following:  Ø
    
    our collaborators may develop and commercialize, either alone or with
others, products and services that are similar to or competitive with the
products that are the subject of the collaboration with us;Ø
    
    collaborators may underfund or not commit sufficient resources to the
testing, marketing, distribution or other development of our products;Ø
    
    our collaborators may not properly maintain or defend our intellectual
property rights or they may utilize our proprietary information in such a
way as to invite litigation that could jeopardize or potentially invalidate
our proprietary information or expose us to potential liability;Ø
    
    our collaborators may encounter conflicts of interest, changes in
business strategy or other business issues which could adversely affect
their willingness or ability to fulfill their obligations to us (for
example, pharmaceutical and biotechnology companies historically have
re-evaluated their priorities following mergers and consolidations, which
have been common in recent years in these industries); andØ
    
    disputes may arise between us and our collaborators delaying or
terminating the research, development or commercialization of our drug
candidates, resulting in significant litigation or arbitration that could
be time-consuming and expensive, or causing collaborators to act in their
own self-interest and not in the interest of our stockholders. In addition to our collaborations, we are dependent on certain license
relationships. We have in-licensed technology that is important to our business, and we
expect to enter into additional licenses in the future. For example, we
hold a license from Bayer for intellectual property relating to MEM 1003.
Our license from Bayer imposes on us development and commercialization
obligations, milestone and royalty payment obligations and other
obligations. Other licenses to which we are a party contain, and we expect
that any future in-licenses will contain, similar provisions. If we fail to
comply with these obligations to Bayer or to any other licensor, the
licensor may have the right to terminate the license, in which event we
would not be able to commercialize drug candidates or technologies that
were covered by the license. Also, the milestone and other payments
associated with these licenses could make it less profitable for us to
develop drug candidates utilizing these drug candidates and technologies. In the event that our license agreements are terminated, we may not be able
to obtain licenses for alternative drug candidates or technologies on terms
favorable to us, if at all. If any of our licensors terminates or breaches
its agreement with us, such termination or breach could have a material
adverse effect on our business. Our preclinical and clinical testing results may not be predictive of
future trial results. If subsequent study or trial results are unfavorable,
we may be forced to stop developing drug candidates that we currently
believe are important to our future. The results of preclinical studies and early stage clinical trials of our
drug candidates are not necessarily predictive of the results of subsequent
preclinical studies or later stage clinical trials. Our approach to drug
development involves rigorous preclinical testing with a variety of in
vitroassays and animal models in order to obtain early indications of
efficacy and safety. We have invested in and continue to invest substantial
resources in this capability. However, since none of our drug candidates
has progressed past 18




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Phase I clinical trials and only one drug candidate has completed Phase I
clinical trials, we cannot determine whether our preclinical testing
methodologies are predictive of clinical safety or efficacy. As we or our collaborators obtain results from further preclinical or
clinical trials, we or our collaborators may elect to discontinue or delay
preclinical studies or clinical trials for certain products in order to
focus our resources on more promising products. We or our collaborators may
also change the indication being pursued for a particular drug candidate or
otherwise revise the development plan for that compound. Moreover, drug
candidates in later stages of clinical trials may fail to show the desired
safety and efficacy traits despite having progressed through preclinical or
initial clinical testing. For example, we are currently developing PDE4
inhibitors for a variety of indications. Drugs in this class of compounds
developed by others generally have shown adverse side effect profiles that
have limited the ability of these compounds to be used as effective drugs.
While our early preclinical tests and the initial Phase I clinical trial
with MEM 1414 suggest a better tolerability profile than other known PDE4
inhibitors, in a 13-week animal toxicology study of MEM 1414 recently
completed by Roche, there were deaths at high doses in one of the two
species tested. Roche has initiated additional investigational animal
toxicology and other assessments of MEM 1414. The results of these
assessments and current Phase I clinical trials or other subsequent studies
could impact the continuation of the MEM 1414 program under the Roche
collaboration. In addition, any other PDE4 inhibitors that we or our
collaborators develop may not ultimately prove to have a better safety
profile than PDE4 inhibitors developed by others in light of these
problems. If our clinical trials or those of our collaborators are unsuccessful, or
if we experience significant delays in these trials, our ability to
commercialize our products will be impaired. Before obtaining regulatory approval for the sale of our drug candidates,
they must be subjected to extensive clinical trials to demonstrate their
safety and efficacy for humans. The clinical trials of any drug candidates
that we develop must comply with regulation by numerous federal, state and
local government authorities in the U.S., principally the U.S. Food and Drug
Administration (FDA), and by similar agencies in other countries.
Securing FDA approval requires the submission of extensive preclinical and
clinical data and supporting information for each therapeutic indication to
establish the product candidates safety and efficacy. Only two of our drug candidates, MEM 1003 and MEM 1414, are currently
undergoing clinical trials. Neither has progressed past Phase I clinical
trials, which have been conducted in the United Kingdom. It takes years to complete the testing of a product, and failure can occur
at any stage of testing. For example, our testing may be delayed or halted
due to any of the following:  Ø
    
