##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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
    
    04-3363475(State or Other Jurisdiction of Incorporation or
Organization)
    
    (I.R.S. Employer Identification No.)100 Philips Parkway, Montvale, New Jersey
    
    07645(Address of Principal Executive Offices)
    
    (Zip 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. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): o þ
 As of November 9, 2004 the registrant had 20,447,911 shares of common
stock, $0.001 par value per share, outstanding.




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MEMORY PHARMACEUTICALS CORP. Table of Contents Part I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3BALANCE SHEETS
    
    
    3STATEMENTS OF OPERATIONS
    
    
    4STATEMENTS OF CASH FLOWS
    
    
    5NOTES TO FINANCIAL STATEMENTS
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33Part II. Other Information
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 5.
Other Information
    
    
    34Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35EX-10.1 CONSULTING AGREEMENTEX-10.2 AMENDMENT TO COLLABORATION & LICENSE AGREEMENTEX-10.3 REGISTRANT'S FORM OF STOCK OPTION AGREEMENTEX-10.4 LETTER AGREEMENTEX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATION
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements MEMORY PHARMACEUTICALS CORP. 
 BALANCE SHEETS
 (unaudited)
 (in thousands, except for share and per share amounts)
 September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,781
    
    
    $
    16,884Marketable securities
    
    
    15,892
    
    
    
    13,223Receivables
    
    
    875
    
    
    
    2,019Prepaid and other current assets
    
    
    943
    
    
    
    1,664Total current assets
    
    
    49,491
    
    
    
    33,790Property and equipment, net
    
    
    10,669
    
    
    
    9,085Restricted cash
    
    
    505
    
    
    
    505Other assets
    
    
    48
    
    
    
    54Total assets
    
    $
    60,713
    
    
    $
    43,434LIABILITIES AND STOCKHOLDERS EQUITY / (DEFICIT)Current liabilities:Accounts payable
    
    $
    1,437
    
    
    $
    1,754Accrued expenses
    
    
    2,765
    
    
    
    3,103Current portion of equipment notes payable
    
    
    1,910
    
    
    
    1,675Deferred revenue  current
    
    
    7,095
    
    
    
    6,220Total current liabilities
    
    
    13,207
    
    
    
    12,752Equipment notes payable, less current portion
    
    
    1,964
    
    
    
    2,112Deferred revenue  long-term
    
    
    11,277
    
    
    
    13,752Total liabilities
    
    
    26,448
    
    
    
    28,616Redeemable convertible preferred stock, Series A, B, C, D and R; $0.001 par value per share;
no shares authorized, issued or outstanding at September 30, 2004; 39,217,908 shares
authorized, and 39,210,765 shares issued and outstanding at December 31, 2003
    
    
    
    
    
    
    86,598Accrued dividends on redeemable convertible preferred stock
    
    
    
    
    
    
    17,677Total redeemable convertible preferred stock and accrued dividends
    
    
    
    
    
    
    104,275Stockholders equity / (deficit):Common stock, $0.001 par value per share; 100,000,000 shares authorized and 20,447,183
issued and outstanding at September 30, 2004, and 17,758,666 shares authorized and
1,138,203 issued and outstanding at December 31, 2003;
    
    
    20
    
    
    
    1Additional paid-in capital
    
    
    149,147
    
    
    
    5,410Accumulated deficit
    
    
    (113,597
    )
    
    
    (94,316
    )Accumulated other comprehensive loss
    
    
    (33
    )
    
    
    Deferred compensation
    
    
    (1,272
    )
    
    
    (552
    )Total stockholders equity / (deficit)
    
    
    34,265
    
    
    
    (89,457
    )Total liabilities and stockholders equity / (deficit)
    
    $
    60,713
    
    
    $
    43,434
 See accompanying notes to financial statements. 3




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MEMORY PHARMACEUTICALS CORP. 
 STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except for share and per share amounts)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    2,430
    
    
    $
    2,088
    
    
    $
    7,350
    
    
    $
    5,179Operating expenses:Research and development
    
    
    7,263
    
    
    
    4,968
    
    
    
    19,061
    
    
    
    16,100General and administrative
    
    
    1,856
    
    
    
    1,268
    
    
    
    5,675
    
    
    
    3,345Total operating expenses
    
    
    9,119
    
    
    
    6,236
    
    
    
    24,736
    
    
    
    19,445Loss from operations
    
    
    (6,689
    )
    
    
    (4,148
    )
    
    
    (17,386
    )
    
    
    (14,266
    )Other Income
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    150Interest:Income
    
    
    191
    
    
    
    84
    
    
    
    458
    
    
    
    340Expense
    
    
    (109
    )
    
    
    (114
    )
    
    
    (325
    )
    
    
    (352
    )Interest income (expense), net
    
    
    82
    
    
    
    (30
    )
    
    
    133
    
    
    
    (12
    )Net loss before income taxes
    
    
    (6,607
    )
    
    
    (4,028
    )
    
    
    (17,253
    )
    
    
    (14,128
    )Income taxes
    
    
    2
    
    
    
    (2
    )
    
    
    7
    
    
    
    10Net loss
    
    
    (6,609
    )
    
    
    (4,026
    )
    
    
    (17,260
    )
    
    
    (14,138
    )Less redeemable convertible preferred stock dividends
and accretion
    
    
    
    
    
    
    2,249
    
    
    
    2,022
    
    
    
    5,578Net loss attributable to common stockholders
    
    $
    (6,609
    )
    
    $
    (6,275
    )
    
    $
    (19,282
    )
    
    $
    (19,716
    )Basic and diluted net loss per share of common stock
    
    $
    (0.32
    )
    
    $
    (5.57
    )
    
    $
    (1.38
    )
    
    $
    (21.34
    )Basic and diluted weighted average number of shares
of common stock outstanding
    
    
    20,440,442
    
    
    
    1,125,833
    
    
    
    13,978,520
    
    
    
    923,782
 See accompanying notes to financial statements. 4




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MEMORY PHARMACEUTICALS CORP. 
 STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Nine Months EndedSeptember 30,2004
    
    2003Cash flows used in operating activities:Net loss
    
    $
    (17,260
    )
    
    $
    (14,138
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,502
    
    
    
    1,300Non-cash stock based compensation
    
    
    1,109
    
    
    