    any preclinical test or clinical trial may fail to produce safety and
efficacy results satisfactory to the FDA or foreign regulatory authorities;Ø
    
    preclinical and clinical data can be interpreted in different ways,
which could delay, limit or prevent regulatory approval;Ø
    
    negative or inconclusive results from a preclinical test or clinical
trial or adverse medical events during a clinical trial could cause a
preclinical study or clinical trial to be repeated or a program to be
terminated, even if other studies or trials relating to the program are
successful;Ø
    
    the FDA can place a clinical hold on a trial if, among other reasons, it
finds that patients enrolled in the trial are or would be exposed to an
unreasonable and significant risk of illness or injury;Ø
    
    the FDA might not approve the manufacturing processes or facilities that
we utilize, or the processes or facilities of our collaborators;Ø
    
    any regulatory approval we ultimately obtain may be limited or subject
to restrictions or post-approval commitments that render the product not
commercially viable; 19




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Ø
    
    we or our collaborators may encounter delays or rejections based on
changes in regulatory agency policies during the period in which we develop
a drug or the period required for review of any application for regulatory
agency approval; andØ
    
    our clinical trials may not demonstrate the safety and efficacy of our
compounds or result in marketable products. In addition, we or our collaborators may encounter delays or rejections
based on our inability to enroll a sufficient number of patients to
complete our clinical trials. Patient enrollment depends on many factors,
including the size of the patient population, the nature of the trial
protocol, the proximity of patients to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment may result in
increased costs, program delays or both, which could have a harmful effect
on our ability to develop products. We face intense competition in the development and commercialization of
our drug candidates. The development and commercialization of new drugs is highly competitive.
There are a number of companies that focus on the CNS disease markets that
we are addressing. We face competition from major pharmaceutical companies,
specialty pharmaceutical companies and biotechnology companies worldwide.
Additionally, various large pharmaceutical and biotechnology companies,
universities and public agencies are developing and using technologies to
address the treatment of cognitive disorders. Many of our competitors
possess greater financial, managerial, scientific and technical resources
than we do and have significantly more experience in preclinical testing,
human clinical trials, product manufacturing, the regulatory approval
process and marketing and distribution than we do, all of which put us at a
competitive disadvantage. We face and will continue to face competition in
the discovery, in-licensing, development and commercialization of our drug
candidates, which could severely impact our ability to generate revenue or
achieve significant market acceptance of our drug candidates. Furthermore,
new developments, including the development of other drugs and technologies
and methods of preventing the incidence of disease, such as vaccines, occur
in the pharmaceutical industry at a rapid pace. These developments could
render our drug candidates obsolete or noncompetitive. We are aware that there are a number of drugs under development by both
large pharmaceutical companies and small biotechnology companies for
additional treatments of Alzheimers disease, depression and schizophrenia
as well as potential therapies for vascular dementia and MCI. We depend on our key scientific and other key personnel. If we are not able
to retain them or recruit additional scientific and technical personnel,
our business will suffer. Our performance is substantially dependent on the performance of our senior
management and key scientific and technical personnel, particularly Tony
Scullion, our Chief Executive Officer, Dr. Axel Unterbeck, our President
and Chief Scientific Officer, Dennis Keane, our Chief Financial Officer,
Dr. James E. Barrett, our President of Research and Development, and
Gardiner F. H. Smith, our Vice President of Business Development. Our
employment agreements with these executive officers are terminable by us or
the executive on short or no notice. The loss of the services of one or
more of our key employees or the inability to attract and retain qualified
personnel could have an adverse impact on our business and prospects. We do
not carry key man life insurance on any of our key personnel. We face competition for research scientists and technical staff from other
companies, academic institutions, government entities, nonprofit
laboratories and other organizations. To pursue our product development
plans, we will need to hire additional management personnel and additional
qualified scientific personnel to perform research and development. If we
cannot continue to attract and retain, on acceptable terms, the qualified
personnel necessary for the continued development of our business, we may
not be able to sustain our operations or grow. 20




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We may need additional financing, which may be difficult to obtain. Our
failure to obtain necessary financing, or obtaining financing on
unattractive terms, could adversely affect our development programs and
other operations. We believe that the proceeds from our recently completed offering and
projected revenue from our collaborations should be sufficient to fund our
anticipated levels of operations through year-end 2005. However, our
business or operations may change in a manner that would consume available
resources more rapidly than we anticipate. Our future capital requirements will depend on many factors, including:  Ø
    
    the number of compounds and drug candidates that we advance through the
development process;Ø
    
    the success of our two collaborations with Roche;Ø
    
    whether we are able to enter into a collaboration with regard to MEM
1003 and the terms of any such collaboration;Ø
    
    our ability to establish and maintain additional collaborations;Ø
    
    the scope and results of our and our collaborators clinical trials;Ø
    
    potential in-licensing or acquisition of other compounds or
technologies;Ø
    
    the timing of, and the costs involved in, obtaining regulatory
approvals;Ø
    
    the availability of third parties, and the cost, to manufacture
compounds for clinical trial supply;Ø
    
    the cost of commercialization activities, including product marketing,
sales and distribution; andØ
    
    the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs and the results of such litigation. We may not be able to obtain additional financing when we need it or on
acceptable terms. If we are unable to obtain adequate financing on a timely
basis, we may have to reduce substantially or eliminate expenditures for
the development and production of certain of our proposed products or
obtain funds through arrangements with collaborators that require us to
relinquish greater rights to our technologies or drug candidates than we
might otherwise have done. Either of these alternatives could have a
material adverse effect on our business, operating results, financial
condition and future growth prospects. If we raise additional funds by
issuing equity securities, our then existing stockholders will experience
dilution, and the terms of any new equity securities may have preferences
over our common stock. If third-party clinical research organizations do not perform in an
acceptable and timely manner, our clinical trials could be delayed or
unsuccessful. We do not have the ability to conduct our clinical trials independently. In
addition to our collaborators, we rely and will continue to rely on
clinical investigators, third-party clinical research organizations and
consultants to perform some or all of the functions associated with
clinical trials. From time to time, clinical investigators, third-party
clinical research organizations and consultants have not performed in a
manner that we believed was acceptable or timely. In each case we have
discussed and resolved these issues with the vendor, and none of these
issues have led to a material delay or other material adverse effect on our
clinical trials. However, the failure of any vendor to perform in an
acceptable and timely manner in the future could cause a delay or other
material adverse effect on our clinical trials. If we or our collaborators cannot locate acceptable contractors to run a
portion of our or our collaborators clinical trials or enter into
favorable agreements with them, or if these third parties do not
successfully carry out their contractual duties, satisfy FDA and
other U.S.
and foreign legal and regulatory requirements 21




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for the conduct of clinical trials or meet expected deadlines, our clinical
development programs and those of our collaborators could be delayed and
otherwise adversely affected. If we or our collaborators fail to obtain regulatory clearance for our
current or future drug candidates, we will be unable to market and sell any
products and therefore may never be able to generate product revenue or be
profitable. We or our collaborators will be required to obtain and maintain an
effective investigational new drug application, or IND, to conduct human
clinical trials in the U.S. and must obtain and maintain regulatory approval
for commercial distribution. This process is expensive, uncertain and takes
many years. None of our drug candidates is currently approved for sale by
the FDA or by any other regulatory agency in the world, and our drug
candidates may never be approved for sale or become commercially viable. If
we, either alone or with collaborators, are unable to successfully complete
clinical trials of any of our current or future drug candidates, or if the
results of these trials are not positive or are only modestly positive, we
or our collaborators may not be able to obtain marketing approval for any
drugs or may obtain approval for indications that are not as broad as we
wanted. If this occurs, our business will be materially harmed, our ability
to generate revenue will be severely impaired and our stock price may
decline. Failure to obtain regulatory approval in foreign jurisdictions would
prevent us from marketing our products abroad. We intend to have our products marketed outside the U.S. In order to market
our products in the European Union and many other foreign jurisdictions, we
or our collaborators must obtain separate regulatory approvals and comply
with numerous and varying regulatory requirements. The approval procedure
varies among countries and can involve additional testing. The time
required to obtain approval may differ from that required to obtain FDA
approval. The foreign regulatory approval process entails all of the risks
associated with obtaining FDA approval. We and our collaborators may fail
to obtain foreign regulatory approvals on a timely basis, if at all.
Approval by the FDA does not ensure approval by regulatory authorities in
other countries, and approval by one foreign regulatory authority does not
ensure approval by regulatory authorities in other foreign countries or by
the FDA. We and our collaborators may not be able to file for, and may not
receive, necessary regulatory approvals to commercialize our products in
any market. If we or our collaborators fail to obtain these approvals, our
business, financial condition and results of operations could be materially
and adversely affected. Our potential products may not be commercially viable if we or our
collaborators fail to obtain an adequate level of reimbursement for these
products by Medicare and other third-party payors. Our commercial success will depend in part on third-party payors such as
government health administration authorities, including Medicare, private
health insurers and other organizations agreeing to reimburse patients for
the costs of our products. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Because most
persons suffering from Alzheimers disease are elderly, we expect that
coverage for any products that we and our collaborators successfully
develop to treat Alzheimers disease in the US will be provided primarily
through the Medicare program. Our business would be materially adversely
affected if the Medicare program were to determine that our drugs are not
reasonable and necessary and deny reimbursement of our or our
collaborators prospective products. Our business could also be adversely
affected if the Medicare program or other reimbursing bodies or payors
limit the indications for which our or our collaborators prospective
products will be reimbursed to a smaller set of indications than we believe
is appropriate. In some foreign countries, particularly the countries of the European
Union, the pricing of prescription pharmaceuticals is subject to
governmental control. In these countries, pricing negotiations with
governmental authorities can take 6 to 12 months or longer after the
receipt of regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we or our
collaborators may be required to conduct a clinical trial that compares the
cost-effectiveness of our products to other available therapies. If
reimbursement for our products in foreign countries is unavailable 22