    11Changes in operating accounts:Receivables
    
    
    1,144
    
    
    
    Prepaid and other current assets
    
    
    721
    
    
    
    88Other assets
    
    
    6
    
    
    
    127Accounts payable
    
    
    (317
    )
    
    
    (1,669
    )Accrued expenses
    
    
    (338
    )
    
    
    (534
    )Deferred revenue
    
    
    (1,600
    )
    
    
    10,946Net cash used in operating activities
    
    
    (15,033
    )
    
    
    (3,869
    )Cash flows used in investing activities:Purchases of marketable securities
    
    
    (11,393
    )
    
    
    (9,024
    )Sales of marketable securities
    
    
    8,691
    
    
    
    10,181Additions to property and equipment
    
    
    (3,086
    )
    
    
    (681
    )Change in restricted cash
    
    
    
    
    
    
    (25
    )Net cash used in investing activities
    
    
    (5,788
    )
    
    
    451Cash flows provided by financing activities:Proceeds from issuance of common stock
    
    
    35,630
    
    
    
    254Proceeds from issuance of redeemable convertible preferred stock
    
    
    
    
    
    
    10,000Proceeds from equipment notes payable
    
    
    1,745
    
    
    
    1,224Principal repayment equipment notes payable
    
    
    (1,657
    )
    
    
    (1,307
    )Net cash provided by financing activities
    
    
    35,718
    
    
    
    10,171Net increase in cash and cash equivalents
    
    
    14,897
    
    
    
    6,753Cash and cash equivalents, beginning of period
    
    
    16,884
    
    
    
    14,063Cash and cash equivalents, end of period
    
    $
    31,781
    
    
    $
    20,816Supplemental cash flow information:Cash paid for interest
    
    $
    325
    
    
    $
    352Cash paid for taxes
    
    
    7
    
    
    
    10Accrued dividends on redeemable convertible preferred stock
    
    
    1,862
    
    
    
    4,694Accretion of redeemable convertible preferred stock to liquidation value
    
    
    160
    
    
    
    300Beneficial conversion feature on Series Roche preferred stock
    
    
    
    
    
    
    584
 See accompanying notes to financial statements. 5




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MEMORY PHARMACEUTICALS CORP. 
 NOTES TO FINANCIAL STATEMENTS
 (unaudited)
 (in thousands, except for share and per share amounts)
  (1)
    
    Basis of PresentationAs used herein, we, our, the Company and similar terms refer to Memory
Pharmaceuticals Corp. We are 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 financial statements included herein have been prepared from our books
and records pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) for reporting on Form 10-Q. The information and
footnote disclosures normally included in complete financial statements
prepared in accordance with U.S. generally accepted accounting principles
(U.S. GAAP) have been condensed or omitted pursuant to these rules and
regulations. The interim financial statements should be read in conjunction
with the audited financial statements and notes thereto included in our
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.We are responsible for the financial statements included in this document.
Our interim financial statements are unaudited and are subject to year-end
adjustments. Interim results may not be indicative of the results and trends
that may be expected for the year. However, we believe all adjustments
considered necessary for a fair presentation of these interim statements have
been included and are of a normal and recurring nature.ReclassificationA reclassification relating to December 31, 2003 was made to classify certain
investments previously classified as cash and cash equivalents to marketable
securities on our balance sheet. Also we classified certain deferred revenue
relating to our 2003 Roche Collaboration, refer to Note 9  License
Agreements and Collaborations, previously classified as long-term to current
deferred revenue on our balance sheet.(2)
    
    Recent Accounting DevelopmentsOn March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed statement, Share-Based Payment, which addresses the accounting for
share-based awards to employees, including those made under employee stock
purchase plans. The FASB formally proposed to require companies to recognize
the fair value of stock options and other stock-based compensation to
employees in their statements of operations. The proposed statement would
eliminate the ability to account for share-based compensation transactions
using Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees,and generally would require instead, that such
transactions be accounted for using a fair-value based method. The FASB has
delayed the effective date of this proposed statement until fiscal periods
beginning after June 15, 2005. We currently account for our stock-based
compensation plans in accordance with APB Opinion No. 25. Therefore, the
eventual adoption of this proposed statement, if issued in final form by the
FASB, could have a material effect on our financial statements.(3)
    
    Stock-Based CompensationWe apply the intrinsic-value based method of accounting prescribed by APB
Opinion No. 25, and related interpretations including FASB Interpretation No.
44, Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, issued in March 2000, to account for
our 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. 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, we have elected to continue to apply the intrinsic-value based method of
accounting for employee stock options described above, and have adopted only
the disclosure requirements of SFAS No. 148. 6




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We account for stock options and warrants granted to non-employees based on
the fair value of the stock option or warrant. Fair market value is
determined using the Black-Scholes option-pricing model based on assumptions
for expected stock price volatility, expected term of the option, the
risk-free interest rate and expected dividend yield at the grant date. Prior
to April 5, 2004, our common stock was not publicly traded. As a result, in
valuing our common stock, stock options and warrants issued prior to this
date, 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.The following table illustrates the effect on net loss attributable to common
stockholders 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 below. Because options granted during 2004 and 2003
vest over several years and additional awards are expected to be issued in
the future, the pro forma results shown below are not likely to be
representative of the effects on future years of the application of the
fair-value based method. Three Months ended September 30,
    
    Nine Months ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss attributable to common stockholders, as reported
    
    $
    (6,609
    )
    
    $
    (6,275
    )
    
    $
    (19,282
    )
    
    $
    (19,716
    )Add: Stock-based employee compensation expense included in reported
net loss
    
    
    181
    
    
    
    
    
    
    
    484
    
    
    
    11Deduct: Employee stock-based compensation expense under fair-value
based method
    
    
    (533
    )
    
    
    (46
    )
    
    
    (1,325
    )
    
    
    (150
    )Pro forma net loss attributable to common stockholders
    
    $
    (6,961
    )
    
    $
    (6,321
    )
    
    $
    (20,123
    )
    
    $
    (19,855
    )Pro forma basic and diluted net loss per share of common stock
    
    $
    (0.34
    )
    
    $
    (5.61
    )
    
    $
    (1.44
    )
    