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or limited in scope or amount, or if pricing is set at unsatisfactory
levels, our business could be materially harmed. If physicians and patients do not accept our product candidates, we may be
unable to generate significant revenue. Even if our drug candidates obtain regulatory approval, they still may not
gain market acceptance among physicians, patients and the medical
community, which would limit our ability to generate revenue and would
adversely affect our results of operations. Physicians will not recommend
products developed by us or our collaborators until clinical data or other
factors demonstrate the safety and efficacy of our products as compared to
other available treatments. In addition, competitors may be more effective
in marketing their drugs. Even if the clinical safety and efficacy of
products developed from our drug candidates is established, physicians may
elect not to recommend these products for a variety of factors, including
the reimbursement policies of government and third-party payors. We have no manufacturing capacity and depend on third parties to
manufacture our products. We do not currently operate manufacturing facilities for clinical or
commercial production of our drug candidates under development, and we do
not currently intend to do so in the foreseeable future. We have no
manufacturing experience, and we currently lack the resources and
capability to manufacture any of our drug candidates on a clinical or
commercial scale. As a result, we are dependent on third parties, including
Roche, for the manufacture of clinical and commercial scale quantities of
our drug candidates. These third parties may not be successful in
manufacturing these drug candidates on a commercial scale. Although we
believe that there are an adequate number of suppliers for our compounds
under development and for those that may become future products, we could
experience a shortage of suppliers, or an interruption in supply if a
supplier relationship were terminated, that could have an adverse effect on
our or our collaborators ability to supply products. In addition, in the
event of a natural disaster, equipment failure, power failure, strike or
other difficulty, we may be unable to replace our third-party manufacturers
in a timely manner. Manufacturing of our products must meet applicable regulatory standards. We, our collaborators and our third-party manufacturers are required to
adhere to federal current good manufacturing practices requirements, known
as cGMP. Under these requirements, our drug candidates must be manufactured
and our records maintained in a prescribed manner with respect to
manufacturing, testing, quality control and other activities. Furthermore,
the manufacturing facilities used by us or our collaborators must pass a
pre-approval inspection by the FDA and foreign authorities before obtaining
marketing approval, and will be subject to periodic inspection by the FDA
and corresponding foreign regulatory authorities. These inspections may
result in compliance issues that could prevent or delay marketing approval,
result in interruption or shortage of clinical or commercial product or
require the expenditure of money or other resources to correct. If these
manufacturing facilities fail to comply with applicable regulatory
requirements, we may be subject to fines, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. We face the risk of product liability claims and may not be able to obtain
insurance. Our business exposes us to the risk of product liability claims that is
inherent in the development of drugs. If the use of one or more of our or
our collaborators drugs harms people, we may be subject to costly and
damaging product liability claims brought against us by clinical trial
participants, consumers, health care providers, pharmaceutical companies or
others selling our products. We have product liability insurance that
covers our clinical trials up to an aggregate of $10.0 million annually,
with a deductible of $25,000 per claim. We believe that this coverage is
consistent with industry practice, but we cannot predict all of the
possible harms or side effects that may result and, therefore, the amount
of insurance coverage we currently hold may not be adequate to cover all
liabilities we might incur. We intend to expand our insurance coverage to
include the sale of commercial products if we obtain marketing approval for
our drug candidates in development, but we may be unable to obtain
commercially reasonable product liability 23




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insurance for any products approved for marketing. If we are unable to
obtain insurance at an acceptable cost or otherwise protect against
potential product liability claims, we will be exposed to significant
liabilities, which may materially and adversely affect our business and
financial position. If we are sued for any injury allegedly caused by our
or our collaborators products, our liability could exceed our total assets
and our ability to pay the liability. A successful product liability claim
or series of claims brought against us would decrease our cash and could
cause our stock price to fall. Our or our collaborators products could be subject to restrictions or
withdrawal from the market. We or they may be subject to penalties if we or
they fail to comply with post-approval regulatory requirements or
experience unanticipated problems with any approved products. If we or our collaborators obtain marketing approval for a product, that
product, along with the associated manufacturing processes, any
post-approval clinical data and the advertising and promotional activities
for the product will be subject to continual requirements, review and
periodic inspections by the FDA and other regulatory bodies. Even if
regulatory approval of a product is granted, the approval may be subject to
limitations on the indicated uses for which the product may be marketed or
to other restrictive conditions of approval. Furthermore, any approval may
contain requirements for costly post-marketing testing and surveillance to
monitor the safety or efficacy of the product. Later discovery of
previously unknown problems with our products supplier processes, or
failure to comply with regulatory requirements, may result in:  Ø
    