    $
    (21.49
    )
  The fair values of these option grants were calculated using weighted
averages of assumptions for the multiple stock options granted during the
three-month and nine-month periods ended September 30, 2004 and 2003. Three Months ended
    
    Nine Months endedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003Expected stock price
volatility
    
    60%
    
    60%
    
    60%
    
    60%Expected term until exercise
    
    5 years
    
    5 years
    
    5 years
    
    5 yearsRisk-free interest rate
    
    3.7%
    
    4.5%
    
    3.6%
    
    3.2%Expected dividend yield
    
    0%
    
    0%
    
    0%
    
    0%
  The per share weighted average fair value of stock options granted during the
nine months ended September 30, 2004 and 2003 was determined using the
Black-Scholes option-pricing model. These assumptions resulted in weighted
average fair values of $5.72 and $0.13 per share for stock options granted in
the nine months ended September 30, 2004 and 2003, respectively.Stock OptionsDuring the nine months ended September 30, 2004, the Company granted an
option to purchase 100,000 shares of common stock 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 four-year vesting period. The Company recognized $181 and
$484 of total compensation expense during the three-month and nine-month
periods ended September 30, 2004, respectively. 7




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##### Table of Contents



(4)
    
    Net Loss Per ShareBasic net loss per share is calculated by dividing net loss attributable to
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock and the dilutive potential common stock
equivalents then outstanding. Potential common stock equivalents consist of
stock options, warrants and redeemable convertible preferred stock.Since we had a net loss in each of the periods presented, basic and diluted
net loss per share is the same. As a result, the computation of diluted net
loss per share for the three-month and nine-month periods ended September 30,
2004 excludes the effect of the potential exercise of options to purchase
3,113,309 shares of common stock and warrants to purchase 124,073 shares of
common stock, because the effect would be anti-dilutive.Similarly, the computation of diluted net loss per share for the three-month
and nine-month periods ended September 30, 2003 excludes the effect of the
potential exercise of options to purchase 2,188,791 shares of common stock
and warrants to purchase 172,656 shares of common stock, because the effect
would be anti-dilutive. In addition, the diluted weighted average number of
            shares outstanding for both the three-month and nine-month periods ended
September 30, 2003 excludes the Companys redeemable convertible preferred
stock that would have converted into 12,369,501 shares of common stock, since
the effects would be anti-dilutive.Pro forma net loss per share is calculated using the weighted average number
of shares of common stock outstanding, including the pro forma effects of the
automatic conversion of all outstanding redeemable convertible preferred
stock into shares of the Companys common stock effective upon the closing of
the Companys initial public offering, as if such conversion had occurred at
the date of the original issuance.The following table sets forth the calculation of basic and diluted net loss
per share and pro forma basic and diluted net loss per share for the
three-month and nine-month periods ended September 30, 2004 and the same
periods in 2003. The pro forma basic and diluted net loss per share gives
effect to the conversion of the redeemable convertible preferred stock as if
converted at the date of original issuance: Three Months ended September 30,
    
    Nine Months ended September 30,2004
    
    2003
    
    2004
    
    2003Basic and diluted:Net loss
    
    $
    (6,609
    )
    
    $
    (4,026
    )
    
    $
    (17,260
    )
    
    $
    (14,138
    )Dividends and accretion to redemption value
    
    
    
    
    
    
    (2,249
    )
    
    
    (2,022
    )
    
    
    (5,578
    )Net loss attributable to common stockholders
    
    
    (6,609
    )
    
    
    (6,275
    )
    
    
    (19,282
    )
    
    
    (19,716
    )Basic and diluted weighted average number of
shares of common stock outstanding
    
    
    20,440,442
    
    
    
    1,125,833
    
    
    
    13,978,520
    
    
    
    923,782Basic and diluted net loss per share
    
    $
    (0.32
    )
    
    $
    (5.57
    )
    
    $
    (1.38
    )
    
    $
    (21.34
    )Pro forma basic and diluted:Net loss
    
    
    (6,609
    )
    
    
    (4,026
    )
    
    
    (17,260
    )
    
    
    (14,138
    )Basic and diluted weighted average number of
shares of common stock outstanding
    
    
    20,440,442
    
    
    
    1,125,833
    
    
    
    13,978,520
    
    
    
    923,782Weighted average number of shares of common
stock outstanding assuming the conversion of
all redeemable convertible preferred stock and
exercise of certain warrants at the date of
original issuance
    
    
    
    
    
    
    12,678,143
    
    
    
    4,432,321
    
    
    
    12,472,382Pro forma basic and diluted weighted average
shares of common stock outstanding
    
    
    20,440,442
    
    
    
    13,803,976
    
    
    
    18,410,841
    
    
    
    13,396,164Pro forma basic and diluted net loss per share
    
    $
    (0.32
    )
    
    $
    (0.29
    )
    
    $
    (0.94
    )
    
    $
    (1.06
    )
 8




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##### Table of Contents



(5)
    
    Initial Public Offering of Common StockIn April 2004, we sold 5,000,000 shares of our common stock in our initial
public offering at a price of $7.00 per share. We also issued an additional
750,000 shares of common stock through an over-allotment option exercised by
our managing underwriters in April 2004, 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 us of approximately
$35,400. In connection with the initial public offering, all of the
outstanding shares of the Companys redeemable convertible preferred stock
were automatically converted into shares of our common stock as described in
Note 6  Redeemable Convertible Preferred Stock.(6)
    
    Redeemable Convertible Preferred StockUpon the closing of our initial public offering in April 2004, all of the
outstanding shares of our redeemable convertible preferred stock, including
accrued but unpaid dividends, were automatically converted into 13,295,427
shares of common stock. Additionally, 1,536 shares of common stock were
issued upon the net share settled exercise of warrants, which occurred
immediately prior to the closing of our initial public offering.Common stock issued upon automatic conversion is as follows: CommonShares
    
    Carrying
    
    Conversion
    
    StockSeries
    
    Date Issued
    
    Outstanding
    
    Amount
    
    Ratio
    
    IssuedA
    
    April 1998
    
    
    1,000,000
    
    
    $
    985
    
    
    
    0.3333
    
    
    
    333,332B
    
    December 1998, March 1999
    
    
    6,142,857
    
    
    
    10,730
    
    
    