    product recalls;Ø
    
    revocation of previously granted approvals;Ø
    
    the need to conduct additional clinical trials; andØ
    
    fines and other censures. We or our collaborators may be slow to adapt, or we or they may not be able
to adapt, to changes in existing regulatory requirements or adoption of new
regulatory requirements or policies. Our business activities require compliance with environmental laws. If we
violate these laws, we could be subject to significant fines, liabilities
or other adverse consequences. Our research and development programs involve
the controlled use of hazardous materials. Accordingly, we are subject to
federal, state and local laws governing the use, handling and disposal of
these materials. Although we believe that our safety procedures for
handling and disposing of these materials comply in all material respects
with the standards prescribed by state and federal regulations, we cannot
completely eliminate the risk of accidental contamination or injury from
these materials. In addition, our collaborators may not comply with these
laws. In the event of such an accident or failure to comply with
environmental laws, we could be held liable for damages that result, and
any such liability could exceed our assets and resources. RISKS RELATING TO INTELLECTUAL PROPERTY If we are unable to obtain intellectual property protection for our
chemical compounds and research tools, the value of our technology and
products will be adversely affected. Our success depends in part on our ability to obtain and maintain
intellectual property protection for our drug candidates, technology and
know-how. Our policy is to seek to protect our chemical compounds and
technologies by, among other methods, filing U.S. and foreign patent
applications related to our proprietary technology, inventions and
improvements that are important to the development of our business. We or
our licensors file patent applications directed to all drug candidates in
an effort to establish 24




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intellectual property positions regarding new chemical entities relating to
our drug candidates as well as uses of new chemical entities in the
treatment of CNS diseases. The patent positions of companies like ours are generally uncertain and
involve complex legal and factual questions. Our ability to maintain and
solidify our proprietary position for our technology will depend on our
success in obtaining effective patent claims and enforcing those claims
once granted. We do not know whether any of our patent applications or
those patent applications that we license will result in the issuance of
any patents. Our issued patents and those that may be issued in the future, or
those licensed to us, may be challenged, invalidated, rendered
unenforceable or circumvented, which could limit our ability to stop
competitors from marketing related products or the length of term of patent
protection that we may have for our or our collaborators products. In
addition, the rights granted under any issued patents may not provide us
with competitive advantages against competitors with similar compounds or
technologies. Furthermore, our competitors may independently develop
similar technologies or duplicate any technology developed by us in a
manner that does not infringe our patents or other intellectual property.
Because of the extensive time required for development, testing and
regulatory review of a potential product, it is possible that, before any
of our products or those developed by our collaborators can be
commercialized, any related patent may expire or remain in force for only a
short period following commercialization, thereby reducing any advantages
of the patent. We rely on trade secrets and other confidential information to maintain our
proprietary position. In addition to patent protection, we also rely on protection of trade
secrets, know-how and confidential and proprietary information. To maintain
the confidentiality of trade secrets and proprietary information, we have
entered into confidentiality agreements with our employees, consultants and
collaborators upon the commencement of their relationships with us. These
agreements require that all confidential information developed by the
individual or made known to the individual by us during the course of the
individuals relationship with us be kept confidential and not disclosed to
third parties. Our agreements with employees also provide that inventions
conceived by the individual in the course of rendering services to us shall
be our exclusive property. However, we may not obtain these agreements in
all circumstances, and individuals with whom we have these agreements may
not comply with their terms. In the event of unauthorized use or disclosure
of our trade secrets or proprietary information, these agreements, even if
obtained, may not provide meaningful protection for our trade secrets or
other confidential information. To the extent that our employees,
consultants or contractors use technology or know-how owned by others in
their work for us, disputes may arise as to the rights in related
inventions. Adequate remedies may not exist in the event of unauthorized use or
disclosure of our confidential information. The disclosure of our trade
secrets would impair our competitive position and could have a material
adverse effect on our operating results, financial condition and future
growth prospects. We may be involved in lawsuits to protect or enforce our patents or the
patents of our collaborators or licensors, which could be expensive and
time consuming. Competitors may infringe our patents or the patents of our collaborators or
licensors. To counter infringement or unauthorized use, we may be required
to file infringement claims, which can be expensive and time-consuming. In
addition, in an infringement proceeding, a court may decide that a patent
of ours is not valid or is unenforceable, or may refuse to stop the other
party from using the technology at issue on the grounds that our patents do
not cover its technology. An adverse determination of any litigation or
defense proceedings could put one or more of our patents at risk of being
invalidated or interpreted narrowly and could put our patent applications
at risk of not issuing. Interference proceedings
brought by the U.S. Patent and Trademark Office may
be necessary to determine the priority of inventions with respect to our
patent applications or those of our collaborators or licensors. Litigation
or interference proceedings may fail and, even if successful, may result in
substantial costs and be a distraction to our management. We may not be
able, alone or with our collaborators and licensors, to 25