    0.3333
    
    
    
    2,047,615C
    
    June, August 2000
    
    
    10,000,000
    
    
    
    24,974
    
    
    
    0.3559
    
    
    
    3,558,521D
    
    March, April 2002
    
    
    19,290,130
    
    
    
    40,441
    
    
    
    0.3333
    
    
    
    6,430,033Roche
    
    September 2003
    
    
    2,777,778
    
    
    
    9,468
    
    
    
    0.3333
    
    
    
    925,926$
    86,598
    
    
    
    
    
    
    
    13,295,427
  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. Upon the closing of our initial public offering on April
8, 2004, all of our preferred stock converted into common stock, and all
related accrued dividends in the amount of $19,539 were forfeited.(7)
    
    Marketable SecuritiesOur marketable securities are debt securities primarily consisting of
government obligations, mortgage-backed securities, and corporate debt
securities. We classify all of our marketable securities as
available-for-sale, as defined by Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported as a component of stockholders equity
(deficit) in accumulated other comprehensive loss. As of September 30, 2004,
our accumulated unrealized loss was $33 for these securities. Interest
income, realized gains and losses, and declines in value judged to be
other-than-temporary on securities are included in our statements of
operations. Our investment in debt securities of $13,223, with maturity
dates exceeding 90 days at December 31, 2003, were reclassified to marketable
securities on our balance sheet. 9




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(8)
    
    Comprehensive LossComprehensive loss includes net loss and unrealized gains and losses on
available-for-sale marketable securities. Cumulative unrealized gains and
losses on available-for-sale marketable securities are reflected as
accumulated other comprehensive loss in stockholders equity / (deficit) on
our balance sheet. For the three months ended September 30, 2004,
comprehensive loss was $6,595, which includes our net loss of $6,609, which
was offset by an unrealized gain on available-for-sale marketable securities
of $14. For the nine months ended September 30, 2004, comprehensive loss was
$17,293, which includes our net loss of $17,260 with an unrealized loss on
available-for-sale marketable securities of $33.(9)
    
    License Agreements and CollaborationsBayer AGIn June 2001, we entered into an exclusive license agreement with Bayer AG
(Bayer). Under the agreement, we have been granted an exclusive worldwide
license to Bayers know-how and patents to commercialize and market a drug
candidate to treat human peripheral and CNS-related disorders. As of
September 30, 2004, we have paid $1,000 in upfront and milestone payments
under this agreement. We are also required to make milestone payments to
Bayer and pay royalties to Bayer on proceeds received by us from the sale of
any products incorporating the licensed compound.Hoffmann-LaRoche (2002 Collaboration)In July 2002, we executed a Research Collaboration and License Agreement
(2002 Roche Agreement) with F. Hoffmann-La Roche Ltd./Hoffmann-La Roche
Inc., or Roche, for the development of PDE4 inhibitors for neurological and
psychiatric indications, and potential other indications. Under the 2002
Roche Agreement, we granted Roche a worldwide, exclusive, sublicensable
license to our 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 September 30, 2004, Roche has made an
$8,000 upfront license payment and two $2,000 milestone payments. Roche is
obligated to make future payments if specified developmental milestones are
achieved. On August 6, 2004, the research collaboration under the 2002 Roche
Agreement for the development of PDE4 inhibitors was extended for a two-year
period. In connection with this extension, Roche has committed to a minimum
of 18 months funding of our research collaboration efforts in the aggregate
amount of $5,250, payable quarterly commencing September 9, 2004.During the three and nine month periods ended September 30, 2004, we
recognized revenue of $1,287 and $3,861, respectively, under the 2002 Roche
Agreement, representing $412 and $1,236, respectively, related to the upfront
license payment and milestone payments received as of September 30, 2004,
which is being amortized over the expected development period of 7.5 years
from the date of the collaboration, and $875 and $2,625, respectively,
related to the funding of the research collaboration. During the three and
nine months ended September 30, 2003, the Company recognized revenue of
$2,088 and $5,179, respectively, under the 2002 Roche Agreement, representing
$318 and $1,054, respectively, related to the upfront license payment and a
milestone payment received as of September 30, 2003, which are being
amortized over the expected development period, and $1,770 and $4,125,
respectively, 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
nonrefundable payment and will make future payments based on the Company
achieving certain developmental milestones. Additionally, the agreement
provides for Roche to make nonrefundable quarterly payments of $750 over a
two-year period for research collaboration efforts. 10




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During the second quarter of 2004, we changed our revenue recognition
approach for the upfront nonrefundable payment and the nonrefundable
quarterly payments for our research collaboration efforts received under the
2003 Roche Agreement from two units of accounting to a single unit of
accounting, as defined in the Emerging Issues Task Force (EITF) No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. Since Roche
has the right to enter into a license under our 2003 agreement, the upfront
nonrefundable payment and the nonrefundable quarterly payments for research
collaboration efforts are now being amortized over the five-year period
following the commencement of the collaboration. During this period, we are
responsible for the pre-clinical and clinical development through Phase IIa
of nicotinic alpha -7 partial agonist compounds. This period also reflects
the time period that Roche has the right to obtain an exclusive,
sublicensable license to our patent rights and know-how for any nicotinic
alpha-7 partial agonist that we develop. We will recognize revenue over the
five-year period based on the level of actual research efforts expended in a
period as compared to our estimated efforts over the full period. The
adoption of this single unit of accounting for revenue recognition treatment
under the 2003 Roche Agreement does not have a material impact on the
Companys financial position, results of operations or cash flows.During the three and nine months ended September 30, 2004, the Company
recognized revenue of $1,143 and $3,489, respectively, under the 2003 Roche
Agreement. The Company did not recognize any revenue under the 2003 Roche
Agreement during the nine months ended September 30, 2003.(10)
    
    Consulting AgreementsIn April 1998, we entered into a consulting agreement with one of the
founders of the Company for an initial term of four years, with the option to
automatically extend the term for additional one-year periods. Under the
consulting agreement, we are obligated to pay a consulting fee during each of
the one-year terms. Additionally, we were required to grant additional
options to the consultant upon the issuance of new securities by the Company
to ensure that the founder maintained a 4.9216% ownership in the Company,
which obligation expired upon the completion of our initial public offering.
Upon the closing of our initial public offering, we issued this consultant an
option to purchase 117,187 shares of common stock with an exercise price
equal to the initial public offering price of $7.00, as a result of which we
recognized compensation expense of $437 during the nine-month period ended
September 30, 2004.We have 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 us to pay
consulting fees on a monthly or quarterly basis as services are provided. 11




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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. We generally identify these statements by
words or phases such as believe, anticipate, expect, intend, plan,
will, may, should, estimate, predict, potential, continue, or the
negative of such terms or other similar expressions. 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 Risk Factors, 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 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. 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 September 30, 2004, we had received $43.7 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 to us 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. On August 6, 2004, the research collaboration for the
development of PDE4 inhibitors was extended for a two-year period. In
connection with this extension, Roche committed to a minimum of 18 months
funding of our research collaboration efforts in the aggregate amount of $5.3
million, payable quarterly commencing September 9, 2004. In June 2001, we entered into an agreement with Bayer for the in-license of the
compound we refer to as MEM 1003. As of September 30, 2004, we had paid $1.0
million in upfront and milestone payments under this agreement. Under the
agreement, we are required to make additional 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 September
30, 2004, we had an accumulated deficit of $113.6 million, of which $19.5
million related to preferred stock 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, 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 to support our discovery and development
programs. 12




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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 and
our level of pre-clinical and clinical activities and the amount of funding and
other support being provided for these activities directly by us versus by our
collaboration partners. In particular, we currently intend to fund a safety
and tolerability study in Alzheimers patients and Phase IIa clinical trials
for MEM 1003 ourselves. If Phase IIa 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. If we do not enter into a
collaboration and decide to advance the MEM 1003 development program beyond
Phase IIa 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 because of the range of factors that could affect
our results from one quarter to the next and should not be relied on as
indicative of our future performance. RECENT DEVELOPMENTS On August 6, 2004, the research collaboration under the 2002 Roche Agreement
for the development of PDE4 inhibitors was extended for a two-year period. In
connection with this extension, Roche has committed to a minimum of 18 months
funding of our research collaboration efforts in the aggregate amount of $5.3
million, payable quarterly commencing September 9, 2004. RESULTS OF OPERATIONS Three Months Ended September 30, 2004 compared to Three Months Ended September 30, 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 that we may enter into in the future. Revenue for the three months ended September 30, 2004 was $2,430, representing
the currently recognizable portion of licensing fees, milestone payments, and
fees for research and development services from Roche. This represented a 16.4%
increase from revenue of $2,088 for the three months ended September 30, 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 $2,295, or 46.2%, to $7,263 for
the three months ended September 30, 2004 from $4,968 for the three months
ended September 30, 2003. Of this increase, $1,539 was attributable to fees
related to third party research services for the development of our compounds,
$499 was attributable to an increase in building occupancy costs associated
with running our expanded facility, $204 was attributable to higher personnel
and personnel-related costs as we increased headcount to support our discovery
and development programs, and $76 was attributable to additional spending on
lab materials and supplies. In general, 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 $1,611 and
$1,133 for the three months ended September 30, 2004 and 2003, respectively.
Indirect costs principally represent facility and information technology costs. 13




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General and administrative expense General and administrative expense increased $588 or 46.4%, to $1,856 for the
three months ended September 30, 2004 from $1,268 for the three months ended
September 30, 2003. The increase is primarily the result of increases of $182
for insurance premiums, $122 in non-cash compensation expense, $107 in legal
fees relating to the maintenance and expansion of our intellectual property
portfolio, $91 for occupancy costs relating to our expanded facility, and $71
in personnel and personnel-related costs. During the remainder of 2004, and
thereafter, we expect that general and administrative expense will be higher
than 2003 due to expenses associated with being a public company. Interest income and interest expense Interest income increased $107, or 127.4%, to $191 for the three months ended
September 30, 2004 compared to the same period in 2003. Interest expense
decreased $5, or 4.4%, to $109 for the three months ended September 30, 2004
compared to the same period in 2003. The increase in interest income was the
result of higher investment balances, due to our receipt of net proceeds from
our initial public offering in April 2004. The decrease in interest expense
was primarily due to the repayment of two equipment notes that came due in the
second quarter of 2004. Income taxes For the three months ended September 30, 2004, we recognized $2 in state income
taxes as compared to a state income tax benefit of $2 for the three months
ended September 30, 2003. Preferred stock dividends and accretion There were no preferred stock dividends and accretion for the three months
ended September 30, 2004 as compared to $2,249 for preferred stock dividends
and accretion for the three months ended September 30, 2003. This change was
attributable to the conversion of our preferred stock in connection with our
initial public offering in April 2004. Upon the closing of our initial public
offering on April 8, 2004, all of our preferred stock converted into common
stock, and all related accrued dividends were forfeited. 14




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Nine Months Ended September 30, 2004 compared to Nine Months Ended September 30, 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 nine months ended September 30, 2004 was $7,350, representing
the currently recognizable portion of licensing fees, milestone payments, and
fees for research and development services from Roche. This represented a 41.9%
increase from revenue of $5,179 for the nine months ended September 30, 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 $2,961, or 18.4%, to $19,061 for
the nine months ended September 30, 2004 from $16,100 for the nine months ended
September 30, 2003. Of this increase, $2,306 was attributable to fees related
to increased consulting and outside service providers used for pre-clinical and
clinical activities, $1,113 was attributable to an increase in occupancy costs
associated with running our expanded facility, $503 was attributable to
personnel and personnel-related costs associated with our increased headcount
to support our discovery and development programs, and $349 was attributable to
additional spending on lab materials and supplies used to advance our programs.
Reduced spending of $1,308 on third party preclinical research services offset
these increases. In general, 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 $4,321 and
$3,505 for the nine months ended September 30, 2004 and 2003, respectively.
Indirect costs principally represent facility and information technology costs. General and administrative expense General and administrative expense increased $2,330, or 70.0%, to $5,675 for
the nine months ended September 30, 2004 from $3,345 for the nine months ended
September 30, 2003. The increase was primarily the result of non-cash
compensation expense of $1,044 related to the grant of stock options to
consultants and employees, $390 for insurance premiums, $363 in personnel and
personnel-related costs, and $249 in legal fees relating to the maintenance and
expansion of our intellectual property portfolio. During the remainder of
2004, and thereafter, we expect that general and administrative expense will be
higher than 2003 due to expenses associated with being a public company. Interest income and interest expense Interest income increased $118, or 34.7%, to $458 for the nine months ended
September 30, 2004, compared to the same period in 2003. Interest expense
decreased $27, or 7.7%, to $325 for the nine months ended September 30, 2004,
compared to the same period in 2003. The increase in interest income was
attributable to higher investment balances, due to our receipt of net proceeds
from our initial public offering in April 2004. The decrease in interest
expense was related to the repayment of two equipment notes, which came due in
the second quarter of 2004. Income taxes For the nine months ended September 30, 2004 and 2003, we recognized $7 and $10
in state income taxes, respectively. 15