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prevent misappropriation of our proprietary rights, particularly in
countries where the laws may not protect such rights as fully as in the U.S. Furthermore, because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk that some
of our confidential information could be compromised by disclosure during
this type of litigation. In addition, during the course of this kind of
litigation, there could be public announcements of the results of hearings,
motions or other interim proceedings or developments. If securities
analysts or investors perceive these results to be negative, it could have
a substantial adverse effect on the price of our common stock. We may not prevail in any litigation or interference proceeding in which we
are involved. Even if we do prevail, these proceedings can be very
expensive and distract our management. Third parties may own or control patents or patent applications that are
infringed by our technologies or drug candidates. Our success depends in part on avoiding the infringement of other parties
patents and proprietary rights as well as avoiding the breach of any
licenses relating to our technologies and products. In the U.S., patent
applications filed in recent years are confidential for 18 months, while
older applications are not published until the patent issues. As a result,
there may be patents of which we are unaware, and avoiding patent
infringement may be difficult. We may inadvertently infringe third-party
patents or patent applications. These third parties could bring claims
against us, our collaborators or our licensors that, even if resolved in
our favor, could cause us to incur substantial expenses and, if resolved
against us, could additionally cause us to pay substantial damages.
Further, if a patent infringement suit were brought against us, our
collaborators or our licensors, we or they could be forced to stop or delay
research, development, manufacturing or sales of any infringing product in
the country or countries covered by the patent we infringe, unless we can
obtain a license from the patent holder. Such a license may not be
available on acceptable terms, or at all, particularly if the third party
is developing or marketing a product competitive with the infringing
product. Even if we, our collaborators or our licensors were able to obtain
a license, the rights may be nonexclusive, which would give our competitors
access to the same intellectual property. We also may be required to pay substantial damages to the patent holder in
the event of an infringement. Under some circumstances in the U.S., these
damages could be triple the actual damages the patent holder incurs. If we
have supplied infringing products to third parties for marketing or
licensed third parties to manufacture, use or market infringing products,
we may be obligated to indemnify these third parties for any damages they
may be required to pay to the patent holder and for any losses the third
parties may sustain themselves as the result of lost sales or damages paid
to the patent holder. Any successful infringement action brought against us may also adversely
affect marketing of the infringing product in other markets not covered by
the infringement action, as well as our marketing of other products based
on similar technology. Furthermore, we may suffer adverse consequences from
a successful infringement action against us even if the action is
subsequently reversed on appeal, nullified through another action or
resolved by settlement with the patent holder. The damages or other
remedies awarded, if any, may be significant. As a result, any infringement
action against us would likely delay the regulatory approval process, harm
our competitive position, be very costly and require significant time and
attention of our key management and technical personnel. Under our agreement with Bayer, we have the first right, but not the
obligation, to defend the patent rights covered under the agreement against
infringement or interference by any third party. Under our collaborations
with Roche, Roche has the first right to bring an action with respect to
the infringement of patent rights covered under the applicable agreement.
In the event that Roche does not exercise this right, we retain the right
to bring the infringement action. 26




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RISKS RELATED TO OUR COMMON STOCK Our executive officers, directors and major stockholders have the ability
to significantly influence all matters submitted to stockholders for
approval. As of March 31, 2004, our executive officers, directors and stockholders
who owned more than 5% of our outstanding common stock before completion of
the initial public offering, in the aggregate, beneficially owned shares
representing approximately 47% of our capital stock. Accordingly, these
executive officers, directors and stockholders, acting as a group, have
substantial influence over the outcome of corporate actions requiring
stockholder approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets or any
other significant corporate transactions. These stockholders may also delay
or prevent a change of control of us, even if such a change of control
would benefit our other stockholders. Our stock price is subject to fluctuation, which may cause an investment in
our stock to suffer a decline in value. The trading price of our common stock may be highly volatile and could be
subject to wide fluctuations in price in response to various factors, many
of which are beyond our control, including:  Ø
    
    announcements regarding the results of preclinical tests or clinical
studies involving our product candidates;Ø
    
    disputes, modifications, terminations or other developments regarding
our collaborations with Roche;Ø
    
    announcements regarding new collaborations or changes in these
collaborations;Ø
    
    announcements regarding technological innovations or new products by us,
our collaborators or our competitors;Ø
    
    changes in the market valuations of similar companies;Ø
    
    conditions or trends in the biotechnology and pharmaceutical industries;Ø
    
    developments relating to patents and other intellectual property rights,
including disputes with licensors or other third parties, litigation
matters and our ability to obtain patent protection for our chemical
compounds or technologies;Ø
    
    FDA or international regulatory actions;Ø
    
    additions to or departures of our key personnel;Ø
    
    actual or anticipated variations in quarterly operating results;Ø
    
    changes in financial estimates by securities analysts; andØ
    
    sales of our common stock. In addition, public companies in general and companies listed on The Nasdaq
National Market in particular have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the
operating performance of those companies. Further, there has been
particular volatility in the market prices of securities of biotechnology
and other life sciences companies. These broad market and industry factors
may seriously harm the market price of our common stock, regardless of our
operating performance. In the past, following periods of volatility in the
market, securities class action litigation has often been instituted
against companies. Such litigation, if instituted against us, could result
in substantial costs and diversion of managements attention and resources. 27




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Antitakeover provisions that we have in place could entrench our management
team and delay or prevent an acquisition. These provisions could adversely
affect the price of our common stock because purchasers cannot acquire a
controlling interest. Provisions of our certificate of incorporation and bylaws and applicable
provisions of the General Corporation Law of the State of Delaware may make
it more difficult for or prevent a third party from acquiring control of us
without the approval of our board of directors. These provisions include:  Ø
    
    a classified board of directors;Ø
    
    limitations on the removal of directors;Ø
    
    limitations on stockholder proposals at meetings of stockholders;Ø
    
    the inability of stockholders to act by written consent or to call
special meetings; andØ
    
    the ability of our board of directors to designate the terms of and
issue new series of preferred stock without stockholder approval. The affirmative vote of the holders of at least 75% of our shares of
capital stock entitled to vote is necessary to amend or repeal the above
provisions of our certificate of incorporation. In addition, absent
approval of our board of directors, our bylaws may only be amended or
repealed by the affirmative vote of the holders of at least 75% of our
 shares of capital stock entitled to vote. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203
of the Delaware General Corporation Law, which may prohibit large
stockholders from consummating a merger with or acquisition of us. These provisions may have the effect of entrenching our management team and
preventing a merger or acquisition that would be attractive to
stockholders. As a result, these provisions may deprive you of the
opportunity to sell your shares to potential acquirors at a premium over
prevailing prices. This potential inability to obtain a control premium
could reduce the market price of our common stock. An active trading market for our common stock may not develop. We only recently completed our initial public offering. Prior to our
initial public offering, you could not buy or sell our common stock
publicly. After our initial public offering, the average daily trading
volume for our common stock has been relatively low. An active public
market for our common stock may not continue to develop or be sustained. Because we do not intend to pay dividends, you will benefit from an
investment in our common stock only if it appreciates in value. We have paid no cash dividends on any of our capital stock to date, and we
currently intend to retain our future earnings, if any, to fund the
development and growth of our business. As a result, we do not expect to
pay any cash dividends in the foreseeable future. The success of your
investment in our common stock will likely depend entirely upon any future
appreciation. There is no guarantee that our common stock will appreciate
in value or even maintain the price at which you purchased your shares. If there are substantial sales of our common stock, our stock price could
decline. If our existing stockholders sell a large number of shares of our common
stock, or the public market perceives that existing stockholders might sell
 shares of common stock, the market price of our common stock could decline
significantly. In connection with our recently completed initial public
offering, our executive officers and directors and substantially all of our
pre-initial public offering stockholders and optionholders executed lock-up
agreements that prohibit them from selling, offering to sell, contracting
or agreeing to sell, hypothecating, pledging, granting any option to
purchase or otherwise dispose of or agree to dispose of any shares of our common stock for the 180 day period from
the date of our initial public offering through October 2, 2004. 28




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Item 3. Quantitative and Qualitative Disclosures About Market Risk We have not used derivative financial instruments for speculation or
trading purposes. However, we are exposed to market risk related to changes
in interest rates. Our current policy is to maintain an investment
portfolio consisting mainly of U.S. money market and government-grade
securities, directly or through managed funds, with maturities of
three months
or less. Our cash is deposited in and invested through highly rated
financial institutions in North America. Our short-term investments are
subject to interest rate risk and will fall in value if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by 10% from levels at March 31, 2004, we estimate that the fair
value of our investment portfolio would decline by an immaterial amount. We
currently have the ability to hold our fixed income investments until
maturity, and therefore we do not expect our operating results or cash
flows to be affected to any significant degree by the effect of a change in
market interest rates on our investments. 
 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures Based on their evaluation as of March 31, 2004, our chief executive officer
and chief financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure
that the information required to be disclosed by us in this quarterly
report on Form 10-Q was recorded, processed, summarized and reported within
the time periods specified in the SECs rules and Form 10-Q. Change in internal control There were no changes in our internal controls over financial reporting
during the quarter ended March 31, 2004 that have materially affected, or
are reasonably likely to affect, our internal control over financial
reporting. Limitations on the effectiveness of controls Our disclosure controls and procedures are designed to provide reasonable,
not absolute, assurance that the objectives of our disclosure control
system are met. Because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control
issues, if any, within a company have been detected. However, as set forth
above, our chief executive officer and chief financial officer have
concluded, based on their evaluation as of March 31, 2004, that our
disclosure controls and procedures were sufficiently effective to provide
reasonable assurance that the objectives of our disclosure control system
were met. 29