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Preferred stock dividends and accretion Preferred stock dividends and accretion decreased by $3,556, or 63.8%, to
$2,022 for the nine months ended September 30, 2004 from $5,578 for the nine
months ended September 30, 2003. This decrease was attributable to the
conversion of the preferred stock in connection with our initial public
offering in April 2004. Upon the closing of our initial public offering on
April 8, 2004, all of our preferred stock converted into common stock, and all
related accrued dividends were forfeited. Liquidity and capital resources We have financed our operations since inception through the sale of equity
securities, payments received under our collaboration agreements with Roche,
equipment financings and interest income. From inception through September 30,
2004, we have raised net proceeds of $123,800 from the sale of equity
securities. In addition, as of September 30, 2004, we have received $22,000 in
upfront and milestone payments, $9,975 in collaboration agreement fees, $9,345
from equipment financings, $1,600 from research reimbursement cost and $3,400
in interest income. To date, inflation has not had a material effect on our
business. At September 30, 2004, cash, cash equivalents and marketable securities were
$47,673 as compared to $30,107 at December 31, 2003. Our cash, cash equivalents
and marketable securities are highly liquid investments and consist of term
deposits and investments in money market funds with commercial banks and
financial institutions, short-term commercial paper, corporate debt securities,
mortgage-backed securities and government obligations. Net cash used in operating activities was $15,033 for the nine months ended
September 30, 2004. This primarily reflects the net loss of $17,260, offset by
working capital sources of $1,216, the recognition of $1,600 of deferred
revenues from our two Roche collaborations offset by non-cash charges for
depreciation expense of $1,502 and non-cash compensation expense of $1,109. Net
cash used in investing activities for the nine months ended September 30, 2004
was $5,788, which represents an increase in our net investment in marketable
securities, and funds used for our facility expansion and to purchase
additional equipment. Net cash provided by financing activities during the nine
months ended September 30, 2004 was $35,718, which consisted primarily of
$35,388 of net proceeds from our initial public offering in the second quarter,
and $1,745 generated from borrowings under equipment notes, and was offset by
$1,657 used in repayment of equipment notes. The following table summarizes as of September 30, 2004, our contractual
obligations for equipment notes and operating lease payments in connection with
the lease of our current facility. This table should be read in conjunction
with the notes accompanying our financial statements. Payments due inContractual obligations
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009-2014Equipment
notes payable, including interest
    
    $
    622
    
    
    $
    1,995
    
    
    $
    1,165
    
    
    $
    491
    
    
    $
    17
    
    
    $
    Operating lease payments
    
    
    460
    
    
    
    1,867
    
    
    
    1,923
    
    
    
    1,981
    
    
    
    2,040
    
    
    
    12,373
 In connection with our in-license agreement with Bayer for MEM 1003, we are
required to make payments up to $19,000 upon achievement of future milestones
(including a $1,000 milestone payment due upon commencement of Phase II
clinical trials) and to pay royalties upon sales of any products incorporating
the licensed compound. 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 testing and clinical trials, and hiring of
personnel. We expect that our general and administrative expenses will remain
at an increased level, reflecting the additional costs related to being a
public company, including increased professional fees and costs related to
additional finance and legal staff, maintaining directors and officers
insurance,and complying with applicable rules and regulations. We believe that
our existing cash and cash equivalents, and marketable securities, together
with payments required to be made by Roche in the future under our 2002 and
2003 Roche Agreements, will be sufficient to fund our operating expenses,
repayment of equipment notes and capital equipment requirements through at
least year-end 2005. Our future cash requirements will depend on many factors,
including:  Ø
    
    the number of compounds and drug candidates that we advance through the development process; 16




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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. 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 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 is based on our financial statements, which have been prepared in
accordance with U.S. GAAP. 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 the judgments and
estimates used in the preparation of our financial statements. Revenue recognition We recognize revenue relating to our collaborations in accordance with the
SEC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. Deferred revenue
consists of payments received in advance of revenue recognition under such
collaborations. 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. Under the terms of our 2002 Roche Agreement, because we
have licensed to Roche certain intellectual property and we have continuing
performance obligations, we are recognizing the non-refundable license fees and
performance milestone payments as revenue ratably over the period in which we
expect to obtain FDA approval of the compound for which the milestone is paid.
We are recognizing the upfront payment ratably over the period in which we
expect the first compound to be so approved. Solely for purposes of revenue
recognition under our 2002 Roche Agreement, we have estimated the period until
approval of the first compound as 7.5 years from the date of the collaboration.
We periodically review the estimated development periods and our estimated
research efforts and, to the extent such estimates change, the impact of such
change is recorded at that time. 17




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We are applying the provisions of the EITF No. 00-21 prospectively to the 2003
Roche Agreement using a single unit of accounting, since Roche has the right to
enter into a license under this agreement. Revenue is being recognized over
the five-year period that Roche has to obtain a sublicensable license to our
patent rights and know-how for any nicotinic alpha-7 partial agonist that we
develop. We will recognize revenue over the five-year period based on the
level of efforts expended in a period as compared to our estimated efforts over
the full period. Payments received from our collaboration partners for research and development
services performed by us that are deemed to be a separate unit of accounting,
as defined by EITF No. 00-21, are recognized as research and development
services are performed. Otherwise, the payments are recognized over the term
of the applicable collaboration agreement. 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 fees;Ø
    
    contract preclinical and clinical service fees;Ø
    
    fees paid to data management organizations and investigators in conjunction with clinical trials; andØ
    
    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 performed 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 materially 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 U.S. GAAP. 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, lab supplies and materials, 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 manufacturing 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. We adjust our
accrual based on actual costs; such changes in estimates may be material
changes 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. 18




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We account for stock options and warrants granted to non-employees based on the
fair value of the stock option or warrant using the Black-Scholes
option-pricing model based on assumptions for expected stock price volatility,
expected term of the option, risk-free interest rate and expected dividend
yield at the grant date. Prior to April 5, 2004, our common stock was not
publicly traded. As a result, in valuing our common stock, stock options and
warrants issued prior to this date, 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. Since our initial public
offering, the fair value of stock-based compensation has been based on the
price of our common stock on the measurement date. 19




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RISK FACTORS Investing in our common stock involves a high degree of risk. You should
consider carefully the risks and uncertainties described below and the other
information contained in this report. If any of the following risks or
uncertainties actually occurs, our business, prospects, financial condition and
operating results would likely suffer, possibly materially. In that event, the
market price of our common stock could decline and you could lose part or all
of your investment. 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 and nine
months ended September 30, 2004 was $6.6 million and $17.3 million,
respectively, and as of September 30, 2004, we had an accumulated deficit of
approximately $113.6 million, of which $19.5 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 cannot assure you that any external
financing we seek will be available on favorable terms, if at all. 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 is 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. 20




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The diseases we are targeting are poorly understood, which increases our
chances of failure. Our drug development programs principally target a broad range of central
nervous system conditions that exhibit significant impairment of memory and
other cognitive functions. These conditions include neurological diseases
associated with aging, such as Alzheimers, vascular dementia and mild
cognitive impairment and also include certain psychiatric disorders such as
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. 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 if 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 currently intend to fund
our Phase IIa clinical trials for MEM 1003, which we are in the process of
designing, ourselves. If Phase IIa 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. If we do not engage a
collaboration partner for MEM 1003 following Phase IIa clinical trials or if we
are unable to engage a collaboration partner for any other drug candidate, our
requirements for capital will substantially increase. Such capital 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 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. 21




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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 and may not be sufficient to support regulatory approval of
future clinical trials. If subsequent study or trial results are unfavorable or
insufficient, 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 vitro
assays 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
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. In addition, we
cannot assure you that the data collected from the preclinical studies and
clinical trials of our drug candidates will be sufficient to support regulatory
approval of our future clinical trials by the U. S. Food and Drug
Administration (FDA), or by similar agencies in other countries. 22




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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. For each of our collaborative programs,
we develop multiple drug candidates for the same class of compounds and for the
same indication. Over the course of pre-clinical studies, these candidates may
not be sufficiently different to warrant pursuing them individually for the
same indication, or at all. 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
subsequently conducted 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. 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 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. 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 or are being conducted in Europe. In order for us or our
collaborators to conduct human clinical trials in the U.S. for these or other
drug candidates, we or they must obtain and maintain an effective
investigational new drug application, or IND, from the FDA. In connection with
obtaining an IND, we may be required to provide the FDA with supplementary
information regarding our preclinical testing of these drug candidates and the
trials conducted in foreign countries. For example, we are in the
process of preparing an IND under which we will conduct a safety and
tolerability study for MEM 1003 in
Alzheimers patients in the U.S., prior to commencing our
Phase IIa clinical trials. This safety and tolerability study
will serve as a means to bridge the safety and tolerability
assessment between healthy volunteers and Alzheimers patients.
In connection with the preparation of our IND, the FDA indicated that
we should consider conducting an additional preclinical safety study
prior to submitting the IND. We have conducted this study and will
include the results with our IND submission. The FDA has also
recommended that we conduct a three-month toxicology study at higher
doses than were previously studied and that we submit these results
prior to commencing Phase IIa clinical trials. We are also
planning for the supply of sufficient amounts of MEM 1003 to conduct
the safety and tolerability study, the three-month toxicology study
and the Phase IIa clinical trials. We now anticipate that these
steps will delay the initiation of Phase IIa clinical trials for
MEM 1003 from the end of the first quarter of 2005 to the end of the
first half of 2005. We cannot assure you that we will be able to
satisfactorily address any concerns the FDA may have or that
additional studies and clinical trials that we conduct will support
our earlier results. We also cannot assure you that we will not
experience further delays in carrying out the requirements for
commencing Phase IIa clinical trials. If we are unable to
satisfy the FDA we may face delays in proceeding with the safety and
tolerability study, which could delay future clinical trials for MEM
1003 in the U.S., or we could be prevented from proceeding with MEM
1003 in the U.S. Even if we are able to commence and complete the
safety and tolerability study on the time schedule that we have
planned, we cannot assure you that we will be able to initiate
Phase IIa by the end of the first half of 2005. 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, additional
tests to be conducted or a program to be terminated, even if other
studies or trials relating to the program are successful; 23




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Ø
    
    the FDA can place a clinical hold on a trial if, among other
reasons, it requires further information regarding certain results or
events during preclinical tests or clinical trials, or 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;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 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 our existing cash and cash equivalents, and marketable
securities, together with payments required to be made in the future by Roche
under our 2002 and 2003 Roche Agreements, should be sufficient to fund our
anticipated levels of operations through at least 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. 24




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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. 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, 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
Co-Founder, Dr. David A. Lowe, our Chief Scientific Officer, Dennis M. Keane,
our Chief Financial Officer, 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. If third-party preclinical or 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 preclinical testing or 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 preclinical testing or 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, including in
accordance with any FDA regulations, could cause a delay or other material
adverse effect on our clinical trials. 25




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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 for the conduct of preclinical testing and clinical
trials or meet expected deadlines, our preclinical or 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 from the FDA and to maintain
an effective 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 clinical trials to date
has been conducted in the U. S. In order to obtain regulatory clearance to
conduct clinical trials in the U. S. and eventually obtain approval in the U.
S., we or our collaborators must provide the FDA with data sufficient to
demonstrate the safety and efficacy of each drug candidate. 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 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 or limited
in scope or amount, or if pricing is set at unsatisfactory levels, our business
could be materially harmed. 26