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Part II. Other Information 
 Item 2. Changes in Securities and Use of Proceeds  Changes in Constituent Instruments Defining the Rights of Security
Holders  A one-for-three reverse stock split was effected on March 15, 2004.In April 2004, in connection with our initial public offering, our
amended and restated certificate of incorporation, our amended and
restated bylaws and new form of common stock certificate became
effective.  Recent Sales of Unregistered Securities  During the three months ended March 31, 2004, we granted stock options
to purchase 100,000 shares of our common stock to one of our employees
under our 1998 Employee, Director and Consultant Stock Option Plan at
an exercise price of $2.70 per share. In addition, during the three
months ended March 31, 2004, we issued 10,810 shares of our common stock
that were not registered under the Securities Act of 1933 to our
employees and directors upon the exercise of options for cash
consideration of $8,118.In February 2004, we issued a warrant to purchase 2,222 shares of our
common stock at an exercise price of $10.80 per share.The securities issued in the foregoing transactions were offered and
sold in reliance on exemptions from registration set forth in Sections
4(2) of the Securities Act or regulations promulgated thereunder,
relating to sales by an issuer not involving any public offering, or an
exemption from registration under Rule 701 promulgated under the
Securities Act. No underwriters or placement agents were involved in the
foregoing issuances and sales.  Initial Public Offering and Use of Proceeds from Sales of Registered
Securities  On April 5, 2004, we completed an initial public offering of 5,000,000
 shares of our common stock at a price to the public of $7.00 per share.
The offer and sale of all of the shares in the initial public offering
were registered under the Securities Act of 1933, as amended, pursuant
to a registration statement on Form S-1, as amended (File No.
333-111474), which was declared effective by the Securities and Exchange
Commission on April 5, 2004. The managing underwriters in the offering
were UBS Securities LLC, SG Cowen Securities Corporation, Banc of
America Securities LLC and Fortis Securities. The offering commenced on
April 5, 2004 and did not terminate until after the sale of all of the
securities registered in the Registration Statement. As part of the
initial public offering, we granted the managing underwriters an
overallotment option to purchase up to an additional 750,000 shares of
our common stock from us at the initial public offering price. The
underwriters exercised the overallotment option on April 20, 2004.
There were no selling stockholders in our initial public offering. We
invested the proceeds in short-term securities.Net proceeds of our initial public offering, including the exercise of
the underwriters overallotment option, are estimated to be $35.4
million. In connection with the offering we paid underwriters
commission of $2.8 million and incurred offering expenses estimated at
$2.0 million. None of the expenses, or application of the net proceeds,
were paid, directly or indirectly, to directors, officers or persons
owning 10% or more of our common stock or to their associates, or to our
affiliates. The proceeds to us have conformed with our intended use
outlined in the prospectus related to the offering. 30




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Item 4. Submission of Matters to a Vote of Security Holders During the three months ended March 31, 2004, we solicited the written
consent of our stockholders pursuant to Section 228 of the General
Corporation Law of the State of Delaware in connection with the following
proposals: 1. In February 2004, we sent a written consent to our stockholders
requesting approval to the taking of the following actions in connection
with an initial public offering: (a) the approval of an amendment to our
1998 Employee, Director and Consultant Stock Option Plan increasing the
number of shares available for grant; (b) the approval and adoption of
amendments to our certificate of incorporation to increase the number of
 shares available for grant under our 1998 Employee, Director and Consultant
Stock Option Plan, to effect a reverse stock split to be effective prior to
our initial public offering and to amend the definition of a Qualified
Initial Public Offering therein; (c) the approval and adoption of our
amended and restated certificate of incorporation to become effective upon
the completion of our initial public offering; (d) the approval and
adoption of our amended and restated bylaws to become effective upon the
completion of our initial public offering; (e) the approval and adoption of
our 2004 Stock Option Plan and our 2004 Employee Stock Purchase Plan, each
to become effective upon the closing of our initial public offering; and
(f) the election of the following seven nominees to serve as members of the
board of directors for the respective classes: (i) Class I directors: Alix
Marduel and Michael E. Meyers, (ii) Class II directors: Anthony B. Evnin, Michael Sheffery and Axel J. Unterbeck, and (iii) Class III
directors: Jonathan J. Fleming, Walter Gilbert and Tony Scullion. A total of 10,717,085
 shares, representing 80.6%, of our stock on an as-converted to common stock
basis voted in favor of these matters. 2. In April 2004, we sent a written consent to our stockholders requesting
approval to the taking of the following action in connection with the
initial public offering of our common stock: the approval and adoption of
an amendment to our certificate of incorporation to amend the definition of
a Qualified Initial Public Offering therein. A total of 10,696,480
 shares, representing 80.5%, of our stock on an as-converted to common stock
basis voted in favor of this matter. 3. In April 2004, we sent a second written consent to our stockholders
requesting approval to the taking of the following action in connection
with the initial public offering of our common stock: the approval and
adoption of an amendment to our certificate of incorporation to amend the
definition of Excluded Shares therein. A total of 11,277,005 shares,
representing 84.8%, of our stock on an as-converted to common stock basis
voted in favor of this matter. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification by the Chief Executive Officer Pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934 31.2 Certification by the Chief Financial Officer Pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (b) Reports on Form 8-K There were no reports on Form 8-K filed or furnished by the Company
during the fiscal quarter ended March 31, 2004. 31




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized. MEMORY PHARMACEUTICALS CORP.By:
    
    /s/ DENNIS KEANEDENNIS KEANEChief Financial Officer(Principal Financial Officer)Date: May 20, 2004
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Exhibit Index Exhibit Number
    
    Description31.1
    
    Certification by the Chief Executive Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 193431.2
    
    Certification by the Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 193432.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002