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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 supply us with
the compounds under development, to develop effective formulations and to
manufacture our products We have no manufacturing experience, and we currently lack the resources and
capability to develop formulations and manufacture any of our drug candidates
on a clinical or commercial scale. 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.
As a result, we are dependent on third parties, including Roche, for the
formulation and manufacture of clinical and commercial scale quantities of our
drug candidates. If we or our collaborators are unable to secure an adequate
supply of our compounds under development, or if the third parties we contract
with are unable to develop effective formulations or to timely manufacture our
drug candidates on a commercial scale, we may encounter delays in our clinical
trials. Although we believe that there are an adequate number of suppliers for
compounds such as ours, 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 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. 27




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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 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. 28




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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 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 proprietary rights 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 proprietary rights. 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. 29




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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. 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 November 9, 2004, our executive officers, directors and their affiliates
who owned more than 5% of our outstanding common stock, in the aggregate,
beneficially owned shares representing approximately 26% of our capital stock.
Accordingly, these executive officers, directors and their affiliates, 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. This concentration of ownership may
have the effect of delaying or preventing 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; 30




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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. 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 acquirers 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. 31




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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 option-holders executed lock-up agreements
that prohibited 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. This lock-up period
ended on October 2, 2004. 32




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Item 3. Quantitative and Qualitative Disclosures About Market Risk We do not use derivative financial instruments for speculation or trading
purposes. However, we are exposed to market risk related to changes in
interest rates. We currently do not hedge interest rate exposure. Our current
policy is to maintain an investment portfolio consisting mainly of U.S. money
market funds, government obligations, mortgage-backed securities, and corporate
debt securities, directly or through managed funds. Our cash is deposited in
and invested through highly rated financial institutions in North America. Our
marketable securities 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 September 30, 2004, we estimate
that the fair value of our investment portfolio would decline by an immaterial
amount. There has been no material change to our market risk since December 31,
2003. 
 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures Based on their evaluation as of September 30, 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 over financial reporting There were no changes in our internal control over financial reporting during
the quarter ended September 30, 2004 that have materially affected, or are
reasonably likely to materially 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. 33




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PART II. OTHER INFORMATION 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 over-allotment 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
over-allotment option on April 20, 2004. There were no selling
stockholders in our initial public offering. We invested the proceeds in
short-term interest bearing, investment grade securities. Net proceeds of our initial public offering, including the exercise of the
underwriters over-allotment option, were $35.4 million. In connection
with the offering we paid underwriters commission of $2.8 million and
incurred offering expenses of $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. Item 5. Other
Information The Company
has been informed that Tony Scullion, the Companys Chief
Executive Officer, and Axel J. Unterbeck, Ph.D., the Companys
President, have each, as of November 12, 2004 and
November 15, 2004, respectively, entered into a
written plan to sell certain of their shares of our common stock in
accordance with Rule 10b5-1 of the Securities Exchange Act of
1934, as amended (each a Plan). Both Mr. Scullion
and Dr. Unterbeck also serve on the Companys Board of
Directors. Sales under
Mr. Scullions Plan will commence on or after
December 6, 2004 and his Plan will terminate on the earlier to
occur of August 31, 2005 or when an aggregate of
210,000 shares of common stock have been sold thereunder, unless
terminated sooner in accordance with the Plans terms. Subject
to certain contingencies, an aggregate of 35,000 shares of
common stock will be sold under Mr. Scullions Plan per
month (which amount may be increased to account for shares that were
not sold in the prior month). Sales under
Dr. Unterbecks Plan will commence on or after
December 6, 2004 and his Plan will terminate on the earlier to
occur of February 28, 2006 or when an aggregate of
57,600 shares of common stock have been sold thereunder, unless
terminated sooner in accordance with the Plans terms. Subject
to certain contingencies, an aggregate of 4,800 shares of common
stock will be sold under Dr. Unterbecks plan per month (which amount may be increased to
 account for shares that were
not sold in the prior month). Mr. Scullion
and Dr. Unterbeck have informed us that any sales pursuant to the
Plan will comply with Rule 144, and each of them has represented
that he had no knowledge of any material, nonpublic information
regarding the Company when he adopted his Plan. Any actual sales
under each Plan will be publicly disclosed under Rule 16a-3. As of
November 9, 2004, Mr. Scullion beneficially owned 3.1% of
the Companys outstanding shares of Common Stock (as determined
in accordance with Rule 13d-3 of the Exchange Act). As of
November 9, 2004, Dr. Unterbeck beneficially owned 2.6% of
the Companys outstanding shares of Common Stock (as determined
in accordance with Rule 13d-3 of the Exchange Act). Rule 10b5-1
permits officers and directors of public companies to adopt
pre-determined plans for selling specified amounts of stock. The plans
may be entered into only when the director or officer is not in
possession of material, non-public information and sales thereunder
may continue even if the individual entering into the plan
subsequently becomes aware of material, non-public information. 
 Item 6. Exhibits  10.1
    *
    Consulting Agreement, dated as of July 2, 2004, between James E.
Barrett, Ph.D. and the Registrant10.2
    
    Amendment to the Collaboration and License Agreement, dated as
of August 6, 2004, between F. Hoffmann-La Roche Ltd., Hoffmann-La
Roche Inc. and the Registrant10.3
    *
    Registrants Form of Stock Option Agreement10.4
    *
    Letter Agreement, dated as of August 2, 2004, between Gardiner F.
H. Smith and the Registrant31.1
    
    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.*
    Indicates management contract or compensatory plan or arrangement. 34




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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, thereunto duly authorized. MEMORY PHARMACEUTICALS CORP.By:
    /s/ Dennis M. KeaneDENNIS M. KEANEChief Financial Officer(Principal Financial Officer) Date: November 15, 2004 35




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Exhibit Index Exhibit Number
    
    Description10.1
    *
    
    Consulting Agreement, dated as of July 2, 2004, between James E. Barrett, Ph.D. and the Registrant10.2
    
    
    Amendment to the Collaboration and License Agreement, dated as of August 6, 2004, between F.
Hoffmann-La Roche Ltd., Hoffmann-La Roche Inc. and the Registrant10.3
    *
    
    Registrants Form of Stock Option Agreement10.4
    *
    
    Letter Agreement, dated as of August 2, 2004, between Gardiner F. H. Smith and the Registrant31.1
    
    
    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
  *
    Indicates management contract or compensatory plan or arrangement. 36